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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

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

 

For the fiscal year ended December 31, 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

 

ff20201231_10kimg001.jpg

 

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware  

20-3340900

(State or Other Jurisdiction of Incorporation or Organization) 

(IRS Employer Identification No.)

 

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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No

 

Note —Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

 

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑

 

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

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $302,740,842.

 

Note — If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in this Form.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of March 16, 2021: 43,743,243

 

 

 
 

 

Table of Contents

 

 

Page

Part I

 
   

Item 1. Business.

1

Item 1A. Risk Factors.

15

Item 1B. Unresolved Staff Comments.

28

Item 2. Properties.

28

Item 3. Legal Proceedings.

28

Item 4. Mine Safety Disclosures.

28

   

Part II

29

   

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

29

Item 6. Selected Financial Data.

32

Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.

33

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

46

Item 8. Financial Statements and Supplementary Data.

47

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

77

Item 9A. Controls and Procedures.

77

Item 9B. Other Information.

79

   

Part III

80

   

Item 10. Directors, Executive Officers, and Corporate Governance.

80

Item 11. Executive Compensation.

86

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

94

Item 13. Certain Relationships and Related Transactions, and Director Independence.

96

Item 14. Principal Accountant Fees and Services.

97

   

Part IV

98

   

Item 15. Exhibits and Financial Statement Schedules.

98

Item 16. Summary

99

 

 

 

PART I

 

 

Item 1.

Business

 

General

 

FutureFuel Corp. (sometimes referred to as the “Company,” “we,” “us,” or “our,” and includes our wholly owned subsidiaries) is a Delaware corporation, and, through its wholly-owned subsidiary, FutureFuel Chemical Company, manufactures diversified chemical products, bio-based fuel products, and bio-based specialty chemical products.

 

We are headquartered in St. Louis, Missouri, and our manufacturing operations are conducted at our facility in Batesville, Arkansas. Trading of our common stock on the New York Stock Exchange (“NYSE”) commenced on March 23, 2011 under the symbol “FF”.

 

During 2020, we distributed normal quarterly cash dividends of $0.06 per share and a special dividend of $3.00 per share on our common stock. Additionally, we have declared normal quarterly cash dividends of $0.06 per share on our common stock for the calendar year 2021.

 

Our business is managed in two segments: chemicals and biofuels. The chemicals segment manufactures a diversified listing 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. We have actively worked to develop our chemicals business with new customers in more diversified growth markets. Our specialty chemicals business is based on a solid reputation as a technology-driven, highly reliable, and globally competitive specialty chemicals producer. We retain a strong emphasis on operational excellence, cost control, and efficiency improvements to enable us to compete in the worldwide chemical industry.

 

With respect to our biofuels segment, our plant has a demonstrated capacity near 59 MMgy (million gallons per year) with production of 58 MMgy during 2020 with the reinstatement of the blenders’ tax credit (“BTC”), which strengthened a COVID-19 weakened market for renewable fuel volumes and resulting price declines. In late December 2019, the BTC was retroactively reinstated from its expiry on January 1, 2018 through December 31, 2022. The future production of biodiesel is uncertain and will depend on various factors including: (i) changes in feedstock prices relative to biodiesel prices; (ii) competition from alternative products, such as renewable diesel; (iii) whether government mandates with respect to biodiesel usage remain in effect; (iv) whether certain tax credits with respect to biodiesel production remain in effect; and (v) competitiveness and availability of foreign imports. See the discussion below, including “Risk Factors” beginning at page 15 below.  

 

The COVID-19 pandemic and measures to address the pandemic have significantly reduced domestic demand for gasoline and diesel, thereby reducing demand for 2020 RINs. Renewable Volume Obligations (RVOs) are based on the volume of sales of gasoline and diesel of an obligated party under RFS2. As those volumes decrease, there is a corresponding decrease in the volume of RINs required for RFS compliance. As a result, demand for RINs and the value of RINs going forward is uncertain. Further, it is uncertain how long the impacts of COVID-19 will continue.

 

1

 

Narrative Description of Our Business

`

Principal Executive Offices

 

Our principal executive offices are located at 8235 Forsyth Blvd., 4th Floor, Clayton, Missouri 63105. Our telephone number is (314) 854-8352. FutureFuel Chemical Company’s principal executive offices are located at 2800 Gap Road, Highway 394 South, Batesville, Arkansas 72501-9680. Its telephone number is (870) 698-3000.

 

Plant Location

 

We own approximately 2,200 acres of land six miles southeast of Batesville in north central Arkansas fronting the White River. Approximately 500 acres of the site are occupied with batch and continuous manufacturing facilities, laboratories, and associated infrastructure, including on-site liquid waste treatment. Land and infrastructure are available to support expansion and business growth.

 

Operations

 

For the year ended December 31, 2020, approximately 61% of our revenue was derived from biofuels, 31% from manufacturing specialty chemicals for specific customers (“custom manufacturing”), and 8% of revenues from multi-customer specialty chemicals (“performance chemicals”).

 

Our biofuels business segment primarily involves the production and sale of biodiesel and petrodiesel blends and the buying, selling, and shipping of refined petroleum products on common carrier pipelines. Custom chemicals manufacturing involves producing unique products for strategic customers, generally under long-term contracts. Our custom chemicals manufacturing portfolio includes agrochemicals and intermediates, detergent additives, biocides intermediates, specialty polymers, dyes, stabilizers, and chemicals intermediates. Our performance chemicals product portfolio includes polymer modifiers that enhance stain resistance and dye-ability to nylon and polyester fibers, in addition to several small-volume specialty chemicals and solvents for diverse applications.

 

We are committed to growing our biofuels and chemicals businesses. For the biofuels business segment, we will continue to leverage our technical capabilities and quality certifications, secure local and regional markets, and expand marketing efforts to fleets and regional/national customers. For our chemicals segment, we intend to pursue commercialization of other products, including building block chemicals. While pursuing this strategy, we will continue our efforts to establish a name identity for both segments.

 

Biofuels Business Segment

 

Biofuel Products

 

Our biofuels business segment began in 2005 and primarily produces and sells biodiesel. In addition, we sell petrodiesel in blends with our biodiesel and, from time to time, with no biodiesel added. Finally, we are a shipper of refined petroleum products on common carrier pipelines, and we buy and sell petroleum products to maintain our active shipper status on these pipelines.

 

Biodiesel is a renewable energy product consisting of mono-alkyl esters of fatty acids. The mono-alkyl esters are typically produced from vegetable oil, fat, or grease feedstocks. Biodiesel is used primarily as a blend with petrodiesel (usually 5% (commonly referenced as “B5”) to 20% (commonly referenced as “B20”) by volume). A major advantage of biodiesel is that it can be used in most existing diesel engines and fuel injection equipment in blends up to B20 with no material impact to engine performance. In 1998, Congress approved the use of biodiesel as an Energy Policy Act compliance strategy, which allowed federal, state, and public fleets covered by this Act to meet their alternative fuel vehicle purchase requirements by simply buying biodiesel and burning it in new or existing diesel vehicles in a minimum B20 blend. Finally, biodiesel also benefits from favorable properties compared to petrodiesel (e.g., negligible sulfur content, lower particulate matter, lower greenhouse gas emissions, and a higher cetane number leading to better engine performance and lubrication). See https://afdc.energy.gov/files/pdfs/30882.pdf.

 

2

 

Our technical and operational competency acquired as a supplier of specialty chemicals enabled the development of a flexible manufacturing process, which can use a broad range of feedstock oils, including, but not limited to, soy oil, cottonseed oil, pork lard, poultry fat, inedible corn oil, yellow grease, inedible tallow, choice white grease, used cooking oil, and beef tallow. Our Batesville plant produces biodiesel, which is sometimes referenced as “B100.” A biodiesel blend is currently used in the facility’s diesel fleet and is available for retail sale at the site. We offer B100 and biodiesel blended with petrodiesel (B2, B5, B10, B20, and B50 blends) at our short-term leased storage facility in Little Rock, Arkansas. In addition, we deliver blended product to a small group of customers within our region.

 

Biodiesel Production/Capacity

 

While biodiesel can be made from various renewable sources, the choice of feedstock to be used at any particular facility is determined primarily by the price and availability of each feedstock variety, the yield loss of lower quality feedstock, and the capabilities of the producer’s biodiesel production facility. In addition, the chemical properties of the biodiesel (e.g., cloud point, pour point, and cetane number) depend on the type of feedstock. See EIA, Monthly Biodiesel Production Report, http://www.eia.gov/biofuels/biodiesel/production/biodiesel.pdf.

 

In the United States, the majority of biodiesel historically has been made from domestically produced crude soybean oil due to its widespread availability and ease of processing. Since we started our biodiesel production, the cost of crude soybean oil has increased due in part to its use in biodiesel production and competing food demands. As a result, the biodiesel feedstock market in the United States transitioned from this expensive first-generation soy feedstock to alternative second-generation lower-cost, non-food feedstocks, such as waste vegetable oil, tallow, and inedible corn oil. Our continuous production line produces biodiesel from these second-generation lower-cost feedstocks with high-free fatty acids and has demonstrated a biodiesel production capacity in excess of 58 MMgy.

 

Legislative Incentives

 

Biodiesel production and use in the United States continues to be driven in large part by legislative initiatives at both the federal and state levels.

 

Federal Renewable Fuels Mandate

 

The largest incentive program at this time is the federal mandate enacted by Congress as part of the Energy Policy Act of 2005 (the “2005 Act”). The 2005 Act included a number of provisions intended to spur the production and use of biodiesel. In particular, the 2005 Act’s provisions included biodiesel as part of the minimum volume (i.e., a mandate) of renewable fuels (the “renewable fuels standard” or “RFS”) to be included in the nationwide gasoline and diesel pool. The volume increased each year, from 4 billion gallons per year in 2006 to 16.55 billion gallons per year in 2013. The 2005 Act required the Environmental Protection Agency (the “USEPA”) to publish “renewable fuel obligations” applicable to refiners, blenders, and importers in the contiguous 48 states. The renewable fuel obligations are expressed in terms of a volume percentage of gasoline sold or introduced into commerce and consist of a single applicable percentage that applies to all categories of refiners, blenders, and importers. The renewable fuel obligations are based on estimates that the Energy Information Association provides to the USEPA on the volumes of gasoline it expects will be sold or introduced into commerce. The USEPA released the final rules to implement the RFS on April 10, 2007. Under those rules, the RFS compliance period began on September 1, 2007. No differentiation was made among the various types of renewable fuels (e.g., biodiesel or ethanol).

 

3

 

On December 19, 2007, the Energy Independence and Security Act of 2007 (the “2007 Act”) was enacted which, among other things, expanded the RFS (the “RFS2”). Prior to the enactment of the 2007 Act, the RFS requirement was mostly filled by ethanol. In contrast to the 2005 Act, the 2007 Act provided a renewable fuel standard carve-out specifically applicable to biodiesel. On July 1, 2010, RFS2’s biodiesel requirement became effective, thus requiring that a certain percentage of the diesel fuel consumed in the United States be made from renewable sources. The biomass-based diesel mandate rose annually and reached 2.10 billion gallons per year in 2019. Currently, the mandate is determined by the USEPA in coordination with the U.S. Secretaries of Energy and Agriculture. The last update to the mandate was issued on December 19, 2019, when the USEPA finalized the volume requirements and percentage standards under the RFS2 program for 2020 for cellulosic biofuel, biomass-based diesel, advanced biofuel, and total renewable fuel and for biomass-based diesel for 2021.

 

The following table shows the finalized volume requirement by the USEPA with a modest growth rate in biomass-based diesel.

 

   

Final Renewable Fuel Volumes

 
   

2019

   

2020

   

2021

 

Cellulosic biofuel (million gallons)

    418       593       n/a  

Biomass-based diesel (billion gallons)

    2.10       2.43       2.43  

Advanced biofuel (billion gallons)

    4.92       5.09       n/a  

Renewable fuel (billion gallons)

    19.92       20.09       n/a  

Implied conventional biofuel (billion gallons)

    15       n/a       n/a  

 

 

Units for all volumes are ethanol-equivalent, except for biomass-based diesel volumes, which are expressed as physical gallons.

 

The 2020 biomass-based diesel volume requirement was established in the 2019 final rule (40 CFR 80.1405, December 19, 2019).

 

See https://www.epa.gov/renewable-fuel-standard-program/final-renewable-fuel-standards-2020-and-biomass-based-diesel-volume

 

 

U.S. biomass-based diesel production capacity, of which biodiesel represents a significant amount, exceeded the federal mandate from 2016 through November 2020 as shown in the following chart:

 

image01.jpg

 

 

Biomass Production Source: Total U.S. production of renewable fuels in the RFS2 program broken out by fuel type and category is reported by the USEPA at https://www.eia.gov/biofuels/biodiesel/production/.

 

4

 

Federal Blenders and Producers Credits

 

Biodiesel tax incentives have been provided through various federal statutes, including the 2005 Act and the American Jobs Creation Act, and later, the Emergency Economic Stabilization Act of 2008. The most important of these is the one dollar per gallon BTC applicable to all biodiesel. This credit has lapsed and been reinstated numerous times over the last decade. The BTC was not in place during 2012, 2014, 2015, 2018, and the majority of 2019. For each of these years, the BTC was retroactively reinstated. The longest period of retroactive reinstatement was in late December 2019 which reinstated the credit for 2018 through December 31, 2022 (the longest established period in law).

 

Like the BTC, the small agri-biodiesel credit was not in place for the majority of 2019. The small agri-biodiesel credit provides for an annual tax incentive in the amount of $0.10 per gallon on the first 15 million gallons of qualified agri-biodiesel produced. In late December 2019, the small agri-biodiesel credit was retroactively reinstated from its expiry on January 1, 2018 through December 31, 2022.

 

State Incentives

 

Our review of state statutes reveals that virtually all states provide user or producer incentives for biodiesel, several states provide both types of incentives, and more than 35 states provide incentives to biodiesel producers to build facilities in their states, typically offering tax credits, grants, and other financial incentives. We also are registered in the states of California and Oregon fuel programs, which incentivize the use of low carbon fuels specific to biomass-based diesel. Washington is in the process of implementing a similar program. As we expand our business, we will assess these and other state incentives and determine if we qualify. We will also stay abreast of regulations and update registrations if eligible.

