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EX-31.2 - EXHIBIT 31.2 - Sooner Holdings, Inc. | c16810exv31w2.htm |
EX-32.2 - EXHIBIT 32.2 - Sooner Holdings, Inc. | c16810exv32w2.htm |
EX-32.1 - EXHIBIT 32.1 - Sooner Holdings, Inc. | c16810exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - Sooner Holdings, Inc. | c16810exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011.
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NO. 001-34490
SYNTROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 73-1565725 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
5416 S. Yale Suite 400
Tulsa, Oklahoma 74135
(Address of principal executive offices) (Zip Code)
Tulsa, Oklahoma 74135
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (918) 592-7900
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every interactive data file required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and small reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer o | Accelerated filer þ | Smaller reporting company o | Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
At May 1, 2011, the number of outstanding shares of the issuers common stock was 81,965,610.
SYNTROLEUM CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011
Page | ||||||||
PART I FINANCIAL INFORMATION |
||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
10 | ||||||||
12 | ||||||||
12 | ||||||||
PART II OTHER INFORMATION |
||||||||
13 | ||||||||
13 | ||||||||
13 | ||||||||
13 | ||||||||
13 | ||||||||
13 | ||||||||
13 | ||||||||
14 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, as well as historical facts. These
forward-looking statements include statements relating to the Fischer-Tropsch (FT) process,
Syntroleum® Process, Synfining® Process, and related technologies including, gas-to-liquids
(GTL), coal-to-liquids (CTL) and biomass-to-liquids (BTL), our renewable fuels Bio-Synfining
Technology, plants based on the Syntroleum® Process and/or Bio-Synfining, anticipated costs to
design, construct and operate these plants, the timing of commencement and completion of the design
and construction of these plants, expected production of fuel, obtaining required financing for
these plants and our other activities, the economic construction and operation of Fischer-Tropsch
(FT) and/or Bio-Synfining plants, the value and markets for products, testing, certification,
characteristics and use of plant products, the continued development of the Syntroleum® Process
and Bio-Synfining Technology and the anticipated capital expenditures, expense reductions, cash
outflows, expenses, use of proceeds from our equity offerings, anticipated revenues, availability
of catalyst, our support of and relationship with our licensees, and any other forward-looking
statements including future growth, cash needs, capital availability, operations, business plans
and financial results. When used in this document, the words anticipate, believe, estimate,
expect, intend, may, plan, project, should and similar expressions are intended to be
among the statements that identify forward-looking statements. Although we believe that the
expectations reflected in these forward-looking statements are reasonable, these kinds of
statements involve risks and uncertainties. Actual results may not be consistent with these
forward-looking statements. Syntroleum undertakes no obligation to update or revise
forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events
or changes to future operating results over time. Important factors that could cause actual
results to differ from these forward-looking statements are described under Item 1A. Risk Factors
and elsewhere in our 2010 Annual Report on Form 10-K.
As used in this Quarterly Report on Form 10-Q, the terms Syntroleum, we, our or us
mean Syntroleum Corporation, a Delaware corporation, and its predecessors and subsidiaries, unless
the context indicates otherwise.
1
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands)
(in thousands)
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 10,406 | $ | 12,513 | ||||
Restricted cash |
574 | 484 | ||||||
Accounts receivable |
173 | 556 | ||||||
Accounts receivable from Dynamic Fuels, LLC |
1,405 | 729 | ||||||
Other current assets |
257 | 361 | ||||||
Total current assets |
12,815 | 14,643 | ||||||
PROPERTY AND EQUIPMENT at cost, net |
103 | 97 | ||||||
INVESTMENT IN AND LOANS TO DYNAMIC FUELS, LLC |
41,414 | 43,523 | ||||||
OTHER ASSETS, net |
1,148 | 1,133 | ||||||
$ | 55,480 | $ | 59,396 | |||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Accounts payable |
$ | 185 | $ | 1,090 | ||||
Accrued employee costs |
240 | 119 | ||||||
Deposits |
574 | 484 | ||||||
Total current liabilities |
999 | 1,693 | ||||||
NONCURRENT LIABILITIES OF DISCONTINUED OPERATIONS |
603 | 603 | ||||||
DEFERRED REVENUE |
24,518 | 24,300 | ||||||
COMMITMENTS AND CONTINGENCIES |
||||||||
STOCKHOLDERS EQUITY: |
||||||||
Preferred stock, $0.01 par value, 5,000 shares authorized, no shares issued |
| | ||||||
Common stock, $0.01 par value, 150,000 shares authorized, 81,909 and
81,683 shares issued and outstanding at March 31, 2011 and December
31, 2010, respectively |
819 | 817 | ||||||
Additional paid-in capital |
374,862 | 374,397 | ||||||
Accumulated deficit |
(346,321 | ) | (342,414 | ) | ||||
Total stockholders equity |
29,360 | 32,800 | ||||||
$ | 55,480 | $ | 59,396 | |||||
The accompanying notes are an integral part of these unaudited consolidated statements.
