UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 (Mark One)

 

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

  For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from __________ to ___________

Commission file number: 0-52577

 

 

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware  

 

20-3340900  

(State or Other Jurisdiction of 

 

(IRS Employer Identification No.) 

Incorporation or Organization) 

 

 

8235 Forsyth Blvd., Suite 400

St. Louis, Missouri

(Address of Principal Executive Offices)

Zip Code

63105

(314) 854-8352 

(Registrant’s Telephone Number, Including Area Code)

 

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

Yes √ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes √ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer  

Smaller reporting company

(do not check if a smaller reporting company)    

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No √

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 9, 2019: 43,743,243  

 

 

 

 

 

PART I FINANCIAL INFORMATION

   

Item 1. Financial Statements.

 

The following sets forth our unaudited consolidated balance sheet as of June 30, 2019, our audited consolidated balance sheet as of December 31, 2018, our unaudited consolidated statements of operations and comprehensive income for the three and six month periods ended June 30, 2019 and 2018, our unaudited consolidated statements of stockholders’ equity for the six months ended June 30, 2019 and 2018, and our unaudited consolidated statements of cash flows for the six month periods ended June 30, 2019 and 2018.

 

FutureFuel Corp.

Consolidated Balance Sheets

As of June 30, 2019 and December 31, 2018

(Dollars in thousands)

 

   

(Unaudited)

         
   

June 30, 2019

   

December 31, 2018

 

Assets

               

Cash and cash equivalents

  $ 222,871     $ 214,972  

Accounts receivable, net of allowance for bad debts of $0

    21,641       16,294  

Accounts receivable – related parties

    30       1,844  

Inventory

    36,116       39,296  

Income tax receivable

    5,522       6,858  

Prepaid expenses

    1,055       1,767  

Prepaid expenses – related parties

    -       12  

Marketable securities

    80,560       79,888  

Deferred financing costs

    108       144  

Other current assets

    625       1,255  

Total current assets

    368,528       362,330  

Property, plant and equipment, net

    102,374       103,575  

Intangible assets

    1,408       1,408  

Deferred financing costs

    -       36  

Other noncurrent assets

    5,359       3,806  

Total noncurrent assets

    109,141       108,825  

Total Assets

  $ 477,669     $ 471,155  

Liabilities and Stockholders’ Equity

               

Accounts payable

  $ 20,705     $ 19,981  

Accounts payable – related parties

    441       1,689  

Deferred revenue – short-term

    5,258       4,581  

Dividends payable

    5,249       10,498  

Accrued expenses and other current liabilities

    4,011       2,742  

Total current liabilities

    35,664       39,491  

Deferred revenue – long-term

    20,233       20,319  

Other noncurrent liabilities

    5,649       4,241  

Noncurrent deferred income tax liability

    17,640       18,026  

Total noncurrent liabilities

    43,522       42,586  

Total liabilities

    79,186       82,077  

Commitments and contingencies

               

Preferred stock, $0.0001 par value, 5,000,000 shares authorized, none issued and outstanding

    -       -  

Common stock, $0.0001 par value, 75,000,000 shares authorized, 43,743,243, issued and outstanding as of June 30, 2019 and December 31, 2018

    4       4  

Accumulated other comprehensive income

    199       (20 )

Additional paid in capital

    282,145       282,145  

Retained earnings

    116,135       106,949  

Total stockholders’ equity

    398,483       389,078  

Total Liabilities and Stockholders’ Equity

  $ 477,669     $ 471,155  

 

The accompanying notes are an integral part of these financial statements.

 

1

 

 

 

 FutureFuel Corp.

Consolidated Statements of Operations and Comprehensive Income

For the Three and Six Months ended June 30, 2019 and 2018

(Dollars in thousands, except per share amounts)

(Unaudited)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Revenue

  $ 70,076     $ 87,653     $ 117,498     $ 142,596  

Revenues – related parties

    788       683       1,867       1,487  

Cost of goods sold

    61,501       73,218       101,566       85,357  

Cost of goods sold – related parties

    4,063       5,302       7,859       10,031  

Distribution

    1,994       1,498       3,319       2,817  

Distribution – related parties

    36       47       89       100  

Gross profit

    3,270       8,271       6,532       45,778  

Selling, general, and administrative expenses

                               

Compensation expense

    620       846       1,335       2,121  

Other expense

    547       596       1,048       1,006  

Related party expense

    130       205       259       278  

Research and development expenses

    788       784       1,494       1,966  
      2,085       2,431       4,136       5,371  

Income from operations

    1,185       5,840       2,396       40,407  

Interest and dividend income

    2,750       2,153       5,112       4,145  

Interest expense

    (44 )     (43 )     (87 )     (86 )

Gain/(loss) on marketable securities

    826       281       3,753       (4,088 )

Other expense

    (113 )     (177 )     (113 )     (177 )
      3,419       2,214       8,665       (206 )

Income before income taxes

    4,604       8,054       11,061       40,201  

Provision/(benefit) for income taxes

    917       2,003       1,875       (1,676 )

Net income

  $ 3,687     $ 6,051     $ 9,186     $ 41,877  
                                 

Earnings per common share

                               

Basic

  $ 0.08     $ 0.14     $ 0.21     $ 0.96  

Diluted

  $ 0.08     $ 0.14     $ 0.21     $ 0.96  

Weighted average shares outstanding

                               

Basic

    43,743,243       43,716,726       43,743,243       43,716,698  

Diluted

    43,743,243       43,720,942       43,746,109       43,721,568  
                                 

Comprehensive income

                               

Net income

  $ 3,687     $ 6,051     $ 9,186     $ 41,877  

Other comprehensive income/(loss) from unrealized net gains/(losses) on available-for-sale securities

    22       55       278       (19 )

Income tax effect

    (5 )     (12 )     (59 )     4  

Total unrealized gain/(loss), net of tax

    17       43       219       (15 )

Comprehensive income

  $ 3,704     $ 6,094     $ 9,405     $ 41,862  

 

The accompanying notes are an integral part of these financial statements.

 

2

 

 

 

FutureFuel Corp.

Consolidated Statements of Stockholders’ Equity

For the Six Months ended June 30, 2019 and 2018

(Dollars in thousands)

(Unaudited)

 

   

For the Six Months Ended June 30, 2019

 
                   

Accumulated

                         
                   

Other

   

Additional

           

Total

 
   

Common Stock

   

Comprehensive

   

paid-in

   

Retained

   

Stockholders’

 
   

Shares

   

Amount

   

Income

   

Capital

   

Earnings

   

Equity

 

Balance - December 31, 2018

    43,743,243     $ 4     $ (20 )   $ 282,145     $ 106,949     $ 389,078  

Other comprehensive income

    -       -       219       -       -       219  

Net income

    -       -       -       -       9,186       9,186  

Balance - June 30, 2019

    43,743,243     $ 4     $ 199     $ 282,145     $ 116,135     $ 398,483  

 

   

For the Six Months Ended June 30, 2018

 
                   

Accumulated

                         
                   

Other

   

Additional

           

Total

 
   

Common Stock

   

Comprehensive

   

paid-in

   

Retained

   

Stockholders’

 
   

Shares

   

Amount

   

Income

   

Capital

   

Earnings

   

Equity

 

Balance - December 31, 2017 - As previously reported

    43,741,670     $ 4     $ 8,433     $ 281,964     $ 61,195     $ 351,596  

Prior period adjustment: Change in accounting principles

    -       -       (8,273 )     -       3,094       (5,179 )

Balance - January 1, 2018 - As adjusted

    43,741,670     $ 4     $ 160     $ 281,964     $ 64,289     $ 346,417  

Stock based compensation

    -       -       -       214       -       214  

Other comprehensive loss

    -       -       (15 )     -       -       (15 )

Net income

    -       -       -       -       41,877       41,877  

Balance - June 30, 2018

    43,741,670     $ 4     $ 145     $ 282,178     $ 106,166     $ 388,493  

 

The accompanying notes are an integral part of these financial statements.

 

3

 

 

 

FutureFuel Corp.