 

Summary

 

We will continue to identify and pursue other legislative incentives to support our business. However, no assurances can be given that we will qualify for any such incentives or, if we do qualify, what the amount of such incentives will be or whether such incentives will continue to be available.

 

5

 

Quality

 

For quality specification purposes, and to qualify for the federal mandate, biodiesel must meet the requirements of American Society for Testing and Materials (“ASTM”) D6751. This specification ensures that blends up to B20 are compatible with diesel engines and associated fuel system hardware. See Status and Issues for Biodiesel in the United States, National Renewable Energy Laboratory, Theresa Alleman, Margo Melendez, and Wendy Dafoe et. al., Feb. 2015. All biodiesel manufactured at our Batesville plant is tested in on-site quality control laboratories and confirmed to meet, and typically exceed, the ASTM D6751 standard.

 

Commercially available biodiesels can contain small amounts of unreacted or partially reacted oils and fats as well as other minor impurities. The unreacted or partially reacted oils and fats are called glycerides. In rare instances, the glycerides and other minor components and impurities can clog engine filters. To address this issue, ASTM D6751 was amended in February 2012 to create two new grades of biodiesel. Grade No. 2 is essentially the specifications in effect before the amendment. Grade No. 1 provides for a maximum total monoglyceride content and a maximum cold soak filterability time and, in theory, would be used where the cloud point of No. 2 biodiesel does not provide adequate assurance of quality. Both grades of biodiesel qualify as “biodiesel” for purposes of the RFS2 mandate. FutureFuel continues to operate under the most recently published version of ASTM D6751, Standard Specifications for Biodiesel Fuel Blend Stock (B100) for Middle Distillate Fuels. All biodiesel made in our continuous process meets the specifications for No. 1 biodiesel.

 

The U.S. biodiesel industry created the BQ-9000 program to address quality issues that arose during the early years of the industry. This program is run by the National Biodiesel Accreditation Committee, which is a cooperative and voluntary program for the accreditation of biodiesel producers and marketers. The program is a quality system-oriented program that includes standards for storage, sampling, testing, blending, shipping, distribution, and fuel management practices. Since the creation and adoption of the BQ-9000 program, the quality of biodiesel in the U.S. market has markedly improved. Our plant has operated as a BQ-9000 accredited production facility since 2006.

 

The ISO 9000 family of standards represents an international consensus on good quality management practices. It consists of standards and guidelines relating to quality management systems and related supporting standards. ISO 9001 provides a set of standardized requirements for a quality management system, regardless of what the user organization does, its size, or whether it is in the private or public sector. It is the only international standard against which organizations can be certified, although certification is not a compulsory requirement of the standard. Our plant is an ISO 9001 accredited production facility for both chemicals and biofuels.

 

Renewable Identification Numbers

 

As noted above, the RFS2 mandates levels of various types of renewable fuels that are to be blended with U.S. gasoline and diesel fuel by U.S. refiners, blenders, and importers. Renewable Identification Numbers (“RINs”) are the mechanism for ensuring that the prescribed levels of blending are reached. As ethanol and biodiesel is produced or imported, the producer or importer has the responsibility to report the activity in the USEPA’s Moderated Transaction System (“EMTS”) where a series of numbers (i.e., a RIN) is assigned to their product. Assignment is made according to guidelines established by the USEPA. Currently, 1½ RINs are assigned for each gallon of biodiesel produced. When biofuels change ownership to the refiners, importers, and blenders of the fuel, the RINs are also transferred. The RINs ultimately are separated from the renewable fuel generally at the time the renewable fuel is blended. The refiners, importers, and blenders generally use the RINs to establish that they have blended their applicable percentage of renewable fuels during the applicable reporting period. However, once the RINs are separated from the underlying biofuels (e.g., by blending the underlying biodiesel with petrodiesel), they can also be sold separate and apart from the underlying biofuels.

 

We generate RINs with our biodiesel. At times, we sell biodiesel with the RIN attached to the fuel. If we blend the biodiesel with petrodiesel in blends of B80 or less (e.g., B5 or B20), we can either sell the RINs with our blended biodiesel or we can sell them as a separate, free-standing instrument removed from the biodiesel. The decision of whether or not to separate the RINs from the blended biodiesel depends on the desires of the customer and market conditions for separated RINs, particularly, market prices. While biodiesel RINs continue to be traded through market makers, no assurances can be given that a separate market for RINs will be sustained or what value will be realized upon the sale of biodiesel RINs.

 

6

 

Byproducts

 

Glycerin

 

A byproduct of the biodiesel process is crude glycerin, which is produced at the rate of approximately 10% by mass of the quantity of biodiesel produced. Countervailing duties levied in 2017 by the U.S. Commerce Department on biodiesel imported from Argentina and Indonesia reduced excess supply of imported glycerin. The U.S glycerin market corrected in 2018 with supply/demand more in balance. Crude glycerin (as generated from biodiesel production) is commonly sold into energy exploration and water treatment markets, the price of which is determined, among other factors, by energy prices, product supply, and corn commodity prices.

 

Crude glycerin can be refined into a pure form and then used in higher value markets such as specialty chemical production, agricultural formulations, food, pharmaceutical, and/or cosmetic applications. We have added the capability to refine our crude glycerin to an industrial grade with higher value applications. We currently market both crude and industrial grade glycerin with our product mix dependent upon refining capacity, product specifications, prices, and other market conditions.

 

Biodiesel Residue

 

An additional byproduct of the biodiesel production process is biodiesel residue. We use distillation columns in our biodiesel production process. Biodiesel residue accumulates in these columns as biodiesel is produced. This is a low-priced commodity that we aggregate and sell to multiple customers, primarily for use in Bunker C #6 Oil and as an asphalt release agent.

 

Biodiesel Production Capacity

 

According to Biodiesel Magazine (December 15, 2020) the United States had a total combined annual capacity of 2,806 million gallons from 105 biodiesel plants. See http://www.biodieselmagazine.com/plants/listplants/USA/. Available plant capacity increased 293 million gallons from 2017. We believe that the biodiesel industry will continue to be highly competitive given the excess capacity.

 

Customers and Markets

 

Biodiesel and biodiesel blends are currently used in nearly all of the end markets where petrodiesel is used. Most biodiesel in the United States is consumed in the on-road diesel fuel market, although some is used for off-road purposes such as farming, residential/commercial heating oil, and power generation.

 

We currently market our biodiesel products by truck, rail, and barge directly to customers in the United States. Through the utilization of liquid bulk storage facilities and barge loading capabilities, we are positioned to market biodiesel throughout the United States mainly for transportation. Although the regional market is still being developed, we estimate that the regional direct market available to us at maturity will be at least 30 million gallons per year.

 

For the twelve months ended December 31, 2020 and 2019, one customer represented approximately 20% and 22% of biofuel revenue (12% and 11% of total revenue). For the twelve months ended December 31, 2018 four customers represented approximately 58% of biofuel revenue (35% of total revenue), with the remaining biofuel revenue spread across multiple other customers. We do not have long term contracts with any biofuels customer, but rather sell on the basis of monthly or short-term, multi-month purchase orders at prices based upon then-prevailing market rates. We do not believe that the loss of any of these customers would have a material adverse effect on our biofuels segment or on us as a whole in that: (i) biofuels are a commodity with a large potential customer base; (ii) we believe that we could readily sell biofuels to other customers; (iii) the prices we receive from these customers are based upon then-market rates; and (iv) our sales to the customers are not under fixed terms, and the customers have no obligation to purchase any minimum quantities except as stipulated by short term purchase orders.

 

7

 

Competition

 

Renewable diesel is a rapidly growing competing biofuel with biodiesel. FutureFuel uses a conventional process of transesterification of feedstocks fats, vegetable oils, or waste cooking oils to make biodiesel. Renewable diesel is produced via hydro-processing of the same feedstocks. Renewable diesel, unlike conventional biodiesel, meets the fuel specification requirements of ASTM D975 (petrodiesel fuel) and ASTM D396 (home heating oil) and can be used as a direct substitute without requiring the need for petrodiesel blending. As a result, renewable diesel trades at a premium price to conventional biodiesel based on fungibility with petrodiesel, better cold weather performance and generation of a higher number of RINS on a per gallon basis.

 

According to the U.S. Department of Energy, five plants produce renewable diesel in the United States, with a combined capacity of nearly 400 million gallons per year. Production is expected to grow in the coming years due to expansions at existing plants and the construction of new plants. The U.S. Energy Information Administration (EIA) does not report renewable diesel production; however, the U.S. Environmental Protection Agency (EPA) reports RFS RIN data, which indicates that the United States consumed over 900 million gallons in 2019. Nearly all domestically produced and imported renewable diesel is used in California due to economic benefits under the Low Carbon Fuel Standard. See https://afdc.energy.gov/fuel/emerging_hydrocarbon.html#:~:text=Five%20plants%20produce%20renewable%20diesel, 400%20million%20gallons%20per%20year.

 

We compete with other producers of biodiesel regionally, nationally, and with foreign imports. The principal methods of competition in the biodiesel industry are price, supply reliability, biodiesel quality, and RIN integrity, i.e., the degree of confidence the market maintains in the validity of a biodiesel producer’s RINs. The ten largest producers in terms of production capacity of biodiesel in the United States in 2020 were Renewable Energy Group, Inc., Marathon and affiliates, World Energy and affiliates, RBF Port Neches, LLC, Cargill and affiliates, Ag Processing, Inc., Louis Dreyfus Agricultural Industries LLC, Hero BX, Archer Daniels Midland Co., and Seaboard Energy and affiliates. See http://www.biodieselmagazine.com/plants/listplants/USA/. These ten producers account for 59% of the total 2.8 billion gallons of production capacity available in 2020. Additionally, we compete with numerous other smaller producers and emerging renewable diesel and cellulosic based biodiesel technologies.

 

We cannot give any assurances that renewable diesel fuel, green diesel, natural gas or some other product produced by these or similar competing technologies will not supplant biodiesel as an alternative to conventional petrodiesel. A significant capital investment would be required for FutureFuel to produce renewable diesel, and the current economics and business uncertainty do not support this level of investment.

 

The biodiesel industry also is in competition with the petroleum-based diesel fuel industry. The biodiesel industry is small relative to the size of the petroleum-based diesel fuel industry, and large petroleum companies have greater resources than we do. Without government incentives and requirements, the consequent impact on processing economics would be uncertain.

 

Supply and Distribution

 

As a result of our feedstock-flexible process, we are able to source feedstock from a broad supplier base, which includes crude corn oil producers, reclaimed used cooking oil, and pork, chicken, and beef rendering facilities from both national and regional suppliers. Crude corn oil has been sourced from several national and regional producers. All feedstocks are currently supplied by either rail or truck. We believe that an adequate supply of feedstocks can be sourced to support our anticipated production.

 

We sell biodiesel from our plant site as well as ship it to liquid bulk storage facilities for further distribution. Sales from our plant site are made by railcar and tank truck. Biodiesel is being delivered by Company-owned tank trucks and common carriers to a liquid bulk storage facility leased by us for distribution there and for further transportation by barge or tank truck.

 

Several biodiesel producers and petroleum refiners are investing in large scale renewable diesel production. These include Neste Corporation with production facilities in Asia and Europe, Valero Corporation through its Diamond Green JV with Darling Ingredients in Norco, Louisiana and World Energy, Paramount California. Greenea reported a six times potential growth in U.S. installed capacity of Renewable Diesel over the next six years. http://www.greenea.com/wp-content/uploads/2021/01/Greenea-Horizon-2030-Which-investments-will-see-the-light-in-the-biofuel-industry-1.pdf

 

8

 

Cyclicality and Seasonality

 

Biodiesel producers have historically experienced seasonal fluctuations in demand for biodiesel. Biodiesel demand has tended to be lower during the winter in northern and Midwestern states due to concerns about biodiesel’s ability to operate optimally in cold weather as compared to petrodiesel. This seasonal fluctuation has been strongest for biodiesel made from animal fats and used cooking oils. Biodiesel made from such feedstocks has a higher cloud point (which is the point at which a fuel begins to gel) than biodiesel produced from vegetable oils, such as soybean, canola, or crude corn oil. This higher cloud point may cause cold weather performance issues.

 

The mandate for biodiesel usage as established by RFS2 may interject an additional seasonal fluctuation in our biodiesel business. Once the mandate for a calendar year is met, or is anticipated to be met, demand for biodiesel may decrease.

 

 

Outlook for the Biodiesel Industry/Our Future Strategy

 

In late December 2019, the BTC was retroactively reinstated from its expiry on January 1, 2018 and extended through December 31, 2022. Based on analysis from industry analysts, the biodiesel industry is entering a new era of transition to alternative feedstocks, emerging technologies, and revised government policies favoring sustainable feedstocks and fuels. Further, it is anticipated that the U.S. market may transition to larger plants, alternative feedstocks and second-generation technologies, resulting in consolidation among smaller, first-generation producers accompanied by a series of mergers and acquisitions in the field. Although it is unclear whether this trend will occur, if it does, we believe that producers who are proactive in responding to these changes can compete with foreign imports and benefit in this emerging market. These responses include: new and improved technologies; alternative feedstocks with higher yields; production scalability and flexibility options; supply chain, distribution and co-location strategies; the sale of RINs separate from the underlying biodiesel; and innovative risk management strategies.

 

Our future strategy for our biofuels segment is geared towards these responses. Notwithstanding our future strategy, our continued production of biodiesel may be severely limited, in part, by our ability to source feedstock given competitive growing renewable diesel markets, or eliminated entirely, in the event Congress eliminates the federal mandate of the RFS2. See “Risk Factors” beginning at page 15 below.

 

Chemicals Business Segment

 

Overview of the Segment

 

Our chemicals segment manufactures diversified chemical products that are sold to third party customers. This segment comprises two components: “custom manufacturing” (manufacturing specialty chemicals for specific customers) and “performance chemicals” (multi-customer specialty chemicals).

