The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2014
1. BUSINESS AND ORGANIZATION
Nature of Operations
The
focus of Syntroleum Corporation and subsidiaries (the Company, Syntroleum, or we) is the commercialization of its 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 (HRJ), 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 (Dynamic Fuels) joint venture with Tyson Foods, Inc. (Tyson). The technology processes renewable feedstocks such as triglycerides and/or fatty acids to make renewable synthetic products.
In the past we have sustained recurring losses and negative cash flows from operations. As of March 31, 2014, we had approximately $7.8
million of cash and cash equivalents available to fund operations and investing activities and have limited income from operations. Additionally, the Dynamic Fuels plant (the Geismar Facility) was placed in stand-by mode in December
2012, and remains in stand-by mode as the Company and Tyson have not agreed upon the conditions necessary for start-up.
Asset Purchase Agreement with
Renewable Energy Group
On December 17, 2013, we entered into an asset purchase agreement (the Asset Purchase Agreement)
with Renewable Energy Group, Inc. (REG) and REG Synthetic Fuels, LLC, (REG Synthetic), a wholly-owned subsidiary of REG, pursuant to which we have agreed to sell substantially all of our assets to REG Synthetic, including all
of our intellectual property and our 50% equity interest Dynamic Fuels (the Asset Sale). As consideration for the Asset Sale, REG will assume substantially all of our material liabilities and we will receive 3,796,000 shares of REG
common stock, subject to downward adjustment (based on the value of REG common stock at closing, as calculated under the Asset Purchase Agreement) to the extent that our cash on hand at closing is less than $3.2 million; provided, that, if the per
share value of REGs common stock at closing (as calculated under the Asset Purchase Agreement) is equal to or greater than $12.91, then the number of shares of REG common stock will be equal to (A) $49,000,000, divided by (B) the REG
common stock value at closing (as calculated under the Asset Purchase Agreement). The closing of the transactions contemplated by the Asset Purchase Agreement is conditioned upon the approval of our stockholders and other specified closing
conditions. REG has filed a Registration Statement on Form S-4, Amendment No. 1 and Amendment No. 2 in connection with the transactions contemplated by the Asset Purchase Agreement, which includes our proxy statement for a special meeting
of stockholders to be held in order to approve the transactions. If our stockholders approve the transaction and the other closing conditions are satisfied or waived, it is expected that the Asset Sale will close in the second quarter of 2014.
Following the closing of the Asset Sale and subject to the approval of our stockholders, we intend to liquidate and dissolve in compliance
with the applicable provisions of the Delaware General Corporation Law.
2. BASIS OF REPORTING
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. 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 operating activities is
reflected in the Consolidated Statements of Operations and the subsidiarys summarized financial information is reported in Note 4, 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.
6
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 consolidated financial statements should be read together with the consolidated financial statements and the notes thereto included in the
Companys Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC under the Securities Exchange Act of 1934, as amended.
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 three months ended December 31, 2013.
The consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates
continuity of operations, realization of assets and liquidation of liabilities in the normal course of business. As a result of the factors described in Note 1, and in connection with our accumulated deficit of $369 million, and our expectation of
future cash requirements exceeding our capital availability there is substantial doubt about our ability to continue as a going concern.
The consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the
amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. If the consolidated financial statements were prepared on a liquidation basis, the carrying value of our assets and liabilities
would be adjusted to the net realizable amounts. In addition, the classification of the assets and liabilities would be adjusted to reflect the liquidation basis of accounting.
As of March 31, 2014, the Syntroleum 401K Plan was terminated.
3. DISCONTINUED OPERATIONS
Income from Discontinued Operations for the quarter ended March 31, 2013 included $5.8 million in proceeds from the
sale of our nominal two b/d pilot plant. The Company had no carrying value for the pilot plant since all costs incurred had been expensed as research and development expenses. As such, the total amount of the proceeds was recognized as a gain. In
connection with this sale, the buyer assumed all dismantlement and retirement costs, as such, the previously recognized asset retirement obligation of $603,000, was also recognized as a gain in connection with the sale of the pilot plant.
