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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, 2020

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 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, 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

 

 

 

 

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 7, 2020: 43,743,243  

 

 

 

 

PART I FINANCIAL INFORMATION

   

Item 1. Financial Statements.

 

 

FutureFuel Corp.

Consolidated Balance Sheets

(Dollars in thousands)

 

   

(Unaudited)

         
   

June 30, 2020

   

December 31, 2019

 

Assets

               

Cash and cash equivalents

  $ 187,823     $ 243,331  

Accounts receivable, inclusive of the blenders' tax credit of $16,307 and $97,295 at June 30, 2020 and December 31, 2019, respectively, and net of allowances for bad debt of $53 and $0 at June 30, 2020 and December 31, 2019, respectively

    29,223       110,264  

Accounts receivable – related parties

    312       4,602  

Inventory

    42,183       37,573  

Income tax receivable

    27,442       8,062  

Prepaid expenses

    1,150       1,932  

Prepaid expenses – related parties

    12       12  

Marketable securities

    62,095       73,620  

Other current assets

    4,228       1,493  

Total current assets

    354,468       480,889  

Property, plant and equipment, net

    95,348       98,597  

Intangible assets

    1,408       1,408  

Other noncurrent assets

    5,622       5,611  

Total noncurrent assets

    102,378       105,616  

Total Assets

  $ 456,846     $ 586,505  

Liabilities and Stockholders’ Equity

               

Accounts payable, inclusive of the blenders' tax credit rebates due customers of $6,802 and $39,423

  $ 31,503     $ 61,299  

Accounts payable – related parties

    1,475       1,255  

Deferred revenue – short-term

    3,427       5,237  

Dividends payable

    5,249       10,498  

Accrued expenses and other current liabilities

    6,982       4,410  

Accrued expenses and other current liabilities – related parties

    -       64  

Total current liabilities

    48,636       82,763  

Deferred revenue – long-term

    22,442       21,291  

Noncurrent deferred income tax liability

    13,620       12,965  

Other noncurrent liabilities

    2,204       2,388  

Total noncurrent liabilities

    38,266       36,644  

Total liabilities

    86,902       119,407  

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 June 30, 2020 and December 31, 2019

    4       4  

Accumulated other comprehensive income

    133       296  

Additional paid in capital

    282,215       282,166  

Retained earnings

    87,592       184,632  

Total stockholders’ equity

    369,944       467,098  

Total Liabilities and Stockholders’ Equity

  $ 456,846     $ 586,505  

 

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

 

 

1

 

 

 FutureFuel Corp.

Consolidated Statements of Operations and Comprehensive Income

(Dollars in thousands, except per share amounts)

(Unaudited)

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Revenue

 $47,310  $70,076  $99,682  $117,498 

Revenue – related parties

  112   788   822   1,867 

Cost of goods sold

  43,469   61,501   76,250   101,566 

Cost of goods sold – related parties

  1,342   4,063   3,557   7,859 

Distribution

  1,657   1,994   3,297   3,319 

Distribution – related parties

  43   36   90   89 

Gross profit

  911   3,270   17,310   6,532 

Selling, general, and administrative expenses

                

Compensation expense

  724   620   1,579   1,335 

Other expense

  403   547   985   1,048 

Related party expense

  155   130   303   259 

Research and development expenses

  768   788   1,603   1,494 

Total operating expenses

  2,050   2,085   4,470   4,136 

(Loss) income from operations

  (1,139)  1,185   12,840   2,396 

Interest and dividend income

  1,519   2,750   3,486   5,112 

Interest expense

  (31)  (44)  (87)  (87)

Gain (loss) on marketable securities

  1,573   826   (8,486)  3,753 

Other income (expense)

  8,348   (113)  8,348   (113)

Other income

  11,409   3,419   3,261   8,665 

Income before taxes

  10,270   4,604   16,101   11,061 

Income tax (benefit) provision

  (4,889)  917   (18,101)  1,875 

Net income

 $15,159  $3,687  $34,202  $9,186 
                 

Earnings per common share

                

Basic

 $0.35  $0.08  $0.78  $0.21 

Diluted

 $0.35  $0.08  $0.78  $0.21 

Weighted average shares outstanding

                

Basic

  43,743,243   43,743,243   43,743,243   43,743,243 

Diluted

  43,743,740   43,743,243   43,743,491   43,746,109 
                 

Comprehensive income

                

Net income

 $15,159  $3,687  $34,202  $9,186 

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

  190   22   (207)  278 

Income tax effect

  (40)  (5)  44   (59)

Total other comprehensive income (loss), net of tax

  150   17   (163)  219 

Comprehensive income

 $15,309  $3,704  $34,039  $9,405 

  

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

 

2

 

 

FutureFuel Corp.

