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 September 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     63105
(Address of Principal Executive Offices)   (Zip Code)

  (314) 854-8352 

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

FF

NYSE

 

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 and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes √ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 November 8, 2019: 43,743,243  

 

 

 

 

 

PART I FINANCIAL INFORMATION

   

Item 1. Financial Statements.

 

FutureFuel Corp.

Consolidated Balance Sheets

(Dollars in thousands)

 

   

(Unaudited)

         
   

September 30, 2019

   

December 31, 2018

 

Assets

               

Cash and cash equivalents

  $ 235,945     $ 214,972  

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

    20,820       16,294  

Accounts receivable – related parties

    22       1,844  

Inventory

    42,789       39,296  

Income tax receivable

    367       6,858  

Prepaid expenses

    510       1,767  

Prepaid expenses – related parties

    12       12  

Marketable securities

    75,583       79,888  

Deferred financing costs

    72       144  

Other current assets

    870       1,255  

Total current assets

    376,990       362,330  

Property, plant and equipment, net

    100,320       103,575  

Intangible assets

    1,408       1,408  

Deferred financing costs

    -       36  

Other noncurrent assets

    5,548       3,806  

Total noncurrent assets

    107,276       108,825  

Total Assets

  $ 484,266     $ 471,155  

Liabilities and Stockholders’ Equity

               

Accounts payable

  $ 25,632     $ 19,981  

Accounts payable – related parties

    972       1,689  

Deferred revenue – short-term

    5,232       4,581  

Dividends payable

    2,625       10,498  

Accrued expenses and other current liabilities

    5,227       2,742  

Total current liabilities

    39,688       39,491  

Deferred revenue – long-term

    19,394       20,319  

Noncurrent deferred income tax liability

    17,813       18,026  

Other noncurrent liabilities

    2,244       4,241  

Total noncurrent liabilities

    39,451       42,586  

Total liabilities

    79,139       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 at September 30, 2019 and December 31, 2018

    4       4  

Accumulated other comprehensive income (loss)

    200       (20 )

Additional paid in capital

    282,166       282,145  

Retained earnings

    122,757       106,949  

Total stockholders’ equity

    405,127       389,078  

Total Liabilities and Stockholders’ Equity

  $ 484,266     $ 471,155  

 

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

 

1

 

 

 

 FutureFuel Corp.

Consolidated Statements of Operations and Comprehensive Income

(Dollars in thousands, except per share amounts)

(Unaudited)

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Revenue

  $ 65,332     $ 80,588     $ 182,830     $ 223,184  

Revenue – related parties

    352       834       2,219       2,321  

Cost of goods sold

    54,037       61,559       155,603       146,916  

Cost of goods sold – related parties

    4,455       5,651       12,314       15,682  

Distribution

    1,687       1,512       5,006       4,329  

Distribution – related parties

    43       47       132       147  

Gross profit

    5,462       12,653       11,994       58,431  

Selling, general, and administrative expenses

                               

Compensation expense

    661       933       1,996       3,054  

Other expense

    561       476       1,609       1,482  

Related party expense

    132       138       391       416  

Research and development expenses

    833       877       2,327       2,843  

Total operating expenses

    2,187       2,424       6,323       7,795  

Income from operations

    3,275       10,229       5,671       50,636  

Interest and dividend income

    2,718       2,543       7,830       6,688  

Interest expense

    (43 )     (43 )     (130 )     (129 )

Gain (loss) on marketable securities

    1,424       815       5,177       (3,273 )

Other income (expense)

    262       (87 )     149       (264 )

Other income

    4,361       3,228       13,026       3,022  

Income before taxes

    7,636       13,457       18,697       53,658  

Income tax provision

    1,014       4,012       2,889       2,336  

Net income

  $ 6,622     $ 9,445     $ 15,808     $ 51,322  
                                 

Earnings per common share

                               

Basic

  $ 0.15     $ 0.22     $ 0.36     $ 1.17  

Diluted

  $ 0.15     $ 0.22     $ 0.36     $ 1.17  

Weighted average shares outstanding

                               

Basic

    43,743,243       43,724,195       43,743,243       43,719,215  

Diluted

    43,743,243       43,732,920       43,745,153       43,725,370  
                                 

Comprehensive income

                               

Net income

  $ 6,622     $ 9,445     $ 15,808     $ 51,322  

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

    1       (27 )     279       (46 )

Income tax effect

    -       6       (59 )     10  

Total unrealized gains (losses), net of tax

    1       (21 )     220       (36 )

Comprehensive income

  $ 6,623     $ 9,424     $ 16,028     $ 51,286  

 

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

 

2

 

 

 

FutureFuel Corp.

