Sooner 10-Q 2011 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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	73-1565725
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

5416 S. Yale Suite 400
Tulsa, Oklahoma 74135
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code:(918) 592-7900

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

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). Yeso Noo

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 filero Accelerated filerþ Smaller reporting companyo Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

At May 1, 2011, the number of outstanding shares of the issuer’s common stock was 81,965,610.

SYNTROLEUM CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011

	Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010		2
Unaudited Consolidated Statements of Operations for the three-months ended March 31, 2011 and 2010		3
Unaudited Consolidated Statement of Stockholders’ Equity for the three-months ended March 31, 2011		4
Unaudited Consolidated Statements of Cash Flows for the three-months ended March 31, 2011 and 2010		5
Notes to Unaudited Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3. Quantitative and Qualitative Disclosures About Market Risk		12
Item 4. Controls and Procedures		12
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		13
Item 1A. Risk Factors		13
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		13
Item 3. Defaults Upon Senior Securities		13
Item 4. Reserved		13
Item 5. Other Information		13
Item 6. Exhibits		13
SIGNATURES		14
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

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.

1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

SYNTROLEUM CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands)

	March 31,			December 31,
	2011			2010
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	10,406		$	12,513
Restricted cash		574			484
Accounts receivable		173			556
Accounts receivable from Dynamic Fuels, LLC		1,405			729
Other current assets		257			361
Total current assets		12,815			14,643
PROPERTY AND EQUIPMENT — at cost, net		103			97
INVESTMENT IN AND LOANS TO DYNAMIC FUELS, LLC		41,414			43,523
OTHER ASSETS, net		1,148			1,133
	$	55,480		$	59,396
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	185		$	1,090
Accrued employee costs		240			119
Deposits		574			484
Total current liabilities		999			1,693
NONCURRENT LIABILITIES OF DISCONTINUED OPERATIONS		603			603
DEFERRED REVENUE		24,518			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, 81,909 and 81,683 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively		819			817
Additional paid-in capital		374,862			374,397
Accumulated deficit		(346,321	)		(342,414	)
Total stockholders’ equity		29,360			32,800
	$	55,480		$	59,396

The accompanying notes are an integral part of these unaudited consolidated statements.

2

SYNTROLEUM CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

	For the Quarter Ended March 31,
	2011			2010
REVENUES:
Technology	$	150		$	2,900
Technical services		501			901
Technical services from Dynamic Fuels, LLC		198			437
Total revenues		849			4,238
COSTS AND EXPENSES:
Engineering		556			596
Depreciation and amortization		49			62
General, administrative and other (including non-cash equity compensation of $467 and $821 for the quarter ended March 31, 2011 and 2010, respectively.)		1,831			2,053
OPERATING INCOME (LOSS)		(1,587	)		1,527
INTEREST INCOME		4			6
OTHER INCOME		2			34
EQUITY IN LOSS OF DYNAMIC FUELS, LLC		(2,109	)		(746	)
FOREIGN CURRENCY EXCHANGE		(218	)		(396	)
INCOME (LOSS) FROM CONTINUING OPERATIONS		(3,908	)		425
INCOME (LOSS) FROM DISCONTINUED OPERATIONS		1			(22	)
NET INCOME (LOSS)	$	(3,907	)	$	403
BASIC NET INCOME (LOSS) PER SHARE:
Income (loss) from continuing operations	$	(0.05	)	$	0.01
Income from discontinued operations		0.00			0.00
Net income (loss)	$	(0.05	)	$	0.01
DILUTED NET INCOME (LOSS) FROM CONTINUING OPERATIONS PER SHARE:	$	(0.05	)	$	0.01
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		81,893			76,183
Diluted		81,893			78,783

The accompanying notes are an integral part of these unaudited consolidated statements.

3

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
Vesting of awards granted		15		—		86		—			86
Stock-based bonuses and match to 401(k) Plan		211		2		379		—			381
Net loss		—		—		—		(3,907	)		(3,907	)
Balance, March 31, 2011		81,909	$	819	$	374,862	$	(346,321	)	$	29,360

The accompanying notes are an integral part of these unaudited consolidated statements.

