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Syntroleum Corp. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: November 8, 2011 04:36PM

Syntroleum Corp. (SYNM) filed Quarterly Report for the period ended 2011-09-30. Syntroleum Corp. has a market cap of $119.4 million; its shares were traded at around $1.22 with and P/S ratio of 14.2.



Highlight of Business Operations:

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 September 30, 2011, Syntroleum’s total estimate of maximum exposure to loss as a result of its relationships with this entity was approximately $37,915,000, which represents our equity investment in and loans to this entity in the amount of $35,737,000 and accounts receivable from this entity in the amount of $2,178,000, which fluctuates from time to time with certain operating activities. Each member has contributed $40.5 million in capital contributions and an additional $9.5 million in the form of a working capital loans to the entity as of September 30, 2011. An additional $2.5 million working capital loan was made to the entity in October, 2011. The $12.0 million loans each will be repaid to each member upon Dynamic Fuels generating sufficient working capital from fuel sales.

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 $2,114,000 and $3,340,000 for the nine months ended September 30, 2011 and 2010, respectively. Revenue from Dynamic Fuels decreased in 2011 as the initial engineering design work on the plant is completed. We expect to continue to earn revenues for engineering services to other clients on an individual contract basis in 2011.

Engineering. Expenses from engineering activities were $1,706,000 for the nine months ended September 30, 2011 compared to $1,952,000 during the same period in 2010. Engineering activities were increased for the same period in 2010 due to increases in outside analytical costs related to client projects. Non-cash Equity Compensation. Non-cash equity compensation for the nine months ended September 30, 2011 was $528,000 compared to $1,299,000 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. General, Administrative and Other. General and administrative expenses for the nine months ended September 30, 2011 were $3,084,000 compared to $4,105,000 during the same period in 2010. The decrease in general and administrative expenses primarily relates to decreased legal fees due to settlement of litigation in early 2011. Loss from Dynamic Investment. The losses generated by Dynamic Fuels during the nine months ended June 30, 2011, relate to plant commissioning with limited production, of approximately 14.0 million gallons or approximately 25% 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 $5,348,000 and $12,286,000 for the quarter and nine months ended June 30, 2011, respectively. This compares to a loss of $980,000 and $2,845,000 for the same periods in 2010. Dynamic Fuels’ revenues were $63,101,000 with operating expenditures of $86,087,000 and other expense of $2,034,000 for the nine months ended June 30, 2011. We report our 50 percent share of Dynamic Fuels results of operations on a three month lag basis. Liquidity and Capital Resources General As of September 30, 2011, we had approximately $28,430,000 in cash and cash equivalents and $671,000 in restricted cash. At September 30, 2011, we had $2,283,000 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 $1,368,000 as of September 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 $3,119,000 during the nine months ended September 30, 2011, compared to cash flows provided by operations of $943,000 during the nine months ended September 30, 2010. The decrease in cash flows provided by operations primarily results from the collection of revenues from technology deployment agreements of $3,000,000 in 2010 compared to $0 in 2011 and the untimely collection of receivables from Dynamic Fuels, LLC in 2011. Cash flows used in investing activities were $4,537,000 during the nine months ended September 30, 2011 compared to $10,014,000 during the nine months ended September 30, 2010. We funded $4,500,000 into Dynamic Fuels as a working capital loan during the nine months ended September, 2010. We provided an additional $2,500,000 in working capital loans in October 2011 and may provide additional working capital loans to the plant if additional cash is needed. Cash flows provided by financing activities during the nine months ended September 30, 2011 was $23,573,000 compared to $4,886,000 provided during the nine months ended September 30, 2010. The cash provided by financing activities in 2011 relates to the public offering in July of 15,900,000 shares of our common stock and accompanying warrants resulting in net proceeds of $23,575,000. 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. 12

Loss from Dynamic Investment. The losses generated by Dynamic Fuels during the nine months ended June 30, 2011, relate to plant commissioning with limited production, of approximately 14.0 million gallons or approximately 25% 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 $5,348,000 and $12,286,000 for the quarter and nine months ended June 30, 2011, respectively. This compares to a loss of $980,000 and $2,845,000 for the same periods in 2010. Dynamic Fuels’ revenues were $63,101,000 with operating expenditures of $86,087,000 and other expense of $2,034,000 for the nine months ended June 30, 2011. We report our 50 percent share of Dynamic Fuels results of operations on a three month lag basis.

Cash flows used in operations was $3,119,000 during the nine months ended September 30, 2011, compared to cash flows provided by operations of $943,000 during the nine months ended September 30, 2010. The decrease in cash flows provided by operations primarily results from the collection of revenues from technology deployment agreements of $3,000,000 in 2010 compared to $0 in 2011 and the untimely collection of receivables from Dynamic Fuels, LLC in 2011.

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