2
Table of Contents
SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(in thousands, except per share data)
For the Quarter Ended March 31, | ||||||||
2011 | 2010 | |||||||
REVENUES: |
||||||||
Technology |
$ | 150 | $ | 2,900 | ||||
Technical services |
501 | 901 | ||||||
Technical services from Dynamic Fuels, LLC |
198 | 437 | ||||||
Total revenues |
849 | 4,238 | ||||||
COSTS AND EXPENSES: |
||||||||
Engineering |
556 | 596 | ||||||
Depreciation and amortization |
49 | 62 | ||||||
General, administrative and other (including non-cash
equity compensation of $467 and $821 for
the quarter ended March 31, 2011 and 2010,
respectively.) |
1,831 | 2,053 | ||||||
OPERATING INCOME (LOSS) |
(1,587 | ) | 1,527 | |||||
INTEREST INCOME |
4 | 6 | ||||||
OTHER INCOME |
2 | 34 | ||||||
EQUITY IN LOSS OF DYNAMIC FUELS, LLC |
(2,109 | ) | (746 | ) | ||||
FOREIGN CURRENCY EXCHANGE |
(218 | ) | (396 | ) | ||||
INCOME (LOSS) FROM CONTINUING OPERATIONS |
(3,908 | ) | 425 | |||||
INCOME (LOSS) FROM DISCONTINUED OPERATIONS |
1 | (22 | ) | |||||
NET INCOME (LOSS) |
$ | (3,907 | ) | $ | 403 | |||
BASIC NET INCOME (LOSS) PER SHARE: |
||||||||
Income (loss) from continuing operations |
$ | (0.05 | ) | $ | 0.01 | |||
Income from discontinued operations |
0.00 | 0.00 | ||||||
Net income (loss) |
$ | (0.05 | ) | $ | 0.01 | |||
DILUTED NET INCOME (LOSS) FROM CONTINUING OPERATIONS
PER SHARE: |
$ | (0.05 | ) | $ | 0.01 | |||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |
||||||||
Basic |
81,893 | 76,183 | ||||||
Diluted |
81,893 | 78,783 | ||||||
The accompanying notes are an integral part of these unaudited consolidated statements.
3
Table of Contents
SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(in thousands)
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(in thousands)
Common Stock | Total | |||||||||||||||||||
Number | Additional | Accumulated | Stockholders | |||||||||||||||||
of Shares | Amount | Paid-In Capital | Deficit | Equity | ||||||||||||||||
Balance, December 31, 2010 |
81,683 | $ | 817 | $ | 374,397 | $ | (342,414 | ) | $ | 32,800 | ||||||||||
Vesting of awards granted |
15 | | 86 | | 86 | |||||||||||||||
Stock-based bonuses and match to 401(k) Plan |
211 | 2 | 379 | | 381 | |||||||||||||||
Net loss |
| | | (3,907 | ) | (3,907 | ) | |||||||||||||
Balance, March 31, 2011 |
81,909 | $ | 819 | $ | 374,862 | $ | (346,321 | ) | $ | 29,360 | ||||||||||
The accompanying notes are an integral part of these unaudited consolidated statements.
4
Table of Contents
SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(in thousands)
For the Quarter Ended March 31, | ||||||||
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income (loss) |
$ | (3,907 | ) | $ | 403 | |||
Income (loss) from discontinued operations |
1 | (22 | ) | |||||
Income (loss) from continuing operations |
(3,908 | ) | 425 | |||||
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities: |
||||||||
Depreciation and amortization |
49 | 62 | ||||||
Foreign currency exchange |
218 | 396 | ||||||
Non-cash compensation expense |
467 | 821 | ||||||
Non-cash loss in equity method investee |
2,109 | 746 | ||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
383 | 2,563 | ||||||
Accounts receivable from Dynamic Fuels, LLC |
(676 | ) | (33 | ) | ||||
Other assets |
56 | 73 | ||||||
Accounts payable |
(905 | ) | 35 | |||||
Accrued liabilities and other |
121 | (152 | ) | |||||
Deferred revenue |
| (2,967 | ) | |||||
Net cash provided by (used in) continuing operations |
(2,086 | ) | 1,969 | |||||
Net cash provided by (used in) discontinued operations |
1 | (202 | ) | |||||
Net cash provided by (used in) operating activities |
(2,085 | ) | 1,767 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchase of property and equipment |
(22 | ) | (1 | ) | ||||
Net cash used in investing activities |
(22 | ) | (1 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Proceeds from sale of common stock, warrants and option exercises |
| 33 | ||||||
Net cash provided by financing activities |
| 33 | ||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS |
(2,107 | ) | 1,799 | |||||
CASH AND CASH EQUIVALENTS, beginning of period |
12,513 | 25,012 | ||||||
CASH AND CASH EQUIVALENTS, end of period |
$ | 10,406 | $ | 26,811 | ||||
The accompanying notes are an integral part of these unaudited consolidated statements.
