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Table of Contents

 
 
UNITED STATES
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 JUNE 30, 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
(State or other jurisdiction of
incorporation or organization)
  73-1565725
(I.R.S. Employer
Identification No.)
5416 S. Yale Suite 400
Tulsa, Oklahoma 74135

(Address of principal executive offices) (Zip Code)
Registrant’s 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 þ 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 August 1, 2011, the number of outstanding shares of the issuer’s common stock was 97,903,160.
 
 

 

 


 

SYNTROLEUM CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011
         
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 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT
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.

 

 


Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.   Financial Statements.
SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
                 
    June 30,     December 31,  
    2011     2010  
ASSETS
CURRENT ASSETS:
               
Cash and cash equivalents
  $ 6,253     $ 12,513  
Restricted cash
    1,233       484  
Accounts receivable
    59       556  
Accounts receivable from Dynamic Fuels, LLC
    1,842       729  
Other current assets
    112       361  
 
           
Total current assets
    9,499       14,643  
 
               
PROPERTY AND EQUIPMENT — at cost, net
    89       97  
INVESTMENT IN AND LOANS TO DYNAMIC FUELS, LLC
    40,435       43,523  
OTHER ASSETS, net
    1,132       1,133  
 
           
 
  $ 51,155     $ 59,396  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
               
Accounts payable
  $ 26     $ 1,090  
Accrued employee costs
    436       119  
Deposits
    1,233       484  
 
           
Total current liabilities
    1,695       1,693  
 
               
NONCURRENT LIABILITIES OF DISCONTINUED OPERATIONS
    603       603  
DEFERRED REVENUE
    24,948       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, 81,978 and 81,683 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively
    820       817  
Additional paid-in capital
    374,888       374,397  
Accumulated deficit
    (351,799 )     (342,414 )
 
           
Total stockholders’ equity
    23,909       32,800  
 
           
 
  $ 51,155     $ 59,396  
 
           
The accompanying notes are an integral part of these unaudited consolidated statements.

 

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SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
                                 
    For the Three months     For the Six Months  
    Ended June 30,     Ended June 30,  
    2011     2010     2011     2010  
REVENUES:
                               
Technology
  $ 150     $ 400     $ 300     $ 3,300  
Technical services
    383       512       884       1,413  
Technical services from Dynamic Fuels, LLC
    316       378       514       815  
Royalties from Dynamic Fuels, LLC plant production
    339             339        
 
                       
Total revenues
    1,188       1,290       2,037       5,528  
 
                       
 
                               
COSTS AND EXPENSES:
                               
Engineering
    588       528       1,144       1,124  
Depreciation and amortization
    50       54       99       116  
General, administrative and other (including non-cash equity compensation of ($8) and $205 for the three months ended June 30, 2011 and 2010, respectively, and $459 and $1,026 for the six months ended June 30, 2011 and 2010, respectively.)
    764       1,774       2,595       3,827  
 
                       
 
                               
OPERATING INCOME (LOSS)
    (214 )     (1,066 )     (1,801 )     461  
 
                               
INVESTMENT AND INTEREST INCOME
    2       8       6       14  
LOSS IN EQUITY OF DYNAMIC FUELS, LLC
    (4,829 )     (1,119 )     (6,938 )     (1,865 )
OTHER EXPENSE, net
    2       28       4       62  
FOREIGN CURRENCY EXCHANGE
    (430 )     942       (648 )     546  
 
                       
 
                               
LOSS FROM CONTINUING OPERATIONS
    (5,469 )     (1,207 )     (9,377 )     (782 )
 
                       
 
                               
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
    (9 )     182       (8 )     160  
 
                       
 
                               
NET LOSS
  $ (5,478 )   $ (1,025 )   $ (9,385 )   $ (622 )
 
                       
 
                               
BASIC NET INCOME (LOSS) PER SHARE:
                               
Loss from continuing operations
  $ (0.07 )   $ (0.01 )   $ (0.11 )   $ (0.01 )
Income (loss) from discontinued operations
    0.00       0.00     $ 0.00     $ 0.00  
 
                       
Net loss
  $ (0.07 )   $ (0.01 )   $ (0.11 )   $ (0.01 )
 
                       
 
                               
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
                               
Basic
    81,965       76,336       81,954       76,687  
 
                       
Diluted
    81,965       76,336       81,954       76,687  
 
                       
The accompanying notes are an integral part of these unaudited consolidated statements.