Consolidated Statements of Stockholders’ Equity

(Dollars in thousands)

(Unaudited)

 

   

For the Nine Months Ended September 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

    -       -       202       -       -       202  

Net income

    -       -       -       -       5,499       5,499  

Balance - March 31, 2019

    43,743,243     $ 4     $ 182     $ 282,145     $ 112,448     $ 394,779  

Other comprehensive income

    -       -       17       -       -       17  

Net income

    -       -       -       -       3,687       3,687  

Balance - June 30, 2019

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

Stock based compensation, net of tax

    -       -       -       21       -       21  

Other comprehensive income

    -       -       1       -       -       1  

Net income

    -       -       -       -       6,622       6,622  

Balance - September 30, 2019

    43,743,243     $ 4     $ 200     $ 282,166     $ 122,757     $ 405,127  

 

   

For the Nine Months Ended September 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, net of tax

    -       -       -       107       -       107  

Other comprehensive loss

    -       -       (58 )     -       -       (58 )

Net income

    -       -       -       -       35,826       35,826  

Balance - March 31, 2018

    43,741,670     $ 4     $ 102     $ 282,071     $ 100,115     $ 382,292  

Stock based compensation, net of tax

    1,007       -       -       107       -       107  

Other comprehensive income

    -       -       43       -       -       43  

Net income

    -       -       -       -       6,051       6,051  

Balance - June 30, 2018

    43,742,677     $ 4     $ 145     $ 282,178     $ 106,166     $ 388,493  

Stock based compensation, net of tax

    566       -       -       (69 )     -       (69 )

Other comprehensive loss

    -       -       (21 )     -       -       (21 )

Net income

    -       -       -       -       9,445       9,445  

Balance - September 30, 2018

    43,743,243     $ 4     $ 124     $ 282,109     $ 115,611     $ 397,848  

 

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

 

3

 

 

 

FutureFuel Corp.

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

  

   

Nine Months Ended September 30,

 
   

2019

   

2018

 

Cash flows from operating activities

               

Net income

  $ 15,808     $ 51,322  

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

               

Depreciation

    9,092       8,502  

Amortization of deferred financing costs

    108       108  

Benefit for deferred income taxes

    (273 )     (3,609 )

Change in fair value of equity securities

    (6,621 )     5,597  

Change in fair value of derivative instruments

    (357 )     (2,290 )

Loss (gain) on the sale of investments

    1,444       (2,324 )

Stock based compensation

    21       321  

(Gain) loss on disposal of property and equipment

    (11 )     41  

Noncash interest expense

    22       22  

Changes in operating assets and liabilities:

               

Accounts receivable

    (4,526 )     3,031  

Accounts receivable – related parties

    1,822       (2,382 )

Inventory

    (3,493 )     (4,251 )

Income tax receivable

    6,491       6,458  

Prepaid expenses

    1,257       1,190  

Other assets

    221       (247 )

Accounts payable

    5,951       13,018  

Accounts payable – related parties

    (717 )     1,949  

Accrued expenses and other current liabilities

    1,904       5,385  

Deferred revenue

    (274 )     (2,672 )

Other noncurrent liabilities

    (3,511 )     -  

Net cash provided by operating activities

    24,358       79,169  

Cash flows from investing activities

               

Collateralization of derivative instruments

    852       2,384  

Purchase of marketable securities

    (19,200 )     (19,664 )

Proceeds from the sale of marketable securities

    28,962       33,942  

Proceeds from the sale of property and equipment

    13       22  

Capital expenditures

    (6,139 )     (3,084 )

Net cash provided by investing activities

    4,488       13,600  

Cash flows from financing activities

               

Minimum tax withholding on stock options exercised and awards vested

    -       (176 )