5
Table of Contents
SYNTROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
March 31, 2011
1. Basis of Reporting
The focus of Syntroleum Corporation and subsidiaries is the commercialization of our
technologies to produce synthetic liquid hydrocarbons. Operations to date have consisted of
activities related to the commercialization of a proprietary process (the Syntroleum® Process)
and previously consisted of research and development of the Syntroleum® Process designed to convert
carbonaceous material (biomass, coal, natural gas and petroleum coke) into synthetic liquid
hydrocarbons. Synthetic hydrocarbons produced by the Syntroleum® Process can be further processed
using the Syntroleum Synfining® Process into high quality liquid fuels, such as diesel, jet fuel
(subject to certification), kerosene, naphtha, propane and other renewable chemical products.
Our Bio-Synfining Technology is a renewable fuels application of our Synfining® Technology.
This technology is applied commercially via our Dynamic Fuels, LLC joint venture with Tyson Foods,
Inc. The technology processes renewable triglycerides and/or fatty acids to make renewable
synthetic products.
The consolidated financial statements include the accounts of Syntroleum Corporation and our
majority-owned subsidiaries. All significant inter-company accounts and transactions have been
eliminated. Companies in which we own a 20 percent to 50 percent interest, but in which we do not
have a controlling interest are accounted for by the equity method. We own 50 percent and have a
non-controlling interest in Dynamic Fuels, LLC (Dynamic Fuels). The 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 results of operations is reflected in the Consolidated Statements of
Operations and the subsidiarys summarized financial information is reported in Note 5, Investment
in and Loans to Dynamic Fuels, LLC. The carrying value of our investment in Dynamic Fuels is
reflected in Investment in and Loans to Dynamic Fuels, LLC in our Consolidated Balance Sheets.
The consolidated financial statements included in this report have been prepared by the
Company without audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Accordingly, these statements reflect all adjustments (consisting of normal
recurring entries), which are, in the opinion of management, necessary for a fair statement of the
financial results for the interim periods presented. These financial statements should be read
together with the financial statements and the notes thereto included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2010 filed with the SEC under the Securities
Exchange Act of 1934.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Our financial position and results of operations are
materially affected by Dynamic Fuels financial position and results of operations as of and for
the three months ended December 31, 2010. During this period, the plant was commencing initial
operations when its operating and financial controls were undergoing late-stage development. As a
result the financial statements may be more significantly impacted by managements estimates and
assumptions than they will be when operations stabilize and the accounting processes mature.
Actual results could differ from those estimates.
2. Operations and Liquidity
In the past we have sustained recurring losses and negative cash flows from operations. As of
March 31, 2011, we had approximately $10.4 million of cash and cash equivalents and $1.6 million of
accounts receivable available to fund operations and investing activities. We review cash flow
forecasts and budgets periodically. Based on production levels and gross margins from the sale of
finished goods and upon working capital and capital expenditures requirements for the Dynamic Fuels
plant, we expect to receive partner distributions from Dynamic Fuels in the future.
3. Restricted Cash
Restricted cash consists of cash held in an escrow account for the prepayment of operations
and invoices for an ongoing contractual project. The account has also been recorded as a liability
in current deposits on the Consolidated Balance Sheet at March 31, 2011 and December 31, 2010.
4. Reclassifications
Certain reclassifications have been made to the March 31, 2010 consolidated statements to
conform to the March 31, 2011 presentation. These reclassifications had no impact on net income.
6
Table of Contents
5. Investment in and Loans to Dynamic Fuels, LLC
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).
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. Our carrying value in Dynamic Fuels is reflected in Investment
in and Loans to Dynamic Fuels LLC in our Consolidated Balance Sheets. As of March 31, 2011,
Syntroleums total estimate of maximum exposure to loss as a result of its relationships with this
entity was approximately $42,819,000, which represents our equity investment in and loans to this
entity in the amount of $41,414,000 and accounts receivable from this entity in the amount of
$1,405,000, which fluctuates from time to time with certain operating activities.