4. INVESTMENT IN AND LOANS TO DYNAMIC FUELS
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). Other agreements entered into included a technology license agreement whereby we would provide for the transfer of our
Bio-Synfining
®
Technology, provide technology support services to Dynamic Fuels, and receive payment of royalties for plant production. These agreements also included a sales agreement
whereby Tyson would be paid a sourcing fee to procure feedstock.
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. Dynamic Fuels has a different fiscal year than us. The Dynamic Fuels fiscal year ends on September 30 and we report our share of
Dynamic Fuels results of operations on a three month lag basis. Our carrying value in Dynamic Fuels is reflected in Investment in and Loans to Dynamic Fuels, LLC in our Consolidated Balance Sheets. As of March 31, 2014,
Syntroleums exposure to loss as a result of its relationship with this entity was approximately $36.5 million, which represents our equity investment in and loans to this entity as well as the valuation of the guarantee liability, net of
recognized losses and other equity accounting adjustments. Additionally, Syntroleum has responsibility for up to 50% of Tysons losses under the bond guarantee. The carrying value of our investment in Dynamic Fuels exceeds the amount of
underlying equity in net assets and loans to Dynamic Fuels by approximately $8.5 million with $7.5 million related to warrants issued to Tyson and $1 million related to the bond guarantee. The warrants are being amortized over the remaining life of
the Dynamic Fuels bonds which expire in 2033.
7
Dynamic Fuels was initially capitalized on July 13, 2007 with $4.25 million in capital
contributions from Tyson and $4.25 million in capital contributions from us. We contributed an additional $49.31 million and Tyson contributed an additional $52.49 million in cash and non-cash capital contributions by December 31, 2013. During
the quarter ended March 31, 2014, each partner made additional working capital loans of $1.05 million. Each partner has remaining outstanding working capital loans to Dynamic Fuels of $12.6 million. The remaining loans are non-interest bearing
and do not have a stated term but will be repaid to each partner upon Dynamic Fuels generating sufficient operating cash flow. Syntroleum will likely be required to fund future working capital of Dynamic Fuels.
In 2008, Dynamic Fuels received approval from the Louisiana State Bond Commission to issue up to $100 million of certain Gulf Opportunity Tax
Exempt Bonds originated by the Louisiana Public Facilities Authority (the Bonds). On October 21, 2008, the issuance of the Bonds occurred and required a letter of credit in the amount of $100 million as collateral for Dynamic
Fuels obligations under the Bonds. Under the terms of a warrant agreement, Tyson agreed to provide credit support for the entire $100 million Bond issue for which we issued Tyson a warrant to purchase 800,000 shares of our common stock for
$0.10 per share, which was exercised in full on April 16, 2009. As described in Note 7, we have accepted responsibility for up to 50% of Tysons losses under the bond guarantee.
In prior years, Dynamic Fuels was engaged in the development and construction of the Geismar Facility. Dynamic Fuels began commercial
operations in November of 2010. The Geismar Facility sold 66.9 million gallons of renewable products such as diesel, naphtha, and LPG from December 2010 to December 2013. Nameplate capacity for the Geismar Facility is 75 million gallons
per year.
Since inception of commercial operations, the Geismar Facility has experienced mechanical issues, hydrogen supply disruptions
and feedstock adulterants which have contributed to plant down time, higher than expected operational costs and operating losses. After completion of a maintenance turnaround on December 10, 2012, the plant was placed in stand-by mode primarily
because of economic conditions, including without limitation, falling RIN prices, uncertainty regarding the extension and retroactive application of federal tax credits, and the high price of feedstocks. While the plant is ready for commercial
operation, the Dynamic Fuels management committee has not determined a re-start date. As of the date of this Quarterly Report on Form 10-Q, the plant continues to be in stand-by mode and is non-operational as Syntroleum and Tyson have not agreed on
the conditions necessary for plant start-up.