Payment of dividends

    (7,873 )     (7,872 )

Net cash used in financing activities

    (7,873 )     (8,048 )

Net change in cash and cash equivalents

    20,973       84,721  

Cash and cash equivalents at beginning of period

    214,972       114,627  

Cash and cash equivalents at end of period

  $ 235,945     $ 199,348  
                 

Cash paid for interest

  $ -     $ -  

Cash paid for income taxes

  $ 1,076     $ 1,506  

Noncash investing and financing activities:

               

Noncash capital expenditures

  $ 42     $ -  

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” or “the Company”), 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 chemical segment manufactures a diversified portfolio of chemical products that are sold to third party customers. The majority of the revenues from the chemical 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. 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. Certain reclassifications were made to prior year amounts to conform to the 2019 presentation.

 

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 direct and indirect 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 $28,865 (a reduction in revenue of $13,559 for customer rebates (“BTC Rebates”) upon reinstatement and a reduction in cost of goods sold of $42,424). 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 $1,500 benefit in the income tax provision in the nine-month period ended September 30, 2018.

 

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.  

 

5

 

 

 Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)  

 

 

 

 3 )

 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 customer contract 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.

 

A select number of FutureFuel custom chemical contracts within the chemical segment contain a material right as defined by Topic 606, from the provision of a customer option to purchase future goods or services at a discounted price 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 the Company’s 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 per the customer contract and title and risk of loss are transferred. This typically occurs at the time of shipment or delivery; or 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 biofuels segment customers.

 

 

Contract Assets and Liabilities:

 

Contract assets consist of amounts typically resulting from amounts related to FutureFuel’s contractual right to consideration for completed performance obligations not yet invoiced.  Contract assets are recorded as accounts receivable on the consolidated balance sheet. Contract liabilities consist of upfront capital payments from a customer material right. 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.  “Contract liabilities – short-term” primarily reflects deferred revenue from prepayments from customers for product to be delivered in 12 months or less.  “Contract liabilities – long-term” includes advance payments that FutureFuel has received from customers related to long-term supply contracts that are deferred and recognized over the life of the contract. 

 

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.

 

6

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers.

 

 

Contract Assets and Liability Balances

 

September 30, 2019

   

December 31, 2018

 

Trade receivables, which are included in Accounts receivable, net of allowances for bad debts of $0

  $ 20,045     $ 15,496  

Contract assets

  $ 775     $ 798  

Contract liabilities, which are included in Deferred revenue - short-term

  $ 5,025     $ 4,374  

Contract liabilities, which are included in Deferred revenue - long-term

  $ 15,199     $ 15,958  

 

 

The increase in contract liabilities from December 31, 2018 to September 30, 2019 was $3,402 of advanced payments from customers related to long-term supply agreements.  Revenue recognized in the first nine months of 2019 from amounts included in contract liabilities at the beginning of the period was $3,510. 

 

 

Transaction price allocated to the remaining performance obligations:

 

At September 30, 2019, approximately $20,224 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 25% of this revenue is expected to be recognized over the next 12 months, and 75% is expected to be recognized between one and five 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.

 

The Company 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 the Company recognizes revenue at the amount to which it has the right to invoice for services performed.

 

7

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

Disaggregation of revenue - contractual and non-contractual:

 

   

Three months ended

September 30,

   

Nine months ended

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Contract revenue from customers with > 1 year arrangements

  $ 16,331     $ 14,587     $ 43,470     $ 47,745  

Contract revenue from customer with < 1 year arrangements

    49,298       66,780       141,413       191,154  

Revenue from non-contractual arrangements

    55       55       166       165  

BTC rebate

    -       -       -       (13,559 )

Total revenue

  $ 65,684     $ 81,422     $ 185,049     $ 225,505  

 

Timing of revenue:

 

   

Three months ended

September 30,

   

Nine months ended

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Bill-and-hold revenue

  $ 14,417     $ 11,576     $ 38,179     $ 32,470  

Non-bill-and-hold revenue

    51,267       69,846       146,870       193,035  

Total revenue

  $ 65,684     $ 81,422     $ 185,049     $ 225,505  

 

 

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.

