Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SYNM > SEC Filings for SYNM > Form 10-K on 15-Mar-2013All Recent SEC Filings

Show all filings for SYNTROLEUM CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-K for SYNTROLEUM CORP


15-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation

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 our renewable fuels technology and previously consisted of research and development designed to convert carbonaceous material (biomass, coal, natural gas and petroleum coke) into synthetic liquid hydrocarbons including such products as diesel, jet fuel (HRJ), kerosene, naphtha, and propane.

Operating Revenues

Our revenues were primarily generated from the sale or transfer of our Technologies, engineering technical services from third parties and from Dynamic Fuels and royalties from Dynamic Fuels plant production. In the future, we expect to receive revenue from engineering technical services, royalties and other income from our investment in Dynamic Fuels, sales and licensing of our Technologies and product sales or royalties for the use of our Technologies in facilities in which we own an equity interest.

We record revenue related to royalty fees based on the production of the facility. Income and Loss from our investment in Dynamic Fuels is recorded below operating income, as "Income/Loss in Equity of Dynamic Fuels, LLC". The income or loss is based on our proportionate equity ownership of the plant.

Our future operating revenues and investments in projects will depend on the successful commercial operation of the Dynamic Fuels facility. We expect our results of operations and cash flows to be affected by changing crude oil, natural gas, oils, fats, fuel and specialty product prices and trends in environmental regulations.


Table of Contents

Operating Expenses

Our operating expenses historically have consisted primarily of engineering, including third party engineering and general and administrative expenses, which include costs associated with general corporate overhead, compensation expense, legal and accounting expenses and expenses associated with other related administrative functions. Our current workforce consists of engineers and general and administrative employees.

We have also recognized depreciation and amortization expense related to office and computer equipment, leasehold improvements and patents.

We have incurred costs related specifically to the development and design of the Bio-Synfining ® and Syntroleum® Process. These costs, which relate primarily to engineers and outside contract services for initial engineering, design, and development, are included in engineering costs in our consolidated statements of operations.

We have invested $43.5 million of cash into Dynamic Fuels for our portion of capital expenditures, engineering design, construction and start-up of the plant. In addition, we have made working capital loans of $14.0 million to Dynamic Fuels primarily related to the cost of feedstocks and operating expenses. The investments and working capital loans are recorded net of our share of Dynamic Fuels' losses on our Consolidated Balance Sheets, under "Investment in and loans to Dynamic Fuels, LLC".

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 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, 2012, Syntroleum's total estimate of maximum exposure to loss as a result of its relationships with this entity was approximately $38,659,000, which represents our equity investment in and loans to this entity, net of recognized losses and other equity accounting adjustments, in the amount of $38,407,000 and accounts receivable from this entity in the amount of $252,000.

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. Syntroleum 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. The $14.0 million non-interest bearing loans do not have a stated term but will be repaid to each partner upon Dynamic Fuels generating sufficient operating cash flow. On February 15, 2013, Syntroleum made an additional $2.3 million working capital loan to Dynamic Fuels. Tyson made an additional $2.3 million working capital loan (for a total of $4.6 million) on February 19, 2013. We will likely need to fund future working capital needs of Dynamic.

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 for which we issued Tyson warrants to purchase 8,000,000 shares of our common stock for $0.01 per share. Tyson exercised the warrants in 2009. 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 provided by each member.

The renewable diesel produced by Dynamic Fuels is quality tested and meets ASTM D975 standards for diesel. Our jet fuel meets all petroleum based jet fuel specifications for ASTM D7566, commercial jet fuel, as well as HRJ-5, military jet fuel. The production of our fuel was eligible for the $1.00 tax credit per gallon of renewable diesel under the Energy Independence Act and Energy Policy Act of 2005 ("EPAct") in 2010 and 2011. EPAct further designated a $0.50 per gallon alternative fuels mixture credit (AFMC) for the production of qualified alternative fuels, of which Dynamic Fuels' renewable naphtha qualifies. These tax credits are generated upon mixture with allowed motor vehicle fuels such as petroleum diesel and gasoline. Prior to receiving EPA Part 79 registration on August 16, 2012, Dynamic Fuels' renewable naphtha was not eligible to generate the $.50 per gallon AFMC. These tax credits are typically renewed at the end of each year in what is known as "tax extenders bills". These tax credits expired on December 31, 2009 and were not renewed until November 2010, retroactively for 2010 and extended through December 31, 2011. These tax credits again expired unrenewed on December 31, 2011. On January 3, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which reinstated the credits for 2013 and retroactively reinstated the credits for 2012. Dynamic Fuels or its owners will receive a combined total of approximately $23 million for 2012 production from the $1 tax credit and will receive the alternative fuels mixture credit of $0.50 per gallon for a portion of the renewable naphtha also produced during 2012.