Dynamic Fuels, LLC Quarter Ended December 31, 2010 Unaudited Financials (in thousands):
December 31, | ||||
Balance Sheet | 2011 | |||
Cash and Receivables |
14,636 | |||
Inventory |
15,530 | |||
Property, Plant and Equipment and Other Assets |
149,577 | |||
Total Assets |
$ | 179,743 | ||
Current Liabilities |
$ | 23,735 | ||
Long-Term Liabilities |
100,036 | |||
Total Liabilities |
123,771 | |||
Total Members Equity |
55,972 | |||
Total Liabilities and Members Equity |
$ | 179,743 | ||
For the Quarter | ||||
Ended December 31, | ||||
Statement of Operations | 2011 | |||
Revenue |
$ | 6,890 | ||
Operating Expenses |
11,483 | |||
Loss from Operations |
$ | (4,593 | ) | |
Other Income (Expense) |
550 | |||
Net Loss |
$ | (4,043 | ) | |
Dynamic Fuels began commercial operations in November of 2010 and produced over 7 million
gallons of products by the end of April. The plant has run the hydro-processing reactors up to
120% of design feed rates, but stable production has been interrupted by mechanical reliability
issues with certain key pieces of rotating equipment. The hydrogen compressor and recycle pump
system reliability upgrades were installed in April and the plant resumed operations on April
26th.
During the three months ended March 31, 2011 and March 31, 2010, we recognized revenue
associated with our technical services agreement between us and Dynamic Fuels in the amount of
$198,000 and $437,000 respectively. This revenue is reported in Technical services from Dynamic
Fuels, LLC in the Consolidated Statement of Operations. We had a receivable from Dynamic Fuels of
$1,405,000 and $729,000 as of March 31, 2011 and December 31, 2010, respectively. In March, we
made additional payments of $477,000 for purchases made on behalf of Dynamic Fuels for prepayments
to raw material suppliers. Dynamic Fuels paid Syntroleum once raw materials were received on site
in April, 2011. In May, Syntroleum and Tyson each contributed an additional $2,000,000 in the form
of a working capital loan to the entity. The $2,000,000 loan will be repaid to each member upon
Dynamic Fuels generating sufficient working capital from fuel sales.
7
Table of Contents
6. Earnings Per Share
Three months ended March 31, | ||||||||
2011 | 2010 | |||||||
(Dollars in thousands, except | ||||||||
per share amounts; shares in | ||||||||
thousands) | ||||||||
Income (loss) from continuing operations available to
common stockholders for basic and diluted earnings per
share |
$ | (3,908 | ) | $ | 425 | |||
Basic weighted-average shares |
81,893 | 76,183 | ||||||
Effect of dilutive securities: |
||||||||
Unvested restricted stock units |
| 12 | ||||||
Stock options |
| 2,588 | ||||||
Dilutive weighted-average shares |
81,893 | 78,783 | ||||||
Earnings (loss) per common share from continuing operations: |
||||||||
Basic |
$ | (0.05 | ) | $ | 0.01 | |||
Diluted |
$ | (0.05 | ) | $ | 0.01 |
The table below includes information related to stock options, warrants and restricted stock
that were outstanding at March 31 of each respective year but have been excluded from the
computation of weighted-average stock options due to the option exercise price exceeding the first
quarter weighted-average market price of our common shares as their inclusion would have been
anti-dilutive to our income (loss) per share.
March 31, | March 31, | |||||||
2011 | 2010 | |||||||
Options, warrants and restricted stock excluded (in thousands) |
18,234 | 12,338 | ||||||
Weighted-average exercise prices of options, warrants and restricted stock excluded |
$ | 2.56 | $ | 4.14 | ||||
First quarter weighted average market price |
$ | 1.82 | $ | 2.40 |
7. Stock-Based Compensation
Our share-based incentive plans permit us to grant restricted stock units, restricted stock,
incentive or non-qualified stock options, and certain other instruments to employees, directors,
consultants and advisors of the Company. Certain stock options and restricted stock units vest in
accordance with the achievement of specific company objectives. The exercise price of options
granted under the plan must be at least equal to the fair market value of our common stock on the
date of grant. All options granted vest at a rate determined by the Nominating and Compensation
Committee of our Board of Directors and are exercisable for varying periods, not to exceed ten
years. Shares issued under the plans upon option exercise or stock unit conversion are generally
issued from authorized, but previously unissued shares.
As of March 31, 2011, approximately 4,505,282 shares of common stock were available for grant
under our current plan. We are authorized to issue up to approximately 12,737,167 plan equivalent
shares of common stock in relation to stock options or restricted shares outstanding or available
for grant under the plans.