 

 

 

4 )

 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 the date of initial application with the practical expedient election for short-term lease exemption along with the election to not separate lease and non-lease components for all leases.

 

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 four 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, an ROU asset and ROU liability was reported as other noncurrent assets of $1,641 and other current liabilities and other noncurrent liabilities of $370 and $1,271, respectively.

 

8

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

Following are supplemental income statement and cash flow information related to leases at September 30, 2019.

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Operating lease expense

  $ 149     $ 135     $ 427     $ 405  

Short-term lease expense

  $ 73     $ -     $ 165     $ -  

Cash paid for operating leases

  $ 149     $ 135     $ 427     $ 405  

ROU assets obtained in exchange for lease obligations

  $ -     $ -     $ 432     $ -  

Weighted average discount rate

 

4.4% per annum

      N/A    

4.4% per annum

      N/A  

 

Following are supplemental balance sheet information related to leases at September 30, 2019.

 

Operating lease ROU assets:

       

Other noncurrent assets

  $ 1,688  

Total operating lease assets

  $ 1,688  
         

Operating lease liabilities:

       

Other current liabilities

  $ 531  

Other noncurrent liabilities

    1,157  

Total operating lease liabilities

  $ 1,688  

 

Following are maturities of lease liabilities at September 30, 2019.

 

2019

  $ 130  

2020

    595  

2021

    388  

2022

    370  

2023

    319  

2024

    32  

Total

  $ 1,834  

Less: imputed interest

    146  

Present value of lease payments

  $ 1,688  

 

 

 

5 )

INVENTORY

 

The carrying values of inventory were as follows as of:   

 

   

September 30, 2019

   

December 31, 2018

 

At average cost (approximates current cost)

               

Finished goods

  $ 18,283     $ 23,658  

Work in process

    1,480       2,100  

Raw materials and supplies

    30,917       23,909  
      50,680       49,667  

LIFO reserve

    (7,891 )     (10,371 )

Total inventory

  $ 42,789     $ 39,296  

  

9

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)  

 

 

6 )

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 options 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 $322 for the three months ended September 30, 2019 and a loss of $676 for the three months ended September 30, 2018, and a loss of $711 and $3,947 for the nine months ended September 30, 2019 and 2018, respectively.

 

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

 

   

September 30, 2019

   

December 31, 2018

 
   

Contract

Quantity

Short

   

Fair

Value

   

Contract

Quantity

Short

   

Fair

Value

 

Regulated options

    -     $ -       100     $ (484 )

Regulated fixed price future commitments

    10     $ 60       96     $ 187  

 

The margin account maintained with a broker to collateralize these derivative instruments carried an account balance of $128 and $980 at September 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.

 

 

 

7 )

MARKETABLE SECURITIES

 

At September 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 nine months ended September 30, 2019 and 2018, the change in the fair value of equity securities was reported as gain (loss) on marketable securities as a component of net income.

 

10

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

  

AVAILABLE-FOR-SALE DEBT SECURITIES:

 

The following comprises the available-for-sale debt securities balances included within marketable securities in the consolidated balance sheets at the respective dates:

 

   

September 30, 2019

 
   

Adjusted Cost

   

Unrealized Gains

   

Unrealized Losses

   

Fair Value

 

Exchange-traded debt

  $ 1,428     $ 112     $ (5 )   $ 1,535  

Trust preferred stock

    3,676       147       -       3,823  

Total debt securities

  $ 5,104     $ 259     $ (5 )   $ 5,358  

 

   

December 31, 2018

 
   

Adjusted Cost

   

Unrealized Gains

   

Unrealized Losses

   

Fair Value

 

Exchange-traded debt

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

Trust preferred stock

    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 $256 at September 30, 2019, and the aggregate fair value of debt securities with unrealized losses totaled $2,540 at December 31, 2018. FutureFuel had investments in debt securities with a total value of $256 and $187 that were in an unrealized loss position for a greater-than-12-month period at September 30, 2019 and December 31, 2018, respectively. The unrealized loss position for those securities was $5 and $19, respectively, at September 30, 2019 and December 31, 2018.  These unrealized losses are interest rate related and therefore considered temporary. FutureFuel will hold these debt securities as they are fully expected to recover. Both unrealized and realized gains and losses are recognized on the specific identification method. There were no sales of debt securities in 2019 or 2018.