Table of Contents

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 up to 100 percent renewable fuel, which means no blending of petroleum based diesel is required. In 2012, Dynamic Fuels entered into strategic marketing alliance, commercial off-take and supply chain management agreements with Mansfield Oil Company ("Mansfield") to distribute the plants renewable diesel. 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.

The table below compares per gallon full value renewable diesel market prices, which is calculated as the sum of ULSD diesel price plus 1.7 times RIN to Soy Methyl Ester ("SME") biodiesel market pricing, to Gulf Coast Ultra Low Sulphur Diesel market pricing and to Dynamic Fuels realized diesel price per quarter. Prices do not include transportation cost. Changing prices in crude oil per barrel are also depicted below.

                                                  Quarter        Quarter       Quarter        Quarter
                                                   Ended          Ended         Ended          Ended
                                                 3/31/2012       6/30/12       9/30/12        12/31/12
DF Realized Diesel Price per gallon             $      5.50      $   4.89      $   4.73      $     4.16
Full Value Renewable Diesel Market Price per
gallon(1)                                       $      5.63      $   5.19      $   4.87      $     3.99
SME Biodiesel Market Price per gallon           $      4.84      $   4.59      $   4.56      $     4.18
Gulf Coast Ultra Low Sulphur Diesel per
gallon                                          $      3.16      $   2.94      $   3.07      $     3.04
WTI Spot Crude per barrel                       $    102.88      $  93.43      $  92.18      $    87.96

(1) OPIS Gulf Coast Ultra Low Sulphur Diesel plus mean OPIS RINs times 1.7 per gallon. No transportation cost included.

Note: Table does not include the $1 per gallon tax credit which was retroactively reinstated in January 2013. Approximately $6.7 million will be included as income during 2013.

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, naphtha, and LPG. Nameplate capacity for the plant is 75.0 million gallons per year. During the year ended September 30, 2012, the plant produced renewable products at an average rate of 49% of nameplate capacity compared to 35% during the year ended September 30, 2011.

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 were completed during 2012. The quality of the feedstock has not impacted the quality of the finished product which has in all cases met or exceeded ASTM standards.

The plant was placed in stand-by mode after completion of a maintenance turnaround in December, 2012, primarily because of economic conditions. Although economic conditions have improved in 2013, the plant remains in stand-by mode as the Company and Tyson have not yet agreed upon the economic conditions required for plant start-up.

The table below shows average revenue per gallon we receive for the renewable diesel, naphtha and LPG sold and cost of goods sold and operating expenses and general and administrative expenses. The net operating loss per gallon listed below for the fiscal year ended September 30, 2012, corresponds to "Loss from Operations" as reported in the Audited GAAP Dynamic Fuels summarized financial information in Note 4, "Investment in and Loans to Dynamic Fuels, LLC".

                                       Quarter Ended           Quarter Ended           Quarter Ended           Quarter Ended           Quarter  Ended
                                         12/31/11                 3/31/12                 6/30/12                 9/30/12                 12/31/12
Renewable Products Sold (in
millions)                                        11.0                     8.9                     4.7                    10.6                      5.9
% of Design Capacity                               58 %                    47 %                    25 %                    56 %                     31 %
Revenue $/Gal                         $          4.87         $          5.23         $          5.13         $          3.94         $           3.35
Feedstock $/Gal                                  3.83                    3.93                    3.94                    3.62                     3.34
OPEX and General &
Administrative per Gal                           1.19                    1.32                    2.19                    1.03                     1.98

Net Operating Loss per Gal            $         (0.15 )       $         (0.02 )       $         (1.00 )       $         (0.71 )       $          (1.97 )


Table of Contents

Discontinued Operations

Research and Development. In 2007, we determined we had completed the research and development activities necessary to validate our technology and subsequently have focused on commercialization activities.

Results of Operations

Consolidated Results for the Years Ended December 31



                                                         2012        2011        2010
  Revenues                                                      (in thousands)
  Technology                                           $  9,600     $   600     $ 3,600
  Technical Services                                      1,909       1,719       2,805
  Technical Services from Dynamic Fuels                   5,228         974       2,005
  Royalties from Dynamic Fuels, LLC Plant Production        789         921          -
  Other                                                      -           -           -

  Total Revenues                                       $ 17,526     $ 4,214     $ 8,410

Technology Revenue. Technology Revenue was $9,600,000, $600,000 and $3,600,000 for the years ended December 31, 2012, 2011 and 2010, respectively. During 2012, $9 million was recognized from earned deferred licensee income and in 2010 $3 million was recognized due to the sale and delivery of technology and equipment. Revenue recognition will be determined on an individual contract basis which typically spans current year timing.

