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SYNM > SEC Filings for SYNM > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for SYNTROLEUM CORP


3-May-2013

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, 2012 (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 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.

Commercial and Licensee Projects

Dynamic Fuels was initially capitalized in 2007. During the quarter ended March 31, 2013, each partner made additional equity contribution of $1,720,000 resulting in total cash and non-cash equity contributions by Syntroleum of $51,830,000 and $55,011,000 by Tyson. Also during the quarter, each partner made additional working capital loans of $3,950,000. In conjunction with specific provisions of the reinstatement of the $1 tax credit, each partner will receive $8,986,000 of their total portion of the 2012 tax credit as a refund directly from the IRS. The refunds were recorded by Dynamic Fuels as repayment of working capital loans. Each partner has remaining outstanding working capital loans to Dynamic Fuels of $8,963,000. The remaining loans are non-interest bearing and do not have a stated term but will be repaid to each partner upon Dynamic Fuels generating sufficient operating cash flow.


In 2008, Dynamic Fuels was issued $100 million in tax exempt bonds through the Louisiana Public Facilities Authority to fund construction of the plant. The interest rate for the Bonds is a daily floating interest rate. Dynamic Fuels entered into an interest rate swap locking in the interest rate at 2.19% for the 5 year period ending October 2013 with declining swap coverage. 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, which they have exercised, to purchase 800,000 shares of our common stock for $0.10 per share. This debt funding is in addition to the equity contributions provided by each member.

Dynamic Fuels began commercial operations in November of 2010. The plant has sold 66.8 million gallons of renewable products such as diesel, naphtha, and LPG from December 2010 to December 2012. 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 fuel produced by Dynamic Fuels generates 1.7 Renewable Identification Number's, ("RIN") per gallon. As of March 28, 2013, RIN prices were $0.78 per gallon and therefore worth $1.33 per gallon with the 1.7 multiplier. Our fuel can be sold with the RIN premium included in our price of fuel.

Full rate capacity for the plant is 75.0 million gallons per year. Since the start of commercial operations, the plant has experienced adulterants found in the feedstock, hydrogen disruptions and rotating equipment issues which have contributed to plant downtime and higher than expected operating costs. Upgrades to the feedstock pre-treatment area were completed during 2012.

Planned turnaround operations commenced on October 25, 2012 and were completed on December 10, 2012 at which time the plant was placed in standby mode as Dynamic Fuels monitored economic conditions to determine the appropriate time to resume operations. The plant continues to be in standby mode. While the economic conditions have improved in 2013, Syntroleum and Tyson continue to monitor the long term economic conditions conducive for plant restart. During the first quarter Syntroleum and Tyson each made an additional $4 million working capital loans and invested an additional $1.7 million in the form of an equity contribution. Working capital requirements for restart of the facility are estimated to be approximately $20 million.

Discontinued Operations

Income from Discontinued Operations for the quarter ended March 31, 2013 includes $5,798,000 in proceeds from the sale of our nominal two b/d pilot plant in Tulsa, Oklahoma and $603,000 from the previously accrued asset retirement obligations from which Syntroleum was released in connection with the sale. The pilot plant had no carrying value as all costs incurred had been expensed as research and development.

Results of Operations

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Consolidated Unaudited Results for the Quarters Ended,



                                                         March 31,       March 31,
   Revenues                                                2013            2012
                                                              (in thousands)
   Technology                                           $       100     $       150
   Technical Services                                           382             481
   Technical Services from Dynamic Fuels, LLC                   417             379
   Royalties from Dynamic Fuels, LLC Plant Production            -              240

   Total Revenues                                       $       899     $     1,250

Technical Services Revenue. Revenues from engineering services were $799,000 and $860,000 for the quarters ended March 31, 2013 and 2012, respectively. Revenue from Dynamic Fuels increased in 2013 as additional engineering design work for the plant was requested. We expect to continue to earn revenues for engineering services to other customers 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 $0.026 adjusted for inflation per gallon produced and are accrued as earned by Syntroleum. Because the plant was in standby mode during the entire first quarter of 2013, no royalties were earned during the quarter.

--------------------------------------------------------------------------------
                                                 March 31,       March 31,
           Operating Costs and Expenses            2013            2012
                                                      (in thousands)
           Engineering                          $       586     $       598
           Depreciation and amortization                 43              52
           Non-cash equity compensation                 384             312
           General, administrative and other          1,895           1,074

           Total Operating Costs and Expenses   $     2,908     $     2,036

Engineering. Expenses from engineering activities were $586,000 for the quarter ended March 31, 2013 compared to $598,000 during the same period in 2012.

Non-cash Equity Compensation. Non-cash equity compensation for the quarter ended March 31, 2013 was $384,000 compared to $312,000 for the same period in 2012. This expense primarily relates to restricted stock units granted for annual independent director fees.

General, Administrative and Other. General and administrative expenses for the quarter ended March 31, 2013 were $1,895,000 compared to $1,074,000 during the same period in 2012. The overhead activities associated with the company remain relatively the same for 2013 compared to 2012 and the increase primarily relates to higher legal fees.

Gain (Loss) from Dynamic Investment. Our equity in the earnings of Dynamic Fuels for the quarter ended March 31, 2013 includes $12,631,000 in gains representing our potion of the retroactive reinstatement of the $1 tax credit for 2012, partially offset by $5,896,000 in losses representing our share of Dynamic Fuels' operating results for its first quarter ended December 31, 2012. Due to the material impact of the retroactive reinstatement of the $1 tax credit, we are reporting it in the current quarter rather than on a three-month lag basis as is our normal accounting practice. Our $6,707,000 equity in earnings in Dynamic Fuels' operations for their quarter ended December 31, 2012 consisted of revenues of $19,800,000, operating expenditures of $31,200,000 and other expenses of $390,000, adjusted for the tax credit discussed above. This compares to a loss of $830,000 for the same period in 2011 consisting of revenues of $53,623,000, operating expenditures of $55,302,000 and other expenses of $450,000.

Liquidity and Capital Resources

General

As of March 31, 2013, we had $14,935,000 in cash and cash equivalents and current liabilities of $1,476,000. On April 12, 2013 Syntroleum received $8,986,000 in refunds from the IRS related to the reinstatement of the $1 tax credit retroactive to 2012 resulting in total cash of approximately $23,921,000.

Dynamic Fuels will receive approximately $7,200,000 for the 2012 reinstatement of the $1 tax credit. We expect that we will fund additional short-term working capital needs of Dynamic Fuels through working capital loans in 2013. We have contributed cash in the amount of $45,220,000 to the capital of Dynamic Fuels since inception and have remaining working capital loans to Dynamic Fuels of $8,963,000. Although management remains positive about the future of Dynamic Fuels 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 operations was $1,100,000 during the three months ended March 31, 2013, compared to cash flows used in operations of $1,170,000 during the three months ended March 31, 2012.

Cash flows used in investing activities related to small purchases of capital office equipment and additional equity contributions and working capital loans to Dynamic in the first quarter of 2013 of $1.7 million and $4.0 million respectively. This was offset by from the sale of the Company's nominal two b/d pilot plant in Tulsa for $5,798,000 which is reflected in Discontinued Operations. No additional investments to Dynamic Fuels were made in the first quarter of 2012.

Cash flows provided by financing activities of zero and $63,000 related to the exercise of stock options for the quarter ended March 31, 2013.and 2012 respectively.

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 $2,208,000 at March 31, 2013. Expense is not recognized until an employee is severed.

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, 2012 was filed.

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