Accounting standards for equity method investments require us to consider all factors that
may indicate that the value of our investment in Dynamic Fuels is less than the amount resulting from the application of the equity method reported in our consolidated balance sheet. If such a value deficiency has occurred and is other than
temporary, it must be recognized currently. Our management has considered Dynamic Fuels financial condition, current status and outlook and has concluded that should a current valuation deficiency exist, it does not meet the other than
temporary criteria of the accounting standards. When the Company and Tyson reach an agreement to resume production, for which there is no assurance, should the plant upgrades and improvements fail to improve operational performance or industry
economics make the plant uneconomic to operate, should the Asset Purchase Agreement not be approved, or should we be required to seek protection under the U.S. Bankruptcy Code or similar relief, we may be required to assess the recoverability of our
investment in and loans to Dynamic Fuels.
Dynamic Fuels, LLC Quarter Ended December 31, 2013 Unaudited Financials (in thousands):
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
December 31,
2013
|
|
|
September 30,
2013
|
|
Cash and Current Assets
|
|
$
|
7,303
|
|
|
$
|
9,727
|
|
Inventory
|
|
|
3,179
|
|
|
|
3,297
|
|
Property, Plant and Equipment and Other Assets
|
|
|
149,165
|
|
|
|
150,843
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
159,647
|
|
|
$
|
163,867
|
|
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
1,445
|
|
|
$
|
2,254
|
|
Notes and Accounts Payable to Related Parties
|
|
|
24,211
|
|
|
|
21,057
|
|
Long-Term Liabilities
|
|
|
100,062
|
|
|
|
100,060
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
125,718
|
|
|
|
123,371
|
|
|
|
|
|
|
|
|
|
|
Total Members Equity
|
|
|
33,929
|
|
|
|
40,496
|
|
Total Liabilities and Members Equity
|
|
$
|
159,647
|
|
|
$
|
163,867
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
Statement of Operations
|
|
For the Quarter Ended
December 31, 2013
|
|
|
For the Quarter Ended
December 31, 2012
|
|
Revenue
|
|
$
|
150
|
|
|
$
|
19,826
|
|
Cost of Goods Sold and Operating Expenses
|
|
|
6,255
|
|
|
|
31,078
|
|
General and Administrative Expenses
|
|
|
221
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(6,326
|
)
|
|
|
(11,404
|
)
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
(241
|
)
|
|
|
(388
|
)
|
Net Loss
|
|
$
|
(6,567
|
)
|
|
$
|
(11,792
|
)
|
|
|
|
|
|
|
|
|
|
During the quarters ended March 31, 2014 and 2013, we recognized revenue earned pursuant to our technical
services agreement with Dynamic Fuels in the amount of $0 and $417,000, respectively. This revenue is reported in Technical services from Dynamic Fuels, LLC in the Consolidated Statement of Operations. No royalty revenue was recognized
during the quarters ended March 31, 2014 and 2013 as the plant was in stand-by mode.
5. EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(Dollars in thousands, except per share
amounts; shares in thousands)
|
|
Income (loss) from continuing operations available to common stockholders for basic and diluted earnings per share
|
|
$
|
(6,478
|
)
|
|
$
|
4,634
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average shares
|
|
|
9,956
|
|
|
|
9,585
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Unvested restricted stock units
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive weighted-average shares
|
|
|
9,956
|
|
|
|
9,585
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share from continuing operations:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.65
|
)
|
|
$
|
0.48
|
|
Diluted
|
|
$
|
(0.65
|
)
|
|
$
|
0.48
|
|
The table below includes information related to stock options, warrants and restricted stock that were
outstanding at March 31 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 as
their inclusion would have been anti-dilutive to our income (loss) per share.