Stock Options
The number and weighted average exercise price of stock options outstanding are as follows:
Weighted | ||||||||
Shares Under Stock | Average Price | |||||||
Options | Per Share | |||||||
OUTSTANDING AT DECEMBER 31, 2010 |
8,283,586 | $ | 2.94 | |||||
Granted at market price |
| $ | | |||||
Exercised |
| $ | | |||||
Expired, forfeited, cancelled or repurchased |
(64,413 | ) | $ | 15.06 | ||||
OUTSTANDING AT MARCH 31, 2011 |
8,219,173 | $ | 2.80 | |||||
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The following table summarizes information about stock options outstanding at March 31, 2011:
Options Outstanding | Options Exercisable | |||||||||||||||||||||||
Weighted | ||||||||||||||||||||||||
Weighted | Weighted Average | Average | ||||||||||||||||||||||
Range of | Options | Average | Remaining | Options | Exercise Price | |||||||||||||||||||
Exercise Price | Outstanding | Exercise Price | Contractual Life | Exercisable | Per Share | |||||||||||||||||||
$0.66 $0.66 | 5,010,631 | $ | 0.66 | 7.30 | 1,352,681 | $ | 0.66 | |||||||||||||||||
$1.49 $1.55 | 1,010,666 | 1.55 | 1.50 | 1,010,666 | 1.55 | |||||||||||||||||||
$1.62 $2.89 | 1,140,195 | 2.33 | 3.46 | 1,140,195 | 2.33 | |||||||||||||||||||
$3.19 $6.88 | 769,277 | 6. 32 | 3.25 | 769,277 | 6.32 | |||||||||||||||||||
$7.10 $9.67 | 240,904 | 9.28 | 4.38 | 240,904 | 9.28 | |||||||||||||||||||
$10.51 $13.85 | 47,500 | 12.09 | 2.32 | 47,500 | 12.09 | |||||||||||||||||||
8,219,173 | $ | 1.85 | 4,561,223 | $ | 2.80 | |||||||||||||||||||
A total of 3,657,950 stock options with a weighted average exercise price of $0.66 were
outstanding at March 31, 2011 and had not vested. There were no stock options granted during the
three months ended March 31, 2011 or 2010.
The total intrinsic value of options exercised (i.e., the difference between the market price
on the exercise date and the price paid by the employee to exercise the options) during the three
months ended March 31, 2011 and 2010 was $0 and $85,000, respectively. The total amount of cash
received in 2011 and 2010 by the Company from the exercise of these options was $0 and $33,000,
respectively. As of March 31, 2011 there was $6,145,000 intrinisic value of stock options that
were fully vested or were expected to vest. The remaining weighted average contractual term for
options exercisable is approximately 4.29 years. In addition, as of March 31, 2011 unrecognized
compensation cost related to non-vested stock options was $77,000, which will be fully amortized
upon vesting of the options, which is expected to occur in 2011.
Non-cash compensation cost related to stock and stock options and restricted stock recognized
during the three months ended March 31, 2011 and 2010 was $467,000 and $821,000, respectively.
Restricted Stock
We also grant common stock and restricted common stock units to employees. These awards are
recorded at their fair values on the date of grant and compensation cost is recorded using graded
vesting over the expected term. The weighted average grant date fair value of common stock and
restricted stock units granted during the three months ended March 31, 2011 and 2010 was $2.21
(total grant date fair value of $436,000) and $2.71 (total grant date fair value of $350,000),
respectively. As of March 31, 2011, the aggregrate intrinsic value of restricted stock units that
are expected to vest was approximately $2,269,000. In addition, as of March 31, 2011, unrecognized
compensation cost related to non-vested restricted stock units was $22,000, net of forfeitures,
which is expected to be recognized in 2011. The total fair value of restricted stock units vested
during the quarter ended March 31, 2011 and 2010 was $499,000 and $420,000, respectively. The
following summary reflects restricted stock unit activity and related information.
Weighted-Average | ||||||||
Grant Date Fair | ||||||||
Shares / Units | Value | |||||||
NONVESTED AT DECEMBER, 31, 2010 |
1,055,212 | $ | 0.41 | |||||
Granted |
196,977 | $ | 2.21 | |||||
Vested or Exercised |
(204,477 | ) | $ | 2.44 | ||||
Expired or forfeited |
| $ | | |||||
NONVESTED AT MARCH 31, 2011 |
1,047,712 | $ | 0.35 | |||||
8. Commitments and Contingencies
We have entered into employment agreements, which provide severance benefits to several key
employees. Commitments under these agreements totaled approximately $2,139,000 at March 31, 2011.
Expense is not recognized until an employee is severed.
We entered into a Bio-Synfining Master License Agreement on June 22, 2007 with Dynamic Fuels,
LLC. Under this license agreement, we at the request of the licensee must execute a Site License
Agreement in favor of licensee for licensees use of our Bio-Synfining Technology. The form of
the Site License Agreement is included in the agreement as Exhibit B. The form of the Site License
Agreement includes process guarantees if the plant fails to pass a performance test as defined in
the Site License Agreement. If the plant fails to meet the Process Guarantee during the
Performance Test and such failure is due in whole or in part to the Process Design Package, then we
and Dynamic Fuels shall mutually agree whether or not remedial measures are reasonably likely to
cause the plant to satisfy the Process Guarantee. The actual cost of the remedial measures will be
reimbursed to licensee through application of any future royalties owed to us, not to exceed
$9,800,000. If the remedial measures are not effective, we shall pay to Dynamic Fuels an
additional amount for liquidated damages in an amount not to exceed $9,800,000.