 

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SYNTROLEUM CORPORATION AND SUBSIDIARIES
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  
 
                                       
Stock options exercised
    53       1       34             35  
 
                                       
Vesting of awards granted
    15             42             42  
 
                                       
Stock-based bonuses and match to 401(k) Plan
    227       2       415             417  
 
                                       
Net loss
                      (9,385 )     (9,385 )
 
                             
 
                                       
Balance, June 30, 2011
    81,978     $ 820     $ 374,888     $ (351,799 )   $ 23,909  
 
                             
The accompanying notes are an integral part of these unaudited consolidated statements.

 

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SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
                 
    For the Six Months Ended June 30,  
    2011     2010  
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net loss
  $ (9,385 )   $ (622 )
Income (loss) from discontinued operations
    (8 )     160  
 
           
Net loss from continuing operations
    (9,377 )     (782 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    99       116  
Abandoned patent write-off
          466  
Foreign currency exchange
    648       (546 )
Non-cash compensation expense
    459       1,026  
Non-cash loss in equity method investee
    6,938       1,865  
Changes in assets and liabilities:
               
Accounts receivable
    497       46  
Accounts receivable from Dynamic Fuels, LLC
    (1,113 )     2,793  
Other assets
    182       196  
Accounts payable
    (1,064 )     73  
Accrued liabilities and other
    317       58  
Deferred revenue
          (3,217 )
 
           
Net cash provided by (used in) continuing operations
    (2,414 )     2,094  
Net cash used in discontinued operations
    (8 )     (257 )
 
           
Net cash provided by (used in) operating activities
    (2,422 )     1,837  
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of property and equipment
    (23 )     (3 )
Investment in and loans to Dynamic Fuels, LLC
    (3,850 )     (5,000 )
 
           
Net cash used in investing activities
    (3,873 )     (5,003 )
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from sale of common stock, warrants and option exercises
    35       83  
Proceeds from common stock purchase agreement
          2,749  
 
           
Net cash provided by financing activities
    35       2,832  
 
           
 
               
NET CHANGE IN CASH AND CASH EQUIVALENTS
    (6,260 )     (334 )
CASH AND CASH EQUIVALENTS, beginning of period
    12,513       25,012  
 
           
CASH AND CASH EQUIVALENTS, end of period
  $ 6,253     $ 24,678  
 
           
The accompanying notes are an integral part of these unaudited consolidated statements.

 

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SYNTROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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, 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 subsidiary’s 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 Company’s 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 six months ended March 31, 2011. During this period, the plant was commencing initial operations while its operating and financial controls were undergoing late-stage development. As a result the financial statements may be more significantly impacted by management’s 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 June 30, 2011, we had approximately $6.3 million of cash and cash equivalents and $1.9 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 Sheets at June 30, 2011 and December 31, 2010.
4. Reclassifications
Certain reclassifications have been made to the June 30, 2010 statements of cash flows to conform to the June 30, 2011 presentation. These reclassifications had no impact on net income.
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”).

 

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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 June 30, 2011, Syntroleum’s total estimate of maximum exposure to loss as a result of its relationships with this entity was approximately $42,277,000, which represents our equity investment in and loans to this entity in the amount of $40,435,000 and accounts receivable from this entity in the amount of $1,842,000, which fluctuates from time to time with certain operating activities.
Dynamic Fuels, LLC Quarter Ended March 31, 2011 Unaudited Financials (in thousands):
         
    March 31,  
Balance Sheet   2011  
Cash and Receivables
  $ 10,892  
Inventory
    10,506  
Property, Plant and Equipment and Other Assets
    150,682  
 
     
Total Assets
  $ 172,080  
 
     
 
       
Current Liabilities
  $ 8,079  
Notes and Accounts Payable to Related Parties
    17,620  
Long-Term Liabilities
    100,037  
 
     
Total Liabilities
    125,736  
 
     
Total Members’ Equity
    46,344  
 
     
Total Liabilities and Members’ Equity
  $ 172,080  
 
     
                 
    For the Quarter     For the Six  
    Ended March 31,     Months Ended  
Statement of Operations   2011     March 31, 2011  
 
               
Revenue
  $ 20,375     $ 28,098  
Operating Expenses
    28,455       40,464  
 
           
Loss from Operations
    (8,080 )     (12,366 )
 
           
Other Income (Expense)
    (1,025 )     (1,305 )
 
           
Net Loss
  $ (9,105 )   $ (13,671 )
 