Consolidated Statements of Stockholders’ Equity

(Dollars in thousands)

(Unaudited)

 

  

For the Six Months Ended June 30, 2020

 
          

Accumulated

             
          

Other

  

Additional

      

Total

 
  

Common Stock

  

Comprehensive

  

Paid-in

  

Retained

  

Stockholders’

 
  

Shares

  

Amount

  

Income (Loss)

  

Capital

  

Earnings

  

Equity

 

Balance - December 31, 2019

  43,743,243  $4  $296  $282,166  $184,632  $467,098 

Prior period adjustment: change in accounting principle

  -   -   -   -   (12)  (12)

Balance – January 1, 2020, As adjusted

  43,743,243  $4  $296  $282,166  $184,620  $467,086 

Cash dividends declared, $3.00 per share

  -   -   -   -   (131,230)  (131,230)

Stock based compensation

  -   -   -   49   -   49 

Other comprehensive loss

  -   -   (313)  -   -   (313)

Net income

  -   -   -   -   19,043   19,043 

Balance - March 31, 2020

  43,743,243  $4  $(17) $282,215  $72,433  $354,635 

Other comprehensive income

  -   -   150   -   -   150 

Net income

  -   -   -   -   15,159   15,159 

Balance - June 30, 2020

  43,743,243  $4  $133  $282,215  $87,592  $369,944 

 

 

   

For the Six Months Ended June 30, 2019

 
                   

Accumulated

                         
                   

Other

   

Additional

           

Total

 
   

Common Stock

   

Comprehensive

   

Paid-in

   

Retained

   

Stockholders’

 
   

Shares

   

Amount

   

Income (Loss)

   

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  

 

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

 

3

 

 

FutureFuel Corp.

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited)

 

  

Six Months Ended June 30,

 
  

2020

  

2019

 

Cash flows from operating activities

        

Net income

 $34,202  $9,186 

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

        

Depreciation

  5,862   5,602 

Amortization of deferred financing costs

  60   72 

Benefit for deferred income taxes

  699   (445)

Change in fair value of equity securities

  7,405   (4,891)

Change in fair value of derivative instruments

  198   (297)

Loss on the sale of investments

  1,080   1,138 

Stock based compensation

  49   - 

Loss on disposal of property and equipment

  2   11 

Noncash interest expense

  27   14 

Changes in operating assets and liabilities:

        

Accounts receivable

  81,029   (5,347)

Accounts receivable – related parties

  4,290   1,814 

Inventory

  (4,610)  3,180 

Income tax receivable

  (19,380)  1,336 

Prepaid expenses

  782   712 

Prepaid expenses – related parties

  -   12 

Other assets

  350   539 

Accounts payable

  (29,702)  958 

Accounts payable – related parties

  220   (1,248)

Accrued expenses and other current liabilities

  2,572   688 

Accrued expenses and other current liabilities – related parties

  (64)  - 

Deferred revenue

  (659)  591 

Other noncurrent liabilities

  (211)  (98)

Net cash provided by operating activities

  84,201   13,527 

Cash flows from investing activities

        

Collateralization of derivative instruments

  (2,877)  908 

Purchase of marketable securities

  (2,359)  (14,323)

Proceeds from the sale of marketable securities

  5,192   17,682 

Proceeds from the sale of property and equipment

  50   13 

Capital expenditures

  (2,759)  (4,659)

Net cash used in investing activities

  (2,753)  (379)

Cash flows from financing activities

        

Loan proceeds

  8,180   - 

Payment on loan

  (8,180)  - 

Deferred financing costs

  (477)  - 

Payment of dividends

  (136,479)  (5,249)

Net cash used in financing activities

  (136,956)  (5,249)

Net change in cash and cash equivalents

  (55,508)  7,899 

Cash and cash equivalents at beginning of period

  243,331   214,972 

Cash and cash equivalents at end of period

 $187,823  $222,871 
         

Cash paid for interest

 $1  $- 

Cash paid for income taxes

 $639  $898 

Noncash investing and financing activities:

        

Noncash capital expenditures

 $94  $108 

Noncash operating leases

 $-  $432 

 

The accompanying notes are an integral part of these consolidated 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 composed 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. 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 unaudited consolidated financial statements have been prepared by FutureFuel in accordance and consistent with the accounting policies stated in FutureFuel’s 2019 audited consolidated financial statements and should be read in conjunction with the 2019 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 unaudited consolidated 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 one dollar per gallon tax credit to the blender of biomass-based diesel with at least 0.1% petroleum-based diesel fuel. 

 

The Further Consolidated Appropriations Act of 2020 was passed by Congress and signed into law on December 20, 2019, retroactively reinstating the BTC for 2018 and 2019 and extending it through December 31, 2022. As this act was passed into law in 2019, the Company recognized its impact in the last quarter of 2019 for both periods (2018 and 2019) within the Company’s 2019 financial results. Rebates to customers are recorded as a reduction of revenue.  The Company records the BTC as a reduction to cost of goods sold.

 

5

 

 Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)  

 

 

As the law from which the BTC mentioned above 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 Company was eligible for this credit and recognized its benefit in the three months ended December 31, 2019 and in the three and six months ended June 30, 2020 as part of the tax provision.

 

 

3 )

REVENUE RECOGNITION

 

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. 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 chemicals segment customers and 2 to 10 days for biofuels segment customers.

 

Certain of FutureFuel custom chemical contracts within the chemicals 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. If the customer is deemed to take control of the inventory prior to pick up, the Company recognizes the revenue as a bill-and-hold transaction in accordance with Topic 606. FutureFuel applies 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 estimates 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.