Consolidated Statements of Cash Flows

For the Six Months ended June 30, 2019 and 2018

(Dollars in thousands)

(Unaudited)

  

   

Six Months Ended June 30,

 
   

2019

   

2018

 

Cash flows from operating activities

               

Net income

  $ 9,186     $ 41,877  

Adjustments to reconcile net income to net cash from operating activities:

               

Depreciation

    5,472       5,512  

Amortization of deferred financing costs

    72       72  

Benefit for deferred income taxes

    (445 )     (3,885 )

Change in fair value of equity securities

    (4,891 )     6,412  

Change in fair value of derivative instruments

    (297 )     (1,559 )

Impairment of fixed assets

    130       171  

(Gain)/loss on the sale of investments

    1,138       (2,324 )

Stock based compensation

    -       214  

Loss on disposal of fixed assets

    11       37  

Noncash interest expense

    14       14  

Changes in operating assets and liabilities:

               

Accounts receivable

    (5,347 )     (417 )

Accounts receivable – related parties

    1,814       (11 )

Inventory

    3,180       (3,767 )

Income tax receivable

    1,336       3,456  

Prepaid expenses

    712       706  

Prepaid expenses – related parties

    12       -  

Accrued interest on marketable securities

    19       (82 )

Other assets

    520       39  

Accounts payable

    958       16,316  

Accounts payable – related parties

    (1,248 )     (402 )

Accrued expenses and other current liabilities

    688       4,584  

Deferred revenue

    591       (1,603 )

Other noncurrent liabilities

    (98 )     -  

Net cash provided by operating activities

    13,527       65,360  

Cash flows from investing activities

               

Collateralization of derivative instruments

    908       1,237  

Purchase of marketable securities

    (14,323 )     (10,690 )

Proceeds from the sale of marketable securities

    17,682       35,718  

Proceeds from the sale of fixed assets

    13       20  

Capital expenditures

    (4,659 )     (1,103 )

Net cash (used in)/provided by investing activities

    (379 )     25,182  

Cash flows from financing activities

               

Payment of dividends

    (5,249 )     (5,248 )

Net cash used in financing activities

    (5,249 )     (5,248 )

Net change in cash and cash equivalents

    7,899       85,294  

Cash and cash equivalents at beginning of period

    214,972       114,627  

Cash and cash equivalents at end of period

  $ 222,871     $ 199,921  
                 

Cash paid for interest

  $ -     $ -  

Cash paid for income taxes

  $ 898     $ 759  

Noncash items incurred:

               

Noncash capital expenditures

  $ 108     $ -  

Noncash operating leases

  $ 432     $ -  

 

The accompanying notes are an integral part of these financial statements.

 

4

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

1 )

NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

Organization

 

FutureFuel Corp. (“FutureFuel”), through its wholly-owned subsidiary, FutureFuel Chemical Company (“FutureFuel Chemical”), owns and operates a chemical production facility located on approximately 2,200 acres of land six miles southeast of Batesville in north central Arkansas fronting the White River (the “Batesville Plant”). FutureFuel Chemical manufactures diversified chemical products, biobased products comprised of biofuels, and biobased specialty chemical products. FutureFuel Chemical’s operations are reported in two segments: chemicals and biofuels.

 

The chemicals segment manufactures a diversified portfolio of chemical products that are sold to third party customers. The majority of the revenues from the chemicals segment are derived from the custom manufacturing of specialty chemicals for specific customers.

 

The biofuels segment primarily produces and sells biodiesel. FutureFuel Chemical also sells petrodiesel in blends with the company’s biodiesel and, from time to time, with no biodiesel added. Finally, FutureFuel Chemical is a shipper of refined petroleum products on common carrier pipelines and buys and sells petroleum products to maintain an active shipper status on these pipelines.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared by FutureFuel in accordance and consistent with the accounting policies stated in FutureFuel’s 2018 audited consolidated financial statements and should be read in conjunction with the 2018 audited consolidated financial statements of FutureFuel.

 

In the opinion of FutureFuel, all normal recurring adjustments necessary for a fair presentation have been included in the unaudited consolidated financial statements. The unaudited consolidated financial statements have been prepared in compliance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all the information and footnotes required by GAAP for complete financial statements, and do include amounts that are based upon management estimates and judgments. Future actual results could differ from such current estimates. The unaudited consolidated financial statements include assets, liabilities, revenues, and expenses of FutureFuel and its wholly owned subsidiaries; namely, FutureFuel Chemical Company, FFC Grain, L.L.C., FutureFuel Warehouse Company, L.L.C., and Legacy Regional Transport, L.L.C. Intercompany transactions and balances have been eliminated in consolidation.

  

 

 

2 )

REINSTATEMENT OF THE BIODIESEL BLENDERS’ TAX CREDIT AND SMALL AGRI-BIODIESEL PRODUCER TAX CREDIT

 

The biodiesel Blenders’ Tax Credit (“BTC”) provides a $1.00 per gallon tax credit to the blender of biomass-based diesel with at least 0.1% petroleum-based diesel fuel.  When in effect, FutureFuel is the blender of record and recognizes the credit as a reduction to cost of goods sold.  The BTC expired on December 31, 2016 and was not reinstated for 2017 until it was signed into law as part of The Bipartisan Budget Act of 2018 passed by Congress on February 9, 2018.  As this Act was passed into law in 2018, FutureFuel recognized a net estimated pretax benefit from the reinstatement in the biofuels segment of $28,869 (a reduction in sales revenue of $13,559 for customer rebates (“BTC Rebates”) upon reinstatement and a reduction in cost of goods sold of $42,428). The gallons related to this credit were sold in the twelve months ended December 31, 2017.

  

As part of the law from which the BTC was reinstated, small agri-biodiesel producers with production capacity not in excess of 60 million gallons were eligible for an additional tax credit of $0.10 per gallon on the first 15 million gallons of agri-biodiesel sold (the “Small Agri-biodiesel Producer Tax Credit”).  The benefit of the Small Agri-biodiesel Producer Tax Credit was recognized as a benefit in the tax provision in the six month period ended June 30, 2018.

 

5

 

 

 Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)  

 

Neither the BTC nor the Small Agri-biodiesel Producer Tax Credit have been passed into law for gallons blended and sold in 2018 or 2019.  

 

 

 

3 )

INVENTORY

 

The carrying values of inventory were as follows as of:

 

   

June 30, 2019

   

December 31, 2018

 

At average cost (approximates current cost)

               

Finished goods

  $ 17,765     $ 23,658  

Work in process

    1,551       2,100  

Raw materials and supplies

    25,248       23,909  
      44,564       49,667  

LIFO reserve

    (8,448 )     (10,371 )

Total inventory

  $ 36,116     $ 39,296  

  

 

 

)

DERIVATIVE INSTRUMENTS

 

FutureFuel is exposed to certain risks relating to its ongoing business operations. Commodity price risk is the primary risk managed by using derivative instruments. Regulated fixed price futures and option contracts are utilized to manage the price risk associated with future purchases of feedstock used in FutureFuel’s biodiesel production along with physical feedstock and finished product inventories attributed to this process.

 

FutureFuel recognizes all derivative instruments as either assets or liabilities at fair value in its consolidated balance sheets. FutureFuel’s derivative instruments do not qualify for hedge accounting under the specific guidelines of ASC 815-20-25, Derivatives and Hedging. None of the derivative instruments are designated and accounted for as hedges primarily as a result of the extensive record keeping requirements.

 

The fair value of FutureFuel’s derivative instruments is determined based on the closing prices of the derivative instruments on relevant commodity exchanges at the end of an accounting period. Realized gains and losses on derivative instruments and changes in fair value of the derivative instruments are recorded in the statements of operations as a component of cost of goods sold, and amounted to a gain of $443 for the three months ended June 30, 2019 and a loss of $3,109 for the three months ended June 30, 2018, and a loss of $1,033 and $3,271 for the six months ended June 30, 2019 and 2018, respectively.

 

The volumes and carrying values of FutureFuel’s derivative instruments were as follows at: 

 

   

June 30, 2019

   

December 31, 2018

 
   

Contract quantity

   

Fair Value

   

Contract quantity Short

   

Fair Value

 

Regulated options, included in other current assets

    -     $ -       100     $ (484 )

Regulated fixed price future commitments, included in other current assets

    -     $ -       96     $ 187  

 

The margin account maintained with a broker to collateralize these derivative instruments carried an account balance of $72 and $980 at June 30, 2019 and December 31, 2018, respectively, and was classified as other current assets in the consolidated balance sheets. The carrying values of the margin account and of the derivative instruments are included net, in other current assets.