4

SYNTROLEUM CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

	For the Quarter Ended March 31,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(3,907	)	$	403
Income (loss) from discontinued operations		1			(22	)
Income (loss) from continuing operations		(3,908	)		425
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		49			62
Foreign currency exchange		218			396
Non-cash compensation expense		467			821
Non-cash loss in equity method investee		2,109			746
Changes in assets and liabilities:
Accounts receivable		383			2,563
Accounts receivable from Dynamic Fuels, LLC		(676	)		(33	)
Other assets		56			73
Accounts payable		(905	)		35
Accrued liabilities and other		121			(152	)
Deferred revenue		—			(2,967	)
Net cash provided by (used in) continuing operations		(2,086	)		1,969
Net cash provided by (used in) discontinued operations		1			(202	)
Net cash provided by (used in) operating activities		(2,085	)		1,767
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(22	)		(1	)
Net cash used in investing activities		(22	)		(1	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, warrants and option exercises		—			33
Net cash provided by financing activities		—			33
NET CHANGE IN CASH AND CASH EQUIVALENTS		(2,107	)		1,799
CASH AND CASH EQUIVALENTS, beginning of period		12,513			25,012
CASH AND CASH EQUIVALENTS, end of period	$	10,406		$	26,811

The accompanying notes are an integral part of these unaudited consolidated statements.

5

SYNTROLEUM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 (subject to certification), kerosene, naphtha, propane and other renewable chemical products.

Our Bio-Synfining™ Technology is a renewable fuels application of our Synfining^® Technology. This technology is applied commercially via our Dynamic Fuels, LLC joint venture with Tyson Foods, Inc. The technology processes renewable triglycerides and/or fatty acids to make renewable synthetic products.

The consolidated financial statements include the accounts of Syntroleum Corporation and our majority-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. Companies in which we own a 20 percent to 50 percent interest, but in which we do not have a controlling interest are accounted for by the equity method. We own 50 percent and have a non-controlling interest in Dynamic Fuels, LLC (“Dynamic Fuels”). The entity is accounted for under the equity method and is not required to be consolidated in our financial statements; however, our share of the Dynamic Fuels results of operations is reflected in the Consolidated Statements of Operations and the subsidiary’s summarized financial information is reported in Note 5, “Investment in and Loans to Dynamic Fuels, LLC”. The carrying value of our investment in Dynamic Fuels is reflected in “Investment in and Loans to Dynamic Fuels, LLC” in our Consolidated Balance Sheets.

The consolidated financial statements included in this report have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, these statements reflect all adjustments (consisting of normal recurring entries), which are, in the opinion of management, necessary for a fair statement of the financial results for the interim periods presented. These financial statements should be read together with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC under the Securities Exchange Act of 1934.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our financial position and results of operations are materially affected by Dynamic Fuels’ financial position and results of operations as of and for the three months ended December 31, 2010. During this period, the plant was commencing initial operations when its operating and financial controls were undergoing late-stage development. As a result the financial statements may be more significantly impacted by management’s estimates and assumptions than they will be when operations stabilize and the accounting processes mature. Actual results could differ from those estimates.

2. Operations and Liquidity

In the past we have sustained recurring losses and negative cash flows from operations. As of March 31, 2011, we had approximately $10.4 million of cash and cash equivalents and $1.6 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 Sheet at March 31, 2011 and December 31, 2010.

4. Reclassifications

Certain reclassifications have been made to the March 31, 2010 consolidated statements to conform to the March 31, 2011 presentation. These reclassifications had no impact on net income.

6

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”).

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 March 31, 2011, Syntroleum’s total estimate of maximum exposure to loss as a result of its relationships with this entity was approximately $42,819,000, which represents our equity investment in and loans to this entity in the amount of $41,414,000 and accounts receivable from this entity in the amount of $1,405,000, which fluctuates from time to time with certain operating activities.

Dynamic Fuels, LLC Quarter Ended December 31, 2010 Unaudited Financials (in thousands):

	December 31,
Balance Sheet	2011
Cash and Receivables		14,636
Inventory		15,530
Property, Plant and Equipment and Other Assets		149,577
Total Assets	$	179,743
Current Liabilities	$	23,735
Long-Term Liabilities		100,036
Total Liabilities		123,771
Total Members’ Equity		55,972
Total Liabilities and Members’ Equity	$	179,743

	For the Quarter
	Ended December 31,
Statement of Operations	2011
Revenue	$	6,890
Operating Expenses		11,483
Loss from Operations	$	(4,593	)
Other Income (Expense)		550
Net Loss	$	(4,043	)

Dynamic Fuels began commercial operations in November of 2010 and produced over 7 million gallons of products by the end of April. 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. The hydrogen compressor and recycle pump system reliability upgrades were installed in April and the plant resumed operations on April 26^th.