 

Chemical Products

 

Custom manufacturing involves producing unique products for strategic customers, generally under long-term contracts. Many of these products are produced under confidentiality agreements in order to protect each company’s intellectual property. This is a service-based business where customers value dependability, regulatory compliance, technical capabilities, responsiveness, product quality, process scale up and improvement, operational safety, and environmental protection. Our custom manufacturing products are manufactured by continuous production, dedicated batch or general-purpose batch mode depending on the volumes required. Management believes that we are a strategic production partner to our key customers in this segment, and our engineering and technology teams collaboratively work together with our customers to further develop the processes and drive continued improvement.

 

Our plant’s custom manufacturing product portfolio includes products that are used in the agricultural chemical, coatings, chemical intermediates, industrial and consumer cleaning, oil and gas, and specialty polymers industries. Historically, our custom manufacturing product portfolio has been highly concentrated on two significant legacy products, namely a laundry detergent additive for a leading consumer products company and a proprietary row crop herbicide. Our current custom manufacturing product portfolio is more diversified into multiple markets including agrochemicals, oilfield chemicals, industrial intermediates, and fabric care markets.

 

Performance chemicals comprise multi-customer products, which are sold based upon specification and/or performance in the end-use application. This portfolio includes a family of polymer (nylon and polyester) modifiers, glycerin products, and several small-volume specialty chemicals and solvents for diverse applications. We have added the capability to refine our crude glycerin to an industrial grade of glycerin for higher value specialty chemical applications.

 

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Future Strategy

 

To build on and maintain our reputation as a technology-driven competitive chemical producer, we believe that we must continuously focus on customer relationship development, cost control, operational efficiency, capacity utilization, operational safety, and environmental protection to maximize earnings. We believe that the ability to use large-scale batch and continuous production processes and a continuous focus on process improvements allows us to compete effectively in the global custom manufacturing market and to remain cost competitive with, and for some products cost-advantaged over, our competitors. We intend to improve margins in this area of our business by careful management of product mix with regard to size of opportunity, timing to market, capital efficiency and matching of opportunities to assets and capabilities. We possess a core competency in chemical processing of bio-based feedstocks, and we believe this, combined with our expertise in specialty chemical synthesis, will position us favorably as a preferred manufacturer of a rapidly growing sustainable products market.

 

Customers and Markets

 

Our chemical products are used in a variety of markets and end uses, including detergent, agrochemical, automotive, oil and gas, coatings, nutrition, and polymer additives. Some of the chemical products can be cyclically driven by changes in energy and agricultural commodity prices. In the case of our custom manufacturing business, the customers are often the “brand owners” and, therefore, control factors related to demand, such as market development, patent expirations and external manufacturing strategy. In such cases, we may be unable to increase or maintain our level of sales revenue for these products.

 

We agreed to extend the supply of our laundry detergent additive to our customer through 2020. However, demand for the laundry detergent additive has continued to decrease, and this customer will not require further production of any of this laundry detergent additive. We believe it is unlikely that there is a profitable market for new customers for this product.

 

No chemical customer represented greater than 10% of total sales revenue in 2020. One of our chemical customers and its affiliates, represented 10% or more of our 2019 and 2018 consolidated sales revenues. This customer represented approximately 22%, and 27% of our chemicals revenue (11% of total revenues each year) in 2019 and 2018, respectively. We sell multiple products to various affiliates of this customer under both long-term and short-term contracts. One product contract was not renewed at December 31, 2020 representing 17%, 10%, and 12% of chemical revenue (7%, 5%, and 5% of total revenue) for 2020, 2019, and 2018, respectively. Another product contract was not renewed at December 31, 2019 representing 15% of chemical revenue in 2019 (7% of total revenue) and 14% of chemical revenue in 2018 (6% of total revenue). We are actively considering new business for the general purpose equipment vacated; however, there is no guarantee if or when we will be successful finding new business.

 

Competition

 

Historically, there have been significant barriers to entry for competitors with respect to specialty chemicals, primarily due to the fact that the relevant technology and manufacturing capability has been held by a small number of companies. As technology and investment have increasingly moved outside of North America, competition from international multi-national chemical manufacturers has intensified, primarily from manufacturers in India and China. We compete with these and other producers primarily based on price, customer service, technology, quality, and reliability. Our major competitors in this segment include large multi-national companies with internal specialty chemical manufacturing divisions and smaller independent producers. The international multi-national competitors are often disadvantaged by poor responsiveness and customer service, while the small producers often have limited technology and financial resources. We believe that we are well positioned for growth due to the combination of our scale of operations, technical capabilities, reputation, and financial strength.

 

Supply and Distribution

 

Specialty chemicals are generally high unit value products sold in packaged, or low-volume bulk form, and for which distribution is a relatively minor component of cost. Most products are sold FOB the Batesville site for distribution globally. Similarly, raw materials for these products are comparatively higher-value components that are sourced globally. An exception is the biofuels co-products, which are recovered from local processing.

 

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Cyclicality and Seasonality

 

Some of the chemical products can be cyclical, driven by changes in energy prices and agricultural commodity prices. For example, demand for chemical products sold into energy exploration and transportation markets is influenced by oil prices. The use of chemical products in agricultural markets likewise is influenced by agricultural commodity prices. Supply and demand dynamics determine profitability at different stages of cycles and global economic conditions affect the length of each cycle. Despite sensitivity to cyclicality in these industries, many of the products in the chemical segment provide stable earnings.

 

Backlog

 

The majority of our chemical revenue is derived from custom manufacturing agreements with specific customers. These customers generally provide us with forecasts of demand on a monthly or quarterly basis. These forecasts are intended to enable us to optimize the efficiency of our production processes and generally are not firm sales orders. As such, we do not monitor or report backlog.

 

Intellectual Property

 

We consider our intellectual property portfolio to be a valuable corporate asset, which we intend to expand and protect globally through a combination of trade secrets, confidentiality and non-disclosure agreements, patents, trademarks, and copyrights. As a producer of a broad and diverse portfolio of chemicals, our intellectual property relates to a wide variety of products and processes acquired through the development and manufacture of over 300 specialty chemicals during the history of the site. Our primary strategy regarding our intellectual property portfolio is to appropriately protect all innovations and know-how in order to provide our business segments with a technology-based competitive advantage wherever possible. In the chemicals business segment, custom manufacturing projects are primarily conducted within the framework of confidentiality agreements with each customer to ensure that intellectual property rights are defined and protected. In the biofuels business segment, innovations and process know-how are vigorously protected as appropriate.

 

As may be necessary, we will seek to license technologies from third parties that complement our strategic business objectives. Neither our business as a whole, nor any particular segment, is materially dependent upon any one particular patent, copyright, or trade secret. As the laws of many foreign countries do not protect intellectual property to the same extent as the laws of the United States, we can make no assurance that we will be able to adequately protect all of our intellectual property assets.

 

Research and Development

 

We devote considerable resources to our research and development programs, which are primarily targeted towards three objectives:

 

 

innovating, developing, and improving biofuels processes, in particular biodiesel and other biofuels, including value-up technology and applications for co-products;

 

developing and improving processes for custom manufacturing products; and

 

innovating, developing, and improving performance chemical products and manufacturing processes.

 

Our research and development capabilities comprise analytical chemistry competencies to assay and characterize raw materials and products, organic chemistry expertise applied across a breadth of reaction chemistries and materials, design and process engineering capabilities for batch and continuous processing of both solid and liquid materials, and proficiency in process safety to design and scale-up safe chemical manufacturing processes. We believe that these core competencies, established in support of the legacy chemical business, are applicable to building a technology-based position in biofuels and associated bio-based specialty products and expanding our performance chemicals product line.

 

Research and development expense incurred by us for the years ended December 31, 2020, 2019, and 2018 were $2,988, $3,191, and $3,524, respectively. Substantially all of such research and development expense are related to the development of new products, services, and processes or the improvement of existing products, services, and processes.

 

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Environmental Matters

 

Various aspects of our operations are subject to regulation by state and federal agencies. Biofuel and chemical operations are subject to numerous, stringent and complex laws and regulations at the federal, state, and local levels governing the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations may:

 

 

require acquisition of permits regarding discharges into the air and discharge of waste waters;

 

place restrictions on the handling and disposal of hazardous and other wastes; and

 

require capital expenditures to implement pollution control equipment.

 

Compliance with such laws and regulations can be costly and noncompliance can result in substantial civil and even criminal penalties. Some environmental laws impose strict liability for environmental contamination, rendering a person liable for environmental damages and cleanup costs without regard to negligence or fault. Moreover, there is strong public interest in the protection of the environment. Our operations could be adversely affected to the extent laws are enacted or other governmental action is taken that imposes environmental protection requirements that result in increased costs to the biofuels and/or chemical manufacturing industry in general. The following provides a general discussion of some of the significant environmental laws and regulations that impact our activities.

 

The federal Comprehensive Environmental Response, Compensation and Liability Act (or “CERCLA”), and analogous state laws, impose joint and several liability, without regard to fault or the legality of the original act, on certain classes of persons that contributed to the release of a hazardous substance into the environment. These persons include the owner and operator of the site where the release occurred, past owners and operators of the site, and companies that disposed of or arranged for the disposal of hazardous substances found at the site. Responsible parties under CERCLA may be liable for the costs of cleaning up hazardous substances that have been released into the environment and for damages to natural resources. Additionally, it is not uncommon for third parties to assert claims for personal injury and property damage allegedly caused by the release of hazardous substances or other pollutants into the environment.

 

The federal Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act (or “RCRA”), is the principal federal statute governing the management of wastes, including the treatment, storage and disposal of hazardous wastes. RCRA imposes stringent operating requirements, and liability for failure to meet such requirements, on a person who is either a generator or transporter of hazardous waste or an owner or operator of a hazardous waste treatment, storage, or disposal facility. Many of the wastes generated in our manufacturing facility are governed by RCRA.

 

The federal Oil Pollution Act of 1990 (or “OPA”) and regulations thereunder impose liability on responsible parties for damages resulting from oil spills into or upon navigable waters, adjoining shorelines, or in the exclusive economic zone of the United States. A responsible party includes the owner or operator of an onshore facility. Spill cleanup liability may not apply if a spill is caused by a party’s gross negligence or willful misconduct, the spill resulted from violation of a federal safety, construction, or operating regulation, or if a party fails to report a spill or to cooperate fully in a clean-up. Failure to comply with OPA’s requirements may subject a responsible party to civil, criminal, or administrative enforcement actions via the Water Pollution Control Act.

 

The federal Water Pollution Control Act (also referred to as the “Clean Water Act”) imposes restrictions and controls on the discharge of pollutants into navigable waters. These controls have become more stringent over the years, and it is possible that additional restrictions may be imposed in the future. Permits must be obtained to discharge pollutants into state and federal waters. The Clean Water Act provides for civil, criminal, and administrative penalties for discharges of oil and other pollutants, and imposes liability on parties responsible for those discharges for the costs of cleaning up any environmental damage caused by the release and for natural resource damages resulting from the release. Comparable state statutes impose liability and authorize penalties in the case of an unauthorized discharge of petroleum or its derivatives, or other pollutants, into state waters.

 

The federal Clean Air Act and associated state laws and regulations restrict the emission of air pollutants from many sources, including facilities involved in manufacturing chemicals and biofuels. New facilities are generally required to obtain permits before operations can commence, and new or existing facilities may be required to incur certain capital expenditures to install air pollution control equipment in connection with obtaining and maintaining operating permits and approvals. Federal and state regulatory agencies can impose administrative, civil, and criminal penalties for non-compliance with permits or other requirements of the Clean Air Act and associated state laws and regulations.

 

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The federal Endangered Species Act, the federal Marine Mammal Protection Act, and similar federal and state wildlife protection laws prohibit or restrict activities that could adversely impact protected plant and animal species or habitats. Manufacturing activities could be prohibited or delayed in areas where such protected species or habitats may be located, or expensive mitigation may be required to accommodate such activities.

 

The Toxic Substances Control Act (TSCA) seeks to reduce risks of injury to health or the environment associated with the manufacture, processing, distribution, use, or disposal of chemical substances. TSCA requires reporting, record-keeping and testing of certain chemicals and restricts use of some chemical substances and/or mixtures. Some substances are excluded from TSCA, including food, drugs, cosmetics and pesticides. Government agencies may initiate regulatory action to label, restrict, or ban a chemical, or to require the submission of additional data needed to determine the risk a chemical may pose. The statute contains enforcement provisions that include both criminal and civil penalties.

 

Our policy is to operate our plant and facilities in a manner that protects the environment and the health and safety of our employees and the public. We intend to continue to make expenditures for environmental protection and improvements in a timely manner consistent with our policies and with the technology available. In some cases, applicable environmental regulations such as those adopted under the Clean Air Act and RCRA, and related actions of regulatory agencies, determine the timing and amount of environmental costs incurred by us.

 

We establish reserves for closure/post-closure costs associated with the environmental and other assets we maintain. Environmental assets include waste management units, such as chemical waste destructors, storage tanks, and boilers. When these types of assets are constructed or installed, a reserve is established for the future costs anticipated to be associated with the closure of the site based on the expected life of the environmental assets, the applicable regulatory closure requirements, and our environmental policies and practices. These expenses are charged into earnings over the estimated useful life of the assets. Currently, we estimate the useful life of each individual asset up to 39 years.

 

In addition to our general environmental policies and policies for asset retirement obligations and environmental reserves, we accrue environmental costs when it is probable that we have incurred a liability and the amount can be reasonably estimated. In some instances, the amount cannot be reasonably estimated due to insufficient data, particularly in the nature and timing of the future performance. In these cases, the liability is monitored until such time that sufficient data exists. With respect to a contaminated site, the amount accrued reflects our assumptions about remedial requirements at the site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, chemical control regulations, and testing requirements could result in higher or lower costs.

 

Our cash expenditures related to environmental protection and improvement were approximately $10,057, $10,024, and $10,940 for the years ended December 31, 2020, 2019, and 2018, respectively, and are included in costs of goods sold in the consolidated statements of income for each period. These amounts pertain primarily to operating costs associated with environmental protection equipment and facilities but also include expenditures for construction and development. While we do not expect future environmental capital expenditures arising from requirements of environmental laws and regulations to materially increase our planned level of annual capital expenditures for environmental control facilities, we can give no assurances that such requirements will not materialize in the future.