 

6

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

  

 

)

MARKETABLE SECURITIES 

 

At June 30, 2019 and December 31, 2018, FutureFuel had investments in certain debt securities (trust preferred securities and exchange traded debt instruments) and in preferred stock and other equity instruments. These investments are classified as current assets in the consolidated balance sheets. FutureFuel has designated the debt securities as being available-for-sale. For the six months ended, June 30, 2019 and 2018, the change in the fair value of equity securities was reported as gains/(losses) on marketable securities as a component of net income.

 

FutureFuel’s available for sale debt securities were comprised of the following at June 30, 2019 and December 31, 2018: 

 

   

June 30, 2019

 
   

Adjusted Cost

   

Unrealized Gains

   

Unrealized Losses

   

Fair Value

 

Exchange traded debt

  $ 1,428     $ 100     $ (8 )   $ 1,520  

Trust preferred

    3,676       161       -       3,837  

Total debt securities

  $ 5,104     $ 261     $ (8 )   $ 5,357  

 

   

December 31, 2018

 
   

Adjusted Cost

   

Unrealized Gains

   

Unrealized Losses

   

Fair Value

 

Exchange traded debt

  $ 1,428     $ 37     $ (65 )   $ 1,400  

Trust preferred

    3,147       21       (18 )     3,150  

Total debt securities

  $ 4,575     $ 58     $ (83 )   $ 4,550  

 

The aggregate fair value of debt securities with unrealized losses totaled $253 at June 30, 2019, and the aggregate fair value of debt securities with unrealized losses totaled $2,540 at December 31, 2018. As of June 30, 2019, FutureFuel had investments in debt securities with a total value of $253 that were in an unrealized loss position for a greater than a 12-month period. As of December 31, 2018, FutureFuel had investments in debt securities with a total value of $187 that were in an unrealized loss position for a greater than 12-month period. The unrealized loss position for those securities was $8 and $19, respectively, at June 30, 2019 and December 31, 2018.  Those loss positions represented a minimal reduction for the securities and are expected to fully recover given changes in market value. Realized gains and losses are recognized on the specific identification method.

 

The adjusted cost basis and fair value of debt securities at June 30, 2019, by contractual maturity, are shown below.

 

   

June 30, 2019

 
   

Adjusted Cost

   

Fair Value

 

Due in one year or less

  $ -     $ -  

Due after one year through five years

    -       -  

Due after five years through ten years

    -       -  

Due after ten years

    5,104       5,357  

Total

  $ 5,104     $ 5,357  

 

The following table shows the recognized change in equity securities sold and the change in unrealized fair value:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Net gains/(losses) recognized on equity securities

  $ 826     $ 281     $ 3,753     $ (4,088 )

Less: net gains/(losses) recognized during the period on equity securities sold during the period

    (1,057 )     663       (1,138 )     2,324  

Unrealized gains/(losses) during the reporting period on equity securities held at the reporting date

  $ 1,883     $ (382 )   $ 4,891     $ (6,412 )

 

7

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

)

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities, including those associated with related parties, consisted of the following at:   

 

   

June 30, 2019

   

December 31, 2018

 

Accrued employee liabilities

  $ 1,296     $ 1,253  

Accrued property, franchise, motor fuel and other taxes

    1,962       1,225  

Lease liability

    525       -  

Other

    228       264  

Total

  $ 4,011     $ 2,742  

 

 

 

)

BORROWINGS

 

On April 16, 2015, FutureFuel, with FutureFuel Chemical as the borrower, and certain of FutureFuel’s other subsidiaries, as guarantors, entered into a $150,000 secured and committed credit facility with the lenders party thereto, Regions Bank as administrative agent and collateral agent, and PNC Bank, N.A., as syndication agent. On May 25, 2016, FutureFuel increased the credit facility by $15,000. The credit facility consists of a five-year revolving credit facility in a dollar amount of up to $165,000, which includes a sublimit of $30,000 for letters of credit and $15,000 for swingline loans (collectively, the “Credit Facility”). The credit facility expires on April 16, 2020.

 

The interest rate floats at the following margins over LIBOR or base rate based upon the leverage ratio from time to time:

 

Consolidated Leverage Ratio

 

Adjusted LIBOR Rate Loans and

Letter of Credit Fee

   

Base Rate Loans

   

Commitment Fee

 

< 1.00:1.0

    1.25%       0.25%       0.15%  

≥ 1.00:1.0 And < 1.50:1.0

    1.50%       0.50%       0.20%  

≥ 1.50:1.0 And < 2.00:1.0

    1.75%       0.75%       0.25%  

≥ 2.00:1.0 And < 2.00:1.0

    2.00%       1.00%       0.30%  

≥ 2.50:1.0

    2.25%       1.25%       0.35%  

 

The terms of the Credit Facility contain certain covenants and conditions including a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio, and a minimum liquidity requirement. FutureFuel was in compliance with such covenants as of June 30, 2019.

 

There were no borrowings under this credit agreement at June 30, 2019 or December 31, 2018.

 

 

 

8 )

LEASE COMMITMENTS AND SHORT-TERM CONTRACTS

 

The FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments under the leases.

 

The Company adopted the new lease standard January 1, 2019 under the modified retrospective transition approach using the effective date as our date of initial application with the practical expedient election for short term lease exemption (leases shorter than 12 months are exempt from this standard) with the election to not separate lease and non-lease components for all leases.

 

8

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

FutureFuel leases railcars under multi-year arrangements primarily for delivery of feedstock and biodiesel within its Biofuels segment. The lease fees are fixed, with no option to purchase and no upfront fees nor residual value guarantees. All railcar leases are direct and no subleases exist. FutureFuel determines lease existence and classification at inception when an agreement conveys the right to control identified property for a period of time in exchange for consideration. The Company’s leases have remaining terms from two to five years with a weighted average remaining term of 4 years. As operating leases do not provide a readily determinable implicit interest rate, the Company uses an incremental borrowing rate based on information available at the commencement date in determining present value of the lease payments. On January 1, 2019, a ROU asset was reported as other noncurrent assets of $1,641 and other current liabilities and other noncurrent liabilities of $370 and $1,271, respectively.

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Operating lease expense

  $ 149     $ 135     $ 279     $ 270  

Short-term lease expense

  $ 38     $ -     $ 92     $ -  

Cash paid for operating leases

  $ 149     $ 135     $ 279     $ 270  

Right of use assets obtained in exchange for lease obligations

  $ -     $ -     $ 432     $ -  

Weighted average discount rate

    4.4% per annum    

NA

      4.4% per annum    

NA

 

 

Supplemental balance sheet information related to leases as of June 30, 2019:

 

Operating lease right-of-use assets:

       

Other noncurrent assets

  $ 1,817  

Total operating lease assets

  $ 1,817  

Operating lease liabilities:

       

Other current liabilities

  $ 525  

Other noncurrent liabilities

    1,292  

Total operating lease liabilities

  $ 1,817  

 

Maturities of lease liabilities as of June 30, 2019:

 

2019

  $ 279  

2020

    595  

2021

    388  

2022

    370  

2023

    318  

2024

    32  

Total

  $ 1,982  

Less: imputed interest

    165  

Present value of lease payments

  $ 1,817  

 

 

 

)

PROVISION FOR INCOME TAXES 

 

The following table summarizes the provision for income taxes.   

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Provision for income taxes

  $ 917     $ 2,003     $ 1,875     $ (1,676 )

Effective tax rate

    19.9 %     24.9 %     17.0 %     (4.2% )

 

9

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

The effective tax rate for the three months ended June 30, 2019 and 2018 reflects our expected tax rate on reported operating income before income tax.  The three-month effective rate ended June 30, 2019 is expected to continue for the remainder of the year. 

 

The effective tax rate for the six months ended June 30, 2019 was favorably impacted by FutureFuel being granted a retroactive research and development credit for a prior year in a state where it does significant business.  Comparatively, the six months ended June 30, 2018, reflects the favorable effect of the BTC and Small Agri-biodiesel Producer Tax Credit (2017 BTC was reinstated in the three months ended March 31, 2018), which were not in law in 2019.