           
The losses generated by Dynamic Fuels during their six months ended March 31, 2011, relate to plant commissioning with limited production, 6.5 million gallons or approximately 20% of plant design, and additional expenses for materials and labor to address mechanical reliability issues with key pieces of equipment. 5.7 million gallons of renewable products were sold during their six months ended March 31, 2011.
Dynamic Fuels began commercial operations in November of 2010 and produced over 19.3 million gallons of products by the end of July, 2011. Specifically, plant production was 7.2 million gallons from the start of plant operations in October 2010 through April, 2011 and 3.1, 3.6 and 5.4 million gallons in May, June and July, respectively. 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 and third party supply of hydrogen, electricity and feedstock. The plant continues to demonstrate improved reliability with compressor run time in excess of 1600 hours which is a 217% improvement over its previous best run time and we have encountered no issues with the solvent recycle pump since we last replaced the seals in March, 2011. The plant’s design rates are 75 million gallons per year.
During the six months ended June 30, 2011 and June 30, 2010, we recognized revenue associated with our technical services agreement between us and Dynamic Fuels in the amount of $514,000 and $815,000 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 $1,842,000 and $729,000 as of June 30, 2011 and December 31, 2010, respectively. In April, we made additional payments of $260,000 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 July 2011. For the three months ended June 30, 2011, Syntroleum and Tyson each contributed an additional $3,850,000 in the form of working capital loans to the entity. We provided $650,000 in the form of a working capital loan in July 2011 and expect to provide additional working capital loans for the prepayment to raw material suppliers of fats, oils and greases in the third quarter. The total amount of working capital loans of $9,500,000 will be repaid to each member upon Dynamic Fuels generating sufficient working capital from fuel sales.

 

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6. Earnings Per Share
                                 
    Three months ended     Six months ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
    (in thousands, except per share     (in thousands, except per share  
    amounts)     amounts)  
Basic weighted-average shares
    81,965       76,336       81,954       76,687  
 
                               
Effect of dilutive securities:
                               
Unvested restricted stock units
                       
Stock options
                       
 
                       
Diluted weighted-average shares
    81,965       76,336       81,954       76,687  
 
                       
The table below includes information related to stock options, warrants and restricted stock that were outstanding at June 30 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 or their inclusion would have been anti-dilutive to our income (loss) per share.
                 
    June 30,     June 30,  
    2011     2010  
 
               
Options, warrants and restricted stock excluded (in thousands)
    18,062       19,283  
Weighted-average exercise prices of options, warrants and restricted stock excluded
  $ 2.56     $ 1.63  
Six month weighted average market price
  $ 1.85     $ 2.23  
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 June 30, 2011, approximately 4,625,032 shares of common stock were available for grant under our current plan. We are authorized to issue up to approximately 12,684,667 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:
                 
    Shares     Weighted  
    Under     Average Price  
    Stock Options     Per Share  
OUTSTANDING AT DECEMBER 31, 2010
    8,283,586     $ 2.94  
Granted at market price
        $  
Exercised
    (52,500 )   $ 0.66  
Expired or forfeited
    (184,163 )   $ 7.41  
 
           
OUTSTANDING AT JUNE 30, 2011
    8,046,923     $ 1.84  
 
           

 

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The following table summarizes information about stock options outstanding at June 30, 2011:
                                         
Options Outstanding     Options Exercisable  
              Weighted  
            Weighted     Weighted Average             Average Exercise  
Range of   Options     Average Exercise     Remaining     Options     Price  
Exercise Price   Outstanding     Price     Contractual Life     Exercisable     Per Share  
$0.66 – $0.66
    4,865,881     $ 0.66       7.05       1,300,181     $ 0.66  
$1.49 – $1.55
    1,010,666       1.55       1.25       1,010,666       1.55  
$1.62 – $2.89
    1,140,195       2.33       3.21       1,140,195       2.33  
$3.19 – $6.88
    764,277       6.33       2.99       764,277       6.33  
$7.10 – $9.67
    240,904       9.28       4.13       240,904       9.28  
$10.51 – $10.51
    25,000       10.51       4.09       25,000       10.51  
 
                               
 
    8,046,923     $ 1.84               4,481,223     $ 2.77  
 
                               
A total of 3,565,700 stock options with a weighted average exercise price of $0.66 were outstanding at June 30, 2011 and had not vested. There were no stock options granted during the six months ended June 30, 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 six months ended June 30, 2011 and 2010 was $76,000 and $197,000, respectively. The total amount of cash received in 2011 and 2010 by the Company from the exercise of these options was $35,000 and $82,000, respectively. As of June 30, 2011, there was $3,941,000 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 4.02 years. In addition, as of June 30, 2011 unrecognized compensation cost related to non-vested stock options was $75,000, which will be fully amortized using the straight-line basis over the remaining vesting period of the options, 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 six months ended June 30, 2011 and 2010 was $459,000 and $1,026,000, 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 six months ended June 30, 2011 and 2010 was $2.21 and $2.59 per share (total grant date fair value of $436,000 and $379,000), respectively. As of June 30, 2011, the aggregrate intrinsic value of restricted stock units that are expected to vest was approximately $1,463,000. In addition, as of June 30, 2011, unrecognized compensation cost related to non-vested restricted stock units was $22,000, which is expected to be recognized in 2011. The total fair value of restricted stock units vested during the six months ended June 30, 2011 and 2010 was $499,000 and $420,000, respectively.
The following table reflects restricted stock unit activity for the six months ended June 30, 2011.
                 