Technical Services Revenue. Revenues from engineering services continued work on the engineering design and project management of Dynamic Fuels were $7,137,000, $2,693,000 and $4,810,000 for the years ended December 31, 2012, 2011 and 2010, respectively. During 2012, $3.7 million in technical service revenue from Dynamic Fuels was recognized that had been previously unrecognized. We expect to continue to earn revenues for engineering services to clients on an individual contract basis in 2013.

Royalty Revenue. Under the terms of the master license agreement royalties from the renewable fuel production at the Dynamic Fuels plant are earned at the rate of $0.025 per gallon produced adjusted for inflation and are accrued as earned by Syntroleum.

                                                 2012        2011         2010
         Operating Costs and Expenses                    (in thousands)
         Engineering                            $ 2,571     $ 2,236     $  2,871
         Depreciation and amortization              186         200          217
         Non-cash equity compensation               508         562        1,719
         General and administrative and other     5,044       4,265        5,855

         Total Operating Costs and Expenses     $ 8,309     $ 7,263     $ 10,662

Engineering Expense. The decrease in engineering expenditures in 2011 compared to 2012 and 2010 primarily results from higher third party analytical lab costs related to client projects in 2012 and 2010.

Non-Cash Equity Compensation. Equity compensation expense for the vesting of stock compensation awards to employees decreased in 2012 and 2011 compared to 2010. These changes in expense primarily relate 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 2010 and years previous to that. We recognized the remaining amount of equity compensation for the milestone based awards in 2012. We will not have equity compensation expense in 2013, unless new awards are granted.

General and Administrative and Other. General and administrative expenses were higher in 2012 and 2010 when compared to 2011 primarily related to higher legal fees due to litigation.

                                                  2012           2011           2010
   Other Income and Expenses                                (in thousands)
   Interest Income                              $      22      $      16      $     31
   Other Income                                         6              8            64
   Loss in equity of Dynamic Fuels, LLC           (10,012 )      (13,880 )      (5,628 )
   Foreign Currency Exchange                         (296 )          (17 )      (1,848 )
   Income Taxes                                        -              -             -
   Income (Loss) From Discontinued Operations         (38 )          (27 )          97


Table of Contents

Interest Income. The majority of interest income is generated from investment of our current cash balances in money market accounts at the current market rates.

Loss in Equity of Dynamic Fuels, LLC. Our 50% share of Dynamic Fuels' loss for its year ended September 30, 2012 relates to plant operations with limited production, approximately 49% of plant design, and additional expenses for materials and labor to address feedstock pre-treatment issues and improve mechanical reliability. Loss from our investment in Dynamic was $4,275,000 and $10,012,000 for the quarter and twelve months ended September 30, 2012, respectively. This compares to a loss of $1,594,000 and $13,880,000 for the same periods in 2011 and a loss of $2,783,000 and $5,628,000 for the same periods in 2010. The plant was under construction most of 2010. Dynamic Fuels' revenues were approximately $167,000,000 with operating expenditures of approximately $181,000,000 and other expense of $2,100,000 for the twelve months ended September 30, 2012. We report our 50% share of Dynamic Fuels results of operations on a three month lag basis. The retroactive reinstatement of the $1.00 Blenders Tax Credit for 2012 diesel production is estimated to result in a net payment to Dynamic Fuels of approximately $6.7 million. We expect to recognize our share of the tax credit in the first quarter of 2013.

Foreign Currency Exchange. Changes in the foreign currency exchange are due to fluctuation in the value of the Australian dollar compared to the U.S. Dollar. The foreign currency changes result from translation adjustments from our license with the Commonwealth of Australia which is denominated in Australian dollars. These changes have no cash impact.

Income (Loss) from Discontinued Operations. Changes in income from discontinued operations primarily resulted from lower than expected dismantlement costs in 2010 resulting in a gain from reducing our asset retirement liability associated with the Catoosa Demonstration Facility to zero.

Liquidity and Capital Resources

General

As of December 31, 2012, we had $15,909,000 in cash and cash equivalents. Our current liabilities totaled $1,108,000 as of December 31, 2012.

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. We expect to obtain funding through debt or equity financing, joint ventures, license agreements and other strategic alliances. 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.

We expect that we will fund additional short-term working capital needs of Dynamic Fuels through working capital loans in 2013. As stated previously, we have contributed cash in the amount of $43.5 million to the capital of Dynamic Fuels since inception, have loaned Dynamic Fuels $14.0 million and have receivables due from Dynamic Fuels of $252,000. Although management remains positive about the future of Dynamic Fuels, if Dynamic Fuels fails to achieve profitability, this entire investment could be subject to loss.