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
|
March 31,
2013
|
|
Options, warrants and restricted stock excluded (in thousands)
|
|
|
2,281
|
|
|
|
1,937
|
|
Weighted-average exercise prices of options, warrants and restricted stock excluded
|
|
$
|
26.32
|
|
|
$
|
29.96
|
|
First quarter weighted-average market price
|
|
$
|
3.72
|
|
|
$
|
4.40
|
|
9
6. STOCK-BASED COMPENSATION
Our stock-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 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 March 31, 2014, 640,750 shares of common stock were available for grant under our current plan. We are authorized to issue up to
1,133,641, 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 Under Stock
Options
|
|
|
Weighted Average
Price Per Share
|
|
OUTSTANDING AT DECEMBER 31, 2013
|
|
|
572,640
|
|
|
$
|
19.08
|
|
Granted at market price
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Expired, forfeited, cancelled or repurchased
|
|
|
(79,749
|
)
|
|
|
7.75
|
|
|
|
|
|
|
|
|
|
|
OUTSTANDING AT MARCH 31, 2014
|
|
|
492,891
|
|
|
$
|
20.91
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options outstanding at March 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of Exercise Price
|
|
Options
Outstanding
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual Life
|
|
|
Options
Exercisable
|
|
|
Weighted Average
Exercise Price Per
Share
|
|
$6.60 - $6.60
|
|
|
352,173
|
|
|
$
|
6.60
|
|
|
|
4.32
|
|
|
|
352,173
|
|
|
$
|
6.60
|
|
$14.10 - $14.10
|
|
|
5,000
|
|
|
|
14.10
|
|
|
|
7.33
|
|
|
|
5,000
|
|
|
|
14.10
|
|
$28.90 - $28.90
|
|
|
50,625
|
|
|
|
28.90
|
|
|
|
2.69
|
|
|
|
50,625
|
|
|
|
28.90
|
|
$31.90 - $68.80
|
|
|
60,023
|
|
|
|
67.64
|
|
|
|
0.69
|
|
|
|
60,023
|
|
|
|
67.64
|
|
$80.30 - $96.70
|
|
|
22,569
|
|
|
|
94.29
|
|
|
|
1.63
|
|
|
|
22,569
|
|
|
|
94.29
|
|
$105.10 - $105.10
|
|
|
2,500
|
|
|
|
105.10
|
|
|
|
1.34
|
|
|
|
2,500
|
|
|
|
105.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
492,891
|
|
|
$
|
20.91
|
|
|
|
|
|
|
|
492,891
|
|
|
$
|
20.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A total of 492,891 stock options with a weighted average exercise price of $20.91 were outstanding and fully
vested at March 31, 2014. There were no stock options granted during the three months ended March 31, 2014 or 2013.
Non-cash
compensation cost related to stock and stock options and restricted stock recognized during the three months ended March 31, 2014 and 2013 was $53,000 and $384,000, respectively.
There were no stock options exercised during the three months ended March 31, 2014 and 2013. As of March 31, 2014, there was no
aggregate intrinsic value of stock options that were fully vested. The remaining weighted average contractual term for options exercisable is approximately 3.83 years. As of March 31, 2014, all stock options have vested and all related
compensation costs has been recognized.
10
Restricted Stock
We also grant common stock and restricted common stock units to employees and directors. 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. There were no shares granted during 2014. The weighted average grant date fair value of common stock and restricted stock units granted during the three
months ended March 31, 2013 was $4.00 per share (total grant date fair value of $350,000). As of March 31, 2014, all restricted stock units had vested.
7. COMMITMENTS AND CONTINGENCIES
We have entered into employment agreements, which provide severance benefits to several key employees. Commitments under
these agreements totaled approximately $2.1million at March 31, 2014. Expense is not recognized until an employee is severed.
During
the quarter ending March 31, 2014, the Company agreed to accept effective responsibility for 50%, or up to $50 million, of any liability incurred by Tyson in connection with its guarantee of $100 million of Bonds issued by Dynamic
Fuels. Tysons guarantee is secured by its letter of credit as described in Note 4. The holders of the Bonds are entitled to draw upon the letter of credit in the event of a default under the Bonds. Dynamic Fuels is not currently
in default under the Bonds. The Companys obligation will continue until the Bonds, which are due in 2033, are repaid or assumed. The Company had previously issued warrants to Tyson in exchange for Tysons agreement to provide
the letter of credit, as described in Note 4.