            Weighted-Average  
            Grant Date Fair  
    Shares / Units     Value  
NONVESTED AT DECEMBER 31, 2010
    1,055,212     $ 0.41  
Granted
    196,977     $ 2.21  
Vested
    (204,477 )   $ 2.44  
Forfeited
        $  
 
           
NONVESTED AT JUNE 30, 2011
    1,047,712     $ 0.35  
 
           
8. Common Stock Purchase Agreement
On July 6, 2011 the Company closed the issuance and sale of 15,900,000 shares of its common stock and accompanying warrants to purchase a total of 7,950,000 shares of common stock. A combination of one share of common stock and a five year warrant to purchase 0.5 shares of common stock was sold in the offering for a combined public offering price of $1.58 per share, less underwriting discounts and commissions payable by the Company. The underwriter, JMP Securities LLC, purchased the common stock and warrants at a discounted price of $1.49 per combination, representing a 5.7% discount to the public offering price. Cash proceeds received by the Company, after the payment of underwriter commission and expenses and offering expenses, were approximately $23,575,000.

 

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9. 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 June 30, 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 licensee’s 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.

 

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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, 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, 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 June 30, 2011, Syntroleum’s total estimate of maximum exposure to loss as a result of its relationships with this entity was approximately $42,277,000, which represents our equity investment in and loans to this entity in the amount of $40,435,000 and accounts receivable from this entity in the amount of $1,842,000, which fluctuates from time to time with certain operating activities. Each member has contributed $40.5 million in capital contributions and an additional $8.9 million in the form of a working capital loans to the entity. An additional $0.7 million working capital loan was made to the entity in July, 2011. The $9.5 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 19.3 million gallons of products by the end of July, 2011. Specifically, plant production was 7.2 million gallons from the start of plant operations in October 2010 through April, 2011 and 3.1, 3.6 and 5.4 million gallons in May, June and July, respectively. 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 and third party supply of hydrogen, electricity and feedstock. The plant continues to demonstrate improved reliability with compressor run time in excess of 1600 hours which is a 217% improvement over its previous best run time and we have encountered no issues with the solvent recycle pump since we last replaced the seals in March, 2011. The plant’s design rates are 75 million gallons per year.
The losses generated by Dynamic Fuels during their six months ended March 31, 2011, relate to plant commissioning with limited production, 6.5 million gallons or approximately 20% of plant design, and additional expenses for materials and labor to address mechanical reliability issues with key pieces of equipment. 5.7 million gallons of renewable products were sold during their six months ended March 31, 2011. Dynamic Fuels summarized financial information is reported in Note 5, “Investment in and Loans to Dynamic Fuels, LLC”.
Diesel is quality tested and meets ASTM D975 standards for diesel. The renewable products have low emissions and nearly no aromatics. Our jet fuel meets all petroleum based jet fuel specifications of ASTM D7566. 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 Number’s, (“RIN”) per gallon. As of June 30, 2011, RIN prices were $1.34 per gallon and therefore worth $2.28 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
Consolidated Unaudited Results for the Three Months and Six Months Ended,
                                 
    Three Months Ended     Six Months Ended  
Revenues   June 30, 2011     June 30, 2010     June 30, 2011     June 30, 2010  
    (In Thousands)  
Technology
  $ 150     $ 400     $ 300     $ 3,300  
Technical Services
    383       512       884       1,413  
Technical Services from Dynamic Fuels, LLC
    316       378       514       815  
Royalties from Dynamic Fuels, LLC Plant Production
    339             339        
 
                       
 
  $ 1,188     $ 1,290     $ 2,037     $ 5,528  
 
                       
Technology Revenue. Technology Revenue was $300,000 and $3,300,000 for the six months ended June 30, 2011 and 2010, respectively and relates to the delivery of technology equipment related to our transfer of technology sale that occurred in 2010. 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 $1,398,000 and $2,228,000 for the six months ended June 30, 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.
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 June 30, 2011. We will continue to recognize royalties from actual plant production of renewable products quarterly.
                                 