 

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

 

   

September 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       5,358  

Total

  $ 5,104     $ 5,358  

 

   

The unrealized gain (loss) on equity securities held for the three and nine months ended September 30, 2019 were $1,730 and $6,621, respectively, and for the three- and nine- months ended September 2018, $815 and ($5,597), respectively. 

     

11

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

 

 

8 )

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 nine-months ended September 30, 2019 and 2018. 

 

Changes in Accumulated Other Comprehensive Income From Unrealized

 

Gains and Losses on Available-for-Sale Securities

 

Three Months Ended September 30, 2019 and 2018

 

(Net of Tax)

 
   

2019

   

2018

 

Balance at July 1

  $ 199     $ 145  

Other comprehensive income before reclassifications

    1       (21 )

Amounts reclassified from accumulated other comprehensive income

    -       -  

Net current-period other comprehensive income

    1       (21 )

Balance at September 30

  $ 200     $ 124  

 

 

Changes in Accumulated Other Comprehensive Income From Unrealized

 

Gains and Losses on Available-for-Sale Securities

 

Nine Months Ended September 30, 2019 and 2018

 

(Net of Tax)

 
   

2019

   

2018

 

Balance at January 1

  $ (20 )   $ 160  

Other comprehensive income before reclassifications

    220       (36 )

Amounts reclassified from accumulated other comprehensive income

    -       -  

Net current-period other comprehensive income

    220       (36 )

Balance at September 30

  $ 200     $ 124  

 

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

 

12

 

 

 

9 )

 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.

 

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

 

   

Asset

 
           

Fair Value Measurements Using

 
   

Fair Value at

   

Inputs Considered as:

 

Description

 

September 30, 2019

   

Level 1

   

Level 2

   

Level 3

 

Derivative instruments

  $ 60     $ 60     $ -     $ -  

Preferred stock and other equity instruments

  $ 70,225     $ 70,225     $ -     $ -  

Trust preferred stock and exchange-traded debt instruments

  $ 5,358     $ 5,358     $ -     $ -  

 

   

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 and other equity instruments

  $ 75,338     $ 75,338     $ -     $ -  

Trust preferred stock and exchange-traded debt instruments,

  $ 4,550     $ 4,550     $ -     $ -  

 

 

 

10 )

 INTANGIBLE ASSETS

 

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 at September 30, 2019 and December 31, 2018. FutureFuel tests the intangible asset for impairment in accordance with Topic 350, Intangibles-Goodwill and Other

 

13

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)  

 

 

11 )

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

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

 

   

September 30, 2019

   

December 31, 2018

 

Accrued employee liabilities

  $ 2,533     $ 1,253  

Accrued property, franchise, motor fuel and other taxes

    1,860       1,225  

Lease liability, current

    531       -  

Other

    303       264  

Total

  $ 5,227     $ 2,742  

 

 

 

12 )

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, 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

< 2.50:1.0

    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 at September 30, 2019.

 

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

 

14

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)  

 

 

13)

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.

 

 

 

14 )

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.

 

 

 

15 )

INCOME TAX PROVISION

 

The following table summarizes the income tax provision.  

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Income tax provision

  $ 1,014     $ 4,012     $ 2,889     $ 2,336  

Effective tax rate

    13.3 %     29.8 %     15.5 %     4.4 %

 

The effective tax rate for the three-and nine-months ended September 30, 2019 included a benefit from the 2014, 2015, and 2016 income tax audit settlements with the Internal Revenue Service (IRS) and a return to provision true-up. The effective tax rate for the nine months ended September 30, 2019 was also favorably impacted from a retroactive research and development credit for a prior year in a state where FutureFuel does significant business.

 

Comparatively, the effective tax rate for the nine months ended September 30, 2018 reflected the expected tax rate on reported operating income before income tax, including the positive effect of the retroactive reinstatement of the 2017 BTC and Small Agri-biodiesel Producer Tax Credit. The effective tax rate in the nine months ended September 30, 2019 does not reflect these credits as they were not applicable for 2018 or 2019.