 

 

Unrecognized tax benefits totaled $2,804 at June 30, 2019 and December 31, 2018.

 

FutureFuel records interest and penalties, net, as a component of provision for income taxes. FutureFuel accrued balances of $734 and $681 at June 30, 2019 and December 31, 2018, respectively, for interest and penalties.

  

 

 

10 )

EARNINGS PER SHARE

 

In the three and six months ended June 30, 2019, FutureFuel used the treasury method in computing earnings per share as all shares with participating security holders had vested. During 2018, FutureFuel had unvested participating shares and computed earnings per share using the two-class method in accordance with ASC Topic No. 260, Earnings per Share. The two-class method is an allocation of earnings between the holders of common stock and a company’s participating security holders. Outstanding unvested shares of restricted stock contain non-forfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. There were no other participating securities at June 30, 2019 or 2018.

 

Contingently issuable shares associated with outstanding service-based restricted stock units were not included in the earnings per share calculations for the three-month and six-month periods ended June 30, 2018 as the vesting conditions had not been satisfied. There were no outstanding service-based restricted stock units for the three and six months ended June 30, 2019.

 

Basic and diluted earnings per common share were computed as follows:    

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Numerator:

                               

Net income

  $ 3,687     $ 6,051     $ 9,186     $ 41,877  

Less: distributed earnings allocated to non-vested stock

    -       -       -       -  

Less: undistributed earnings allocated to non-vested restricted stock

    -       (3 )     -       (24 )

Numerator for basic earnings per share

  $ 3,687     $ 6,048     $ 9,186     $ 41,853  

Effect of dilutive securities:

                               

Add: undistributed earnings allocated to non-vested restricted stock

    -       3       -       24  

Less: undistributed earnings reallocated to non-vested restricted stock

    -       (3 )     -       (24 )

Numerator for diluted earnings per share

  $ 3,687     $ 6,048     $ 9,186     $ 41,853  

Denominator:

                               

Weighted average shares outstanding – basic

    43,743,243       43,716,726       43,743,243       43,716,698  

Effect of dilutive securities:

                               

Stock options and other awards

    -       4,216       2,866       4,870  

Weighted average shares outstanding – diluted

    43,743,243       43,720,942       43,746,109       43,721,568  
                                 

Basic earnings per share

  $ 0.08     $ 0.14     $ 0.21     $ 0.96  

Diluted earnings per share

  $ 0.08     $ 0.14     $ 0.21     $ 0.96  

 

Certain options to purchase FutureFuel’s common stock were not included in the computation of diluted earnings per share for the three and six months ended June 30, 2018 because they were anti-dilutive in the period. The weighted average number of options excluded on this basis was 30,000 for the three and six months ended June 30, 2018.  For the three months ended June 30, 2019, 40,000 options were excluded on a weighted average basis. The weighted average number of options excluded for the six months ended June 30, 2019 was 20,000.

 

10

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

  

 

11 )

SEGMENT INFORMATION

 

FutureFuel has two reportable segments organized along similar product groups – chemicals and biofuels.

 

Chemicals

 

FutureFuel’s chemicals segment manufactures diversified chemical products that are sold externally to third party customers. This segment is comprised of two components: “custom manufacturing” (manufacturing chemicals for specific customers) and “performance chemicals” (multi-customer specialty chemicals).

 

Biofuels

 

FutureFuel’s biofuels segment primarily manufactures and markets biodiesel. Biodiesel revenues are generated through the sale of biodiesel to customers through FutureFuel’s distribution network at the Batesville Plant, through distribution facilities available at leased oil storage facilities, and through a network of remotely located tanks. Biofuels revenues also include the sale of biodiesel blends with petrodiesel, petrodiesel with no biodiesel added, internally generated, separated Renewable Identification Numbers (“RINs”), biodiesel production byproducts, and the purchase and sale of other petroleum products on common carrier pipelines.  Biodiesel selling prices and profitability can at times fluctuate based on the timing of unsold, internally generated RINs. FutureFuel does not allocate production costs to internally generated RINs, and, from time to time, can enter into sales of biodiesel on a “RINs-free” basis. Such method of selling results in FutureFuel maintaining possession of the applicable RINs from the sale. The benefit derived from the eventual sale of the RINs is not reflected in results of operations until such time as the RIN sale has been completed, which may lead to variability in reported operating results.

 

Summary of long-lived assets and revenues by geographic area

 

All of FutureFuel’s long-lived assets are located in the United States.

 

Most of FutureFuel’s sales are transacted with control and title passing at the time of shipment from the Batesville Plant, although some sales are transacted with control and title passing at the delivery point. While many of FutureFuel’s chemicals are utilized to manufacture products that are shipped, further processed, and/or consumed throughout the world, the chemical products, with limited exceptions, generally leave the United States only after ownership has transferred from FutureFuel to the customer. FutureFuel is rarely the exporter of record, never the importer of record into foreign countries, and is not always aware of the exact quantities of its products that are moved into foreign markets by its customers. FutureFuel does track the addresses of its customers for invoicing purposes and uses this address to determine whether a particular sale is within or outside the United States. FutureFuel’s revenues attributable to the United States and foreign countries (based upon the billing addresses of its customers) were as follows: 
 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

United States

  $ 70,302     $ 87,525     $ 118,266     $ 142,791  

All Foreign Countries

    562       811       1,099       1,292  

Total

  $ 70,864     $ 88,336     $ 119,365     $ 144,083  

 

Revenues from a single foreign country during the three and six months ended June 30, 2019 and 2018 did not exceed 1% of total revenues.

 

11

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

Summary of business by segment

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Revenue

                               

Custom chemicals

  $ 21,965     $ 27,072     $ 45,665     $ 50,492  

Performance chemicals

    3,894       4,455       7,546       10,116  

Chemicals revenue

    25,859       31,527       53,211       60,608  

Biofuels revenue

    45,005       56,809       66,154       83,475  

Total Revenue

  $ 70,864     $ 88,336     $ 119,365     $ 144,083  
                                 

Segment gross profit/(loss)

                               

Chemicals

  $ 7,181     $ 8,016     $ 14,490     $ 15,572  

Biofuels

    (3,911 )     255       (7,958 )     30,206  

Total gross profit

    3,270       8,271       6,532       45,778  

Corporate expenses

    (2,085 )     (2,431 )     (4,136 )     (5,371 )

Income before interest and taxes

    1,185       5,840       2,396       40,407  

Interest and other income

    3,576       2,434       8,865       4,145  

Interest and other expense

    (157 )     (220 )     (200 )     (4,351 )

(Provision)/benefit for income taxes

    (917 )     (2,003 )     (1,875 )     1,676  

Net income

  $ 3,687     $ 6,051     $ 9,186     $ 41,877  

 

Depreciation is allocated to segment costs of goods sold based on plant usage. The total assets and capital expenditures of FutureFuel have not been allocated to individual segments as large portions of these assets are shared to varying degrees by each segment, causing such an allocation to be of little value.

 

 

 

12 )

 FAIR VALUE MEASUREMENTS

 

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Fair value accounting pronouncements also include a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of FutureFuel. Unobservable inputs are inputs that reflect FutureFuel’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

12

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

The following tables provide information by level for assets and liabilities that are measured at fair value, on a recurring basis, at June 30, 2019 and December 31, 2018.

 

   

Asset (Liability)

 
           

Fair Value Measurements Using

 
   

Fair Value at

   

Inputs Considered as:

 

Description

 

June 30, 2019

   

Level 1

   

Level 2

   

Level 3

 

Preferred stock, trust preferred, exchange traded debt instruments, and other equity instruments

  $ 80,560     $ 80,560     $ -     $ -  

 

   

Asset (Liability)

 
           

Fair Value Measurements Using

 
   

Fair Value at

   

Inputs Considered as:

 

Description

 

December 31, 2018

   

Level 1

   

Level 2

   

Level 3

 

Derivative instruments

  $ (297 )   $ (297 )   $ -     $ -  

Preferred stock, trust preferred, exchange traded debt instruments, and other equity instruments

  $ 79,888     $ 79,888     $ -     $ -  

 

 

 

13 )

RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME:

 

The following tables summarize changes in accumulated other comprehensive income from unrealized gains and losses on available-for-sale securities in the three and six months ended June 30, 2019 and 2018. 