As of the date of this filing the Site License Agreement has not been executed by Dynamic
Fuels and we cannot be certain the document that will be executed will have this same language and
amounts.
In May 2011, Syntroleum and Tyson each contributed an additional $2,000,000 in the form of a
working capital loan to the entity. The $2,000,000 loan will be repaid to each member upon Dynamic
Fuels generating sufficient working capital from fuel sales.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following information together with the information presented elsewhere in
this Quarterly Report on Form 10-Q and with the information presented in our Annual Report on Form
10-K for the year ended December 31, 2010 (including our audited financial statements and the
accompanying notes).
Overview
Our focus is the commercialization of our technologies to produce synthetic liquid
hydrocarbons. Operations to date have consisted of activities related to the commercialization of
a proprietary process (the Syntroleum® Process) and previously consisted of research and
development of the Syntroleum® Process designed to convert carbonaceous material (biomass, coal,
natural gas and petroleum coke) into synthetic liquid hydrocarbons. Synthetic hydrocarbons
produced by the Syntroleum® Process can be further processed using the Syntroleum Synfining®
Process into high quality liquid fuels, such as diesel, jet fuel (subject to certification),
kerosene, naphtha, propane and other renewable chemical products.
Our Bio-Synfining Technology is a renewable fuels application of our Synfining® Technology.
This technology is applied commercially via our Dynamic Fuels, LLC joint venture with Tyson Foods,
Inc. The technology processes renewable feedstocks such as triglycerides and/or fatty acids to
make renewable synthetic products.
Commercial and Licensee Projects
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).
The LLC Agreement provides for management and control of Dynamic Fuels to be exercised equally
by representatives of the Company and Tyson equally. 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. Our
carrying value in Dynamic Fuels is reflected in Investment in and loans to Dynamic Fuels LLC in
our Consolidated Balance Sheets. As of March 31, 2011, Syntroleums total estimate of maximum
exposure to loss as a result of its relationships with this entity was approximately $42,819,000,
which represents our equity investment in and loans to this entity in the amount of $41,414,000 and
accounts receivable from this entity in the amount of $1,405,000, which fluctuates from time to
time with certain operating activities. Each member has contributed $40.5 million in capital
contributions and an additional $7.0 million in the form of a working capital loans to the entity.
The $7.0 million loans will be repaid to each member upon Dynamic Fuels generating sufficient
working capital from fuel sales.
Dynamic Fuels began commercial operations in November of 2010 and produced over 7 million
gallons of products by the end of April. The plant has run the hydro-processing reactors up to
120% of design feed rates, but stable production has been interrupted by mechanical reliability
issues with certain key pieces of rotating equipment. The hydrogen compressor and recycle pump
system reliability upgrades were installed in April and the plant resumed operations on April
26th.
Diesel is quality tested and meets ASTM D975 standards for diesel. The renewable products
have low emissions and nearly no aromatics. Our jet fuel HRJ, meets all petroleum based jet fuel
specifications subject to certification. The production of our fuel is eligible for the $1.00 tax
credit per gallon of renewable diesel and $0.50 per gallon of renewable naphtha under the Energy
Independence Act and Energy Policy Act of 2005. Our fuel also generates 1.7 Renewable
Identification Numbers, (RIN) per gallon. As of March 31, 2011, RIN prices were $1.26 per
gallon and therefore worth $2.14 per gallon with the 1.7 multiplier. Our fuel can be sold with the
RIN premium included in our price of fuel.
On October 21, 2008, Dynamic Fuels issued tax exempt bonds through the Louisiana Public
Facilities Authority in the amount of $100 million at an initial interest rate of 1.3% to fund
construction of the plant. The Bonds required a letter of credit in the amount of $100 million as
collateral for Dynamic Fuels obligations under the Bonds. Tyson agreed under the terms of the
Warrant Agreement to provide credit support for the entire $100 million Bond issue. The interest
rate for the Bonds is a daily floating interest rate and may change significantly from this amount.
In the fourth quarter of 2008, Dynamic Fuels entered into an interest rate swap, which had the
effect of locking in the interest rate at 2.19% for a period of 5 years with declining swap
coverage. This debt funding is in addition to the equity contributions and loans provided by each
member.