 

We believe that we have obtained, in all material respects, the necessary environmental permits and licenses to carry on our operations as presently conducted. We have reviewed environmental investigations of the properties owned by us and believe, on the basis of the results of the investigations carried out to date, that there are no material environmental issues that adversely impact us. In connection with our acquisition of our warehouse in Batesville, the seller agreed to remediate certain environmental conditions existing at the facility on the date that we acquired it and to indemnify us with respect to those environmental conditions. We continue to monitor the seller’s compliance with its remediation obligations.

 

Management Team and Human Capital

 

Our executive management team at the Batesville plant consists of individuals with a combined 90 plus years of experience in the chemicals industry, comprising technical, operational, and business responsibilities. The members of the executive team also have international experience, including assignments in Europe. The operational and commercial management group at the Batesville site includes additional degreed professionals with an average experience of over 25 years in the chemical industry.

 

Our Batesville workforce comprises approximately 470 full-time non-union employees, and includes degreed professionals including chemists (some with PhDs) and engineers (including licensed professional electrical, mechanical, and chemical engineers). Operations personnel have received extensive training and are highly skilled. Additionally, all site manufacturing and infrastructure is fully automated and computer-controlled. Due to the lack of locally-available process industry infrastructure, the workforce is substantially self-sufficient in the range of required operational skills and experience. Voluntary attrition at the site has averaged 6.5% over the past five years.

 

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Available Information

 

We file annual, quarterly, and other reports, proxy statements, and other information with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers such as us that file electronically with the SEC. You may access that site at http://www.sec.gov.

 

Our Internet website address is www.futurefuelcorporation.com. We make available free of charge, through the “Investor Relations - SEC Filings” section of our Internet website (https://futurefuelcorporation.gcs-web.com/financial-information/sec-filings), our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (or the Exchange Act), as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the SEC.

 

We also make available free of charge, through the “Investor Relations - Corporate Governance” section of our website (https://futurefuelcorporation.gcs-web.com/corporate-governance), the corporate governance guidelines of our board of directors, the charters of each of the committees of our board of directors, and the code of business conduct and ethics for our directors, officers, and employees. Such materials will be made available in print upon the written request of any shareholder to FutureFuel Corp., 8235 Forsyth Blvd., 4th Floor, Clayton, Missouri 63105, Attention: Investor Relations.

 

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Item 1A.

Risk Factors.

 

An investment in us involves a high degree of risk and may result in the loss of all or part of your investment. You should consider carefully all of the information set out in this document and the risks attaching to an investment in us, including, in particular, the risks described below. The information below does not purport to be an exhaustive list and should be considered in conjunction with the contents of the rest of this document.

 

Risks Related to Economic Conditions, Governmental Action, and our Industry

 

We, along with global markets in general, may be significantly affected by the potential COVID-19 public health pandemic, which may adversely affect our business, results of operations or financial condition.

 

The global outbreak of the COVID-19 pandemic has caused governments to take measures to prevent spread of the virus.  We source certain raw materials for our chemicals segment from China.  Currently, the impact of COVID-19 on employees and industries in China and the global economy as a whole is uncertain. If COVID-19 is not stopped, the pandemic could further negatively affect the global economy and our business by negatively impacting our ability to competitively source raw materials, which would have a negative effect on our revenue, expenses and results of operations. We are currently supplied for these raw materials through the near term, however, our ability to competitively source these raw materials after such time is uncertain given the unknown impacts of COVID-19.

 

Additionally, the spread of COVID-19 could generally devastate companies globally, which could in turn have a negative impact on our customers and thus on our business, the extent to which depends on future developments, which are highly unpredictable. We cannot predict the degree to, or the time period over, which our sales and operations will be affected by this outbreak, and the effects could be material. The impacts include, but are not limited to:

 

a significant decline in demand for our products due to market disruptions, resulting in a decline in sales and prices;

 

limitations of feedstocks, price volatility, or disruptions to our suppliers’ operations;

 

the complete or partial closure of our manufacturing facility;

 

the interruption of our distribution system, or temporary or long-term disruption in our supply chains, or delays in the delivery of our product;

 

suspension of renewable fuel and/or low carbon fuel policies;

 

limitations on our ability to operate our business as a result of federal, state or local regulations, including any changes to the designation of our business as “essential” by the US Department of Homeland Security;

 

decreases in the demand for and price of RINs and LCFS credits as a result of reduced demand for petroleum-based gasoline and diesel fuel; and

 

our management of the impact of COVID-19 has and will continue to require significant investment of time and may cause the Company to divert or delay the application of its resources toward other or new initiatives or investments, which may cause a material adverse impact on the results of operations.

 

The extent of the impact of the COVID-19 pandemic on our business is highly uncertain as information is evolving with respect to the duration and severity of the pandemic. We cannot reasonably estimate the duration and severity of the COVID-19 pandemic, or its impact, which may be significantly harmful to our operations and profitability.

 

We operate within the biomass-based diesel industry, which relies on governmental programs requiring or incentivizing the consumption of biofuels, including the BTC. The expiration or loss of mandates or incentives would have a material adverse effect on our business.

 

The most significant tax incentive program in the biomass-based diesel industry has been the BTC. Under the BTC, the first person to blend pure biomass-based diesel with petroleum-based diesel fuel receives a one dollar per gallon refundable tax credit. The BTC was not in place during 2018 and not in place for the majority of 2019. However, in late December 2019, the BTC was retroactively reinstated from its expiry on January 1, 2018 through December 31, 2022. The BTC has not been extended past December 31, 2022. There is no guarantee that the BTC will be reinstated after 2022, which could have a material adverse effect on us and on the biodiesel industry in general.

 

We operate within the biomass-based diesel industry, which relies on governmental programs requiring or incentivizing the consumption of biofuels. Biomass-based diesel has historically been more expensive to produce than petroleum-based diesel fuel and these governmental programs support a market for biomass-based diesel that might not otherwise exist. The petroleum industry is opposed to many of these government incentives and can be expected to continue to challenge these incentives.

 

If biodiesel feedstock costs do not decrease significantly relative to biodiesel prices, we could realize a negative gross margin on biodiesel. As a result, we could cease producing biodiesel, which could have an adverse effect on our financial condition.

 

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Our biofuels operations may be harmed if the federal or state governments were to change current laws and regulations.

 

Alternative fuels businesses benefit from government subsidies and mandates. If any of the state or federal laws and regulations relating to the government subsidies and mandates change, including failure to reinstate the federal biodiesel BTC, our ability to benefit from our alternative fuels business could be harmed.

 

With respect to our biofuels platform, the United States Congress could repeal, curtail or otherwise change the RFS2 program in a manner adverse to us. Similarly, the USEPA could curtail or otherwise change its administration of the RFS2 program in a manner adverse to us, including by not increasing or even decreasing the required renewable fuel volumes, by waiving compliance with the required renewable fuel volumes or otherwise. In addition, while Congress specified RFS2 renewable fuel volume requirements through 2022 (subject to adjustment in the rulemaking process), beginning in 2023 required volumes of renewable fuel will be largely at the discretion of the USEPA (in coordination with the Secretary of Energy and Secretary of Agriculture). We cannot predict what changes, if any, will be instituted or the impact of any changes on our business, although adverse changes could seriously harm our revenues, earnings and financial condition.

 

Further, our biofuels platform is subject to federal, state, and local laws and regulations governing the application and use of alternative energy products, including those related specifically to biodiesel. For instance, biodiesel benefits from successful completion of USEPA Tier I and Tier II health effects testing under Section 211(b) of the Clean Air Act.  This testing verified biodiesel does not pose a threat to human health and improves air quality as a replacement for petroleum diesel. Also, portions of our biofuels may, from time to time, be registered in states where we obtain benefits from state specific subsidies, mandates or programs. If federal or state agency determinations, laws, and regulations relating to the application and use of alternative energy are changed, the marketability and sales of biodiesel production could be materially adversely affected.

 

We derive a significant portion of our revenues from sales of our biofuels in the State of California primarily as a result of Californias Low Carbon Fuel Standard ("LCFS"); adverse changes in this law or reductions in the value of LCFS credits would harm our revenues and profits.

 

The LCFS is designed to reduce greenhouse gas ("GHG") emissions associated with transportation fuels used in California by ensuring that the total amount of fuel consumed meets declining targets for such emissions. The regulation quantifies lifecycle GHG emissions by assigning a “carbon intensity” ("CI") score to each transportation fuel based on that fuel’s lifecycle assessment. Each petroleum fuel provider, generally the fuel’s producer or importer is required to ensure that the overall CI score for its fuel pool meets the annual carbon intensity target for a given year. This obligation is tracked through credits and deficits and credits can be traded. We generate LCFS credits when we sell qualified fuels which are used in California. As a result of the trading price of LCFS credits, California has become a desirable market in which to sell our biodiesel. If the value of LCFS credits were to materially decrease as a result of over-supply, as a result of reduced demand for our fuels, or for other reasons including the continued impact of the COVID-19 pandemic, if the fuel produced is deemed not to qualify for LCFS credits; or if the LCFS or the manner in which it is administered or applied were otherwise changed in a manner adverse to us, our revenues and profits could be seriously harmed.

 

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The industries in which we compete are highly competitive.

 

The biodiesel and specialty chemical industries are highly competitive. There is competition within these industries and also with other industries in supplying the energy, fuel, and chemical needs of industry and individual customers. We compete with other firms in the sale or purchase of various goods or services in many national and international markets. We compete with large national and multi-national companies that have longer operating histories, greater financial, technical, and other resources, and greater name recognition than we do. In addition, we compete with several smaller companies capable of competing effectively on a regional or local basis, and the number of these smaller companies is increasing. Our competitors may be able to respond more quickly to new or emerging technologies and services and changes in customer requirements. As a result of competition, we may lose market share or be unable to maintain or increase prices for our products and/or services or to acquire additional business opportunities, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows. Although we will employ all methods of competition that are lawful and appropriate for such purposes, no assurances can be made that they will be successful. A key component of our competitive position, particularly given the commodity-based nature of many of our products, will be our ability to manage expenses successfully, which requires continuous management focus on reducing unit costs and improving efficiency. No assurances can be given that we will be able to successfully manage such expenses.

 

Our competitive position in the markets in which we participate is, in part, subject to external factors, in addition to those that we can impact. Natural disasters, changes in laws or regulations, trade disputes, war or other outbreak of hostilities, or other political factors in any of the countries or regions in which we operate or do business, or in countries or regions that are key suppliers of strategic raw materials, could negatively impact our competitive position and our ability to maintain market share.

 

As to our biofuels segment, biodiesel produced in Canada, South America, Europe, Eastern Asia, the Pacific Rim, or other regions may be imported into the United States to compete with U.S. produced biodiesel. These regions may benefit from biodiesel production incentives or other financial incentives in their home countries that offset some of their biodiesel production costs and enable them to profitably sell biodiesel in the U.S. at lower prices than U.S.-based biodiesel producers. Under the RFS2, imported biodiesel may be eligible to satisfy an obligated party’s requirements and, therefore, may compete to meet the volumetric requirements of RFS2. This could make it more challenging for us to market or sell biodiesel in the United States, which would have a material adverse effect on our revenues.

 

The total 2019 U.S. production capacity for biodiesel of 2.47 billion gallons is in excess of the current 2.43 billion gallons per year RFS2 mandate for 2020 and 2021. Excess of production capacity over the 2020 and 2021 mandates could result in a decline in biodiesel prices and profitability, negatively impacting our ability to maintain the profitability of our biofuels segment and recover capital expenditures in this business segment.

 

Biodiesel is encountering increased competition from renewable diesel, which is produced via hydrotreating a biomass-based feedstock. Renewable diesel can be used interchangeably with conventional petroleum diesel, is not limited in blends, and can be transported via existing fuel pipeline infrastructure. A significant capital investment would be required for FutureFuel to produce renewable diesel, and the current economics and business uncertainty do not support this level of investment.

 

The primary manufacturers of renewable biodiesel include Neste, World Energy, Zymergen, Diamond Green Diesel, Fulcrum, Red Rock, Raj Renewables, and Dynamic Fuels. Biodiesel Magazine recently estimated in January 2021 that there is close to 5.5 billion gallons of new investments being made to expend capacity of renewable diesel. See http://www.biodieselmagazine.com/articles/2517318/renewable-diesels-rising-tide .

 

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Fluctuations in commodity prices may cause a reduction in the demand or profitability of the products or services we produce.

 

Prices for alternative fuels tend to fluctuate widely based on a variety of political and economic factors. These price fluctuations heavily influence the oil and gas industry. Lower energy prices for existing products tend to limit the demand for alternative forms of energy services and related products and infrastructure. Historically, the markets for alternative fuels have been volatile, and they are likely to continue to be volatile. Wide fluctuations in alternative fuel prices may result from relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty, and other factors that are beyond our control, including:

 

 

worldwide and domestic supplies of oil and gas;

 

the price and/or availability of biodiesel feedstocks;

 

weather conditions;

 

the level of consumer demand;

 

the price and availability of alternative fuels;

 

the availability of pipeline and refining capacity;

 

the price and level of foreign imports;

 

domestic and foreign governmental regulations and taxes;

 

the ability of the members of the Organization of Petroleum Exporting Countries (OPEC) to agree to and maintain oil price and production controls;

 

political instability or armed conflict in oil-producing regions; and

 

the overall economic environment.

 

These factors and the volatility of the commodity markets make it extremely difficult to predict future alternative fuel price movements with any certainty. There may be a decrease in the demand for our products or services and our profitability could be adversely affected.

 

We are reliant on certain strategic raw materials for our operations.

 

We are reliant on certain strategic raw materials (such as biodiesel feedstocks and methanol) for our operations. We have implemented certain risk management tools, such as multiple suppliers and hedging, to mitigate short-term market fluctuations in raw material supply and costs. There can be no assurance, however, that such measures will result in cost savings or supply stability or that all market fluctuation exposure will be eliminated. In addition, natural disasters, changes in laws or regulations, war or other outbreak of hostilities, or other political factors in any of the countries or regions in which we operate or do business, or in countries or regions that are key suppliers of strategic raw materials, could affect availability and costs of raw materials.