 

 

Contract Assets and Liabilities:

 

Contract assets consist of unbilled and undelivered amounts typically resulting from revenue recognized through bill-and-hold arrangements. The contract assets at June 30, 2020 and December 31, 2019 consist of unbilled revenue from one customer and are recorded as accounts receivable in the consolidated balance sheets. Contract liabilities consist of advance payments related to material rights recorded as deferred revenue in the consolidated balance sheets. Increases to contract liabilities from cash received for a performance obligation of chemicals segment plant expansions were $1,051 and $1,471, and $3,358 and $2,909, for the three and six months ended June 30, 2020 and 2019, respectively. Contract liabilities are reduced as the Company transfers product to the customer under the renewal option approach. Revenue recognized in the chemicals segment from the contract liability reductions were $2,579 and $857 for the three months, and $3,906 and $2,208 for the six months ended June 30, 2020 and 2019, respectively. These contract asset and liability balances are reported on the consolidated balance sheets on a contract-by-contract basis at the end of each reporting period.  Included in the three months ended June 30, 2020, was the acceleration of the recognition of the remaining material right related to a customer contract which effectively ends December 31, 2020 for which all product shipments have been fulfilled.  The amortization of this customer contract liability was $2,909 and $89, for the three months ended June 30, 2020 and 2019, respectively; $3,452 and $570, for the six months ended June 30, 2020 and 2019, respectively. 

 

6

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

 

The following table provides the balances of receivables, contract assets, and contract liabilities from contracts with customers.

 

Contract Assets and Liabilities

 

June 30, 2020

  

December 31, 2019

 

Trade receivables, included in accounts receivable*

 $11,738  $11,902 

Contract assets included in accounts receivable

  1,104   1,067 

Contract liabilities, included in Deferred revenue - short-term

  3,220   5,030 

Contract liabilities, included in Deferred revenue - long-term

  18,414   17,151 

 

*Exclusive of the BTC of $16,307 and $97,295, respectively, and net of allowances for bad debt of $53 and $0 as of the dates noted.

 

Transaction price allocated to the remaining performance obligations:

 

At June 30, 2020, approximately $21,634 of revenue is expected to be recognized from remaining performance obligations. FutureFuel expects to recognize this revenue ratably with product sold over the expected term of its long-term contracts which range from four to six years. Approximately 15% of this revenue is expected to be recognized over the next 12 months, and 85% is expected to be recognized between years two and six. 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 applies the practical expedient in ASC 606-10-50-14 and excludes 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.

 

The following tables provide revenue from customers disaggregated by the type of arrangement and by the timing of the recognized revenue.

 

Disaggregation of revenue - contractual and non-contractual:

 

  

Three months ended June 30,

  

Six months ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Contract revenue from customers with > 1 year arrangements

 $4,909  $11,721  $14,523  $27,139 

Contract revenue from customer with < 1 year arrangement

  42,458   59,088   87,887   92,116 

Revenue from non-contractual arrangements

  55   55   111   110 

BTC rebate (customer rebates per Note 2)

  -   -   (2,017)  - 

Total revenue

 $47,422  $70,864  $100,504  $119,365 

 

Timing of revenue:

 

  

Three months ended June 30,

  

Six months ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Bill and hold revenue

 $7,335  $12,006  $17,488  $23,762 

Non-bill and hold revenue

  40,087   58,858   83,016   95,603 

Total revenue

 $47,422  $70,864  $100,504  $119,365 

 

As of June 30, 2020, $4,105 of the three- and six-months bill and hold revenue had not shipped.

 

7

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

  

 

4 )

INVENTORY

 

The carrying values of inventory were as follows as of:   

 

  

June 30, 2020

  

December 31, 2019

 

At average cost (approximates current cost)

        

Finished goods

 $22,844  $22,564 

Work in process

  2,133   2,768 

Raw materials and supplies

  22,193   20,121 
   47,170   45,453 

LIFO reserve

  (4,987)  (7,880)

Total inventory

 $42,183  $37,573 

 

Lower of Cost or Market ("LCM") adjustments are recorded as a decrease in inventory values and an increase in cost of goods sold.  The inventory is relieved at the LCM adjusted cost basis when sold.  There was an LCM adjustment of $530 in the three and six months ended  June 30, 2020.  For the three and six months ended  June 30, 2019, there was no LCM adjustment.

 

 

5 )

DERIVATIVE INSTRUMENTS

 

The Company records all derivative instruments at fair value. Fair value is determined by using the closing prices of the derivative instruments on the New York Mercantile Exchange at the end of an accounting period. Changes in the fair value of derivative instruments are recognized at the end of each accounting period and recorded in the statement of income as a component of cost of goods sold.

 

In order to manage commodity price risk caused by market fluctuations in biofuel prices, future purchases of feedstock used in biodiesel production, physical feedstock, finished product inventories attributed to the process, and other petroleum products purchased or sold, the Company may enter into exchange-traded commodity futures and options contracts. The Company accounts for these derivative instruments in accordance with ASC 815-20-25, Derivatives and Hedging. Under this standard, the accounting for changes in the fair value of a derivative instrument depends upon whether it has been designated as an accounting hedging relationship and, further, on the type of hedging relationship. To qualify for designation as an accounting hedging relationship, specific criteria must be met and appropriate documentation maintained. The Company had no derivative instruments that qualified under these rules as designated accounting hedges in 2020 or 2019. The Company has elected the normal purchase and normal sales exception for certain feedstock purchase contracts and supply agreements. 