During the three months ended March 31, 2011 and March 31, 2010, we recognized revenue associated with our technical services agreement between us and Dynamic Fuels in the amount of $198,000 and $437,000 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 $1,405,000 and $729,000 as of March 31, 2011 and December 31, 2010, respectively. In March, we made additional payments of $477,000 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 April, 2011. In May, Syntroleum and Tyson each contributed an additional $2,000,000 in the form of a working capital loan to the entity. The $2,000,000 loan will be repaid to each member upon Dynamic Fuels generating sufficient working capital from fuel sales.

7

6. Earnings Per Share

	Three months ended March 31,
	2011			2010
	(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	$	(3,908	)	$	425
Basic weighted-average shares		81,893			76,183
Effect of dilutive securities:
Unvested restricted stock units		—			12
Stock options		—			2,588
Dilutive weighted-average shares		81,893			78,783
Earnings (loss) per common share from continuing operations:
Basic	$	(0.05	)	$	0.01
Diluted	$	(0.05	)	$	0.01

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,		March 31,
	2011		2010
Options, warrants and restricted stock excluded (in thousands)		18,234		12,338
Weighted-average exercise prices of options, warrants and restricted stock excluded	$	2.56	$	4.14
First quarter weighted average market price	$	1.82	$	2.40

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 March 31, 2011, approximately 4,505,282 shares of common stock were available for grant under our current plan. We are authorized to issue up to approximately 12,737,167 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:

				Weighted
	Shares Under Stock			Average Price
	Options			Per Share
OUTSTANDING AT DECEMBER 31, 2010		8,283,586		$	2.94
Granted at market price		—		$	—
Exercised		—		$	—
Expired, forfeited, cancelled or repurchased		(64,413	)	$	15.06
OUTSTANDING AT MARCH 31, 2011		8,219,173		$	2.80

8

The following table summarizes information about stock options outstanding at March 31, 2011:

Options Outstanding								Options Exercisable
										Weighted
				Weighted		Weighted Average				Average
Range of		Options		Average		Remaining		Options		Exercise Price
Exercise Price		Outstanding		Exercise Price		Contractual Life		Exercisable		Per Share
	$0.66 – $0.66		5,010,631	$	0.66		7.30		1,352,681	$	0.66
	$1.49 – $1.55		1,010,666		1.55		1.50		1,010,666		1.55
	$1.62 – $2.89		1,140,195		2.33		3.46		1,140,195		2.33
	$3.19 – $6.88		769,277		6. 32		3.25		769,277		6.32
	$7.10 – $9.67		240,904		9.28		4.38		240,904		9.28
	$10.51 – $13.85		47,500		12.09		2.32		47,500		12.09
			8,219,173	$	1.85				4,561,223	$	2.80

A total of 3,657,950 stock options with a weighted average exercise price of $0.66 were outstanding at March 31, 2011 and had not vested. There were no stock options granted during the three months ended March 31, 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 three months ended March 31, 2011 and 2010 was $0 and $85,000, respectively. The total amount of cash received in 2011 and 2010 by the Company from the exercise of these options was $0 and $33,000, respectively. As of March 31, 2011 there was $6,145,000 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 4.29 years. In addition, as of March 31, 2011 unrecognized compensation cost related to non-vested stock options was $77,000, 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 three months ended March 31, 2011 and 2010 was $467,000 and $821,000, 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 three months ended March 31, 2011 and 2010 was $2.21 (total grant date fair value of $436,000) and $2.71 (total grant date fair value of $350,000), respectively. As of March 31, 2011, the aggregrate intrinsic value of restricted stock units that are expected to vest was approximately $2,269,000. In addition, as of March 31, 2011, unrecognized compensation cost related to non-vested restricted stock units was $22,000, net of forfeitures, which is expected to be recognized in 2011. The total fair value of restricted stock units vested during the quarter ended March 31, 2011 and 2010 was $499,000 and $420,000, respectively. The following summary reflects restricted stock unit activity and related information.

				Weighted-Average
				Grant Date Fair
	Shares / Units			Value
NONVESTED AT DECEMBER, 31, 2010		1,055,212		$	0.41
Granted		196,977		$	2.21
Vested or Exercised		(204,477	)	$	2.44
Expired or forfeited		—		$	—
NONVESTED AT MARCH 31, 2011		1,047,712		$	0.35

8. 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 March 31, 2011. Expense is not recognized until an employee is severed.