 

There were no unrecognized tax benefits at September 30, 2019 and unrecognized tax benefits of $2,804 at December 31, 2018. As mentioned above, the Company settled the 2014, 2015, and 2016 IRS audit through resolution of issues previously provided for as unrecognized tax benefits. 

 

FutureFuel recorded interest and penalties, net, as a component of income tax provision and had accrued balances of $748 and $681 at September 30, 2019 and December 31, 2018, respectively.

 

15

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)  

 

 

16 )

EARNINGS PER SHARE

 

In the three- and nine-months ended September 30, 2019, FutureFuel used the treasury method in computing earnings per share as all shares with participating security holders had vested and thus, the two class method was unnecessary. During 2018, FutureFuel had unvested participating shares and computed earnings per share using the two-class method in accordance with ASC Topic 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 September 30, 2019 or 2018.

 

FutureFuel had shares contingently issuable of 53,405 and 160,218 associated with outstanding service-based restricted stock units for the three- and nine-month periods ended September 30, 2018, respectively. These shares were not included in the earnings per share calculations as the vesting conditions had not been satisfied. There were no outstanding service-based restricted stock units for the three- and nine-months ended September 30, 2019.

 

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

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Numerator:

                               

Net income

  $ 6,622     $ 9,445     $ 15,808     $ 51,322  

Less: distributed earnings allocated to non-vested stock

    -       -       -       -  

Less: undistributed earnings allocated to non-vested restricted stock

    -       (4 )     -       (26 )

Numerator for basic earnings per share

  $ 6,622     $ 9,441     $ 15,808     $ 51,296  

Effect of dilutive securities:

                               

Add: undistributed earnings allocated to non-vested restricted stock

    -       4       -       26  

Less: undistributed earnings reallocated to non-vested restricted stock

    -       (4 )     -       (26 )

Numerator for diluted earnings per share

  $ 6,622     $ 9,441     $ 15,808     $ 51,296  

Denominator:

                               

Weighted average shares outstanding – basic

    43,743,243       43,724,195       43,743,243       43,719,215  

Effect of dilutive securities:

                               

Stock options and other awards

    -       8,725       1,910       6,155  

Weighted average shares outstanding – diluted

    43,743,243       43,732,920       43,745,153       43,725,370  
                                 

Basic earnings per share

  $ 0.15     $ 0.22     $ 0.36     $ 1.17  

Diluted earnings per share

  $ 0.15     $ 0.22     $ 0.36     $ 1.17  

 

Certain options to purchase FutureFuel’s common stock were not included in the computation of diluted earnings per share because they were anti-dilutive in the period. For the three- and nine-months ended September 30, 2019, 50,000 and 30,000 options were excluded on a weighted average basis, respectively. There were no options excluded on this basis for the three-months ended September 30, 2018. The weighted average number of options excluded on this basis was 20,000 for the nine-months ended September 30, 2018.

 

16

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)  

 

 

17 )

SEGMENT INFORMATION

 

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

 

Chemicals

 

FutureFuel’s chemical 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, resulting 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 RINs 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 September 30,

   

Nine Months Ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 

United States

  $ 65,340     $ 81,152     $ 183,606     $ 223,943  

All Foreign Countries

    344       270       1,443       1,562  

Total

  $ 65,684     $ 81,422     $ 185,049     $ 225,505  

 

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

 

17

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)  

 

Summary of business by segment

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Revenue

                               

Custom chemicals

  $ 25,270     $ 23,973     $ 70,935     $ 74,465  

Performance chemicals

    3,376       4,049       10,922       14,165  

Chemicals revenue

    28,646       28,022       81,857       88,630  

Biofuels revenue

    37,038       53,400       103,192       136,875  

Total Revenue

  $ 65,684     $ 81,422     $ 185,049     $ 225,505  
                                 

Segment gross profit (loss)

                               

Chemicals

  $ 8,488     $ 8,898     $ 22,978     $ 24,470  

Biofuels

    (3,026 )     3,755       (10,984 )     33,961  

Total gross profit

    5,462       12,653       11,994       58,431  

Corporate expenses

    (2,187 )     (2,424 )     (6,323 )     (7,795 )

Income before interest and taxes

    3,275       10,229       5,671       50,636  

Interest and other income

    4,404       3,358       13,156       6,688  

Interest and other expense

    (43 )     (130 )     (130 )     (3,666 )

Income tax provision

    (1,014 )     (4,012 )     (2,889 )     (2,336 )

Net income

  $ 6,622     $ 9,445     $ 15,808     $ 51,322  

 

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.