 

Realized gains and losses on derivative instruments and changes in fair value of the derivative instruments are recorded in the consolidated statements of operations as a component of cost of goods sold and amounted to a loss of $935 and a gain of $5,922 for the three months and six months ended June 30, 2020, respectively, and a gain of $443 and a loss of $1,033 for the three months and six months ended June 30, 2019, respectively.

 

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

 

  

June 30, 2020

  

December 31, 2019

 
  

Contract

Quantity

Short

  

Fair

Value

  

Contract

Quantity

Short

  

Fair

Value

 

Regulated fixed price future commitments

  415  $(465)  140  $(267)

 

The margin account maintained with a broker to collateralize these derivative instruments carried an account balance of $3,968 and $1,091 at June 30, 2020 and December 31, 2019, 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.

 

8

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

  

 

6 )

MARKETABLE SECURITIES

 

At June 30, 2020 and December 31, 2019, 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. The unrealized gain on equity securities held for the three months ended June 30, 2020 and 2019 were $2,164 and $1,883, respectively. The unrealized (loss) gain on equity securities held for the six months ended June 30, 2020 and 2019 were ($7,405) and $4,891, respectively.

 

Available-for-sale securities:

 

FutureFuel has designated the debt securities as being available-for-sale. The following comprises the available-for-sale debt securities balances included within marketable securities in the consolidated balance sheets at the respective dates:

 

  

June 30, 2020

 
  

Adjusted

Cost

  

Unrealized

Gains

  

Unrealized

Losses

  

Fair

Value

 

Trust preferred stock

 $3,676  $84  $-  $3,760 

Exchange-traded debt

  1,428   86   -   1,514 

Total debt securities

 $5,104  $170  $-  $5,274 

 

  

December 31, 2019

 
  

Adjusted

Cost

  

Unrealized

Gains

  

Unrealized

Losses

  

Fair

Value

 

Trust preferred stock

 $3,676  $250  $-  $3,926 

Exchange-traded debt

  1,428   128   (3)  1,553 

Total debt securities

 $5,104  $378  $(3) $5,479 

 

The aggregate fair value of debt securities with unrealized losses totaled $0 at June 30, 2020 and $151 at December 31, 2019.  Effective January 1, 2020 the Company adopted ASU 2016-13 using the modified retrospective approach. Under ASU 2016-13 the Company evaluates the debt securities for credit losses using the current expected credit loss model (“CECL”). At the date of adoption and at June 30, 2020, the Company held no debt securities with a fair value below adjusted cost, and no evaluation under the CECL model was required.

 

There were no sales of debt securities in the six months ended June 30, 2020 or 2019.

 

The debt securities held at June 30, 2020, had a contractual maturity of greater than ten years.

 

9

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

 

7 )

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 June 30, 2020 and December 31, 2019. 

 

   

Asset (Liability)

 
           

Fair Value Measurements Using

 
   

Fair Value at

   

Inputs Considered as:

 

Description

 

June 30, 2020

   

Level 1

   

Level 2

   

Level 3

 

Derivative instruments

  $ (465 )   $ (465 )   $ -     $ -  

Preferred stock and other equity instruments

  $ 56,821     $ 56,821     $ -     $ -  

Trust preferred stock and exchange-traded debt instruments

  $ 5,274     $ 5,274     $ -     $ -  

 

   

Asset (Liability)

 
           

Fair Value Measurements Using

 
   

Fair Value at

   

Inputs Considered as:

 

Description

 

December 31, 2019

   

Level 1

   

Level 2

   

Level 3

 

Derivative instruments

  $ (267 )   $ (267 )   $ -     $ -  

Preferred stock and other equity instruments

  $ 68,141     $ 68,141     $ -     $ -  

Trust preferred stock and exchange-traded debt instruments

  $ 5,479     $ 5,479     $ -     $ -  

 

 

 

8 )

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 June 30, 2020 and December 31, 2019 FutureFuel tests the intangible asset for impairment in accordance with Topic 350, Intangibles-Goodwill and Other

 

10

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)  

 

 

 

9 )

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities consisted of the following at:   

 

   

June 30, 2020

   

December 31, 2019

 

Accrued employee liabilities

  $ 4,256     $ 2,534  

Accrued property, franchise, motor fuel and other taxes

    2,037       1,226  

Lease liability, current

    392       537  

Other

    297       113  

Total

  $ 6,982     $ 4,410  

 

 

 

10 )

BORROWINGS

 

On March 30, 2020, FutureFuel, with FutureFuel Chemical as the borrower and certain of FutureFuel’s other subsidiaries as guarantors, amended and restated its credit agreement (the “Credit Agreement”) originally entered into on April 16, 2015 (as amended, the “Prior Credit Agreement”) with the lenders party, Regions Bank as administrative agent and collateral agent, and PNC Bank, N.A., as syndication agent. The Credit Agreement consists of a five-year revolving credit facility in a dollar amount of up to $100,000, 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 March 30, 2025.  The primary amendments from the Prior Credit Agreement were a reduction in the facility by $65,000, a reduction in the facility’s applicable interest rate by 0.25%, a reduction in the commitment fee, and elimination of the minimum consolidated fixed charge coverage ratio.

