4. INVESTMENT IN AND LOANS TO DYNAMIC FUELS

On June 22, 2007, we entered into definitive agreements with Tyson to form Dynamic Fuels, to construct and operate facilities in the United States using our Bio-Synfining® Technology. Dynamic Fuels is organized and operated pursuant to the provisions of its Limited Liability Company Agreement between the Company and Tyson (the “LLC Agreement”). Other agreements entered into included a technology license agreement whereby we would provide for the transfer of our Bio-Synfining® Technology, provide technology support services to Dynamic Fuels, and receive payment of royalties for plant production. These agreements also included a sales agreement whereby Tyson would be paid a sourcing fee to procure feedstock.

The LLC Agreement provides for management and control of Dynamic Fuels to be exercised jointly by representatives of the Company and Tyson equally with no LLC member exercising control. This entity is accounted for under the equity method and is not required to be consolidated in our financial statements; however, our share of the Dynamic Fuels net income or loss is reflected in the Consolidated Statements of Operations. Dynamic Fuels has a different fiscal year than us. The Dynamic Fuels fiscal year ends on September 30 and we report our share of Dynamic Fuels results of operations on a three month lag basis. Our carrying value in Dynamic Fuels is reflected in “Investment in and Loans to Dynamic Fuels LLC” in our Consolidated Balance Sheets. As of December 31, 2013, Syntroleum’s total estimate of maximum exposure to loss as a result of its relationships with this entity was approximately $37.85 million, which represents our equity investment in and loans to this entity, net of recognized losses and other equity accounting adjustments. The carrying value of our investment in Dynamic Fuels exceeds the amount of underlying equity in net assets and loans to Dynamic Fuels by approximately $7.6 million, related to warrants issued to Tyson. The warrants are being amortized over the remaining life of the Dynamic Fuels bonds which expire in 2033.

Dynamic Fuels was initially capitalized on July 13, 2007 with $4.25 million in capital contributions from Tyson and $4.25 million in capital contributions from us. We contributed an additional $39.25 million and Tyson contributed an additional $41.25 million in cash capital contributions by December 31, 2012. Each member made $14.0 million in working capital loans to the entity by December 31, 2012.

During the year ended December 31, 2013, each partner made additional equity contributions of

$3.45 million resulting in total cash and non-cash equity contributions by Syntroleum of $53.56 million and

$56.74 million by Tyson. Also during the twelve month period, each partner made additional working capital loans of $7.54 million. Syntroleum will likely be required to fund future working capital of Dynamic Fuels.

In prior years, Dynamic Fuels was engaged in the development and construction of the Geismar Facility. Dynamic Fuels began commercial operations in November of 2010. The Geismar Facility sold 66.8 million gallons of renewable products such as diesel, naphtha, and LPG from December 2010 to September 30, 2013. Nameplate capacity for the plant is 75 million gallons per year.

Since inception of commercial operations, the plant has experienced mechanical issues, hydrogen supply disruptions and feedstock adulterants which have contributed to plant down time, higher than expected operational costs and operating losses. In order to help resolve differences between us and Tyson regarding plant operational and other issues, on June 27, 2012, we entered into a Settlement Agreement whereby the obligations to us and Tyson for sourcing fees, running royalty fees, line of credit or interest fees and services and expenses under the technical service agreement in the amount of $6,597,000 each were contributed to Dynamic Fuels’ equity. Contemporaneous with the execution of the Settlement Agreement, we entered into a revised site license agreement, rights and obligations under the master license agreement were amended, warrants to purchase our common stock that had been issued to Tyson were vested, and the sales agreement under which Tyson procures feedstock was amended to pay Tyson an additional $.01 per pound, up to 1.1 billion pounds, to procure certain low cost feedstock.