The Company agreed to accept this obligation in order to help resolve disagreements between
the Company and Tyson regarding the guarantee described above which had delayed the financial reporting for Dynamic Fuels, and to avoid the possibility that an ongoing dispute with Tyson could delay or prevent the Company from completing the
proposed Asset Sale to REG Synthetic. Pursuant to the proposed asset sale, REG Synthetic has agreed to assume this obligation. Management determined the fair value associated with the guarantee is $1 million by utilizing a Monte Carlo simulation
model. The Company increased its carrying value of its Investment In and Loans To Dynamic Fuels, LLC by $1 million and recorded a noncurrent liability during the quarter ended March 31, 2014.
Three lawsuits challenging the Asset Sale have been filed. First, on December 26, 2013, Daniel Baxter, on behalf of himself and the
public stockholders of Syntroleum, filed a putative class action petition in the District Court of Tulsa County, State of Oklahoma. Second, on December 30, 2013, Philip Crawley, on behalf of himself and the public stockholders of Syntroleum,
filed a putative class action petition in the District Court of Tulsa County, State of Oklahoma. Third, on January 10, 2014, George Kashouh and Thomas Victor, on behalf of themselves and the public stockholders of Syntroleum, filed a putative
class action petition in the District Court of Tulsa, State of Oklahoma. All of the lawsuits name as defendants Syntroleum, each member of Syntroleums board of directors, REG, and REG Synthetic; the Baxter lawsuit also names Syntroleums
Principal Financial Officer as a defendant. On January 14, 2014, the court issued an order consolidating the first two suits, and on February 12, 2014, the third suit was consolidated. On January 22, 2014, the plaintiffs filed an
amended consolidated petition alleging that (1) Syntroleums directors breached their fiduciary duties in connection with entering into the Asset Purchase Agreement, as publicly disclosed on December 17, 2013, by failing to maximize
stockholder value, agreeing to onerous and unreasonable deal protection devices and failing to act in accordance with their duties of care, loyalty, and good faith, (2) Syntroleum, REG and REG Synthetic aided and abetted those alleged breaches
of fiduciary duties, and (3) the combined proxy statement/prospectus omits material information regarding the proposed transaction and is otherwise misleading. Based on these allegations, the amended petition seeks to enjoin the Asset Sale, to
obtain other related declaratory and injunctive relief (including rescission), and to recover the costs of the action, including reasonable attorneys fees. The Baxter plaintiffs filed an Emergency Motion and Memorandum in Support to Expedite
Discovery and Shorten Prescribed Time Period for Defendants to Respond to Discovery together with their original petition, which motion was heard on January 6, 2014 and not granted. On January 24, 2014, the original judge assigned to the
consolidated matter recused herself and the matter was re-assigned to another judge. No further hearing dates have been set in connection with the consolidated lawsuits. On March 7, 2014, Syntroleum agreed to certain supplemental disclosures in
the proxy statement/prospectus relating to the Asset Sale in exchange for plaintiffs agreement not to seek to enjoin or otherwise delay a vote by Syntroleums stockholders on the Asset Sale on the basis of the disclosures contained in
that proxy statement/prospectus. On April 16, 2014, plaintiffs filed a dismissal without prejudice of Syntroleum Corporation from the litigation.
The Company is involved in certain claims and legal proceedings arising in the ordinary course of business. Management believes there will not
be any liability from the resolution of these proceedings and any liability will not have a material adverse effect on the Companys financial condition, future results of operations or liquidity.
11
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, 2013 (including our audited consolidated financial statements and the accompanying notes).