 

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

 1.00% 0.00% 0.15% 

≥ 1.00:1.0

And

< 1.50:1.0

 1.25% 0.25% 0.15% 

≥ 1.50:1.0

And

< 2.00:1.0

 1.50% 0.50% 0.20% 

≥ 2.00:1.0

And

< 2.50:1.0

 1.75% 0.75% 0.20% 

≥ 2.50:1.0

 2.00% 1.00% 0.25% 

 

 

The terms of the Credit Facility contain certain negative covenants and conditions including a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio.   

 

There were no borrowings under the Credit Agreement at June 30, 2020 or under the Prior Credit Agreement at December 31, 2019.

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted to provide emergency assistance for individuals, families and businesses affected by the coronavirus pandemic. Under the CARES Act, certain subsidiaries of FutureFuel entered into a loan with Saint Louis Bank pursuant to the Paycheck Protection Program (“PPP”) totaling $8,180 on April 10, 2020. At the time that FutureFuel applied for the PPP loan, it qualified to receive the funds pursuant to the then published eligibility requirements. FutureFuel ensured continued operation as part of the nation’s critical infrastructure on the receipt and availability of these funds. However, the Small Business Administration and Treasury Department subsequently issued new guidance that cast doubt on the ability of public companies to qualify for a PPP loan. As a result, FutureFuel paid the full amount of the PPP loan on May 5, 2020. 

 

11

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

 

11 )

INCOME TAX PROVISION

 

The following table summarizes the income tax provision.  

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Income tax (benefit) provision

 $(4,889) $917  $(18,101) $1,875 

Effective tax rate

  (47.6%)  19.9%  (112.4%)  17.0%

 

The effective tax rate for the three and six months ended June 30, 2020 reflects the positive effect of the reinstatement of certain tax credits and incentives for 2020, the most significant of which were the BTC and Small Agri-biodiesel Producer Tax Credit. The BTC and Small Producer Agri-biodiesel Producer Credit were retroactively extended for 2018 and 2019 on December 20, 2019 and further extended through December 31, 2022. On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) (“CARES Act”). The CARES Act provides that Net Operating Losses (“NOLs”) arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 shall be treated as a carryback to each of the 5 preceding taxable years unless the taxpayer elects to forego the carryback. This enacted NOL provision had a positive effect on the effective tax rate for the three and six months ended June 30, 2020 as FutureFuel will be able to carryback its 2019 federal NOL to a year with a higher tax rate rather than forward to a year with a lower tax rate.

 

The effective tax rate for the three and six months ended June 30, 2019 reflects the unfavorable effect of the BTC and Small Producer Agri-biodiesel Producer Credit not being in the law for the first six months of 2019. The six months ended June 30, 2019 rate was also favorably impacted from a retroactive research and development credit for 2018 in a state where FutureFuel does significant business.

 

There were no unrecognized tax benefits at June 30, 2020 or December 31, 2019.

 

FutureFuel recorded interest and penalties, net, as a component of income tax provision and had accrued balances of $13 and ($557) at June 30, 2020 and December 31, 2019, respectively.

 

 

 

12 )

EARNINGS PER SHARE

 

In the three and six months ended June 30, 2020 and 2019, FutureFuel used the treasury method in computing earnings per share.

 

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

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Numerator:

                

Net income

 $15,159  $3,687  $34,202  $9,186 

Numerator for diluted earnings per share

 $15,159  $3,687  $34,202  $9,186 

Denominator:

                

Weighted average shares outstanding – basic

  43,743,243   43,743,243   43,743,243   43,743,243 

Effect of dilutive securities:

                

Stock options and other awards

  497   -   248   2,866 

Weighted average shares outstanding – diluted

  43,743,740   43,743,243   43,743,491   43,746,109 
                 

Basic earnings per share

 $0.35  $0.08  $0.78  $0.21 

Diluted earnings per share

 $0.35  $0.08  $0.78  $0.21 

 

For the three and six months ended June 30, 2020, 50,000 and 62,000 options were excluded on a weighted average basis respectively, as these options were anti-dilutive in the computation of diluted earnings per share. For the three and six months ended June 30, 2019, 40,000 and 20,000 options were excluded on a weighted average basis, respectively.

 

12

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)  

 

 

 

13 )

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 by FutureFuel from these related parties.

 

 

 

14 )

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 composed 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; the sale of petrodiesel with no biodiesel added; the sale of internally generated, separated Renewable Identification Numbers (“RINs”); the sale of 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.

 

13

 

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,

 
  

2020

  

2019

  

2020

  

2019

 

Revenue

                

Custom chemicals

 $18,041  $21,965  $41,801  $45,665 

Performance chemicals

  4,797   3,894   8,730   7,546 

Chemicals revenue

  22,838   25,859   50,531   53,211 

Biofuels revenue

  24,584   45,005   49,973   66,154 

Total Revenue

 $47,422  $70,864  $100,504  $119,365 
                 

Segment gross profit (loss)

                

Chemicals

 $7,577  $7,181  $15,591  $14,490 

Biofuels

  (6,666)  (3,911)  1,719   (7,958)

Total gross profit

 $911  $3,270  $17,310  $6,532 

 

Depreciation is allocated to segment cost 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.

 

 

 

15 )

SPECIAL CASH DIVIDEND

 

On March 23, 2020, the Company declared a special cash dividend of $3.00 per share on common stock in the amount of $131,230 that was paid on April 17, 2020.