 

While temporary shortages of raw materials may occasionally occur, these items have historically been sufficiently available to cover current requirements. However, their continuous availability and price are impacted by natural disasters, plant interruptions occurring during periods of high demand, domestic and world market and political conditions, changes in government regulation, and war or other outbreak of hostilities. In addition, as we increase our biodiesel capacity, we will require larger supplies of raw materials, which have not yet been secured and may not be available for the foregoing reasons, or may be available only at prices higher than current levels. Our operations or products may, at times, be adversely affected by these factors.

 

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Market conditions or transportation impediments may hinder access to raw goods and distribution markets.

 

Market conditions, the unavailability of satisfactory transportation, or the location of our manufacturing complex from more lucrative markets may hinder our access to raw goods and/or distribution markets. The availability of a ready market for biodiesel depends on a number of factors, including the demand for and supply of biodiesel and the proximity of the plant to trucking and terminal facilities. The sale of large quantities of biodiesel necessitates that we transport our biodiesel to other markets, since the Batesville, Arkansas regional market is not expected to absorb all of our contemplated production. Common carrier pipelines do not transport biodiesel or biodiesel/ petrodiesel blends. This leaves trucks, barges, and rail cars as the means of distribution of our product from the plant to these storage terminals for further distribution. However, the availability of rail cars is limited and at times unavailable because of repairs or improvements, or as a result of priority transportation agreements with other shippers. Additionally, the current availability of barges is limited, particularly heated barges to transport biodiesel during winter months. If transportation is restricted or is unavailable, we may not be able to sell into more lucrative markets and consequently our cash flow from sales of biodiesel could be restricted.

 

The biodiesel industry also faces several challenges to wide biodiesel acceptance, including cold temperature limitations, storage stability, fuel quality standards, and exhaust emissions. If the industry does not satisfy consumers that these issues have been resolved or are being resolved, biodiesel may not gain widespread acceptance, which may have an adverse impact on our cash flow from sales of biodiesel.

 

If automobile manufacturers and other industry groups express reservations regarding the use of biodiesel, our ability to sell biodiesel will be negatively impacted.

 

Research on biodiesel use in automobiles is ongoing. Some industry groups have recommended that blends of no more than 5% biodiesel be used for automobile fuel due to concerns about fuel quality, engine performance problems, and possible detrimental effects of biodiesel on rubber components and other engine parts. Although some manufacturers have encouraged use of biodiesel fuel in their vehicles, cautionary pronouncements by other manufacturers or industry groups may impact our ability to market our biodiesel.

 

Perception about food vs. fuel could impact public policy, which could impair our ability to operate at a profit and substantially harm our revenues and operating margins.

 

Some people believe that biodiesel may increase the cost of food, as some feedstocks, such as soybean oil, used to make biodiesel can also be used for food products. This debate is often referred to as “food vs. fuel.” Though our biodiesel is sourced from non-food grade feedstocks, this is a concern to the biodiesel industry because biodiesel demand is heavily influenced by government policy and, if public opinion were to erode, it is possible that these policies would lose political support. These views could also negatively impact public perception of biodiesel. Such claims have led some, including members of Congress, to urge the modification of current government policies that affect the production and sale of biofuels in the United States.

 

Concerns regarding the environmental impact of biodiesel production could affect public policy, which could impair our ability to operate at a profit and substantially harm our revenues and operating margins.

 

The environmental impacts associated with biodiesel production and use have not yet been fully analyzed. Under the 2007 Energy Independence and Security Act, the USEPA is required to produce a study every three years of the environmental impacts associated with current and future biofuel production and use, including effects on air and water quality, soil quality and conservation, water availability, energy recovery from secondary materials, ecosystem health and biodiversity, invasive species, and international impacts. The first such triennial report was published in January 2011. The second triennial report was published June 29, 2018. The 2018 report reaffirms the findings of the 2011 report and reflects the current understanding about biofuel production using data gathered through May 2017.

 

To the extent that state or federal laws are modified or public perception turns against biodiesel, use requirements, such as RFS2, may not continue, which could materially harm our ability to operate profitably.

 

Growth in the sale and distribution of biodiesel is dependent on the expansion of related infrastructure, which may not occur on a timely basis, if at all, and our operations could be adversely affected by infrastructure limitations or disruptions.

 

Growth in the biodiesel industry depends on substantial development of infrastructure for the distribution of biodiesel. Substantial investment required for these infrastructure changes and expansions may not be made on a timely basis or at all. The scope and timing of any infrastructure expansion are generally beyond our control. Also, we compete with other biofuel companies for access to some of the key infrastructure components, such as pipeline and terminal capacity. As a result, increased production of biodiesel or other biofuels will increase the demand and competition for necessary infrastructure. Any delay or failure in expanding distribution infrastructure could hurt the demand for or prices of biodiesel, impede delivery of our biodiesel, and impose additional costs, each of which would have a material adverse effect on our results of operations and financial condition. Our business will be dependent on the continuing availability of infrastructure for the distribution of increasing volumes of biodiesel and any infrastructure disruptions could materially harm our business.

 

19

 

Nitrogen oxide emissions from biodiesel may harm its appeal as a renewable fuel and increase costs.

 

In some instances, biodiesel may increase emissions of nitrogen oxide as compared to petrodiesel, which could harm air quality. Nitrogen oxide is a contributor to ozone and smog. These emissions may decrease the appeal of biodiesel to environmental groups and agencies who have been historic supporters of the biodiesel industry, potentially harming our ability to market our biodiesel.

 

In addition, several states have acted to regulate potential nitrogen oxide emissions from biodiesel. Texas currently requires that biodiesel blends contain an additive to eliminate this perceived nitrogen oxide increase. California is in the process of formulating biodiesel regulations that may also require such an additive. The USEPA may also institute requirements for such an additive. In states where such an additive is required to sell biodiesel, the additional cost of the additive may make biodiesel less profitable or make biodiesel less cost competitive against petrodiesel or renewable diesel, which would negatively impact our ability to sell our products in such states and therefore have an adverse effect on our revenues and profitability.

 

 

 

Risks Related to our Business

 

We are reliant upon a relatively small number of customers.

 

Our chemical business is concentrated with five large customers covering multiple products representing greater than 70% of our chemicals segment product sales, or 27% of total revenues. Although this business is contracted in longer-term production agreements, the loss of any of these strategic customers could have a material adverse effect on our chemicals business.

 

Additionally, our biofuels segment has one large customer. Sales to this biodiesel customer totaled approximately 12% of total revenues in 2020 (or $25,460), 11% of total revenues in 2019 (or $22,352), compared to two large customers with total revenue of 20% in 2018 (or $57,198). We do not have a contract with these customers but rather sell based on monthly or short-term, multi-month purchase orders placed with us by the customers at prices based upon then-prevailing market rates.

 

Changes in technology may render our products or services obsolete.

 

The alternative fuel and chemical industries may be substantially affected by rapid and significant changes in technology. Examples include competitive product technologies, such as green gasoline, renewable diesel produced from catalytic hydrotreating of renewable feedstock oils, and competitive process technologies, such as advanced biodiesel continuous reactor and washing designs that increase throughput. Additionally, new supplies of natural gas in the U.S., primarily as a result of shale gas development, have lowered natural gas prices. Lower natural gas prices may lead to increased use of natural gas as a transportation fuel. Increased usage of natural gas in the transportation market, or other markets that have traditionally used petrodiesel or biodiesel, may lead to declines in the demand for petrodiesel and biodiesel. Lastly, new and more active compounds may be discovered that require less volume or different manufacturing methods, or the end products may become obsolete and be replaced with differing materials.

 

These changes may render obsolete certain existing products, energy sources, services, and technologies currently used by us. We cannot provide assurances that the technologies used by or relied upon by us will not be subject to such obsolescence. While we may attempt to adapt and apply the services provided by us to newer technologies, we cannot provide assurances that we will have sufficient resources to fund these changes or that these changes will ultimately prove successful.

 

Failure to comply with governmental regulations could result in the imposition of penalties, fines or restrictions on operations and remedial liabilities.

 

The biofuel and chemical industries are subject to extensive federal, state, local, and foreign laws and regulations related to the general population’s health and safety and those associated with compliance and permitting obligations (including those related to the use, storage, handling, discharge, emission, and disposal of municipal solid waste and other waste, pollutants or hazardous substances or waste, or discharges and air and other emissions) as well as land use and development. Existing laws also impose obligations to clean up contaminated properties, or to pay for the cost of such remediation, often upon parties that did not cause the contamination. Compliance with these laws, regulations, and obligations could require substantial capital expenditures. Failure to comply could result in the imposition of penalties, fines, or restrictions on operations and remedial liabilities. These costs and liabilities could adversely affect our operations.

 

20

 

Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent or costly waste handling, storage, transport, disposal, or cleanup requirements could require us to make significant expenditures to attain and maintain compliance and may otherwise have a material adverse effect on our business segments in general and on our results of operations, competitive position, or financial condition. We are unable to predict the effect of additional environmental laws and regulations that may be adopted in the future, including whether any such laws or regulations would materially adversely increase our cost of doing business or affect our operations in any area.

 

Under certain environmental laws and regulations, we could be held strictly liable for the removal or remediation of previously released materials or property contamination regardless of whether we were responsible for the release or contamination, or if current or prior operations were conducted consistent with accepted standards of practice. Such liabilities can be significant and, if imposed, could have a material adverse effect on our financial condition or results of operations.

 

21

 

Our insurance may not protect us against our business and operating risks.

 

We maintain insurance for some, but not all, of the potential risks and liabilities associated with our business. For some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance policies may become unavailable or available only for reduced amounts of coverage. As a result, we may not be able to renew our existing insurance policies or procure other desirable insurance on commercially reasonable terms, if at all. Although we will maintain insurance at levels we believe are appropriate for our business and consistent with industry practice, we will not be fully insured against all risks that cannot be sourced on economic terms. In addition, pollution and environmental risks generally are not fully insurable. Losses and liabilities from uninsured and underinsured events and delay in the payment of insurance proceeds could have a material adverse effect on our financial condition and results of operations.

 

If a significant accident or other event resulting in damage to our operations (including severe weather, terrorist acts, war, civil disturbances, pollution, or environmental damage) occurs and is not fully covered by insurance or a recoverable indemnity from a customer, it could adversely affect our financial condition and results of operations.

 

We depend on key personnel, the loss of any of whom could materially adversely affect our future operations.

 

Our success depends to a significant extent upon the efforts and abilities of our executive officers and lead management team. The loss of the services of one or more of these key employees could have a material adverse effect on us. Our business is also dependent upon our ability to attract and retain qualified personnel. Acquiring or retaining these personnel could prove more difficult to hire or cost substantially more than estimated. This could cause us to incur greater costs.

 

22

 

If we are unable to effectively manage the commodity price risk of our raw materials or finished goods, we may have unexpected losses.

 

We hedge our raw materials and/or finished products for our biofuels segment to some degree to manage the commodity price risk of such items. This requires the purchase or sale of commodity futures contracts and/or options on those contracts or similar financial instruments. We may be forced to make cash deposits available to counterparties as they mark-to-market these financial hedges. This funding requirement may limit the level of commodity price risk management that we are prudently able to complete. If we do not manage or are not capable of managing the commodity price risk of our raw materials and/or finished products for our biofuels segment, we may incur losses as a result of price fluctuations with respect to these raw materials and/or finished products.

 

In most cases, we are not capable of hedging raw material and/or finished products for our chemicals segment. Certain of our products are produced under manufacturing agreements with our customers, which provide us the contractual ability to pass along raw material price increases. However, we do not have this protection for all product lines within the chemicals segment. If we do not manage or are not capable of managing escalating raw material prices and/or passing these increases along to our customers via increased prices for our finished products, we may incur losses.

 

If we are unable to acquire or renew permits and approvals required for our operations, we may be forced to suspend or cease operations altogether.

 

The operation of our manufacturing plant requires numerous permits and approvals from governmental agencies. We may not be able to obtain or renew all necessary permits (or modifications thereto) and approvals and, as a result, our operations may be adversely affected. In addition, obtaining all necessary renewal permits (or modifications to existing permits) and approvals for future expansions may necessitate substantial expenditures and may create a significant risk of expensive delays or loss of value if a project is unable to function as planned due to changing requirements.

 

Our indebtedness may limit our ability to borrow additional funds or capitalize on acquisition or other business opportunities.

 

We hold a $100 million revolving credit facility with a commercial bank. This credit facility expires in March 2025. Although as of the date of this report we have no outstanding borrowings under the existing facility, if and when we do borrow, the restrictions governing this type of indebtedness (such as total debt to EBITDA limitations) could reduce our ability to incur additional indebtedness, engage in certain transactions, or capitalize on acquisition or other business opportunities. We do not expect the transition from LIBOR (London Inter-Bank Offered Rate) to have a material impact on our credit facility.

 

We expect to have capital expenditure requirements, and we may be unable to obtain needed financing on satisfactory terms.

 

We expect to make capital expenditures for the expansion of our biofuels and chemicals production capacity and complementary infrastructure. We intend to finance these capital expenditures primarily through cash flow from our operations, borrowings under our credit facility, and existing cash. However, if our capital requirements vary materially from those provided for in our current projections, we may require additional financing sooner than anticipated. A decrease in expected revenues or adverse change in market conditions could make obtaining this financing economically unattractive or impossible. As a result, we may lack the capital necessary to complete the projected expansions or capitalize on other business opportunities.

 

23

 

We may be unable to successfully integrate future acquisitions with our operations or realize all of the anticipated benefits of such acquisitions.

 

Failure to successfully integrate future acquisitions, if any, in a timely manner may have a material adverse effect on our business, financial condition, results of operations, and cash flows. The difficulties of combining acquired operations include, among other things:

 

 

operating a significantly larger combined organization;

 

consolidating corporate technological and administrative functions;

 

integrating internal controls and other corporate governance matters; and

 

diverting management’s attention from other business concerns.