Overview
Syntroleum is engaged in the
commercialization of its proprietary solutions to produce synthetic liquid hydrocarbons. Syntroleum owns the Syntroleum
®
process for Fischer-Tropsch (FT) conversion of synthesis
gas into liquid hydrocarbons, the Synfining
®
process for upgrading FT liquid hydrocarbons into refined petroleum products, the
Bio-Synfining
®
technology for converting renewable feedstocks into drop-in fuels and a 50% interest in Dynamic Fuels, LLC (Dynamic Fuels), which owns the 75 million gallon per
year Geismar, Louisiana renewable fuels plant (the Geismar Facility) using Bio-Synfining
®
technology.
Asset Purchase Agreement with Renewable Energy Group
On December 17, 2013, we entered into an asset purchase agreement (the Asset Purchase Agreement) with Renewable Energy Group,
Inc. (REG) and REG Synthetic Fuels, LLC, a wholly-owned subsidiary of REG (REG Synthetic), pursuant to which we have agreed to sell substantially all of our assets to REG Synthetic, including all of our intellectual property
and our 50% equity interest in Dynamic Fuels (the Asset Sale). As consideration for the Asset Sale, REG will assume substantially all of our material liabilities and we will receive 3,796,000 shares of REG common stock, subject to
downward adjustment (based on the value of REG common stock at closing, as calculated under the Asset Purchase Agreement) to the extent that our cash on hand at closing is less than $3.2 million; provided, that, if the per share value of REGs
common stock at closing (as calculated under the Asset Purchase Agreement) is equal to or greater than $12.91, then the number of shares of REG common stock will be equal to (A) $49,000,000, divided by (B) the REG common stock value at
closing (as calculated under the Asset Purchase Agreement). The closing of the transactions contemplated by the Asset Purchase Agreement is conditioned upon the approval of our stockholders and other specified closing conditions. REG has filed a
Registration Statement on Form S-4 in connection with the transactions contemplated by the Asset Purchase Agreement, which includes our proxy statement for a special meeting of stockholders to be held in order to approve the transactions. If our
stockholders approve the transaction and the other closing conditions are satisfied or waived, it is expected that the Asset Sale will close in the second quarter of 2014.
Following the closing of the Asset Sale and subject to the approval of our stockholders, we intend to liquidate and dissolve in compliance
with the applicable provisions of the Delaware General Corporation Law (the Liquidation and Dissolution).
Bio-Synfining
®
ProjectsDynamic Fuels
On June 22, 2007, we entered into
definitive agreements with Tyson to form Dynamic Fuels, to construct and operate facilities in the United States using our Bio-Synfining
®
technology. Dynamic Fuels is organized and operated
pursuant to the provisions of its Limited Liability Company Agreement between the Company and Tyson (the LLC Agreement).
The
LLC Agreement provides for management and control of Dynamic Fuels to be exercised jointly by representatives of the Company and Tyson equally, with no LLC member exercising control. Dynamic Fuels is accounted for under the equity method by
Syntroleum 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,
which ends on September 30. Accordingly, we report our share of Dynamic Fuels results of operations on a three month lag basis. Our carrying value in Dynamic Fuels is reflected in Investment in and Loans to Dynamic Fuels LLC in our
Consolidated Balance Sheets. As of March 31, 2014, Syntroleums exposure to loss as a result of its relationship with Dynamic Fuels was approximately $36.5 million, which represents our equity investment in and loans to Dynamic Fuels as
well as the valuation of our guarantee liability, net of recognized losses and other equity accounting adjustments. Dynamic Fuels was initially capitalized on July 13, 2007 with $4.25 million in capital contributions from Tyson and $4.25
million in capital contributions from us. Syntroleum contributed an additional $49.31 million and Tyson contributed an additional $52.49 million in cash capital contributions by March 31, 2014. As a result of the retroactive reinstatement of
certain tax credits, each of Tyson and Syntroleum received $10 million as a refund directly from the IRS. The refunds were recorded by Dynamic Fuels as repayment of working capital loans. During the quarter ended March 31, 2014, each partner
made additional working capital loans of $1.05 million. Each partner has remaining outstanding working capital loans to Dynamic Fuels of $12.6 million. The remaining loans are non-interest bearing and do not have a stated term but will be repaid to
each partner upon Dynamic Fuels generating sufficient operating cash flow.