 

18

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)  

 

 

 
18 )

RECENTLY ISSUED ACCOUNTING STANDARDS 

 

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.

 

19

 

 

 

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 and biofuels. Within the chemical 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 September 30,

 
                   

Dollar

   

%

 
   

2019

   

2018

   

Change

   

Change

 

Revenue

  $ 65,684     $ 81,422     $ (15,738 )     (19.3% )

Income from operations

  $ 3,275     $ 10,229     $ (6,954 )     (68.0% )

Net income

  $ 6,622     $ 9,445     $ (2,823 )     (29.9% )

Earnings per common share:

                               

Basic

  $ 0.15     $ 0.22     $ (0.07 )     (31.8% )

Diluted

  $ 0.15     $ 0.22     $ (0.07 )     (31.8% )

Capital expenditures (net of customer reimbursements)

  $ 572     $ 642     $ (70 )     (10.9% )

Adjusted EBITDA

  $ 6,834     $ 13,661     $ (6,827 )     (50.0% )

 

   

Nine Months Ended September 30,

 
                   

Dollar

   

%

 
   

2019

   

2018

   

Change

   

Change

 

Revenue

  $ 185,049     $ 225,505     $ (40,456 )     (17.9% )

Income from operations

  $ 5,671     $ 50,636     $ (44,965 )     (88.8% )

Net income

  $ 15,808     $ 51,322     $ (35,514 )     (69.2% )

Earnings per common share:

                               

Basic

  $ 0.36     $ 1.17     $ (0.81 )     (69.2% )

Diluted

  $ 0.36     $ 1.17     $ (0.81 )     (69.2% )

Capital expenditures (net of customer reimbursements)

  $ 1,446     $ 1,539     $ (93 )     (6.0% )

Adjusted EBITDA

  $ 15,633     $ 63,184     $ (47,551 )     (75.3% )

 

20

 

 

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 utilize 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.

 

Additionally, we invest in marketable securities of certain debt securities (trust preferred stock and exchange-traded debt instruments) and in preferred stock and other equity instruments. The realized and unrealized gains and losses on these marketable securities can fluctuate significantly from period to period. 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 net income, the most directly comparable GAAP performance financial measure, with adjusted EBITDA. 

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Net income

  $ 6,622     $ 9,445     $ 15,808     $ 51,322  

Depreciation

    3,620       2,732       9,092       8,502  

Non-cash stock-based compensation

    21       107       21       321  

Interest and dividend income

    (2,718 )     (2,543 )     (7,830 )     (6,688 )

Non-cash interest expense and amortization of deferred financing costs

    43       43       130       130  

(Gain) loss on disposal of property and equipment

    (22 )     4       (11 )     41  

(Gain) loss on derivative instruments

    (322 )     676       711       3,947  

(Gain) loss on marketable securities

    (1,424 )     (815 )     (5,177 )     3,273  

Income tax provision

    1,014       4,012       2,889       2,336  

Adjusted EBITDA

  $ 6,834     $ 13,661     $ 15,633     $ 63,184  

 

21

 

 

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

 

   

Nine Months Ended September 30,

 
   

2019

   

2018

 

Net cash provided by operating activities

  $ 24,358     $ 79,169  

Benefit for deferred income taxes

    273       3,609  

Interest and dividend income

    (7,830 )     (6,688 )

Income tax provision

    2,889       2,336  

Loss on derivative instruments

    711       3,947  

Change in fair value of derivative instruments

    357       2,290  

Changes in operating assets and liabilities, net

    (5,125 )     (21,479 )

Adjusted EBITDA

  $ 15,633     $ 63,184  

 

22

 

 

Results of Operations 

 

Consolidated

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
                   

Change

                   

Change

 
   

2019

   

2018

   

Amount

   

%

   

2019

   

2018

   

Amount

   

%

 
                                                                 