 

Changes in Accumulated Other Comprehensive Income From Unrealized

 

Gains and Losses on Available-for-Sale Securities

 

Three Months Ended June 30, 2019 and 2018

 

(net of tax)

 
   

2019

   

2018

 

Balance at April 1

  $ 182     $ 102  

Other comprehensive income before reclassifications

    17       43  

Amounts reclassified from accumulated other comprehensive income

    -       -  

Net current-period other comprehensive income

    17       43  

Balance at June 30

  $ 199     $ 145  

 

Changes in Accumulated Other Comprehensive Income From Unrealized

 

Gains and Losses on Available-for-Sale Securities

 

Six Months Ended June 30, 2019 and 2018

 

(net of tax)

 
   

2019

   

2018

 

Balance at January 1

  $ (20 )   $ 160  

Other comprehensive income before reclassifications

    219       (15 )

Amounts reclassified from accumulated other comprehensive income

    -       -  

Net current-period other comprehensive income

    219       (15 )

Balance at June 30

  $ 199     $ 145  

 

There were no reclassifications from accumulated other comprehensive income in the three and six months ended June 30, 2019 and 2018. 

 

13

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

14 )

LEGAL MATTERS

 

From time to time, FutureFuel and its operations are parties to, or targets of, lawsuits, claims, investigations, regulatory matters, and proceedings, which are being handled and defended in the ordinary course of business. While FutureFuel is unable to predict the outcomes of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial condition, results of operations, or cash flows.

 

 

 

15 )

RELATED PARTY TRANSACTIONS

 

FutureFuel enters into transactions with companies affiliated with or controlled by a director and significant shareholder. Revenues, expenses, prepaid amounts, and unpaid amounts related to these transactions are captured in the accompanying consolidated financial statements as related party line items.

 

Related party revenues are the result of sales of biodiesel, petrodiesel, blends, other petroleum products, and other similar or related products to these related parties.  

 

Related party cost of goods sold and distribution are the result of sales of biodiesel, petrodiesel, blends, and other petroleum products to these related parties along with the associated expense from the purchase of natural gas, storage and terminalling services, and income tax and consulting services by FutureFuel from these related parties.

 

 

 

16 )

INTANGIBLE ASSET

 

In April of 2015, FutureFuel acquired additional historical line space on a pipeline for $1,408. The acquired line space was recorded as an intangible asset with an indefinite life as there was no foreseeable limit on the time period over which it is expected to contribute to cash flows. The carrying value of the asset was $1,408 as of June 30, 2019 and December 31, 2018. FutureFuel tests the intangible asset for impairment in accordance with Topic 350. 

 

14

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

17 )

RECENTLY ISSUED ACCOUNTING STATEMENTS

 

The following table provides a brief description of recent Accounting Standard Updates ("ASU") issued by the FASB:

 

Standard

 

Description

 

Effective Date

 

Effect on the Financial Statements or Other Significant Matters

In August, 2018 the FASB issued ASU 2018-15, Intangibles – Goodwill and Other  Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

 

These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the amendments require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The amendments also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals.

 

Annual periods beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted, including any interim period.

 

The Company plans to adopt the new guidance effective January 1, 2020.  The new guidance is expected to have minimal impact. 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, Measurement of Credit Losses on Financial Instruments. In April and May of 2019, FASB issued ASU 2019-04 and 2019-05 related to codification improvements and targeted transition relief for ASU 2016-13

 

These amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

 

Annual periods beginning after December 15, 2019. Earlier adoption was permitted, for annual periods beginning after December 15, 2018.

 

The Company is currently considering the potential impact of this standard on financial reporting and internal controls related to the implementation of the standard as it relates to accounts receivable and debt securities and plans to adopt the new guidance on the effective date of January 1, 2020. The new guidance is expected to have minimal impact.

 

 

 

 18 )

REVENUE RECOGNITION

 

FutureFuel recognizes revenue in accordance with ASU 2014-09, Revenue from Contracts with Customers, and related subsequently issued ASUs (“Topic 606”). Under this standard, FutureFuel recognizes revenue when performance obligations of the sale are satisfied. FutureFuel sells to customers through master sales agreements or standalone purchase orders. The majority of FutureFuel's terms of sale have a single performance obligation to transfer products. Accordingly, FutureFuel recognizes revenue when control has been transferred to the customer, generally at the time of shipment or delivery of products. Under the previous revenue recognition accounting standard (“Topic 605”), FutureFuel recognized revenue upon the transfer of title and risk of loss, generally upon shipment or delivery of goods, although some revenue was recognized on a bill and hold basis.

 

15

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

A select number of FutureFuel custom chemical contracts within the chemical segment contain a material right as defined by Topic 606 as a result of upfront payments provided by customers. Each contract also has a performance obligation to transfer products with 30-day payment terms. FutureFuel recognizes revenue when the customer takes control of the inventory, either upon shipment or when the material is made available for pickup. FutureFuel has applied the renewal option approach in allocating the transaction price to these material rights and transfer of product. As a basis for allocating the transaction price to the material right and transfer of product, FutureFuel estimated the expected life of the product, the expected contractual volumes to be sold over that life, and the most likely expected sales price. Each estimate is updated quarterly on a prospective basis.

 

The majority of our revenue is from short term contracts with revenue recognized when a single performance obligation to transfer product under the terms of a contract with a customer are satisfied. Accordingly, FutureFuel recognizes revenue when control is transferred to the customer, which is when products are considered to meet customer specification and title and risk of loss are transferred. This typically occurs at the time of shipment or delivery, however, for certain contracts, this occurs upon delivery of the material to a FutureFuel storage location, ready for customer pickup and separated from other FutureFuel inventory. Revenue is measured as the amount of consideration FutureFuel expects to receive in exchange for transferring products and is generally based upon a negotiated price. FutureFuel sells its products directly to customers generally under agreements with payment terms of 30 to 75 days for chemical segment customers and 3 to 10 days for biofuel segment customers.

 

Contract Assets and Liabilities:

 

Contract assets consist of unbilled amounts typically resulting from revenue recognized through bill and hold arrangements. The contract assets are recorded as accounts receivable on the consolidated balance sheet. Contract liabilities consist of advance payments related to material rights. These amounts were historically recorded as deferred revenue which primarily related to upfront capital payments. The contract liabilities are recorded as deferred revenue in the consolidated balance sheets and are reduced as FutureFuel transfers product to the customer under the renewal option approach.  

 

These contract assets and liabilities are reported on the consolidated balance sheets on a contract-by-contract basis at the end of each reporting period.

 

The following table reflects the changes in FutureFuel’s contract assets and contract liabilities.

 

Contract assets - short-term

               
   

Three months ended June 30,

 
   

2019

   

2018

 

Beginning balance April 1

  $ 1,190     $ 651  

Additions

    820       1,110  

Reductions

    (1,190 )     (651 )

Ending balance June 30

  $ 820     $ 1,110  

 

   

Six months ended June 30,

 
   

2019

   

2018

 

Beginning balance January 1

  $ 798     $ 505  

Additions

    2,010       1,761  

Reductions

    (1,988 )     (1,156 )

Ending balance June 30

  $ 820     $ 1,110  

 

16

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

Contract liabilities

               
   

Three months ended June 30,

 
   

2019

   

2018

 

Beginning balance at April 1

  $ 20,419     $ 19,493  

Additions

    1,471       458  

Revenue recognized

    (857 )     (1,796 )

Ending balance at June 30

  $ 21,033     $ 18,155  

 

   

Six months ended June 30,

 
   

2019

   

2018

 

Beginning balance at January 1

  $ 20,332     $ 21,013  

Additions

    2,909       458  

Revenue recognized

    (2,208 )     (3,316 )

Ending balance at June 30

  $ 21,033     $ 18,155  

 

Transaction price allocated to the remaining performance obligations:

 

As of June 30, 2019, approximately $21,033 of revenue is expected to be recognized from remaining performance obligations. FutureFuel expects to recognize this revenue ratably over expected sales over the expected term of its long-term contracts which range from one to five years. Approximately 24% of this revenue is expected to be recognized over the next 12 months, and 76% is expected to be recognized between one and 5 years. These amounts are subject to change based upon changes in the estimated contract life and estimated quantities to be sold over the contract life.

