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SYNM > SEC Filings for SYNM > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for SYNTROLEUM CORP

Form 10-Q for SYNTROLEUM CORP


8-Nov-2012

Quarterly Report


Item 2. Management's 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, 2011 (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 the "Syntroleum® Process" and previously consisted of research and development supporting 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 (HRJ), kerosene, naphtha, and propane. Our Bio-Synfining® Technology is a renewable fuels application of our Synfining ® Technology. This technology is applied commercially via Dynamic Fuels. 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 pursuant to the provisions of 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 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. As of September 30, 2012, Syntroleum's total estimated maximum exposure to loss as a result of its relationships with this entity was approximately $42,919,000, which represents our equity investment in and loans to this entity in the amount of $42,682,000 and accounts receivable from this entity in the amount of $237,000, which fluctuates from time to time with certain operating activities.

As of September 30, 2012, Syntroleum had contributed $50.1 million in capital contributions and an additional $14.0 million in the form of working capital loans to Dynamic Fuels. The $14.0 million non-interest bearing loan does not have a stated term but will be repaid upon Dynamic Fuels generating sufficient operating cash flow.

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. The daily floating interest rate as of September 30, 2012 was 2.0%. Year to date the average interest rate was 1.56%. This debt funding is in addition to the equity contributions and loans provided by each member.


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Renewable diesel produced by Dynamic Fuels meets ASTM D975 standard for petroleum diesel. Diesel produced by Dynamic Fuels generates 1.7 Renewable Identification Number's, ("RIN") per gallon. As of January 5, 2012 RIN prices were $1.55 per gallon with a 1.7 multiplier value of $2.64 per gallon. During the year RIN prices have averaged $1.21 per gallon with a 1.7 multiplier average value of $2.06 per gallon. On November 1, 2012 RIN prices were $0.58 per gallon and therefore worth $0.99 per gallon with the 1.7 multiplier.

In 2011, Dynamic Fuels announced a contract with the U.S. Navy to supply 450,000 gallons of renewable fuels. This includes 100,000 gallons of jet fuel and 350,000 gallons of marine distillate fuel. The fuel was used in the Navy's "Green Strike Group" composed of air craft, vessels and ships powered by renewable fuels. This represents the single largest purchase of biofuel in government history, as reported by the Navy and USDA.

In 2011, we received approval for registration of our neat renewable diesel from the Environmental Protection Agency. The registration of the neat renewable diesel allows combustion in regular on-road engines of up to 100 percent renewable fuel, which means no blending of petroleum based diesel is required (previously we had registration approval for blends up to 20 percent renewable diesel). This allows Dynamic Fuels to market its fuel directly to third party fuel end-users, such as operators of on-road fleet vehicles. In 2012, Dynamic Fuels entered into strategic marketing alliance, commercial off-take and supply chain management agreements with Mansfield Oil Company ("Mansfield") to efficiently distribute the plants renewable products to the commercial fleet vehicle market. Mansfield markets and distributes over 2.5 billion gallons of fueling product per year to thousands of commercial customers across all 50 states and Canada.

Dynamic Fuels began commercial operations in November of 2010. As of September 30, 2012, the plant had sold 63.0 million gallons of renewable products, such as diesel, jet fuel, naphtha, and LPG since it began commercial operations. Nameplate capacity for the plant is 75.0 million gallons per year. During the nine months ended June 30, 2012, the plant produced renewable products at an average rate of 47% of design capacity or a total of 26.5 million gallons compared to 25% of design capacity or 14.0 million gallons for the same period in 2011. For the quarter ended September 30, 2012, the plant produced renewable products at an average rate of 56% of design or a total of 10.6 million gallons. During the quarter ended September 30, 2012 the plant ran a total of 51 days at full rates, was down a total of 5 days due to Hurricane Isaac, down 16 days due to transition from shutdown to start up and down 20 days due to various mechanical issues related to the heat exchangers and hydrogen compressor.