    Three Months Ended     Six Months Ended  
Operating Costs and Expenses   June 30, 2011     June 30, 2010     June 30, 2011     June 30, 2010  
    (In Thousands)  
Engineering
  $ 588     $ 528     $ 1,144     $ 1,124  
Depreciation and amortization
    50       54       99       116  
Non-cash equity compensation
    (8 )     205       459       1,026  
General, administrative and other
    772       1,569       2,136       2,801  
 
                       
 
  $ 1,402     $ 2,356     $ 3,838     $ 5,067  
 
                       
Engineering. Expenses from engineering activities were $1,144,000 for the six months ended June 30, 2011 compared to $1,124,000 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 six months ended June 30, 2011 was $459,000 compared to $1,026,000 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 six months ended June 30, 2011 were $2,136,000 compared to $2,801,000 during the same period in 2010. The decrease in general and administrative expenses primarily relates to decreased legal fees due to settlement of litigation.
Loss from Dynamic Investment. The losses generated by Dynamic Fuels during the six months ended March 31, 2011, relate to plant commissioning with limited production, 6.5 million gallons or approximately 20% of plant design, and additional expenses for materials and labor to address mechanical reliability issues with key pieces of equipment. Loss from our investment in Dynamic was $4,829,000 and $6,938,000 for the quarter and six months ended March 31, 2011, respectively. This compares to a loss of $1,119,000 and $1,865,000 for the same periods in 2010. Dynamic Fuels’ revenues were $28,098,000 with operating expenditures of $40,464,000 and other expense of $1,305,000 for the six months ended March 31, 2011. We expect to report income from this investment in 2012 upon continuous full rate commercial operations. We report our 50 percent share of Dynamic Fuels results of operations on a three month lag basis.

 

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Liquidity and Capital Resources
General
As of June 30, 2011, we had approximately $6,253,000 in cash and cash equivalents. At June 30, 2011, we had $1,901,000 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.
Our current liabilities totaled $1,695,000 as of June 30, 2011.
On July 6, 2011 the Company closed the issuance and sale of 15,900,000 shares of its common stock and accompanying warrants to purchase a total of 7,950,000 shares of common stock. A combination of one share of common stock and a five year warrant to purchase 0.5 shares of common stock was sold in the offering for a combined public offering price of $1.58 per share, less underwriting discounts and commissions payable by the Company. The underwriter, JMP Securities LLC, purchased the common stock and warrants at a discounted price of $1.49 per combination, representing a 5.7% discount to the public offering price. Cash proceeds received by the Company, after the payment of underwriter commission and expenses and offering expenses, were approximately $23,575,000.
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 $2,422,000 during the six months ended June 30, 2011, compared to cash flows provided by operations of $1,837,000 during the six months ended June 30, 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 $260,000 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 July 2011.
Cash flows used in investing activities were $3,873,000 during the six months ended June 30, 2011 compared to $5,003,000 during the six months ended June 30, 2010. We funded $3,850,000 into Dynamic Fuels as a working capital loan during the three months ended June, 2010. We provided $650,000 in working capital loans in July 2011 and expect to provide additional working capital loans for the prepayment to raw material suppliers of fats, oils and greases in the third quarter.
Cash flows provided by financing activities during the six months ended June 30, 2011 was $35,000 compared to $2,832,000 used during the six months ended June 30, 2010. The cash provided by financing activities during 2010 is primarily due to net proceeds received from our Stock Purchase Agreement with Fletcher. Fletcher purchased 1,135,374 shares of our common stock at a stock price of approximately $2.64 in April of 2010. As reported above, we closed a substantial financing on July 6, 2011, generating net proceeds to the Company of approximately $23,575,000.
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 June 30, 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 licensee’s 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 Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 was filed.

 

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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 June 30, 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 Commission’s rules and forms.
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 June 30, 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.
None.
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.
None.
Use of Proceeds.
Not applicable.
Purchases of Equity Securities by the Issuer and Affiliated Purchases.
None.
Item 3.   Defaults Upon Senior Securities.
None.
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: August 8, 2011
  By:   /s/ Edward G. Roth
 
Edward G. Roth
   
 
      President and Chief Executive Officer
(Principal Executive Officer)
   
 
           
Date: August 8, 2011
  By:   /s/ Karen L. Gallagher
 
Karen L. Gallagher
   
 
      Senior Vice President and Principal Financial Officer
(Principal Financial Officer)
   

 

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INDEX TO EXHIBITS
         
No.   Description of Exhibit
       
 
  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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