 

We applied the practical expedient in ASC 606-10-50-14 and have excluded the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less; and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

 

Disaggregation of revenue - contractual and non-contractual:

 

   

Three months ended June 30,

   

Six months ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Contract revenue from customers with > 1 year arrangements

  $ 11,721     $ 17,908     $ 27,139     $ 33,158  

Contract revenue from customer with < 1 year arrangement

    59,088       70,373       92,116       124,414  

Revenue from non-contractual arrangements

    55       55       110       110  

BTC rebate

    -       -       -       (13,599 )

Total revenue

  $ 70,864     $ 88,336     $ 119,365     $ 144,083  

 

Timing of revenue:

 

   

Three months ended June 30,

   

Six months ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Bill and hold revenue

  $ 12,006     $ 13,373     $ 23,762     $ 20,894  

Non-bill and hold revenue

    58,858       74,963       95,603       123,189  

Total revenue

  $ 70,864     $ 88,336     $ 119,365     $ 144,083  

 

For both long term and short-term contracts, FutureFuel has elected to account for shipping and handling as activities to fulfill the promise to transfer the good. As such, shipping and handling fees billed to customers in a sales transaction are recorded in net sales and shipping and handling costs incurred are recorded in cost of goods sold. FutureFuel has elected to exclude from net sales any taxes which it collects concurrent with revenue-producing activities. These accounting policy elections are consistent with the manner in which FutureFuel historically recorded shipping and handling fees and taxes.

 

17

 

 

 

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

 

All dollar amounts expressed as numbers in this M D&A are in thousands (except per share amounts).

Certain tables may not add due to rounding.

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read together with our consolidated financial statements, including the notes thereto, set forth herein. This discussion contains forward-looking statements that reflect our current views with respect to future events and financial performance. Actual results may differ materially from those anticipated in these forward-looking statements. See “Forward Looking Information” below for additional discussion regarding risks associated with forward-looking statements.

 

Overview

 

Our company is managed and reported in two reporting segments: chemicals segment and biofuels segment. Within the chemicals segment are two product groupings: custom chemicals and performance chemicals. The custom product group is comprised of specialty chemicals manufactured for a single customer whereas the performance product group is comprised of chemicals manufactured for multiple customers. The biofuels segment is comprised of one product group. Management believes that the diversity of each segment strengthens the company in the ability to utilize resources and is committed to growing each segment.

 

Summary of Financial Results

 

Set forth below is a summary of certain consolidated financial information for the periods indicated.

 

   

Three Months Ended June 30,

 
                   

Dollar

   

%

 
   

2019

   

2018

   

Change

   

Change

 

Revenues

  $ 70,864     $ 88,336     $ (17,472 )     (19.8% )

Income from operations

  $ 1,185     $ 5,840     $ (4,655 )     (79.7% )

Net income

  $ 3,687     $ 6,051     $ (2,364 )     (39.1% )

Earnings per common share:

                               

Basic

  $ 0.08     $ 0.14     $ (0.06 )     (42.9% )

Diluted

  $ 0.08     $ 0.14     $ (0.06 )     (42.9% )

Capital expenditures and intangibles (net of customer reimbursements and regulatory grants)

  $ 451     $ 536     $ (85 )     (15.9% )

Adjusted EBITDA

  $ 3,384     $ 11,667     $ (8,283 )     (71.0% )

 

   

Six Months Ended June 30,

 
                   

Dollar

   

%

 
   

2019

   

2018

   

Change

   

Change

 

Revenues

  $ 119,365     $ 144,083     $ (24,718 )     (17.2% )

Income from operations

  $ 2,396     $ 40,407     $ (38,011 )     (94.1% )

Net income

  $ 9,186     $ 41,877     $ (32,691 )     (78.1% )

Earnings per common share:

                               

Basic

  $ 0.21     $ 0.96     $ (0.75 )     (78.1% )

Diluted

  $ 0.21     $ 0.96     $ (0.75 )     (78.1% )

Capital expenditures and intangibles (net of customer reimbursements and regulatory grants)

  $ 874     $ 897     $ (23 )     (2.6% )

Adjusted EBITDA

  $ 8,799     $ 49,264     $ (40,465 )     (82.1% )

 

18

 

 

We use adjusted EBITDA as a key operating metric to measure both performance and liquidity. Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA is not a substitute for operating income, net income, or cash flow from operating activities (each as determined in accordance with GAAP) as a measure of performance or liquidity. Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of results as reported under GAAP. We define adjusted EBITDA as net income before interest, income taxes, depreciation, and amortization expenses, excluding, when applicable, non-cash stock-based compensation expenses, public offering expenses, acquisition-related transaction costs, purchase accounting adjustments, losses on disposal of property and equipment, gains or losses on derivative instruments, and other non-operating income or expenses. Information relating to adjusted EBITDA is provided so that investors have the same data that we employ in assessing the overall operation and liquidity of our business. Our calculation of adjusted EBITDA may be different from similarly titled measures used by other companies; therefore, the results of our calculation are not necessarily comparable to the results of other companies.

     

Adjusted EBITDA allows our chief operating decision makers to assess the performance and liquidity of our business on a consolidated basis to assess the ability of our operating segments to produce operating cash flow to fund working capital needs, to fund capital expenditures and to pay dividends. In particular, our management believes that adjusted EBITDA permits a comparative assessment of our operating performance and liquidity, relative to a performance and liquidity based on GAAP results, while isolating the effects of certain items, including depreciation and amortization, which may vary among our operating segments without any correlation to their underlying operating performance, non-cash stock-based compensation expense, which is a non-cash expense that varies widely among similar companies, and gains and losses on derivative instruments, which can cause net income to appear volatile from period to period relative to the sale of the underlying physical product.

 

We enter into commodity derivative instruments primarily to protect our operations from downward movements in commodity prices, and to provide greater certainty of cash flows associated with sales of our commodities. We enter into hedges, and we utilize mark-to-market accounting to account for these instruments. Thus, our results in any given period can be impacted, and sometimes significantly, by changes in market prices relative to our contract price along with the timing of the valuation change in the derivative instruments relative to the sale of biofuel. We include this item as an adjustment as we believe it provides a relevant indicator of the underlying performance of our business in a given period.

 

The following table reconciles adjusted EBITDA with net income, the most directly comparable GAAP performance financial measure. 

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Adjusted EBITDA

  $ 3,384     $ 11,667     $ 8,799     $ 49,264  

Depreciation

    (2,747 )     (2,756 )     (5,472 )     (5,512 )

Non-cash stock-based compensation

    -       (107 )     -       (214 )

Interest and dividend income

    2,750       2,153       5,112       4,145  

Non-cash interest expense (including amortization of deferred financing costs)

    (44 )     (43 )     (87 )     (86 )

Losses on disposal of property and equipment

    (8 )     (32 )     (11 )     (37 )

Gains/(losses) on derivative instruments

    443       (3,109 )     (1,033 )     (3,271 )

Gains/(losses) on marketable securities

    826       281       3,753       (4,088 )

Income tax (expense)/benefit

    (917 )     (2,003 )     (1,875 )     1,676  

Net income

  $ 3,687     $ 6,051     $ 9,186     $ 41,877  

 

19

 

 

The following table reconciles adjusted EBITDA with cash flows from operations, the most directly comparable GAAP liquidity financial measure.