The plant has experienced mechanical issues, hydrogen supply disruptions and feedstock adulterants all of which have contributed to plant down time and higher than expected operational costs. Upgrades to the feedstock pre-treatment area are progressing with one unit installed and two additional units in the process of being installed with commissioning expected in November. The unit installed in May has provided consistent and steady service.

On October 25, 2012 the plant was taken down for a standard turnaround. During this time routine maintenance will be performed.

The table below shows average revenue per gallon we receive for the renewable diesel, naphtha and LPG we sell and cost of goods sold and operating expenses and general and administrative expenses. The net operating loss per gallon listed below for the quarters ended December 31, 2011 and 2010 corresponds to "Loss from Operations" as reported in the GAAP Dynamic Fuels summarized financial information in Note 4, "Investment in and Loans to Dynamic Fuels, LLC".

                                          Quarter         Quarter          Quarter           Quarter          Quarter         Quarter        Quarter        Quarter
                                           Ended           Ended            Ended             Ended            Ended           Ended          Ended          Ended
                                          12/31/10        3/31/11         6/30/2011         9/30/2011         12/31/11        3/31/12        6/30/12        9/30/12
Renewable Products Sold (in millions)           1.3            4.5               7.2              12.5             11.0            8.9            4.7           10.6
% of Design Capacity                              7 %           23 %              39 %              67 %             58 %           47 %           25 %           56 %
Revenue $/Gal                            $     6.04       $   4.57       $      4.84       $      5.11       $     4.87       $   5.23       $   5.13       $   3.94
Feedstock $/Gal                                2.67           3.05              4.11              4.26             3.83           3.93           3.94           3.62
OPEX and General & Administrative/Gal          6.83           3.39              2.24              1.09             1.19           1.32           2.19           1.03

Net Operating Loss/ Gal                  $    (3.46 )     $  (1.87 )     $     (1.51 )     $     (0.24 )     $    (0.15 )     $  (0.02 )     $  (1.00 )     $  (0.71 )


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Results of Operations

Consolidated Unaudited Results for the Three Months and Nine Months Ended,



                                               Three Months Ended                          Nine Months Ended
                                       September 30,         September 30,        September 30,         September 30,
Revenues                                   2012                  2011                  2012                 2011
                                                                       (In Thousands)
Technology                            $         3,150       $           150                 9,450      $           450
Technical Services                                516                   430                 1,470                1,314
Technical Services from Dynamic
Fuels                                             372                   286                 4,803                  800
Royalties from Dynamic Fuels, LLC
Plant Production                                  304                   310                   679                  649

                                      $         4,342       $         1,176      $         16,402      $         3,213

Technology Revenue.

Technology Revenue was $9,450,000 and $450,000 for the nine months ended September 30, 2012 and 2011, respectively. $9 million at September 30, 2012 relates to the recognition of unearned revenue from two expired license agreements.

Technical Services Revenue.

Revenues from engineering services for technical services and continued work on the engineering design and project management of Dynamic Fuels were $4,803,000 and $800,000 for the nine months ended September 30, 2012 and 2011, respectively. We expect to continue to earn revenues for engineering services to other customers on an individual contract basis in 2012. Revenue from Dynamic Fuels increased in 2012 due to the recognition of revenue from services billed but previously not recognized.

Royalty Revenue.

Revenues from royalties of renewable fuel production at the Dynamic Fuels plant
is recognized from production of renewable products from the date of commercial
operations to September 30, 2012. We will continue to recognize royalties from
actual plant production of renewable products quarterly.



                                                   Three Months Ended                               Nine Months Ended
                                         September 30,            September 30,           September 30,           September 30,
Operating Costs and Expenses                 2012                     2011                    2012                    2011
                                                                             (In Thousands)
Engineering                                         710          $           562         $         1,900         $         1,706
Depreciation and amortization                        42                       49                     143                     148
Non-cash equity compensation                         61                       69                     476                     528
General, administrative and other                 1,492                      948                   3,869                   3,084

                                        $         2,305          $         1,628         $         6,388         $         5,466

Engineering.