 

 

 

16 )

RECENTLY ISSUED ACCOUNTING STANDARDS

 

Recently Adopted Accounting Standards  

 

In the first quarter of 2020, the Company adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" and the associated ASUs (collectively “Topic 326”) on a modified retrospective approach. The amendments replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company recorded a $12 reduction to opening retained earnings and an allowance for bad debt of $12 on our consolidated financial statements.

 

Recently Issued Accounting Standards Not Adopted  

 

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." The amendments simplify the accounting for income taxes by removing certain exceptions to the general principles of Topic 740, "Income Taxes" and improve consistent application by clarifying and amending existing guidance. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, with the amendments to be applied on a retrospective, modified retrospective or prospective basis, depending on the specific amendment. The Company is currently evaluating the impact of adopting this guidance. 

 

14

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)  

Other

 

ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.  Effective March 12, 2020, the guidance in the update is in response to concerns about structural risks of interbank offered rates (IBORs), and, particularly, the risk of cessation of the London Interbank Offered Rate (LIBOR). Regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. This guidance will ease the accounting burden associated with transitioning away from reference rates that are expected to be discontinued within our credit facility as described in Note 10.

 

 

 

17 )

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. 

 

During the three months ended June 30, 2020, the Company reached a legal resolution of a prior year contractual matter for which an accrual of $8,350 was relieved as other income. 

 

15

 
 

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

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations of FutureFuel Corp. (“FutureFuel”, “the Company”, “we”, or “our”) 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.

 

Unless otherwise stated, all dollar amounts are in thousands. 

 

Overview

 

Our Company is managed and reported in two reporting segments: chemicals and biofuels. Within the chemicals segment are two product groupings: custom chemicals and performance chemicals. The custom product group is composed of specialty chemicals manufactured for a single customer whereas the performance chemical product group is composed of chemicals manufactured for multiple customers. The biofuels segment is composed 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.

 

Coronavirus Disease 2019 (“COVID-19”)

 

In March 2020, the World Health Organization categorized COVID-19 as a pandemic. COVID-19 continues to spread throughout the United States and other countries across the world, and the duration and severity of its effects remain unknown. Our priority remains to protect the well-being of our employees, support our customers, obtain materials from our suppliers, and maintain our manufacturing operations. We have been able to continue supplying our products to our customers to date, however, some customers have reduced their near-term demand.  We have also been able to find alternative sources for raw materials and inputs to meet our near-term supply requirements. 

 

We continue to closely monitor the impact of COVID-19 on all aspects of our business, including its impact on our customers, employees, and suppliers. The extent to which COVID-19 impacts our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and are difficult to predict; these developments include, but are not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or address its impact, U.S. and foreign government actions to respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.

 

Because the magnitude and duration of the COVID-19 pandemic and its economic consequences are unclear, the pandemic’s impact on our performance is difficult to predict. The three principle areas we anticipate COVID-19 to negatively impact our financial performance are our customer demand, our ability to procure raw materials and inputs from suppliers, and our ability to operate our manufacturing facility.

 

Customer Demand – Several of our major chemical customers sell the products we produce for them in markets that have been significantly impacted by COVID-19. The energy and automotive markets in particular have drastically been impacted starting in April which we anticipate will reduce chemicals segment revenue the remainder of the year based on current estimates. Low diesel prices and a Renewable Identification Number (RIN) market that has stagnated on uncertainty of required mandates has similarly reduced the value of our finished product. The duration of this impact of COVID-19 is clearly difficult to forecast.  We currently expect these markets to recover over time. However, the speed at which these market sectors rebound is highly uncertain and will be determined by reopening of economies and restoration of consumer confidence. 

 

Supply Chain Impact – Supplier shutdowns may result in raw material or input shortages and negatively impact our ability to manufacture products and meet our customers’ demand. In our biofuels segment, we are seeing significant contraction among many of our feedstock suppliers. Closures and idling of restaurants (used cooking oil source), ethanol plants (corn oil source), rendering and poultry plants (tallow and grease source) have impacted our traditional supply chain. In addition, supply shortages may impact the timing of when customer facilities reopen and/or increase production and the speed at which customers ramp up production, negatively impacting demand for our products. Lower demand increases the risk that certain suppliers may face financial issues, potentially impacting their ability to supply.

 

16

 

Operations Impact - Our manufacturing is generally considered critical services and our plant remains open to meet customer demand. In an effort to contain the spread of COVID-19, maintain the well-being of our employees, ensure compliance with governmental requirements or respond to declines in demand from customers, we have had, where possible, employees work from home and temporarily closed portions of our offices.  We continue to take actions to help prevent the spread of COVID-19 at work including social distancing, expanding cleaning and sanitization, adjusting work hours and temperature checks. To date we have had no negative impact on our ability to operate the plant safely and in a way that meets our customers’ demands.

 

Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts on our financial condition and results of operations. For more information on the risks associated with COVID-19, refer to Part II, Item 1A, "Risk Factors" herein.