 

In addition, we may not realize all of the anticipated benefits from future acquisitions, such as increased earnings, cost savings, and revenue enhancements, for various reasons, including difficulties integrating operations and personnel, higher and unexpected acquisition and operating costs, unknown liabilities, and fluctuations in markets. If benefits from future acquisitions do not meet the expectations of financial or industry analysts, the market price of our shares of common stock may decline.

 

If we are unable to respond to changes in ASTM or customer standards, our ability to sell biodiesel may be harmed.

 

We currently produce biodiesel to conform to or exceed standards established by ASTM. ASTM standards for biodiesel and biodiesel blends may be modified in response to new observations from the industries involved with diesel fuel. New tests or more stringent standards may require us to make additional capital investments in, or modify, plant operations to meet these standards. In addition, some biodiesel customers have developed their own biodiesel standards that are stricter than the ASTM standards. If we are unable to meet new ASTM standards or our biodiesel customers’ standards cost effectively or at all, our production technology may become obsolete, and our ability to sell biodiesel may be harmed, negatively impacting our revenues and profitability.

 

If we fail to maintain effective internal control over financial reporting, we might not be able to report our financial results accurately or prevent fraud; in that case, our stockholders could lose confidence in our financial reporting, which would harm our business and could negatively impact the value of our stock.

 

Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. The process of maintaining our internal controls may be expensive, and time consuming, and may require significant attention from management. Although we have concluded as of December 31, 2020, that our internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our results of operations or cause us to fail to meet our reporting obligations. If we or our independent registered public accounting firm discover a material weakness, the disclosure of that fact could harm the value of our stock and our business.

 

The risk of loss of the Companys intellectual property, trade secrets or other sensitive business information or disruption of operations could negatively impact the Companys financial results. 

 

The Company has information and information processing assets, including intellectual property, trade secrets, and other sensitive, business critical information as well as on-premise and cloud-based business applications critical to conducting business. In addition, our chemical manufacturing facilities are highly automated using modern computer systems.  Cyber-attacks affecting the Company, its supply chain or customers could compromise confidential, business critical information, cause a disruption in the Company’s operations, harm the Company's reputation, or endanger the environment if the Company, its suppliers or customers do not effectively prevent, detect and recover from these or other security breaches. FutureFuel, like many companies today, is the target of industrial espionage, including cyber-attacks. The Company has determined that these attacks have resulted, and could result in the future, in unauthorized parties gaining access to certain confidential business information.  When unauthorized access is discovered, the Company reports such situations to governmental authorities for investigation, as appropriate, and takes measures to mitigate any potential impact.

 

24

 

Although management does not believe that the Company has experienced any material losses to date related to these cyber security breaches, there can be no assurance that such losses will not be suffered in the future. The Company seeks to actively manage the risks within its control that could lead to business disruptions and cyber security breaches through a comprehensive cyber security program that is continuously reviewed (through internal and external, third party, auditing), maintained, and upgraded. As these threats continue to evolve, particularly around cybersecurity, the Company may be required to expend significant resources to enhance its control environment, processes, practices, and other protective measures. Despite these efforts, such events could have a material adverse effect on FutureFuel’s business, results of operations, financial condition and cash flows.  

 

Confidentiality agreements with customers, employees, and others may not adequately prevent disclosures of confidential information, trade secrets, and other proprietary information.

 

We rely in part on trade secret protection to protect our confidential and proprietary information and processes. However, trade secrets are difficult to protect. We have taken measures to protect our trade secrets and proprietary information, but these measures may not be effective. For example, we require new custom manufacturing chemical customers to execute confidentiality agreements before we begin manufacturing custom chemicals for them. We also require employees and consultants to execute confidentiality agreements upon the commencement of their employment or consulting arrangement with us. These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. These agreements also generally provide that know-how and inventions conceived by the individual in the course of rendering services to us are our exclusive property. Nevertheless, these agreements may be breached, or may not be enforceable, and our proprietary information may be disclosed. Further, despite the existence of these agreements, third parties may independently develop substantially equivalent proprietary information and techniques. Accordingly, it may be difficult for us to protect our trade secrets. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

 

Moreover, we cannot assure that our technology does not infringe upon any valid claims of patents that other parties own. In the future, if we were found to be infringing on a patent owned by a third party, we might have to seek a license from such third party to use the patented technology. We cannot assure that, if required, we would be able to obtain such a license on terms acceptable to us, if at all. If a third party brought a legal action against us or our licensors, we could incur substantial costs in defending ourselves, and we cannot assure that such an action would be resolved in our favor. If such a dispute were to be resolved against us, we could be subject to significant damages.

 

We depend on our ability to maintain relationships with industry participants, including our strategic partners.

 

Our ability to maintain commercial arrangements with chemical and biodiesel customers, raw material and feedstock suppliers, and transportation and logistics services providers may depend on maintaining close working relationships with industry participants. There can be no assurance that we will be able to maintain or establish additional necessary strategic relationships, in which case the opportunity to grow our business may be negatively affected.

 

25

 

There is currently excess production capacity and low utilization in the biodiesel industry and if non-operational and underused facilities commence or increase operations, our results of operations may be negatively affected.

 

Many biodiesel plants in the United States do not operate at full capacity. Further, plants under construction and expansion in the United States as of December 2020, if completed, would add additional biodiesel production capacity. The annual production capacity of existing plants and plants under construction far exceeds both historic consumption of biodiesel in the United States and required consumption under RFS2. If this excess production capacity was used for biodiesel production, it would increase competition for our feedstocks, increase the volume of biodiesel on the market, and may reduce biodiesel gross margins, harming our revenues and profitability.

 

Several biofuels companies throughout the United States have filed for bankruptcy over the last several years due to industry and economic conditions.

 

Unfavorable worldwide economic conditions, lack of financing, and volatile biofuel prices and feedstock costs have likely contributed to the necessity of bankruptcy filings by biofuel producers. Our business may be negatively impacted by the industry conditions that influenced the bankruptcy proceedings of other biofuel producers, or we may encounter new competition from buyers of distressed biodiesel properties who enter the industry at a lower cost than original plant investors.

 

We are exposed to credit risk and fluctuations in market values of our investments.

 

We could experience significant declines in the market value of our investment portfolio. Credit ratings and pricing of these investments can be negatively affected by liquidity, credit deterioration, financial results, economic risk, political risk, sovereign risk, or other factors. As a result, the value and liquidity of our cash, cash equivalents, and marketable securities could decline and result in impairment losses.

 

In March of 2020, the COVID-19 virus (referred herein as the coronavirus) outbreak and instability in the geopolitical environment over oil pricing created significant volatility in global financial markets.  If these situations continue to worsen, it is expected that global market values and the value of our investments could experience significant declines.

 

We are exposed to operating risks.

 

As a manufacturer of diversified chemical products and biofuels, our business is subject to operating risks common to chemical manufacturing, storage, handling, and transportation. These risks include, but are not limited to, fires, explosions, inclement weather, natural disasters, mechanical failure, unscheduled downtime, transportation interruptions, remediation, chemical spills, discharges or releases of toxic or hazardous substances or gases. Significant limitation on our ability to manufacture products due to disruption of manufacturing operations or related infrastructure could have a material adverse effect on our sales revenue, costs, results of operations, and financial condition.

 

Disruptions could also occur due to internal factors such as computer or equipment malfunction (accidental or intentional), operator error, or process failures; or external factors such as computer or equipment malfunction at third-party service providers, natural disasters, pandemic illness, changes in laws or regulations, war or other outbreak of hostilities or terrorism, cyber-attacks, or breakdown or degradation of transportation infrastructure used for delivery of supplies to the Company or for delivery of products to customers. No assurances can be provided that any future disruptions due to these, or other, circumstances will not have a material effect on operations. Such disruptions could result in an unplanned event that could be significant in scale and could negatively impact operations, neighbors, and the environment, and could have a negative impact on our results of operations.

 

26

 

Risks Associated With Owning Our Shares

 

We may issue substantial amounts of additional shares without stockholder approval.

 

Our certificate of incorporation authorizes the issuance of 75,000,000 shares of common stock and 5,000,000 shares of preferred stock. As of the date of this report, 43,743,243 shares of our common stock currently are outstanding. The issuance of any additional shares of our common stock or preferred stock would dilute the percentage ownership of our company held by existing stockholders.

 

The market price of our common stock is highly volatile and may increase or decrease dramatically at any time.

 

The market price of our common stock is highly volatile and our shares are thinly traded. Our stock price may change dramatically as the result of: (i) announcements of new products or innovations by us or our competitors; (ii) uncertainty regarding the viability of any of our product initiatives; (iii) significant customer contracts; (iv) significant litigation; (v) the loss of or changes to the BTC or RFS2 mandate; or (vi) other factors or events that would be expected to affect our business, financial condition, results of operations, and future prospects.

 

The market price for our common stock may also be affected by various factors not directly related to our business or future prospects, including the following:

 

 

a reaction by investors to trends in our stock rather than the fundamentals of our business;

 

a single acquisition or disposition, or several related acquisitions or dispositions, of a large number of our shares, including by short sellers covering their position;

 

the interest of the market in our business sector, without regard to our financial condition, results of operations, or business prospects;

 

positive or negative statements or projections about us or our industry by analysts and other persons;

 

the adoption of governmental regulations or government grant programs and similar developments in the United States or abroad that may enhance or detract from our ability to offer our products and services or affect our cost structure; and

 

economic and other external market factors, such as a general decline in market price due to poor economic conditions, investor distrust, or a financial crisis.

 

If securities or industry analysts issue an adverse or misleading opinion regarding our stock or do not publish research or reports about our business, our stock price and trading volume could decline.

 

The trading market for shares of our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. The price of our common stock could decline if one or more equity research analysts downgrade our common stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

 

If Mr. Novelly or his designees exercises his registration rights, such exercise may have an adverse effect on the market price of our shares of common stock.

 

Mr. Paul A. Novelly, our executive chairman of the board, or affiliates of him are entitled to demand that we register under the Securities Act of 1933, as amended (or the “Securities Act”), the resale of certain shares of our common stock beneficially owned by Mr. Novelly or his affiliates (including St. Albans Global Management, Limited Partnership, LLLP). If Mr. Novelly or his affiliates exercise their registration rights with respect to all of their shares of our common stock, there will be an additional 17,725,100 available for trading in the public market. The registration and availability of such a significant number of shares for trading in the public market may have an adverse effect on the market price of our shares.

 

We may be suspended or delisted from the New York Stock Exchange if we do not satisfy their continued listing requirements.

 

Our common stock trades on the NYSE under the symbol “FF”. Securities admitted to the NYSE may be suspended from dealing or delisted at any time the listed company fails to satisfy certain continued listing criteria. These criteria could be triggered if, among other things, the number of our publicly-held shares falls below 600,000, the average closing price of our common stock is less than $1.00 per share over a consecutive 30 trading-day period, or we fail to file certain reports with the SEC. As a matter of practice, the NYSE generally gives a listed company notice if any of these criteria are triggered, and generally provides the listed company with certain cure periods. If we suffer such an event but do not cure it, or if such event cannot be cured, trading of our common stock on the NYSE may be suspended from dealing or our stock may be delisted. Any such suspension or delisting may have an adverse effect on the market price of our common stock.

 

27

 

Item 1B.

Unresolved Staff Comments.

 

None.

 

Item 2.

Properties.

 

Our principal asset is a manufacturing plant situated on approximately 2,200 acres of land six miles southeast of Batesville in north central Arkansas fronting the White River. Approximately 500 acres of the site are occupied with batch and continuous manufacturing facilities, laboratories, and infrastructure, including on-site liquid waste treatment. Our subsidiary, FutureFuel Chemical Company, is the fee owner of this plant and the land upon which it is situated (which plant and land are not subject to any major encumbrances) and manufactures both biofuels and chemicals at the plant. Use of these facilities may vary with product mix and economic, seasonal, and other business conditions, but the plant is substantially used with the exception of facilities designated for capacity expansion of biodiesel. The plant, including approved expansions, has sufficient capacity for existing needs and expected near-term growth. We believe that the plant is well maintained, in good operating condition, and suitable and adequate for its uses.

 

Item 3.

Legal Proceedings.

 

We are not a party to, nor is any of our property subject to, any material pending legal proceedings, other than ordinary routine litigation incidental to our business. From time to time, we may be parties to, or targets of, lawsuits, claims, investigations, and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which we expect to be handled and defended in the ordinary course of business. While we are unable to predict the outcome of any matters currently pending, we do not believe that the ultimate resolution of any such pending matters will have a material adverse effect on our overall financial condition, results of operations, or cash flows.

 

Item 4.

Mine Safety Disclosures.

 

Not applicable.

 

28

 

PART II

 

Item 5.

Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Information

 

The shares of our common stock are traded on the NYSE under the trading symbol “FF”. As of March 16, 2021, there are 43,743,243 shares of our common stock outstanding.

 

Holders

 

The shares of our common stock were held by approximately 278 holders of record on March 16, 2021 as recorded on our transfer agents’ register. We believe that the number of beneficial owners of our common stock is substantially greater than the number of holders of record.

 

Dividends

 

The payment of cash dividends by us is dependent upon our existing cash and cash equivalents, future earnings, capital requirements, and overall financial condition. We declared and paid regular cash dividends for 2020 and 2019, a special dividend in 2020, and we have also declared dividends for 2021. While we anticipate similar regular cash dividends after 2021, no assurances can be given that we will declare or pay dividends for years after 2021.  

 

Securities Authorized for Issuance Under Equity Compensation Plan

 

Our board of directors adopted an omnibus incentive plan, which was approved by our shareholders at our 2017 annual shareholder meeting on September 7, 2017 (the “Incentive Plan”). We do not have any other equity compensation plan or individual equity compensation arrangement. Under the Incentive Plan, awards are limited to 10% of the issued and outstanding shares of our common stock in the aggregate. The shares to be issued under the Incentive Plan were registered with the SEC on a Form S-8 filed on November 9, 2017, and through December 31, 2020, we issued 44,000 options to purchase shares of our common stock and awarded no shares to participants under the Incentive Plan.

 

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The following additional information regarding the incentive plans is as of December 31, 2020.