Expenses from engineering activities were $1,900,000 for the nine months ended September 30, 2012 compared to $1,706,000 during the same period in 2011. There was no change in engineering activities during 2012 compared to 2011.

Non-cash Equity Compensation.

Non-cash equity compensation for the nine months ended September 30, 2012 was $476,000 compared to $528,000 for the same period in 2011. The 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 have recognized the remaining amount of equity compensation for the milestone based awards in 2012.

General, Administrative and Other.

General and administrative expenses for the nine months ended September 30, 2012 were $3,869,000 compared to $3,084,000 during the same period in 2011. The increase in general and administrative expenses primarily relates to increased legal fees.


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Loss from Dynamic Investment.

Our 50% share of the Dynamic Fuels loss for its nine months ended June 30, 2012 decreased compared to the same period last year due to increased production revenue to offset fixed costs of the operating plant. Loss from our investment in Dynamic Fuels was $2,752,000 for the quarter ended June 30, 2012, compared to a loss of $5,348,000 for the same period in 2011. Loss for the nine months ended June 30, 2012, compared to the loss for the same period in 2011 was $5,737,000and $12,286,000 respectively. Dynamic Fuels' revenue was $124,318,000 with operating expenditures of $130,599,000 and other expense of $1,570,000 for the nine months ended June 30, 2012. This compares to revenue of $63,101,000 with operating expenditures of $86,087,000 and other expense of $2,034,000 for the nine months ended June 30, 2011. We report our 50 percent share of Dynamic Fuels results of operations on a three month lag.

Liquidity and Capital Resources

General

As of September 30, 2012, we had approximately $17.6, million in cash and cash equivalents. At September 30, 2012, we had $448,000 in accounts receivable outstanding relating to our technical services revenue provided to Dynamic Fuels and other clients. We believe that all of the receivables currently outstanding will be collected and have not established a reserve for bad debts.

Our current liabilities totaled $2,156,000 as of September 30, 2012.

Our business plan over the next several years is to perform engineering design and services for a GTL plant. If this would ultimately lead to potential investments in additional plants we will need to raise capital. 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.

Until such time the funds provided by Dynamic Fuels operations are sufficient to meet its own working capital requirements, we expect to fund additional short-term working capital needs through working capital loans. We have contributed cash in the amount of $43,500,000 to the capital of Dynamic Fuels since inception, have loaned Dynamic Fuels $14 million and have receivables due from Dynamic Fuels of $237,000. Although management remains positive about the future of Dynamic Fuels, if Dynamic Fuels fails to achieve profitability, our entire investment could be subject to loss.

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 continuing operations were $1,847,000 during the nine months ended September 30, 2012, compared to $3,101,000 during the nine months ended September 30, 2011. The decrease in cash flows used in operations primarily relates to the payment of certain accounts payable in 2011 that were not present in 2012.

Cash flows used in investing activities were $3,011,000 during the nine months ended September 30, 2012 compared to $4,537,000 during the nine months ended September 30, 2011. We funded approximately $3 million in equity capital and $4.5 million in working capital loans to Dynamic Fuels during 2012 and 2011, respectively.

Cash flows used in financing activities during the nine months ended September 30, 2012 were $136,000 compared to cash provided of $23.6 million during the nine months ended September 30, 2011. The cash provided by financing activities during both years is due to net proceeds received from the exercise of stock options and issuance of common stock during the third quarter of 2011. $199,000 was used to purchase and retire restricted stock during the third quarter of 2012.

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 $2,195,000 at September 30, 2012. Expense is not recognized until an employee is severed.

We as licensor, 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 licensee's use of our Bio-Synfining ® Technology. On June 27, 2012 the Site License Agreement was executed and process guarantee and Performance Test contained therein were waived and deemed unnecessary by Dynamic Fuels. For purposes of the Warrant Agreement dated June 22, 2007 between Syntroleum and Tyson Foods, Inc., the First Plant Commercial Operation Date as defined in the Warrant Agreement was deemed to be June 27, 2012. 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 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011 was filed.


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