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Results of Operations
Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
Consolidated Unaudited Results for the Quarters Ended,
March 31, | March 31, | |||||||
Revenues | 2011 | 2010 | ||||||
(in thousands) |
||||||||
Technology |
$ | 150 | $ | 2,900 | ||||
Technical Services |
501 | 901 | ||||||
Technical Services from Dynamic Fuels LLC |
198 | 437 | ||||||
Total Revenues |
$ | 849 | $ | 4,238 | ||||
Technology Revenue. Technology Revenue was $150,000 and $2,900,000 for the quarters ended March
31, 2011 and 2010, respectively and relates to the delivery of technology equipment related to our
transfer of technology sale that occurred in 2009. Technology Agreements will be unique to
individual customers. Revenue recognition will be determined on an individual contract basis. We
are actively pursuing other agreements. Due to the complexity and due diligence requirements of
these agreements, the business development requirements typically span current year timing.
Technical Services Revenue. Revenues from engineering services for technical services contracts
related to certain Technology Revenue Agreements and continued work on the engineering design and
project management of Dynamic Fuels were $699,000 and $1,338,000 for the quarters ended March 31,
2011 and 2010, respectively. We expect to continue to earn revenues for engineering services to
other customers on an individual contract basis in 2011. Revenue from Dynamic Fuels decreased in
2011 as the initial engineering design work is completed.
March 31, | March 31, | |||||||
Operating Costs and Expenses | 2011 | 2010 | ||||||
(in thousands) |
||||||||
Engineering |
$ | 556 | $ | 596 | ||||
Depreciation and amortization |
49 | 62 | ||||||
Non-cash equity compensation |
467 | 821 | ||||||
General, administrative and other |
1,364 | 1,232 | ||||||
Total Operating Costs and Expenses |
$ | 2,436 | $ | 2,711 | ||||
Engineering. Expenses from engineering activities were $556,000 for the quarter ended March 31,
2011 compared to $596,000 during the same period in 2010. There was no change to engineering
personnel or engineering activities for 2011 compared to 2010.
Non-cash Equity Compensation. Non-cash equity compensation for the quarter ended March 31, 2011
was $467,000 compared to $821,000 for the same period in 2010. The decreased expense primarily
relates to the vesting schedule of performance based awards granted to all employees in 2008. The
vesting of these awards is based on achieving certain milestones associated with the Bio-Synfining
Technology project. A majority of the expense associated with these awards was recognized in 2009
and 2010. We expect to recognize the remaining amount of equity compensation for the milestone
based awards in 2011.
General, Administrative and Other. General and administrative expenses for the quarter ended March
31, 2011 were $1,364,000 compared to $1,232,000 during the same period in 2010. The overhead
activities associated with the company remain relatively the same for 2011 compared to 2010.
Loss from Dynamic Investment. Our 50% share of Dynamic Fuels loss for its first quarter ended
December 31, 2010 increased compared to the same period last year due to limited production revenue
to offset fixed costs of the operating plant. The plant was not operational for the same period
ended 2009. The plant began commercial operations in November of 2010 and did not operate at full
production capacity for the entire quarter ended December 31, 2010. Loss from our investment in
Dynamic was $2,021,000 for the quarter ended December 31, 2010, compared to a loss of $746,000 for
the same period in 2009. Dynamic Fuels revenues were $6,890,000 with operating expenditures of
$11,483,000 and other income of $550,000 for the quarter ended December 31, 2010. We expect to
report income from this investment in 2011 upon full rate commercial operations. We report our 50
percent share of Dynamic Fuels results of operations on a three month lag basis.
Liquidity and Capital Resources
General
As of March 31, 2011, we had approximately $10,406,000 in cash and cash equivalents. At March
31, 2011, we had $1,578,000 in accounts receivable outstanding relating to our Technical Services
Revenue provided to Dynamic Fuels and other clients and other payments provided to Dynamic Fuels. We believe that all of the receivables
currently outstanding will be collected and have not established a reserve for bad debts.
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Our current liabilities totaled $999,000 as of March 31, 2011.
Our business plan over the next several years includes potential investments in additional
plants and we will need to raise capital to accomplish this plan. If we obtain additional funds by
issuing equity, dilution to stockholders may occur. In addition, preferred stock could be issued
without stockholder approval, and the terms of our preferred stock could include dividend,
liquidation, conversion, voting and other rights that are more favorable than the rights of the
holders of our common stock. There can be no assurance as to the availability or terms upon which
such financing might be available.
If we are unable to generate funds from operations, our need to obtain funds through financing
activities will be increased.
Cash Flows
Cash flows used in operations was $2,085,000 during the three months ended March 31, 2011,
compared to cash flows provided by operations of $1,767,000 during the three months ended March 31,
2010. The decrease in cash flows provided by operations primarily results from the collection of
revenues from technology deployment agreements of $2,750,000 in 2010 compared to $0 in 2011 and
additional payments of $477,000 for purchases made on behalf of Dynamic Fuels for prepayments to
raw material suppliers. Dynamic Fuels paid Syntroleum once raw materials were received on site in
April, 2011.
