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EXCEL - IDEA: XBRL DOCUMENT - Sooner Holdings, Inc. | Financial_Report.xls |
EX-32.2 - EX-32.2 - Sooner Holdings, Inc. | c21035exv32w2.htm |
EX-31.2 - EX-31.2 - Sooner Holdings, Inc. | c21035exv31w2.htm |
EX-31.1 - EX-31.1 - Sooner Holdings, Inc. | c21035exv31w1.htm |
EX-32.1 - EX-32.1 - Sooner Holdings, Inc. | c21035exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED 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)
Tulsa, Oklahoma 74135
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (918) 592-7900
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every interactive data file required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes 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 issuers common stock was
97,903,160.
SYNTROLEUM CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011
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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.
1
Table of Contents
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.
2
Table of Contents
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.
3
Table of Contents
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.
4
Table of Contents
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 subsidiarys summarized financial information is reported in Note 5, Investment
in and Loans to Dynamic Fuels, LLC. The carrying value of our investment in Dynamic Fuels is
reflected in Investment in and Loans to Dynamic Fuels, LLC in our Consolidated Balance Sheets.
The consolidated financial statements included in this report have been prepared by the
Company without audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Accordingly, these statements reflect all adjustments (consisting of normal
recurring entries), which are, in the opinion of management, necessary for a fair statement of the
financial results for the interim periods presented. These financial statements should be read
together with the financial statements and the notes thereto included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2010 filed with the SEC under the Securities
Exchange Act of 1934.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Our financial position and results of operations are
materially affected by Dynamic Fuels financial position and results of operations as of and for
the 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 managements estimates and
assumptions than they will be when operations stabilize and the accounting processes mature.
Actual results could differ from those estimates.
2. Operations and Liquidity
In the past we have sustained recurring losses and negative cash flows from operations. As of
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).
5
Table of Contents
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, Syntroleums 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 plants 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.
6
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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 licensees use of our Bio-Synfining Technology. The form of
the Site License Agreement is included in the agreement as Exhibit B. The form of the Site License
Agreement includes process guarantees if the plant fails to pass a performance test as defined in
the Site License Agreement. If the plant fails to meet the Process Guarantee during the
Performance Test and such failure is due in whole or in part to the Process Design Package, then we
and Dynamic Fuels shall mutually agree whether or not remedial measures are reasonably likely to
cause the plant to satisfy the Process Guarantee. The actual cost of the remedial measures will be
reimbursed to licensee through application of any future royalties owed to us, not to exceed
$9,800,000. If the remedial measures are not effective, we shall pay to Dynamic Fuels an
additional amount for liquidated damages in an amount not to exceed $9,800,000. As of the date of
this filing the Site License Agreement has not been executed by Dynamic Fuels and we cannot be
certain the document that will be executed will have this same language and amounts.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
You should read the following information together with the information presented elsewhere in
this Quarterly Report on Form 10-Q and with the information presented in our Annual Report on Form
10-K for the year ended December 31, 2010 (including our audited financial statements and the
accompanying notes).
Overview
Our focus is the commercialization of our technologies to produce synthetic liquid
hydrocarbons. Operations to date have consisted of activities related to the commercialization of
a proprietary process (the Syntroleum® Process) and previously consisted of research and
development of the Syntroleum® Process designed to convert carbonaceous material (biomass, coal,
natural gas and petroleum coke) into synthetic liquid hydrocarbons. Synthetic hydrocarbons
produced by the Syntroleum® Process can be further processed using the Syntroleum Synfining®
Process into high quality liquid fuels, such as diesel, jet fuel, 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, Syntroleums 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 plants 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
Numbers, (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 licensees use of our Bio-Synfining Technology. The form of
the Site License Agreement is included in the agreement as Exhibit B. The form of the Site License
Agreement includes process guarantees if the plant fails to pass a performance test as defined in
the Site License Agreement. If the plant fails to meet the Process Guarantee during the
Performance Test and such failure is due in whole or in part to the Process Design Package, then we
and Dynamic Fuels shall mutually agree whether or not remedial measures are reasonably likely to
cause the plant to satisfy the Process Guarantee. The actual cost of the remedial measures will be
reimbursed to licensee through application of any future royalties owed to us, not to exceed
$9,800,000. If the remedial measures are not effective, we shall pay to Dynamic Fuels an
additional amount for liquidated damages in an amount not to exceed $9,800,000. As of the date of
this filing the Site License Agreement has not been executed by Dynamic Fuels and we cannot be
certain the document that will be executed will have this same language and amounts.
We may need to fund future short-term working capital needs of Dynamic Fuels on an as needed
basis.
New Accounting Pronouncements
No new accounting standards have been adopted since the Companys Annual Report on Form 10-K
for the fiscal year ended December 31, 2010 was filed.
12
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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 Commissions 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
|
||||
President and Chief Executive Officer (Principal Executive Officer) |
||||||
Date: August 8, 2011
|
By: | /s/ Karen L. Gallagher
|
||||
Senior Vice President and Principal Financial Officer (Principal Financial Officer) |
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