On February 15, 2013, Syntroleum made an additional $2.3 million working capital loan to Dynamic Fuels. Tyson made an additional $2.3 million working capital loan (for a total of $4.6 million) on February 19, 2013.

As of the date of this Report on form 10-K, the Dynamic Fuels plant is in stand-by mode pending agreement by Tyson and the Company on the required economic conditions for start-up. As start-up costs may require each of us to make additional loans to Dynamic Fuels, receipt of certain tax credits, which were reinstated on January 3, 2013, may play a role in start-up timing.

On March 1, 2013, Syntroleum received $5,798,000 from sales proceeds of its nominal two b/d pilot plant located in Tulsa, Oklahoma.

If we are unable to generate funds from operations, our need to obtain funds through financing activities will be increased. The decline in our stock price and related market capitalization has limited, however, our ability to raise capital through the sale of shares of common stock from our shelf registration statement.

Cash Flows

2012 vs. 2011

Cash flows used in operations was $3,539,000 during the year ended December 31, 2012 compared to cash flows used in operations of $4,433,000 during the year ended December 31, 2011. The decrease in cash flows used in operations in 2012 primarily results from the collection of Dynamic Fuels receivables in 2012.


Table of Contents

Cash flows used in investing activities were $3,017,000 during the year ended December 31, 2012 compared to $9,051,000 during the year ended December 31, 2011. We made an equity contribution of $3,000,000 to Dynamic Fuels in 2012 compared to investment in and loans of $9,000,000 in 2011. We may be required to provide additional working capital loans or investments to the plant in 2013 if additional cash is needed.

Cash flows used in financing activities during the year ended December 31, 2012 was $136,000 compared to cash flows provided by financing activities of $23,572,000 in 2011. The cash flows provided by financing activities in 2011 primarily relates to the public offering in July of 15,900,000 shares of our common stock and accompanying warrants resulting in net proceeds of $23,538,000.

2011 vs. 2010

Cash flows used in operations was $4,433,000 during the year ended December 31, 2011 compared to cash flows used in operations of $1,112,000 during the year ended December 31, 2010. The increase in cash flows used in operations in 2011 primarily results from the collection of $3,000,000 in revenues from technology transfer agreements in 2010 and not collecting Dynamic Fuels receivables in 2011.

Cash flows used in investing activities were $9,051,000 during the year ended December 31, 2011 compared to $21,264,000 during the year ended December 31, 2010. We extended a working capital loan of $9,000,000 to Dynamic Fuels in 2011 compared to our 2010 equity investment of $16,250,000 and working capital loan of $5,000,000.

Cash flows provided by financing activities during the year ended December 31, 2011 was $23,572,000 compared to $9,877,000 in 2010. The cash flows provided by financing activities in 2011 primarily relates to the public offering in July of 15,900,000 shares of our common stock and accompanying warrants resulting in net proceeds of $23,538,000. The cash provided by financing activities in 2010 is primarily due to net proceeds received from sales of 1,135,374 shares of our common stock to Fletcher at a price of $2.64 per share and sales of 3,948,374 shares of our common stock to Energy Opportunity Ltd at a stock price of approximately $1.77.

Contractual Obligations

The following table sets forth our contractual obligations as of December 31,
2012:



                                                                   Payments Due by Period
                                                                       (In thousands)
                                                       Less than 1                                         After 5
Contractual Obligations                   Total           year            1-3 years       4-5 years         years
Operating Lease Obligations               $  199      $         101      $        50      $       18      $      30
Asset Retirement Obligations                 603                 -               603              -              -

Total                                     $  802      $         101      $       653      $       18      $      30

Our operating leases include leases for corporate headquarters, demonstration plants and software.

On March 1, 2013 Syntroleum sold its pilot plant for $5,798,000. Syntroleum had no carrying value for the pilot plant since all costs incurred had been expensed as research and development. As such, the total amount of proceeds will be recognized as a gain in the first quarter of 2013. In connection with this sale, the previously recognized asset retirement obligation of $603,000, reported in "Noncurrent Liabilities of Discontinued Operations" in the Consolidated Balance Sheet, will also be recognized as a gain in the first quarter of 2013. In addition, the associated lease was cancelled.

We have entered into employment agreements, which provide severance cash benefits to several key employees totaling approximately $2,208,000 at December 31, 2012. The 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 at the request of the licensee we must execute a Site License Agreement in favor of licensee for licensee's use of our Bio-Synfining® Technology. On June 27, 2012, we entered into a Site License Agreement with Dynamic Fuels for the use of our Bio-Synfining® Technology at the Geismar plant and the process guarantee and performance test provisions contained therein were waived and deemed unnecessary by Dynamic Fuels. For purposes of the Warrant Agreement dated June 22, 2007 . . .

  Add SYNM to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SYNM - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.