Cash flows used in investing activities related to small purchases of capital office
equipment. No additional investments to Dynamic Fuels were made in the first quarters of 2011 and
2010.
There were no cash flows provided by financing activities during the three months ended March
31, 2011. For the quarter ended March 31, 2010, we received $33,000 from the exercise of stock
options.
Contractual Obligations
Our operating leases include leases for corporate headquarters, copiers and software.
We have entered into employment agreements, which provide severance cash benefits to several
key employees. Commitments under these agreements totaled approximately $2,139,000 at March 31,
2011. Expense is not recognized until an employee is severed.
We entered into a Bio-Synfining Master License Agreement on June 22, 2007 with Dynamic Fuels,
LLC. Under this license agreement, we at the request of the licensee must execute a Site License
Agreement in favor of licensee for licensees use of our Bio-Synfining Technology. The form of
the Site License Agreement is included in the agreement as Exhibit B. The form of the Site License
Agreement includes process guarantees if the plant fails to pass a performance test as defined in
the Site License Agreement. If the plant fails to meet the Process Guarantee during the
Performance Test and such failure is due in whole or in part to the Process Design Package, then we
and Dynamic Fuels shall mutually agree whether or not remedial measures are reasonably likely to
cause the plant to satisfy the Process Guarantee. The actual cost of the remedial measures will be
reimbursed to licensee through application of any future royalties owed to us, not to exceed
$9,800,000. If the remedial measures are not effective, we shall pay to Dynamic Fuels an
additional amount for liquidated damages in an amount not to exceed $9,800,000. As of the date of
this filing the Site License Agreement has not been executed by Dynamic Fuels and we cannot be
certain the document that will be executed will have this same language and amounts.
We may need to fund future short-term working capital needs of Dynamic Fuels on an as needed
basis.
New Accounting Pronouncements
No new accounting standards have been adopted since the Companys Annual Report on Form 10-K
for the fiscal year ended December 31, 2010 was filed.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
There have been no material changes to the Quantitative and Qualitative Disclosures about
Market Risk described in our annual report on Form 10-K for the year ended December 31, 2010.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. In accordance with Exchange Act Rules
13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation
of management, including our Principal Executive Officer and Principal Financial Officer, of the
effectiveness of our disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer
concluded that our disclosure controls and procedures were effective as of March 31, 2011 to
provide reasonable assurance that information required to be disclosed in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commissions rules and forms.
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Changes in Internal Control over Financial Reporting. There has been no change in our
internal controls over financial reporting that occurred during the three months ended March 31,
2011 that has materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
On August 17, 2007, we entered into a Resignation and Compromise Agreement (Compromise
Agreement) with Mr. Ziad Ghandour, a former director, employee and consultant to Syntroleum.
Under the Compromise Agreement, Mr. Ghandour has the right to receive additional compensation until
December 31, 2011 for five potential commercial projects, as defined in the Compromise Agreement.
Mr. Ghandour claims he is entitled to additional compensation as a result of a business transaction
with SINOPEC. We determined that no additional compensation was warranted as a result of the
transaction. The arbitration between Syntroleum Corporation and Ziad Ghandours styled Ziad
Ghandour v. Syntroleum Corporation, Case No. 50 166 T 00048 10, pending before the American
Arbitration Association, was settled on January 17, 2011, and the arbitration was dismissed with
prejudice on January 18, 2011. The parties exchanged mutual releases. The settlement has been
recorded in our year ended December 31, 2010 Statement of Operations.
Item 1A. Risk Factors
There have been no material changes to the risk factors described in our annual report on Form
10-K for the year ended December 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities.
Not applicable.
Use of Proceeds.
Not applicable.
Purchases of Equity Securities by the Issuer and Affiliated Purchases.
Not applicable
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Reserved
Item 5. Other Information.
None.
Item 6. Exhibits.
31.1
|
Section 302 Certification of Edward G. Roth | |
31.2
|
Section 302 Certification of Karen L. Gallagher | |
32.1
|
Section 906 Certification of Edward G. Roth | |
32.2
|
Section 906 Certification of Karen L. Gallagher |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SYNTROLEUM CORPORATION, a Delaware corporation (Registrant) |
||||
Date: May 9, 2011 | By: | /s/ Edward G. Roth | ||
Edward G. Roth | ||||
President and Chief Executive Officer (Principal Executive Officer) |
||||
Date: May 9, 2011 | By: | /s/ Karen L. Gallagher | ||
Karen L. Gallagher | ||||
Senior Vice President and Principal Financial
Officer (Principal Financial Officer) |
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