 

   

Six Months Ended June 30,

 
   

2019

   

2018

 

Adjusted EBITDA

  $ 8,799     $ 49,264  

Benefit for deferred income taxes

    (445 )     (3,885 )

Impairment of fixed assets

    130       171  

Interest and dividend income

    5,112       4,145  

Income tax (expense)/benefit

    (1,875 )     1,676  

Losses on derivative instruments

    (1,033 )     (3,271 )

Change in fair value of derivative instruments

    (297 )     (1,559 )

Changes in operating assets and liabilities, net

    3,137       18,819  

Other

    (1 )     -  

Net cash provided by operating activities

  $ 13,527     $ 65,360  

 

20

 

 

Results of Operations 

 

Consolidated

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
                Change                 Change  
   

2019

   

2018

   

Amount

   

%

   

2019

   

2018

   

Amount

   

%

 
                                                                 
Revenues   $ 70,864     $ 88,336     $ (17,472 )     (19.8 )%   $ 119,365     $ 144,083     $ (24,718 )     (17.2 )%

Volume/product mix effect

                  $ (10,753 )     (12.2 )%                   $ (27,570 )     (19.1 )%

Price effect

                  $ (6,719 )     (7.6 )%                   $ 2,852       2.0  %
                                                                 

Gross profit

  $ 3,270     $ 8,271     $ (5,001 )     (60.5 )%   $ 6,532     $ 45,778     $ (39,246 )     (85.7 )%

 

Consolidated sales revenue in the three and six months ended June 30, 2019 decreased $17,472 and $24,718, respectively, compared to the three and six months ended June 30, 2018.  This decrease primarily resulted from decreased sales volumes in biodiesel and chemicals.  In addition, in the three-month period ended June 30, 2019, sales revenue was reduced by lower average selling prices in our biofuel segment. Partially offsetting the six-month period decrease was higher average selling prices in the biofuels segment of $2,191, as compared with the same period in 2018.  The prior year period was unfavorably impacted by rebates to customers that resulted from the retroactive reinstatement of the 2017 blenders’ tax credit (BTC) passed into law on February 9, 2018.  The BTC has not been reinstated beyond 2017, therefore, these rebates did not reoccur in 2019.  Please see Note 2 for additional discussion.

 

Gross profit in the three and six months ended June 30, 2019 decreased $5,001 and $39,246, respectively, compared to the three and six months ended June 30, 2018. This decrease was primarily from the biofuel segment with the prior year period benefiting from the aforementioned BTC which was not in law in 2019.  Also negatively impacting gross profit in the current periods was reduced sales volumes in both the biofuels segment and chemical segment.  Partially offsetting these decreases in gross profit was the favorable impact of the change in the unrealized and realized activity in derivative instruments with a gain of $443 in the three months ended June 30, 2019 as compared to a loss of $3,109 in the three months ended June 30, 2018 and a loss of $1,033 in the six months ended June 30, 2019, as compared to a loss of $3,271 in the same period of 2018.  Additionally, gross profit was favorably impacted in the three and six months ended June 30, 2019, as compared to the three and six months ended June 30, 2018, by the adjustment in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting.  This adjustment increased gross profit of $287 and $1,924 in the three and six months ended June 30, 2019 as compared to a decrease in gross profit of $2,330 and $1,998 in the three and six months ended June 30, 2018, respectively.

  

Operating Expenses

 

Operating expenses decreased $346 and $1,235 in the three and six months ended June 30, 2019, as compared to the three and six months ended June 30, 2018. This decrease was primarily from reduced compensation expense.

 

Provision for Income Taxes

 

The effective tax rate for the three months ended June 30, 2019 and 2018 reflects our expected tax rate on reported operating income before income tax.  The three-month effective rate ended June 30, 2019 is expected to continue for the remainder of the year. 

 

The effective tax rate for the six months ended June 30, 2019 was favorably impacted by FutureFuel being granted a retroactive research and development credit for a prior year in a state where it does significant business.  Comparatively, the six months ended June 30, 2018, reflects the favorable effect of the BTC and Small Agri-biodiesel Producer Tax Credit (2017 BTC was reinstated in the three months ended March 31, 2018), which were not in law in 2019.

 

Unrecognized tax benefits totaled $2,804 at June 30, 2019 and December 31, 2018.

 

FutureFuel records interest and penalties, net, as a component of provision for income taxes. FutureFuel accrued balances of $734 and $681 at June 30, 2019 and December 31, 2018, respectively, for interest and penalties.

 

21

 

 

Net Income

 

Net income for the three and six months ended June 30, 2019 decreased $2,364 and $32,691, respectively, as compared to the same periods in 2018. The decrease in the three-month period resulted primarily from lower sales volumes of agro/energy chemicals and biodiesel.  The decrease in the six-month period resulted primarily from the absence of biodiesel tax credits and incentives that were in law in the prior year and not in effect for 2019.

 

 

Chemicals Segment

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
                   

Change

                   

Change

 
   

2019

   

2018

   

Amount

   

%

   

2019

   

2018

   

Amount

   

%

 
                                                                 

Revenues

  $ 25,859     $ 31,527     $ (5,668 )     (18.0 )%   $ 53,211     $ 60,608     $ (7,397 )     (12.2 )%

Volume/product mix effect

                  $ (5,787 )     (18.4 )%                   $ (8,058 )     (13.3 )%

Price effect

                  $ 119       0.4  %                   $ 661       1.1  %
                                                                 

Gross profit

  $ 7,181     $ 8,016     $ (835 )     (10.4 )%   $ 14,490     $ 15,572     $ (1,082 )     (6.9 )%

 

Sales revenue in the three months ended June 30, 2019 decreased 18% or $5,668 compared to the three months ended June 30, 2018. Sales revenue for our custom chemicals (unique chemicals produced for specific customers) for the three months ended June 30, 2019 totaled $21,965, a decrease of $5,107 from the same period in 2018. This decrease was primarily attributed to decreased sales volumes in the agrochemical and energy markets and included a planned shutdown of a process line to expand capacity. Performance chemicals (comprised of multi-customer products which are sold based on specification) sales revenues were $3,894 in the three months ended June 30, 2019, a decrease of $561 from the three months ended June 30, 2018. This decrease was primarily from reduced sales volume of glycerin and slower sales of a polymer modifier used in the carpet industry.

 

Sales revenue in the six months ended June 30, 2019 decreased 12% or $7,397 compared to the six months ended June 30, 2018. Sales revenue for our custom chemicals (unique chemicals produced for specific customers) for the six months ended June 30, 2019 totaled $45,665, a decrease of $4,827 from the same period in 2018. This decrease was primarily attributed to decreased sales volumes in the agrochemical and energy markets and included a planned shutdown of a process line to expand capacity. Performance chemicals (comprised of multi-customer products which are sold based on specification) sales revenues were $7,546 in the six months ended June 30, 2019, a decrease of $2,570 from the six months ended June 30, 2018. This decrease was primarily from reduced sales volume of glycerin and slower sales of a polymer modifier used in the carpet industry.

 

Gross profit for the chemicals segment for the three and six months ended June 30, 2019 decreased $835 and $1,082, respectively, when compared to the same period of 2018. This decrease was driven mostly by sales volume declines in the agrochemical and energy market as discussed above. Partially offsetting this decline was improved throughput in our custom chemicals due to production scheduling for annual maintenance, favorable product mix of products we campaign, and a benefit from the change in adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. The change in this adjustment increased the chemical segment gross profit in the three and six month periods ending June 30, 2019 by $217 and $744, respectively, as compared to a decrease in gross profit of $627 and $438, in the same respective periods of 2018.

 

22

 

 

Biofuels Segment

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
                   

Change

                   

Change

 
   

2019

   

2018

   

Amount

   

%

   

2019

   

2018

   

Amount

   

%

 
                                                                 

Revenues

  $ 45,005     $ 56,809     $ (11,804 )     (20.8 )%   $ 66,154     $ 83,475     $ (17,321 )     (20.7 )%

Volume/product mix effect

                  $ (4,966 )     (8.7 )%                   $ (19,512 )     (23.4 )%

Price effect

                  $ (6,838 )     (12.0 )%                   $ 2,191       2.6  %
                                                                 

Gross profit

  $ (3,911 )   $ 255     $ (4,166 )     (1633.5 )%   $ (7,958 )   $ 30,206     $ (38,164 )     (126.3 )%

 

Biofuels sales revenue in the three and six months ended June 30, 2019 decreased $11,804 and $17,321, respectively, as compared to the same periods of 2018. The biodiesel and biodiesel blend volumes decreased in both the three and six month periods as compared to the prior year primarily from the lack of sourcing profitable feedstock. In addition, in the three-months ending June 30, 2019 as compared to the same period of 2018, lower selling price reduced revenue 12% or $6,838. In the six-month period ended June 30, 2019 as compared to the same period of 2018, net sales prices increased revenue 2.6% or $2,191. In the six-month period ended June 30, 2018, sales revenue included rebates that resulted from the retroactive reinstatement of the 2017 BTC. These rebates represented a lower sales price in the six months ended June 30, 2018; these rebates were not present in the six-month period ending June 30, 2019. The BTC has not been reinstated beyond 2017. Please see Note 2 for additional discussion.  