 

 

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

   

%

 
   

2020

   

2019*

   

Change

   

Change

 

Revenue

  $ 47,422     $ 70,864     $ (23,442 )     (33.1 %)

(Loss) income from operations

  $ (1,139 )   $ 1,185     $ (2,324 )     (196.2 %)

Net income

  $ 15,159     $ 3,687     $ 11,472       311.1 %

Earnings per common share:

                               

Basic

  $ 0.35     $ 0.08     $ 0.27       337.5 %

Diluted

  $ 0.35     $ 0.08     $ 0.27       337.5 %

Capital expenditures (net of customer reimbursements)

  $ 563     $ 451     $ 112       24.8 %

Adjusted EBITDA

  $ 2,652     $ 3,514     $ (862 )     (24.5 %)

 

   

Six Months Ended June 30,

 
                   

Dollar

   

%

 
   

2020

   

2019*

   

Change

   

Change

 

Revenue

  $ 100,504     $ 119,365     $ (18,861 )     (15.8 %)

Income from operations

  $ 12,840     $ 2,396     $ 10,444       435.9 %

Net income

  $ 34,202     $ 9,186     $ 25,016       272.3 %

Earnings per common share:

                               

Basic

  $ 0.78     $ 0.21     $ 0.57       271.4 %

Diluted

  $ 0.78     $ 0.21     $ 0.57       271.4 %

Capital expenditures (net of customer reimbursements)

  $ 1,133     $ 874     $ 259       29.6 %

Adjusted EBITDA

  $ 12,829     $ 8,929     $ 3,900       43.7 %

 

* Prior year amounts have been restated for comparison.

 

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.

 

17

 

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.  This measure isolates 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 June 30,

   

Six Months Ended June 30,

 
   

2020

    2019*     2020     2019*  

Net income

  $ 15,159     $ 3,687     $ 34,202     $ 9,186  

Depreciation

    2,858       2,877       5,862       5,602  

Non-cash stock-based compensation

    -       -       49       -  

Interest and dividend income

    (1,519 )     (2,750 )     (3,486 )     (5,112 )

Non-cash interest expense and amortization of deferred financing costs

    31       44       87       87  

Losses on disposal of property and equipment

    -       8       2       11  

(Gain) loss on derivative instruments

    935       (443 )     (5,922 )     1,033  

Loss (gain) on marketable securities

    (1,573 )     (826 )     8,486       (3,753 )

Other income

    (8,350 )     -       (8,350 )     -  

Income tax (benefit) provision

    (4,889 )     917       (18,101 )     1,875  

Adjusted EBITDA

  $ 2,652     $ 3,514     $ 12,829     $ 8,929  

 

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

 

   

Six Months Ended June 30,

 
   

2020

    2019*  

Net cash provided by operating activities

  $ 84,201     $ 13,527  

Benefit for deferred income taxes

    (699 )     445  

Interest and dividend income

    (3,486 )     (5,112 )

Income tax (benefit) provision

    (18,101 )     1,875  

(Gain) loss on derivative instruments

    (5,922 )     1,033  

Change in fair value of derivative instruments

    (198 )     297  

Change in operating assets and liabilities, net

    (34,617 )     (3,137 )

Other income

    (8,350 )     -  

Other

    1       1  

Adjusted EBITDA

  $ 12,829     $ 8,929  

 

*Prior year amounts have been restated for comparison

 

18

 

Results of Operations 

 

Consolidated

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
                   

Change

                   

Change

 
   

2020

   

2019

   

Amount

   

%

   

2020

   

2019

   

Amount

   

%

 
                                                                 

Revenues

  $ 47,422     $ 70,864     $ (23,442 )     (33.1 %)   $ 100,504     $ 119,365     $ (18,861 )     (15.8 %)

Volume/product mix effect

                  $ (6,980 )     (9.8 %)                   $ 5,782       4.8 %

Price effect

                  $ (16,462 )     (23.2 %)                   $ (24,643 )     (20.6 %)
                                                                 

Gross profit

  $ 911     $ 3,270     $ (2,359 )     (72.1 %)   $ 17,310     $ 6,532     $ 10,778       165.0 %

 

 

Consolidated revenue in the three and six months ended June 30, 2020, decreased $23,442 and $18,861, compared to the three and six months ended June 30, 2019. The decrease in the three months ended June 30, 2020 primarily resulted from lower selling prices in the biofuel segment of $19,473 which was negatively impacted by supply demand imbalance and lower sales volume in the chemical segment of $6,032 from an agrochemical product we no longer make.  The decrease in the six months ended June 30, 2020 primarily resulted from lower prices in the biofuel segment of $27,116 and lower sales volume in the chemical segment of $5,153.  Partially offsetting this decrease in the six-month comparison period was higher sales volumes in the biofuels segment of $10,935 given the favorable market conditions with the reinstatement of the blenders' tax credit ("BTC").

 

Gross profit in the three months ended June 30, 2020 decreased $2,359 compared to the three months ended June 30, 2019. This decrease was driven by lower prices in the biofuels segment and lower volumes in both the chemicals and biofuels segments resulting from reduced demand from the weakened global fuel market and the impact of the COVID-19 pandemic as well as an agrochemical product we no longer make.  Gross profit was also reduced by the change in the unrealized and realized activity in derivative instruments with a loss of $935 in the three months ended June 30, 2020 and a gain of $443 in the three months ended June 30, 2019. 

 

Gross profit in the six months ended June 30, 2020 increased $10,778 compared to the six months ended June 30, 2019.  This increase primarily resulted from: i) the BTC being in effect for the current period versus not being in effect in the prior six-month period; and ii) the change in the unrealized and realized activity in derivative instruments with a gain of $5,922 in the six months ended June 30, 2020 and a loss of $1,033 in the six months ended June 30, 2019.  Also benefiting gross profit in both the three and six months ended June 30, 2020 and 2019 was the adjustment in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting.  In the three months ended June 30, 2020 and 2019, this adjustment increased gross profit $1,575 and $287, respectively.  In the six months ended June 30, 2020 and 2019, this adjustment increased gross profit $2,893 and $1,924, respectively. 