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On April 24, 2014, each partner made an additional working capital loan of $300,000.
In 2008, Dynamic Fuels received approval from the Louisiana State Bond Commission to issue up to $100 million of certain Gulf Opportunity Tax
Exempt Bonds originated by the Louisiana Public Facilities Authority (the Bonds). On October 21, 2008, the issuance of the Bonds occurred and required a letter of credit in the amount of $100 million as collateral for Dynamic
Fuels obligations under the Bonds. Under the terms of a warrant agreement, Tyson agreed to provide credit support for the entire $100 million Bond issue for which we issued Tyson a warrant to purchase 800,000 shares of our common stock for
$0.10 per share, which was exercised in full on April 16, 2009. In the first quarter of 2014 we accepted effective responsibility for 50% of any liability incurred by Tyson in connection with this guarantee.
Dynamic Fuels began commercial operations in November of 2010. As of March 31, 2014, the Geismar Facility had sold 66.9 million
gallons of renewable products such as diesel, naphtha, and LPG. Nameplate capacity for the Geismar Facility is 75 million gallons per year. During its fiscal year ended September 30, 2013, the Geismar Facility was in stand-by mode and had
no production.
The Geismar Facility has experienced mechanical issues, hydrogen supply disruptions and feedstock, impurities and
adulterants, which have contributed to plant down time and higher than expected operational costs. The quality of the feedstock has not impacted the quality of the finished product, which has in all cases met or exceeded ASTM standards.
After completion of a maintenance turnaround on December 10, 2012, the Geismar Facility was placed in standby mode pending agreement by
Syntroleum and Tyson as to the appropriate conditions under which to resume production. As of the date of this Quarterly Report on Form 10-Q, the plant continues to be in stand-by mode and is non-operational. To date, Syntroleum and Tyson have not
agreed on the conditions necessary for plant start-up.
Discontinued Operations
In March 31, 2013, we received $5.8 million in proceeds from the sale of our nominal two b/d pilot plant in Tulsa, Oklahoma and $603,000
from the previously accrued asset retirement obligations from which Syntroleum was released in connection with the sale. The pilot plant had no carrying value as all costs incurred had been expensed as research and development.
Results of Operations
Three Months Ended
March 31, 2014 Compared to Three Months Ended March 31, 2013
Consolidated Unaudited Results for the Quarters Ended
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Revenues
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March 31,
2014
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March 31,
2013
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(in thousands)
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Technology
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$
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$
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100
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Technical Services
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261
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382
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Technical Services from Dynamic Fuels, LLC
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417
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Total Revenues
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$
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261
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$
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899
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Technology Revenue.
Technology revenue was $0 and $100,000 for the quarters ended March 31, 2014
and March 31, 2013, respectively. The revenue during 2013 was associated with the nominal two b/d day pilot plant which was sold in March 2013.
Technical Services Revenue.
Revenues from technical services were $261,000 and $799,000 for the quarters ended March 31, 2014
and 2013, respectively, and were derived primarily from two customers, Dynamic Fuels and Sasol (USA) Corporation (Sasol). The agreement pursuant to which we provide technical services to Dynamic Fuels is effective through the
service life of the Geismar Facility; however, Dynamic Fuels is not obligated to issue any work orders to us nor are we obligated to accept any work orders issued by Dynamic Fuels. We have also had historical disagreements with Dynamic Fuels and
Tyson regarding payment for the technical services that we performed for Dynamic Fuels. The agreement pursuant to which we historically provided technical services to an affiliate of Sasol terminated on March 1, 2013 upon the sale of our pilot
plant to Sasol. We continue to provide technical services to Sasol pursuant to an agreement that terminates on March 1, 2015, subject to Sasols right to extend the term of the agreement for up to one additional one-year
term. The loss of either of these significant customers, or our inability to collect revenue for technical services that we performs for these customers, could have a material adverse effect on our operations and financial condition. We expect
to continue to earn revenues for engineering services to other customers on an individual contract basis in 2014.