Revenue

  $ 65,684     $ 81,422     $ (15,738 )     (19.3% )   $ 185,049     $ 225,505     $ (40,456 )     (17.9% )

Volume/product mix effect

                  $ (11,108 )     (13.6% )                   $ (38,678 )     (17.2% )

Price effect

                  $ (4,630 )     (5.7% )                   $ (1,778 )     (0.7% )
                                                                 

Gross profit

  $ 5,462     $ 12,653     $ (7,191 )     (56.8% )   $ 11,994     $ 58,431     $ (46,437 )     (79.5% )

 

Consolidated revenue in the three- and nine-months ended September 30, 2019 decreased $15,738 and $40,456, respectively, compared to the three- and nine-months ended September 30, 2018. This decrease primarily resulted from decreased sales volumes and decreased prices of biodiesel in the three- and nine-month periods ended September 30, 2019. In addition, in the nine-month period ended September 30, 2019, revenue was reduced by lower sales volumes in the chemical segment. Partially reducing the nine-month price effect was prior year rebates paid 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 nine-months ended September 30, 2019 decreased $7,191 and $46,437, respectively, compared to the three- and nine-months ended September 30, 2018. This decrease was primarily from the biofuels 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 were reduced sales volumes and average selling price in the biofuels segment. Additionally, chemical segment sales volumes reduced gross profit in the nine-month period. 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 $322 in the three months ended September 30, 2019 as compared to a loss of $676 in the three months ended September 30, 2018 and a loss of $711 in the nine months ended September 30, 2019, as compared to a loss of $3,947 in the same period of 2018. Additionally, gross profit was favorably impacted in the three- and nine-months ended September 30, 2019, as compared to the three- and nine-months ended September 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 by $557 and $2,480 in the three- and nine-months ended September 30, 2019 as compared to a decrease in gross profit of $623 and $2,621 in the three- and nine-months ended September 30, 2018, respectively.

  

 

Operating Expenses

 

Operating expenses decreased $237 and $1,472 in the three- and nine-months ended September 30, 2019, as compared to the three- and nine-months ended September 30, 2018. This decrease was primarily from reduced compensation expense on accrued bonuses related to the benefit of the 2017 BTC reinstated in the three and nine-month period ended September 30, 2018.

 

 

Income tax provision

 

The effective tax rate for the three-and nine-months ended September 30, 2019 included a benefit from income tax settlements for 2014, 2015, and 2016 Internal Revenue Service audits.  The effective tax rate for the nine-months ended September 30, 2019 was also favorably impacted by a retroactive research and development credit for a prior year in a state where we had significant business.

 

The nine-month period ended September 30, 2018 included the favorable effect of the BTC and Small Agri-biodiesel Producer Tax Credit (2017 BTC which was reinstated in the three months ended March 31, 2018).  These tax credits were not in law in 2019.

 

There were no unrecognized tax benefits at September 30, 2019 and there were unrecognized tax benefits of $2,804 at December 31, 2018. As mentioned in the previous paragraph, we settled the 2014, 2015, and 2016 IRS audits through resolution of issues previously provided for as unrecognized tax benefits.

 

We recorded interest and penalties, net, as a component of income tax provision with accrued balances of $748 and $681 at September 30, 2019 and December 31, 2018, respectively.

 

23

 

 

Net Income

 

Net income for the three- and nine-months ended September 30, 2019 decreased $2,823 and $35,514, respectively, as compared to the same periods in 2018. The decrease in the three-month period resulted primarily from lower sales volumes and lower prices of biodiesel.  The decrease in the nine-month period resulted primarily from the absence of biodiesel tax credits and incentives that benefited the prior year and were not in effect for 2019 and to a lesser extent, lower sales volumes in the chemical segment.

 

 Chemical Segment

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
                   

Change

                   

Change

 
   

2019

   

2018

   

Amount

   

%

   

2019

   

2018

   

Amount

   

%

 
                                                                 

Revenue

  $ 28,646     $ 28,022     $ 624       2.2 %   $ 81,857     $ 88,630     $ (6,773 )     (7.6% )

Volume/product mix effect

                  $ 466       1.7 %                   $ (7,592 )     (8.6% )

Price effect

                  $ 158       0.6 %                   $ 819       0.9 %