 

   

Number of securities

   

Weighted-average

   

Number of securities

 
   

to be issued upon

   

exercise price

   

remaining available for future

 
   

exercise of

   

of outstanding

   

issuance under equity

 

Plan Category

 

outstanding options,

   

options, warrants

   

compensation plans (excluding

 
   

warrants and rights

   

and rights

   

securities reflected in column (a))

 
   

(a)

   

(b)

   

(c)

 

Equity compensation plans approved by security holders

    44,000     $ 12.73       4,330,167  

 

Performance Graph

 

The graph below matches the cumulative 5-Year total return of holders of FutureFuel Corp's common stock with the cumulative total returns of the Russell 2000 index and a customized peer group of 26 companies grouped by SIC code (chemical industry) that includes: Aemetis Inc., American Resources Corp, Amyris Inc., , Bluefire Renewables Inc., Celanese Corp, Cleantech Biofuels Inc., Data443 Risk Mitigatoin Inc., Easylink Solutions Corp, ESP Resources Inc., Glyeco Inc., Green Energy Live Inc., Green Plains Inc., Greenbelt Resources Corp, , Koppers Holdings Inc., Methes Energies International Ltd, New America Energy Corp, Newmarket Corp, Nouveau Life Pharmaceuticals Inc., Pacific Ethanol Inc., Postd Merchant Banque, Rayonier Advanced Materials Inc., Renewable Energy Group Inc., Rex American Resources Corp, Tantech Holdings Ltd, Westlake Chemical Partners LP, and Zeons Corp. The graph assumes that the value of the investment in our common stock, in each index, and in the peer group (including reinvestment of dividends) was $100 on December 31, 2015 and tracks it through December 31, 2020.

 

30

 

image02.jpg

 

 

Recent Sales of Securities

 

We did not sell any of our securities within the three-year period ended December 31, 2020 in transactions that were not registered under the Securities Act.

 

Purchase of Securities by Us

 

During 2020, neither we, or anyone acting on our behalf, purchased any shares of our common stock, which is the only class of our equity securities that is registered pursuant to Section 12 of the Exchange Act.

 

31

 

Item 6.

Selected Financial Data.

 

The following table sets forth summary historical financial and operating data regarding us for the periods indicated below. This summary historic financial and operating data has been derived from our consolidated financial statements for the twelve months ended December 31, 2016, 2017, 2018, 2019 and 2020. The information presented in the table below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and Notes thereto. The financial data presented for 2017 and 2016 is not directly comparable between periods as a result of the adoption of Accounting Standard Codification ("ASC"), Topic 606, Revenue from Contracts with Customers in 2018 using the modified retrospective method.

 

 

(Dollars in thousands, except per share amounts)

 

   

Twelve

   

Twelve

   

Twelve

   

Twelve

   

Twelve

 
   

Months

   

Months

   

Months

   

Months

   

Months

 
   

Ended

   

Ended

   

Ended

   

Ended

   

Ended

 
   

December

   

December

   

December

   

December

   

December

 
Item    31, 2020      31, 2019      31, 2018      31, 2017      31, 2016  

Operating Revenue

  $ 204,505     $ 205,226     $ 291,018     $ 275,026     $ 253,193  

Net income

  $ 46,564     $ 88,181     $ 53,158     $ 23,511     $ 56,341  

Earnings per common share:

                                       

Basic

  $ 1.06     $ 2.02     $ 1.22     $ 0.54     $ 1.29  

Diluted

  $ 1.06     $ 2.02     $ 1.22     $ 0.54     $ 1.29  

Total Assets

  $ 441,304     $ 586,505     $ 471,155     $ 425,563     $ 529,043  

Long-term obligations

  $ 36,433     $ 36,644     $ 42,586     $ 38,686     $ 52,181  

Dividends declared per common share

  $ 3.24     $ 0.24     $ 0.24     $ 0.24     $ 2.77  

Net cash provided by operating activities

  $ 96,403     $ 34,638     $ 85,613     $ 39,347     $ 90,975  

Net cash provided by (used in) investing activities

  $ 474     $ 4,219     $ 25,406     $ (13,183 )   $ (35,207 )

Net cash used in financing activities

  $ (142,086 )   $ (10,498 )   $ (10,674 )   $ (110,809 )   $ (10,545 )

 

32

 

Item 7.

Managements Discussion and Analysis of Financial Condition and Results of Operations.

 

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.

 

Unless otherwise stated, all dollar amounts are in thousands.

 

Overview 

 

In General

 

Our company is managed and reported in two reporting segments: chemicals segment and biofuels segment. Within the chemicals segment are two product groups: custom chemicals and performance chemicals. The custom chemicals group is comprised of chemicals manufactured for a single customer, whereas the performance chemicals 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 by better using resources and is committed to growing each segment.

 

Major products in the custom chemicals group include: (i) consumer products (cosmetics and personal care products, specialty polymers, and specialty products used in the fuels industry); (ii) proprietary herbicide intermediates manufactured for select strategic customers; (iii) chlorinated polyolefin adhesion promoters and antioxidant precursors for a customer; and (iv) a biocide intermediate for another customer.

 

The custom chemicals group historically included a laundry detergent additive manufactured exclusively for a customer for use in a household detergent. Revenues generated from the laundry detergent additive were based on a supply agreement with the customer. In 2018, we entered into a new agreement to extend the supply of the laundry detergent additive to this customer through 2019 at reduced volumes and prices and to provide this customer with the option to purchase this product in 2020. Sales to this customer ended in 2020 and no further sales are expected.

 

Our supply agreement with a major multi-national life sciences company to manufacture an intermediate for a herbicide was effective through December 31, 2020. The agreement was not extended past 2020 and no further sales are anticipated.

 

Pricing for the other custom manufacturing products is negotiated directly with the customer. Some, but not all, of these products have pricing mechanisms and/or protections against raw material or conversion cost changes.

 

Performance chemicals consist of specialty chemicals that are manufactured to general market-determined specifications and are sold to a broad customer base. A major product line in the performance chemicals group is SSIPA/LiSIPA, a polymer modifier that aids the properties of nylon and polyesters. This group of products also includes other sulfonated monomers and hydrotropes, specialty solvents, polymer additives, and chemical intermediates, such as glycerin.

 

SSIPA/LiSIPA revenues are generated from a diverse customer base of nylon fiber manufacturers and other customers that produce condensation polymers. Contract sales are, in certain instances, indexed to key raw materials for inflation; otherwise, there is no pricing mechanism or specific protection against raw material or conversion cost changes.

 

Pricing for the other performance chemical products is established based upon competitive market conditions. Some, but not all, of these products have pricing mechanisms and/or specific protections against raw material or conversion cost changes.

 

33

 

For our biofuels segment, we procure all of our own feedstock and only sell biodiesel for our own account. We have the capability to process multiple types of feedstock including vegetable oils, animal fats, and separated food waste oils. We can receive feedstock by rail or truck, and we have substantial storage capacity to acquire feedstock at advantaged prices when market conditions permit. Our annual biodiesel production capacity is in excess of 58 million gallons per year.

 

There currently is uncertainty as to whether we will produce biodiesel in the future. This uncertainty results from changes in feedstock prices relative to biodiesel prices and the lack of permanency of government mandates including the blenders’ tax credit, the small producer’s tax credit, the renewable fuels program, and the California low carbon fuel program credits. See “Risk Factors” above as well as Note 3 to our consolidated financial statements. This uncertainty also results from government mandates that strengthen markets that we compete against including renewable diesel and electric vehicles.

 

While biodiesel is the principal component of the biofuels segment, we also generate revenue from the sale of petrodiesel both in blends with our biodiesel and, from time to time, with no biodiesel added. Petrodiesel and biodiesel blends are available to customers at our leased storage facility in North Little Rock, Arkansas and at our Batesville plant. In addition, we deliver blended product to a small group of customers within our region. We also sell refined petroleum products on common carrier pipelines in part to maintain our status as an active shipper on these pipelines.

 

Most of our sales are FOB the Batesville plant, although some transfer points are in other states or foreign ports. While many of our chemicals are used 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 we have transferred ownership. Rarely are we the exporter of record, never are we the importer of record into foreign countries, and we are not always aware of the exact quantities of our products that are moved into foreign markets by our customers. We do track the addresses of our customers for invoicing purposes and use this address to determine whether a particular sale is within or outside the United States. Our revenue for the last three fiscal years attributable to the United States and foreign countries (based upon the billing addresses of our customers) is set forth in the following table.

 

           

All Foreign

         

Period

 

United States

   

Countries

   

Total

 

Year ended December 31, 2020

  $ 203,365     $ 1,140     $ 204,505  

Year ended December 31, 2019

  $ 203,470     $ 1,756     $ 205,226  

Year ended December 31, 2018

  $ 289,019     $ 1,999     $ 291,018  

 

The majority of our expenses are cost of goods sold. Cost of goods sold includes raw material costs as well as both fixed and variable conversion costs, such conversion costs being those expenses that are directly or indirectly related to the operation of our plant. Significant conversion costs include labor, benefits, energy, supplies, depreciation, and maintenance and repair. In addition to raw material and conversion costs, cost of goods sold includes environmental reserves and costs related to idle capacity. Finally, cost of goods sold includes hedging gains and losses recognized by us related to our biofuels segment. Cost of goods sold is allocated to the chemicals and biofuels business segments based on equipment and resource usage for most conversion costs and based on revenue for most other costs.

 

Operating costs include selling, general and administrative, and research and development expenses.

 

The discussion of results of operations that follows is based on revenue and expenses in total and for individual product lines and does not differentiate related party transactions.

 

34

 

Fiscal Year Ended December 31, 2020 Compared to Fiscal Year Ended December 31, 2019

 

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

 

(Dollars in thousands other than per share amounts)

 

   

Twelve

   

Twelve

                 
   

Months

   

Months

                 
   

Ended

   

Ended

                 
   

December

   

December

   

Dollar

   

%

 
     31, 2020      31, 2019    

Change

   

Change

 

Revenue

  $ 204,505     $ 205,226     $ (721 )     (0.4 %)

Income from operations

  $ 22,339     $ 65,309     $ (42,970 )     (65.8 %)

Net income

  $ 46,564     $ 88,181     $ (41,617 )     (47.2 %)

Earnings per common share:

                               

Basic

  $ 1.06     $ 2.02     $ (0.96 )     (47.5 %)

Diluted

  $ 1.06     $ 2.02     $ (0.96 )     (47.5 %)

Capital expenditures (net of customer reimbursements)

  $ 2,424     $ 2,243     $ 181       8.1 %

Adjusted EBITDA

  $ 29,157     $ 78,697     $ (49,540 )     (63.0 %)

 

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 depreciation and amortization, which may vary among our operating segments without any correlation to their underlying operating performance, and of non-cash stock-based compensation expense, which is a non-cash expense that varies widely among similar companies, and gains and losses on derivative instruments, which can cause net income to appear volatile from period to period relative to the sale of the underlying physical product.

 

We enter into commodity derivative instruments 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 use 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.

 

35

 

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

 

(Dollars in thousands)

 

   

Twelve months ended December 31:

 
   

2020

   

2019

 

Net income

  $ 46,564     $ 88,181  

Depreciation

    11,150       12,087  

Non-cash stock-based compensation

    49       21  

Interest and dividend income

    (5,648 )     (10,050 )

Non-cash interest expense and amortization of deferred financing costs

    151       173  

Loss (gain) on disposal of property and equipment

    31       (11 )

(Gain) loss on derivative instruments

    (4,379 )     1,301  

Loss (gain) on marketable securities

    4,375       (4,619 )

Other non-operating income

    (8,350 )     -  

Income tax benefit

    (14,786 )     (8,386 )

Adjusted EBITDA

  $ 29,157     $ 78,697  

 

 

 

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

 

(Dollars in thousands)

 

   

Twelve months ended December 31:

 
   

2020

   

2019

 

Net cash provided by operating activities

  $ 96,403     $ 34,638  

Benefit for deferred income taxes

    610       5,145  

Interest and dividend income

    (5,648 )     (10,050 )

Income tax provision

    (14,786 )     (8,386 )

Gain (loss) on derivative instruments

    (4,379 )     1,301  

Change in fair value of derivative instruments

    390       30  

Changes in operating assets and liabilities, net

    (35,083 )     56,017  

Other non-operating income

    (8,350 )     -  

Other

    -       2  

Adjusted EBITDA

  $ 29,157     $ 78,697  

 

36

 

Results of Operations

 

Consolidated

   

2020 Compared to 2019:

   

2019 Compared to 2018:

 
                   

Change

                   

Change

 

(Dollars in thousands)

 

2020

   

2019

   

$

   

%

   

2019

   

2018

   

$

   

%

 
                                                                 

Sales

  $ 204,505     $ 205,226     $ (721 )     (0.4 %)   $ 205,226     $ 291,018     $ (85,792 )     (29.5 %)

Volume/product mix effect

                  $ (5,737 )     (2.8 %)                   $ (53,955 )     (18.5 %)

Price effect

                  $ 5,016       2.4 %                   $ (31,837 )     (10.9 %)
                                                                 

Gross profit

  $ 31,307     $ 74,139     $ (42,832 )     (57.8 %)   $ 74,139     $ 73,398     $ 741       1.0 %

Operating expense

  $ (8,968 )   $ (8,830 )   $ (138 )     1.6 %   $ (8,830 )   $ (9,959 )   $ 1,129       (11.3 %)

Other income

  $ 9,439     $ 14,486     $ (5,047 )     (34.8 %)   $ 14,486     $ (3,262 )   $ 17,748       (544.1 %)

Income tax benefit (provision)

  $ 14,786     $ 8,386     $ 6,400       76.3 %   $ 8,386     $ (7,019 )   $ 15,405       (219.5 %)

Net income

  $ 46,564     $ 88,181     $ (41,617 )     (47.2 %)   $ 88,181     $ 53,158     $ 35,023       65.9 %

 

2020 Compared to 2019

 

Consolidated sales revenue decreased $721 in 2020 compared to 2019. This net decrease primarily resulted from lower sales volumes in the chemical segment mostly offset by increased sales volumes in the biofuel segment.