 

Operating Expenses

 

Operating expenses decreased nominally in the three months ended June 30, 2020, as compared to the three months ended June 30, 2019.  In the six months ended June 30, 2020 operating expenses increased $334 as compared to the same period in the prior year.  This increase was primarily from increased compensation expenses.

 

Other Income

 

During the three months ended June 30, 2020, the Company reached a legal resolution of a prior year contractual matter for which an accrual of $8,350 was relieved as other income.

 

Income Tax Provision

 

The effective tax rate for the three months ended June 30, 2020 reflects the positive effect of the reinstatement of certain tax credits and incentives for 2020, the most significant of which were the BTC and Small Agri-biodiesel Producer Tax Credit. The BTC and Small Producer Agri-biodiesel Producer Credit were retroactively extended for 2018 and 2019 on December 20, 2019 and further extended through December 31, 2022. On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) (“CARES Act”). The CARES Act provides that Net Operating Losses (“NOLs”) arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 shall be treated as a carryback to each of the 5 preceding taxable years unless the taxpayer elects to forego the carryback. This enacted NOL provision had a positive effect on the effective tax rate for the three and six months ended June 30, 2020 as FutureFuel will be able to carryback its 2019 federal NOL to a year with a higher tax rate rather than forward to a year with a lower tax rate.

 

19

 

The effective tax rate for the three months ended June 30, 2019 reflects the unfavorable effect of the BTC and Small Producer Agri-biodiesel Producer Credit not being in the law for the first half of 2019. The rate was also favorably impacted from a retroactive research and development credit for a prior year in a state where FutureFuel does significant business.

 

There were no unrecognized tax benefits at June 30, 2020 or December 31, 2019.

 

FutureFuel recorded interest and penalties, net, as a component of income tax provision and had accrued balances of $13 and ($557) at June 30, 2020 and December 31, 2019, respectively.

 

Net Income

 

Net income for the three and six months ended June 30, 2020 increased $11,472 and $25,016, respectively, as compared to the same periods in 2019. This increase resulted primarily from biodiesel tax credits and incentives that were in effect in the three and six months ended June 30, 2020 that were not in effect for 2019 (see Note 2) and tax benefits in effect in the first half of 2020 not in effect for the same period in 2019 (see the income tax provision discussion above).  In the three and six months ended June 30, 2020, income was also benefited by other income from the resolution of a prior year contractual matter. Partially offsetting this increase in the six month period was the unrealized loss on equity securities. 

 

Chemicals Segment

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
                   

Change

                   

Change

 
   

2020

   

2019

   

Amount

   

%

   

2020

   

2019

   

Amount

   

%

 
                                                                 

Revenues

  $ 22,838     $ 25,859     $ (3,021 )     (11.7 %)   $ 50,531     $ 53,211     $ (2,680 )     (5.0 %)

Volume/product mix effect

                  $ (6,032 )     (23.3 %)                   $ (5,153 )     (9.6 %)

Price effect

                  $ 3,011       11.6 %                   $ 2,473       4.6 %
                                                                 

Gross profit

  $ 7,577     $ 7,181     $ 396       5.5 %   $ 15,591     $ 14,490     $ 1,101       7.6 %

 

 

Chemical revenue in the three and six months ended June 30, 2020 decreased $3,021 and $2,680 as compared to the three and six months ended June 30, 2019. Revenue for our custom chemicals (unique chemicals produced for specific customers) for the three and six months ended June 30, 2020 totaled $18,041 and $41,801, a decrease of $3,924 and $3,864 from the same period in 2019. Decreased revenue in the three and six months ended June 30 as compared to the prior three and six-month period were mostly driven by: i) an agrochemical product we no longer manufacture; ii) a slowdown in near-term business in both automotive and energy related applications resulting from COVID-19; and iii) the phase out of a laundry detergent additive. Partially offsetting the decrease of other custom chemical revenue in the three and six months ended June 30, 2020 and 2019 was the change in accelerated amortization of deferred revenue from customer contracts of $1,722 and $1,698, respectively.  This acceleration was primarily from fulfillment of the performance obligation on an herbicide intermediate product we will no longer make.  Performance chemicals (composed of multi-customer products which are sold based on specification) revenue was $4,797 and $8,730 in the three and six months ended June 30, 2020, an increase of $903 and $1,184 from the three and six months ended June 30, 2019. This increase was primarily from product mix on higher prices of glycerin based on a reduced supply of imported material and increased demand given COVID-19.

 

Gross profit for the chemicals segment for the three and six months ended June 30, 2020, increased $396 and $1,101, respectively, when compared to the same periods of 2019. This increase was driven primarily from the acceleration of amortization of deferred revenue from an herbicide intermediate product we will no longer make.  In the three and six months ended June 30, 2020 and 2019, the change in amortization of the deferred revenue from customer contracts increased gross profit of $1,722 and $1,698, respectively.  Partially offsetting this benefit was the unfavorable product mix variance without the production of the agrochemical product and the volume effects of COVID-19 on our business.