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Operating Costs and Expenses
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March 31,
2014
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March 31,
2013
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(in thousands)
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Engineering
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$
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394
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$
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586
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Depreciation and amortization
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45
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43
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Non-cash equity compensation
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53
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384
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General, administrative and other
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2,309
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1,895
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Total Operating Costs and Expenses
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$
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2,801
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$
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2,908
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Engineering.
Expenses from engineering activities were $394,000 for the quarter ended March 31,
2014 compared to $586,000 during the same period in 2013. The change between years is primarily related to decreased employee bonus accruals along with fewer employees as of March 31, 2014 compared to March 31, 2013.
Non-cash Equity Compensation
. Non-cash equity compensation for the quarter ended March 31, 2014 was $53,000 compared to $384,000
for the same period in 2013. This expense relates to retirement plan matching obligations as of March 31, 2014 and restricted stock units granted for annual independent director fees at March 31, 2013.
General, Administrative and Other.
General and administrative expenses for the quarter ended March 31, 2014 were $2,309,000
compared to $1,895,000 during the same period in 2013. The overhead activities associated with the Company remain relatively the same for 2014 compared to 2013 and the increase primarily relates to higher legal fees, partially offset by lower salary
expense and director fees.
Gain (Loss) from Dynamic Investment.
Our equity in loss of Dynamic Fuels for our quarter ended
March 31, 2014 results from Dynamic Fuels revenues of $150,000, operating expenditures of $6.5 million and other expenses of $241,000 for its quarter ended December 31, 2013. Our equity in the earnings of Dynamic Fuels for the
quarter ended March 31, 2013 includes $12.6 million in gains representing our potion of the retroactive reinstatement of the $1 tax credit for 2012, partially offset by $5.9 million in losses representing our share of Dynamic Fuels
operating results for its quarter ended December 31, 2012. Due to the material impact of the retroactive reinstatement of the $1 tax credit, we are reporting the gain in the current quarter rather than on a three-month lag basis as is our
normal accounting practice. Our $6.7 million equity in earnings in Dynamic Fuels operations for their quarter ended December 31, 2012 consisted of revenues of $19.8 million, operating expenditures of $31.2 million and other expenses of
$390,000, adjusted for the tax credit discussed above.
Liquidity and Capital Resources
General
As of March 31, 2014, we had
$7.8 million in cash and cash equivalents and current liabilities of $600,000.
We have and will continue to fund additional short-term
working capital needs of Dynamic Fuels through working capital loans. Although management remains positive about the future of Dynamic Fuels, if Dynamic Fuels fails to achieve profitability, this entire investment could be subject to loss.
Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business. If we are unable to generate funds from operations and the Asset Sale is not completed, our need to obtain funds through financing activities will be increased.
Cash Flows
Cash flows used in operations
was $2.6 million during the three months ended March 31, 2014, compared to cash flows used in operations of $1.1 million during the three months ended March 31, 2013. The change results primarily from increased legal fees associated with
litigation and the Asset Sale.
14
Cash flows used in investing activities related to additional working capital loans to Dynamic
Fuels in the first quarter of 2014 and 2013 of $1.05 million and $4.0 million, respectively. In the first quarter of 2013, we made additional equity contributions to Dynamic of $1.7 million, which was offset by proceeds from the sale of the
Companys nominal two b/d pilot plant in Tulsa, Oklahoma for $5.8 million.
Contractual Obligations
Our operating leases include the lease for corporate headquarters.
We have entered into employment agreements, which provide severance cash benefits to several key employees. Commitments under these agreements
totaled approximately $2.1 million at March 31, 2014. Expense is not recognized until an employee is severed.
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, 2013 was filed.