 

Revenue from common carrier pipelines varies as its revenue recognition depends upon whether a transaction is bought from and sold to the same party. Purchases and sales of inventory with the same counterparty that are entered into in contemplation of one another (including buy/sell agreements) are combined and recorded on a net basis. Additionally, revenue from common carrier pipelines fluctuates with market conditions. Revenue from net transactions increased $121 in the six months ended June 30, 2019 as compared to the six months ended June 30, 2018.

 

A portion of our biodiesel sold was to one major refiner/blender in 2019 and 2018.  No assurances can be given that we will continue to sell to such major refiners, or, if we do sell, the volume we will sell or the profit margin we will realize. We do not believe that the loss of these customers would have a material adverse effect on our biofuels segment or on us as a whole because: (i) unlike our custom manufacturing products, biodiesel is a commodity with a large potential customer base; (ii) we believe that we could readily sell our biodiesel to other customers as potential demand from other customers for biodiesel exceeds our production capacity; (iii) our sales to these customers are not under fixed terms and the customers have no fixed obligation to purchase any minimum quantities except as stipulated by short term purchase orders; and (iv) the prices we receive from these customers are based upon then-market rates, as would be the case with sales of this commodity to other customers.

 

Biofuels gross profit in the three months ended June 30, 2019 decreased $4,166 when compared to the same period of 2018. Gross profit was benefited in the three months ended June 30, 2018 by higher sales volumes. Partially benefiting gross profit in the three months ended June 30, 2019 the change in adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting as compared to the same period in 2018. This adjustment increased gross profit $70 in the three months ended June 30, 2019, compared to a decrease in gross profit of $1,703 in the three months ended June 30, 2018.

 

Biofuels gross profit was also benefited by the change in the activity in derivative instruments with a gain of $443 in the three months ended June 30, 2019, as compared to a loss of $3,109 in the same period of 2018. In order to better manage the commodity price risk caused by market fluctuations in biofuel prices, we may enter into exchange traded commodity futures and options contracts. We account for these derivative instruments in accordance with accounting standards whereby the fair value of FutureFuel’s derivative instruments is determined based on the closing prices of the derivative instruments on relevant commodity exchanges at the end of an accounting period. Realized gains and losses on derivative instruments and changes in fair value of the derivative instruments are recorded in the statement of operations as a component of cost of goods sold within the biofuels segment.

 

FutureFuel recognizes all derivative instruments as either assets or liabilities at fair value in its consolidated balance sheet. FutureFuel’s derivative instruments do not qualify for hedge accounting under the specific guidelines of Topic 815, Derivatives and Hedging. None of the derivative instruments are designated and accounted for as hedges due primarily to the extensive record keeping requirements.

 

23

 

 

In the six-month period ended June 30, 2019, biofuels gross profit decreased $38,164 when compared to the same period of 2018. The change was primarily from the retroactive reinstatement of the 2017 BTC, totaling $28,869, which benefited the first six months of 2018 and has not been reinstated past December 31, 2017. Further reducing gross profit was lower sales volumes in the six months of 2019 as compared to the same period of 2018. Gross profit was partially benefited in 2019, as compared to 2018, by the change in adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. This adjustment increased gross profit $1,180 in the six months ended June 30, 2019, as compared to a decrease of $1,560 in the six months ended June 30, 2018. In addition, Biofuels gross profit was impacted by the change in the activity in derivative instruments with a loss of $1,033 in the three months ended June 30, 2019, as compared to a loss of $3,271 in the same period of 2018.

 

The volumes and carrying values of FutureFuel’s derivative instruments were as follows:

 

   

June 30, 2019

   

December 31, 2018

 
   

Contract quantity

   

Fair Value

   

Contract quantity Short

   

Fair Value

 

Regulated options, included in other current assets

    -     $ -       100     $ (484 )

Regulated fixed price future commitments, included in other current assets

    -     $ -       96     $ 187  

 

*All derivative instruments are entered into with the standard contract terms and conditions in accordance with major trading authorities of the New York Mercantile Exchange.


 

Critical Accounting Estimates

 

Revenue Recognition

 

The Company recognizes revenue under Topic 606, Revenue from Contracts with Customers. Certain long-term contracts had upfront non-cancellable payments considered material rights. The Company applied the renewal option approach in allocating the transaction price to the material rights. For each of these contracts, the Company estimated the expected contractual volumes to be sold at the most likely expected sales price as a basis for allocating the transaction price to the material right. Estimates are updated quarterly on a prospective basis. These custom chemical contracts have payment terms of 30 days. Please see Note 18 for additional discussion.

 

For most product sales, revenue is recognized when product is shipped from our facilities and risk of loss and title have passed to the customer, which is in accordance with our customer contracts and the stated shipping terms. Nearly all custom manufactured products are manufactured under written master service agreements. Performance chemicals and biodiesel are generally sold pursuant to the terms of written purchase orders. In general, customers do not have any rights of return, except for quality disputes. All of our products are tested for quality before shipment, and historically returns have been inconsequential. We do not offer rebates, except those related to the BTC.

 

Biodiesel selling prices can at times fluctuate based on the timing of unsold, internally generated RINs. From time to time, sales of biodiesel are on a “RINs-free” basis. Such method of selling results in applicable RINs being held. The value of the RINs is not reflected in revenue until such time as the RIN sale has been completed.

 

Revenue from bill and hold transactions in which a performance obligation exists is recognized when the total performance obligation has been met and control of the product has transferred. Bill and hold transactions for the three and six months ended June 30, 2019 and 2018 were related to custom chemicals customers whereby revenue was recognized in accordance with contractual agreements based upon product being produced and ready for use by the customer. These sales were subject to written monthly purchase orders with agreement that production was reasonable. The product was custom manufactured and stored at the customer’s request and could not be sold to another buyer. Credit and payment terms for bill and hold customers are similar to other custom chemicals customers. Sales revenue under bill and hold arrangements were $12,006 and $13,373 for the three months ended June 30, 2019 and 2018, respectively. For the six months ended June 30, 2019 and 2018, bill and hold sales revenue was $23,762 and $20,894, respectively.

 

24

 

 

Liquidity and Capital Resources

 

Our net cash from operating activities, investing activities, and financing activities for the six months ended June 30, 2019 and 2018 are set forth in the following table.

  

   

Six Months Ended June 30,

 
   

2019

   

2018

 

Net cash from operating activities

  $ 13,527     $ 65,360  

Net cash from investing activities

  $ (379 )   $ 25,182  

Net cash from financing activities

  $ (5,249 )   $ (5,248 )

 

Operating Activities

 

Cash from operating activities decreased from $65,360 of cash provided by operating activities in the first six months of 2018 to $13,527 of cash provided in operating activities in the first six months of 2019. This $51,833 decrease was primarily attributable to the decrease of $32,691 in net income, the decrease in the change in accounts payable, including accounts payable - related parties, of $16,204 and the decrease in the change in the fair value of equity securities, of $11,305.  

 

Investing Activities

 

Cash from investing activities decreased from $25,182 of cash provided by investing activities in the first six months of 2018 to $379 of cash used in investing activities in the first six months of 2019. Of this change, $21,669 was the result of decreased cash inflows from net sales of marketable securities in the first six months of 2019 compared to net sales in the first six months of 2018. Such net sales totaled $3,359, in the first six months of 2019, compared to $25,028 in net sales in the first six months of 2018. Our capital expenditures and customer reimbursements for capital expenditures for the six months ended June 30, 2019 and 2018, are summarized in the following table: 

 

   

Six Months Ended June 30,

 
   

2019

   

2018

 

Cash paid for capital expenditures and intangibles

  $ 4,659     $ 1,103  

Cash received as reimbursement of capital expenditures*

  $ (3,785 )   $ (206 )