We entered into a Bio-Synfining Master License Agreement on June 22, 2007 with Dynamic Fuels, LLC. Under this license agreement, we at the request of the licensee must execute a Site License Agreement in favor of licensee for licensee’s use of our Bio-Synfining™ Technology. The form of the Site License Agreement is included in the agreement as Exhibit B. The form of the Site License Agreement includes process guarantees if the plant fails to pass a performance test as defined in the Site License Agreement. If the plant fails to meet the Process Guarantee during the Performance Test and such failure is due in whole or in part to the Process Design Package, then we and Dynamic Fuels shall mutually agree whether or not remedial measures are reasonably likely to cause the plant to satisfy the Process Guarantee. The actual cost of the remedial measures will be reimbursed to licensee through application of any future royalties owed to us, not to exceed $9,800,000. If the remedial measures are not effective, we shall pay to Dynamic Fuels an additional amount for liquidated damages in an amount not to exceed $9,800,000. As of the date of this filing the Site License Agreement has not been executed by Dynamic Fuels and we cannot be certain the document that will be executed will have this same language and amounts.

In May 2011, Syntroleum and Tyson each contributed an additional $2,000,000 in the form of a working capital loan to the entity. The $2,000,000 loan will be repaid to each member upon Dynamic Fuels generating sufficient working capital from fuel sales.

9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following information together with the information presented elsewhere in this Quarterly Report on Form 10-Q and with the information presented in our Annual Report on Form 10-K for the year ended December 31, 2010 (including our audited financial statements and the accompanying notes).

Overview

Our focus is the commercialization of our technologies to produce synthetic liquid hydrocarbons. Operations to date have consisted of activities related to the commercialization of a proprietary process (the “Syntroleum^® Process”) and previously consisted of research and development of the Syntroleum^® Process designed to convert carbonaceous material (biomass, coal, natural gas and petroleum coke) into synthetic liquid hydrocarbons. Synthetic hydrocarbons produced by the Syntroleum^® Process can be further processed using the Syntroleum Synfining^® Process into high quality liquid fuels, such as diesel, jet fuel (subject to certification), 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 March 31, 2011, Syntroleum’s total estimate of maximum exposure to loss as a result of its relationships with this entity was approximately $42,819,000, which represents our equity investment in and loans to this entity in the amount of $41,414,000 and accounts receivable from this entity in the amount of $1,405,000, which fluctuates from time to time with certain operating activities. Each member has contributed $40.5 million in capital contributions and an additional $7.0 million in the form of a working capital loans to the entity. The $7.0 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 7 million gallons of products by the end of April. 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. The hydrogen compressor and recycle pump system reliability upgrades were installed in April and the plant resumed operations on April 26^th.

Diesel is quality tested and meets ASTM D975 standards for diesel. The renewable products have low emissions and nearly no aromatics. Our jet fuel HRJ, meets all petroleum based jet fuel specifications subject to certification. The production of our fuel is eligible for the $1.00 tax credit per gallon of renewable diesel and $0.50 per gallon of renewable naphtha under the Energy Independence Act and Energy Policy Act of 2005. Our fuel also generates 1.7 Renewable Identification Number’s, (“RIN”) per gallon. As of March 31, 2011, RIN prices were $1.26 per gallon and therefore worth $2.14 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

Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010

Consolidated Unaudited Results for the Quarters Ended,

	March 31,		March 31,
Revenues	2011		2010
	(in thousands)
Technology	$	150	$	2,900
Technical Services		501		901
Technical Services from Dynamic Fuels LLC		198		437
Total Revenues	$	849	$	4,238

Technology Revenue.Technology Revenue was $150,000 and $2,900,000 for the quarters ended March 31, 2011 and 2010, respectively and relates to the delivery of technology equipment related to our transfer of technology sale that occurred in 2009. 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 $699,000 and $1,338,000 for the quarters ended March 31, 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.

	March 31,		March 31,
Operating Costs and Expenses	2011		2010
	(in thousands)
Engineering	$	556	$	596
Depreciation and amortization		49		62
Non-cash equity compensation		467		821
General, administrative and other		1,364		1,232
Total Operating Costs and Expenses	$	2,436	$	2,711

Engineering.Expenses from engineering activities were $556,000 for the quarter ended March 31, 2011 compared to $596,000 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 quarter ended March 31, 2011 was $467,000 compared to $821,000 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 quarter ended March 31, 2011 were $1,364,000 compared to $1,232,000 during the same period in 2010. The overhead activities associated with the company remain relatively the same for 2011 compared to 2010.