Upgrades to the feedstock pre-treatment area were installed during 2012. After completion of the maintenance turnaround on December 10, 2012, the plant was placed in stand-by mode primarily because of economic conditions, including without limitation, falling RIN prices, uncertainty regarding the extension and retroactive application of federal tax credits, and the high price of feedstocks. The economic outlook improved when, on January 3, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which reinstated tax credits of $1.00 per gallon for the production of renewable diesel and $.50 per gallon for the production of qualified alternative fuels. The Act applies to 2013 production, but also retroactively reinstated the credits for 2012. Dynamic Fuels or its owners will receive approximately $23 million for 2012 production of diesel plus $.50 per gallon for a portion of the renewable naphtha produced during 2012.

In conjunction with specific provisions of the retroactive reinstatement of the tax credits, each partner will receive $10 million of their total portion of the 2012 tax credits as a refund directly from the IRS. Through December 31, 2013 we have collected approximately $9 million of such credits with the remaining balance included in taxes receivable on the consolidated balance sheets. The refunds were recorded by Dynamic Fuels as repayment of working capital loans. Each partner has remaining outstanding working capital loans to Dynamic Fuels of $11.6 million. The remaining loans are non-interest bearing and do not have a stated term but will be repaid to each partner upon Dynamic Fuels generating sufficient operating cash flow.

On February 25, 2013 the Dynamic Fuels management committee approved a resolution to replace the HI catalyst at a total cost of $7.3 million. Installation of the new catalyst was completed by June 28, 2013. The plant has remained in standby mode pending agreement by Syntroleum and Tyson as to the appropriate conditions under which to resume production. While the plant is ready for commercial operation, the Dynamic Fuels management committee has not determined a re-start date. As of the date these consolidated financial statements were issued, the plant continues to be in stand-by mode.

Accounting standards for equity method investments require us to consider all factors that may indicate that the value of our investment in Dynamic Fuels is less than the amount resulting from the application of the equity method reported in our consolidated balance sheet. If such a value deficiency has occurred and is other than temporary, it must be recognized currently. Our management has considered Dynamic Fuel’s financial condition, current status and outlook and has concluded that should a current valuation deficiency exist, it does not meet the “other than temporary” criteria of the accounting standards. When the Company and Tyson reach an agreement to resume production, for which there is no assurance, should the plant upgrades and improvements fail to improve operational performance or industry economics make the plant uneconomic to operate, should the Asset Purchase Agreement not be approved, or should we be required to seek protection under the U.S. Bankruptcy Code or similar relief, we may be required to assess the recoverability of our investment in and loans to Dynamic Fuels.

During the years ended September 30, 2013, 2012 and 2011, we recognized revenue associated with our technical services agreement between us and Dynamic Fuels in the amount of $469,000, $6,017,000 and $1,895,000, respectively. This revenue is reported in “Technical services from Dynamic Fuels, LLC” and “Royalties from Dynamic Fuels, LLC Plant Production” in the Consolidated Statement of Operations. During 2012, $3.7 million in technical service revenue from Dynamic Fuels was recognized for services that had been provided prior to 2012.

Dynamic Fuels, LLC 2013 and 2012 Audited Financials (in thousands):



Balance Sheet	September 30, 2013		September 30, 2012
Cash and Current Assets	$	9,727	$	9,337
Inventory		3,297		17,509
Property, Plant and Equipment and Other Assets		150,843		150,258
Total Assets	$	163,867	$	177,104
Accounts Payable	$	2,254	$	10,241
Notes and Accounts Payable to Related Parties		21,057		29,976
Long-Term Liabilities		100,060		100,051
Total Liabilities		123,371		140,268
Total Members’ Equity		40,496		36,836
Total Liabilities and Members’ Equity	$	163,867	$	177,104



	For the Year Ended September 30, 2013		For the Year Ended September 30, 2012		For the Year Ended September 30, 2011
Revenue	$	46,340	$	166,986	$	127,069
Cost of Goods Sold and Operating Expenses		47,454		179,550		151,341
General and Administrative Expenses		956		1,595		2,516
Loss from Operations		(2,070)		(14,159)		(26,788)
Other Income (Expense)		(1,170)		(2,086)		(2,548)
Net Loss	$	(3,240)	$	(16,245)	$	(29,336)