Loss from Dynamic Investment.Our 50% share of Dynamic Fuels’ loss for its first quarter ended December 31, 2010 increased compared to the same period last year due to limited production revenue to offset fixed costs of the operating plant. The plant was not operational for the same period ended 2009. The plant began commercial operations in November of 2010 and did not operate at full production capacity for the entire quarter ended December 31, 2010. Loss from our investment in Dynamic was $2,021,000 for the quarter ended December 31, 2010, compared to a loss of $746,000 for the same period in 2009. Dynamic Fuels’ revenues were $6,890,000 with operating expenditures of $11,483,000 and other income of $550,000 for the quarter ended December 31, 2010. We expect to report income from this investment in 2011 upon full rate commercial operations. 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 March 31, 2011, we had approximately $10,406,000 in cash and cash equivalents. At March 31, 2011, we had $1,578,000 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.

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Our current liabilities totaled $999,000 as of March 31, 2011.

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 $2,085,000 during the three months ended March 31, 2011, compared to cash flows provided by operations of $1,767,000 during the three months ended March 31, 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 $477,000 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 April, 2011.

Cash flows used in investing activities related to small purchases of capital office equipment. No additional investments to Dynamic Fuels were made in the first quarters of 2011 and 2010.

There were no cash flows provided by financing activities during the three months ended March 31, 2011. For the quarter ended March 31, 2010, we received $33,000 from the exercise of stock options.

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 March 31, 2011. Expense is not recognized until an employee is severed.

We entered into a Bio-Synfining Master License Agreement on June 22, 2007 with Dynamic Fuels, LLC. Under this license agreement, we at the request of the licensee must execute a Site License Agreement in favor of licensee for licensee’s use of our Bio-Synfining™ Technology. The form of the Site License Agreement is included in the agreement as Exhibit B. The form of the Site License Agreement includes process guarantees if the plant fails to pass a performance test as defined in the Site License Agreement. If the plant fails to meet the Process Guarantee during the Performance Test and such failure is due in whole or in part to the Process Design Package, then we and Dynamic Fuels shall mutually agree whether or not remedial measures are reasonably likely to cause the plant to satisfy the Process Guarantee. The actual cost of the remedial measures will be reimbursed to licensee through application of any future royalties owed to us, not to exceed $9,800,000. If the remedial measures are not effective, we shall pay to Dynamic Fuels an additional amount for liquidated damages in an amount not to exceed $9,800,000. As of the date of this filing the Site License Agreement has not been executed by Dynamic Fuels and we cannot be certain the document that will be executed will have this same language and amounts.

We may need to fund future short-term working capital needs of Dynamic Fuels on an as needed basis.

New Accounting Pronouncements

No new accounting standards have been adopted since the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 was filed.

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 March 31, 2011 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

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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 March 31, 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.

On August 17, 2007, we entered into a Resignation and Compromise Agreement (“Compromise Agreement”) with Mr. Ziad Ghandour, a former director, employee and consultant to Syntroleum. Under the Compromise Agreement, Mr. Ghandour has the right to receive additional compensation until December 31, 2011 for five potential commercial projects, as defined in the Compromise Agreement. Mr. Ghandour claims he is entitled to additional compensation as a result of a business transaction with SINOPEC. We determined that no additional compensation was warranted as a result of the transaction. The arbitration between Syntroleum Corporation and Ziad Ghandour’s styled Ziad Ghandour v. Syntroleum Corporation, Case No. 50 166 T 00048 10, pending before the American Arbitration Association, was settled on January 17, 2011, and the arbitration was dismissed with prejudice on January 18, 2011. The parties exchanged mutual releases. The settlement has been recorded in our year ended December 31, 2010 Statement of Operations.

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.

Not applicable.

Use of Proceeds.

Not applicable.

Purchases of Equity Securities by the Issuer and Affiliated Purchases.

Not applicable

Item 3. Defaults Upon Senior Securities.

Not applicable.

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: May 9, 2011	By:	/s/ Edward G. Roth
		Edward G. Roth
		President and Chief Executive Officer (Principal Executive Officer)
Date: May 9, 2011	By:	/s/ Karen L. Gallagher
		Karen L. Gallagher
		Senior Vice President and Principal Financial Officer (Principal Financial Officer)

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INDEX TO EXHIBITS

No.	Description of Exhibit
31.1	Section 302 Certification of Edward G. Roth
31.2	Section 302 Certification of Karen L. Gallagher
32.1	Section 906 Certification of Edward G. Roth
32.2	Section 906 Certification of Karen L. Gallagher

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