 

Gross profit decreased $42,832 in 2020 compared to 2019. This decrease was primarily attributable to a benefit in the prior year from the reinstatement of the biodiesel BTC for 2018 recognized in 2019, amounting to $31,301, (see Note 3 of our consolidated financial statements for further details), lower margins on biodiesel sold, the absence of a chemical contract that expired in 2019, and reduced chemical sales volumes primarily driven by the COVID-19 pandemic effect on energy, textile, and automobile markets that we sell to. Partially offsetting these declines was an improvement in the change in the derivative activity which increased gross profit $4,379 in 2020 as compared to decrease in gross profit of $1,301 in 2019.

 

Operating expenses decreased $138 in 2020 compared to 2019. This decrease was primarily the result of lower compensation expense.

 

Other income decreased $5,047 in 2020 primarily from the change in gain (loss) on marketable securities of $8,994 and a reduction in interest and dividend income of $4,402. In 2020, the loss on equity securities sold was $4,129 as compared to a loss of $1,837 in 2019. The mark-to-market change on equity investments was a loss of $246 in 2020 and a gain of $6,283 in 2019. These decreases were partially offset by other non-operating income of $8,350 (see Note 24 of the consolidated financial statements).

 

Income tax benefit (provision)

 

The income tax benefit in 2020 was $14,786 or an effective tax rate of (46.5%) as compared to a benefit in 2019 of $8,386 or an effective tax rate of  (10.5%).

 

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (Pub.L. 116-136) (“CARES Act”). The CARES Act, among other things, 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 available to offset 100% of taxable income in each of the 5 preceding taxable years unless the taxpayer elects to forego the carryback. The Company’s effective tax rate for the year 2020 is positively impacted by its ability to carry back both its 2019 and 2020 federal NOLs in full to tax years with 35% marginal tax rates, rather than forward to years with anticipated 21% tax rates. In the fourth quarter of 2020, the Company filed a refund claim of $7,695 and accrued an additional refund claim of $1,211, subsequently filed in January 2021, relating to the carryback of its NOL generated in 2019. No refunds have been received as of December 31, 2020. The Company also anticipates filing a refund claim before the end of 2021 relating to the carryback of the NOL anticipated to be generated in 2020. States in which the Company conducts the majority of its business have not conformed to the CARES Act’s enhanced NOL carryback provisions, and the anticipated benefits of these state NOL carryforwards are accordingly classified as deferred tax assets.

 

The Company’s effective tax rate for the year 2020 reflects the positive effect of certain tax credits and incentives, the most significant of which were the BTC and the Small Agri-biodiesel Producer Tax Credit. Based on technical guidance from Internal Revenue Service, the Company excludes the portion of the BTC not used to satisfy excise tax liabilities from income.

 

The Company’s effective tax rate for the year 2019 reflected the positive effect of the reinstatement of certain tax credits and incentives for 2018 and 2019, the most significant of which was the BTC and Small Agri-biodiesel Producer Tax Credit. The BTC and the Small Agri-biodiesel Producer Tax Credit were retroactively extended for 2018 and 2019 on December 20, 2019 and further extended through December 31, 2022. This tax benefit was recorded in the Company’s fourth quarter 2019 results. See Note 3 for a discussion of the impact of the BTC for the years ended December 31, 2020, 2019, and 2018. The 2019 effective tax rate was also favorably impacted by the Company being granted a retroactive research and development credit for a prior year in the state of Arkansas where it does significant business. Additionally, the Company’s 2019 effective tax rate reflected a one-time benefit from state legislation enacted during the year which applied a lower tax rate to future reversals of deferred tax liabilities.

 

The Company’s unrecognized tax benefit totaled $0 at December 31, 2020 and 2019.

 

37

 

2019 Compared to 2018

 

Consolidated sales revenue decreased 30% or $85,792 in 2019 compared to 2018. This decrease primarily resulted from lower sales volumes in both the biofuel and chemical segments and the reinstatement of the BTC for 2018 and 2019 credited to customers in 2019 in the amount of $39,423 (see Note 3 of our consolidated financial statements for further details).

 

Gross profit increased $741 in 2019 compared to 2018. This increase was primarily attributable to the December 2019 reinstatement of the biodiesel BTC for 2018 and 2019, amounting to $57,872, (see Note 3 of our consolidated financial statements for further details) and the impact of adjustments in the carrying value of our inventory as determined using the LIFO method of inventory accounting. The LIFO adjustment increased gross profit $2,490 in 2019 as compared to decreased gross profit of $2,249 in 2018. The change in LIFO did not result in a lower of cost or market adjustment in 2019 or 2018. These increases were mostly offset by: i) the decreased selling price and volume in the biofuel segment; ii) decreased volumes in the chemical segment from the agrochemical and energy markets; and iii) the change in the derivative activity, which decreased gross profit $1,301 in 2019 as compared to increased gross profit $633 in 2018.

 

Operating expenses decreased $1,129 in 2019 compared to 2018. This decrease was primarily the result of lower compensation expense and research and development expense.

 

Other income increased $17,748 in 2019 primarily from the change in the mark-to-market on equity securities and an increase in interest and dividend income of $876. In 2019, the mark-to-market change was a gain of $6,283 and in 2018 the mark-to-market change was a loss of $13,238. Partially offsetting this increase was the loss on equity securities sold of $1,837 in 2019 as compared to a gain of $1,054 in 2018.

 

Income tax benefit (provision)

 

The income tax benefit in 2019 was $8,386 or an effective tax rate of (10.5%) as compared to a provision of ($7,019) or an effective tax rate of 11.7% in 2018.

 

The Company’s effective tax rate for the year 2019 reflected the positive effect of the reinstatement of certain tax credits and incentives for 2018 and 2019, the most significant of which was the BTC and Small Agri-biodiesel Producer Tax Credit. The BTC and the Small Agri-biodiesel Producer Tax Credit were retroactively extended for 2018 and 2019 on December 20, 2019 and further extended through December 31, 2022. This tax benefit was recorded in the Company’s fourth quarter 2019 results. See Note 3 to our consolidated financial statements for a discussion of the impact of the BTC for the years ended December 31, 2019 and 2018. The 2019 effective tax rate was also favorably impacted by a retroactive research and development credit for a prior year in the state of Arkansas. Additionally, the Company’s effective tax rate reflected a one-time benefit from state legislation enacted during the year which applied a lower tax rate to future reversals of deferred tax liabilities.

 

The Company’s effective tax rate for the year 2018 reflected its uncertain tax position on prior year income of $2,728, net ($2,804, gross) plus interest of $448 in the fourth quarter of 2018. Partially reducing the provision for income taxes was the benefit of the reinstatement of certain tax credits and incentives for 2018, the most significant of which were the BTC and the Small Agri-biodiesel Producer Tax Credit. The BTC and Small Agri-biodiesel Producer Tax Credit were retroactively extended for 2017 (but, not beyond December 31, 2017) on February 9, 2018. This tax benefit was recorded in FutureFuel’s first quarter 2018 results.

 

The Company’s unrecognized tax benefit totaled $0 and $2,804 at December 31, 2019 and 2018, respectively.

 

38

 

Chemicals Segment

   

2020 Compared to 2019:

   

2019 Compared to 2018:

 
                   

Change

                   

Change

 

(Dollars in thousands)

 

2020

   

2019

   

$

   

%

   

2019

   

2018

   

$

   

%

 
                                                                 

Sales

  $ 79,178     $ 104,827     $ (25,649 )     (24.5 %)   $ 104,827     $ 117,128     $ (12,301 )     (10.5 %)

Volume/product mix effect

                    (27,761 )     (26.5 %)                     (12,519 )     (10.7 %)

Price effect

                    2,112       2.0 %                     218       0.2 %
                                                                 

Gross profit

  $ 25,518     $ 29,923     $ (4,405 )     (14.7 %)   $ 29,923     $ 33,986     $ (4,063 )     (12.0 %)

 

2020 Compared to 2019

 

Chemical sales revenue decreased 24.5% or $25,649 in 2020 compared with 2019. Sales revenue for our custom chemicals product line (chemicals produced for specific customers) totaled $63,894, a decrease of $27,068 from 2019. This decrease was primarily driven by: i) an agrochemical product we no longer manufacture of $15,256; ii) a slowdown in near-term business in both automotive and energy related applications resulting from COVID-19 of approximately $8,000; and iii) the phase out of a laundry detergent additive of $6,886. Partially offsetting these declines was the contract revenue of $2,896 upon the termination of a custom chemical contract which expired (see Note 2 of the consolidated financial statements). Performance chemicals revenue (comprised of multi-customer products which are sold based on specification) was $15,284 in 2020, an increase of $1,419 from 2019. This increase resulted from higher sales volumes of our glycerin and was partially offset by reduced sales volumes of our polymer modifier, primarily from COVID-19 weakened effects in the carpet industry.

 

Gross profit for the chemicals segment decreased 14.7% or $4,405 in 2020 compared with 2019. This decrease resulted primarily from volume effects resulting from COVID-19 in the automotive, energy, textile applications and the absence of an herbicide intermediate product we no longer make. Partially offsetting the decrease was the benefit of the recognition of contract revenue of $2,896 upon the termination of a custom contract that was not renewed 12/31/2020.

 

2019 Compared to 2018

 

Chemical sales revenue decreased 11% or $12,301 in 2019 compared with 2018. Sales revenue for our custom chemicals product line (chemicals produced for specific customers) totaled $90,962, a decrease of $6,784 from 2018. This decrease was primarily attributed to decreased sales volumes in the agrochemical and energy markets and reduced sales volumes of our laundry detergent additive. Our contract for sales of the laundry detergent additive terminated in December 2020; however, this customer declined to order any laundry detergent additive after 2019. We continue to pursue other customers for this product. However, we believe it will be a challenge to find a profitable market for this product. Performance chemicals revenue (comprised of multi-customer products which are sold based on specification) was $13,865 in 2019, a decrease of $5,517 from 2018. This decrease resulted from reduced sales volumes of our polymer modifier and reduced selling price and volume of glycerin.

 

Gross profit for the chemicals segment decreased 12% or $4,063 in 2019 compared with 2018. This decrease resulted from lower sales volumes in the consumer product, agrochemical and energy markets and polymer modifier and glycerin. Partially offsetting the decrease was the change in adjustments in the carrying value of our inventory as determined using the LIFO method of inventory accounting resulting primarily from deflation experienced in 2019 and inflation experienced in 2018. The change in LIFO increased gross profit in 2019 by $780 and reduced gross profit by $422 in 2018.

 

39

 

Biofuel Segment

   

2020 Compared to 2019:

   

2019 Compared to 2018:

 
                   

Change

                   

Change

 

(Dollars in thousands)

 

2020

   

2019

   

$

   

%

   

2019

   

2018

   

$

   

%

 
                                                                 

Sales

  $ 125,327     $ 100,399     $ 24,928       24.8 %   $ 100,399     $ 173,890     $ (73,491 )     (42.3 %)

Volume/product mix effect

                    22,024       21.9 %                     (41,436 )     (23.8 %)

Price effect

                    2,904       2.9 %                     (32,055 )     (18.4 %)
                                                                 

Gross profit

  $ 5,789     $ 44,216     $ (38,427 )     (86.9 %)   $ 44,216     $ 39,412     $ 4,804       12.2 %

 

2020 Compared to 2019

 

Biofuels sales revenue increased $24,928 in 2020 compared to 2019, primarily from increased sales volumes of biodiesel and biodiesel blends. Sales volumes improved on greater availability of feedstocks with the BTC in law during 2020. Revenue was also improved by the reduction of rebates to customers (shown as a price effect) of $2,017 in 2020 as compared to $39,423 in 2019 (see Note 3 of the consolidated financial statements for further information).

 

A portion of our biodiesel sold was to one major refiner in the United States in 2020 and 2019. No assurances can be given that we will continue to sell to such major refiners, or, if we do sell, the volume we will sell or the profit margin we will realize. We do not believe that the loss of this customer would have a material adverse effect on our biofuels segment or on us as a whole in that: (i) unlike our custom manufacturing products, biodiesel is a commodity with a large potential customer base; (ii) we believe that we could readily sell our biodiesel to other customers as potential demand from other customers for biodiesel exceeds our production capacity; (iii) our sales to this customer are not under fixed terms and the customer has no fixed obligation to purchase any minimum quantities except as stipulated by short term purchase orders; and (iv) the prices we receive from this customer are based upon then-market rates, as would be the case with sales of this commodity to other customers.

 

Biofuels gross profit decreased $38,427 in 2020 compared to 2019. Gross profit compared to 2019 primarily decreased due to  the recognition of the 2018 BTC for $31,301 which was retroactively reinstated on December 20, 2019. See Note 3 of the consolidated financial statements for additional discussion. Gross profit was also unfavorably impacted by lower margins from COVID-19 weakened effects on the transportation market in 2020 as compared to 2019. Partially benefiting gross profit in 2020 was the change in the realized and unrealized activity of derivative instruments in comparison to the prior year with a gain of $4,379 as compared to a loss of $1,301 in 2019.

 

2019 Compared to 2018

 

Biofuels sales revenue decreased 42% or $73,491 in 2019 compared to 2018, primarily from decreased sales volumes of biodiesel and biodiesel blends given the challenging market without the BTC in effect and the increased number of RIN waivers granted. Revenue was also reduced by the recognition of rebates (shown as a price effect) owed to customers of $39,423 in 2019 as compared to $13,599 in 2018 (see Note 3 of the consolidated financial statements for further information).

 

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

 

Biofuels gross profit increased $4,804 in 2019 compared to 2018. Cost of goods sold decreased largely as a result of the 2018 and 2019 BTC (which was retroactively reinstated on December 20, 2019) in 2019 compared to 2018, when the 2017 BTC was retroactively reinstated on February 9, 2018. See Note 3 of the consolidated financial statements for additional discussion. Gross profit also benefited from the change in adjustments in the carrying value of our inventory as determined using the LIFO method of inventory accounting. The LIFO reserve for the biofuel segment decreased $1,711 in 2019 and increased $1,828 in 2018. Gross profit was reduced by the change in the realized and unrealized activity of derivative instruments in comparison to the prior year with a loss of $1,301 in 2019 and a gain of $633 in 2018.

 

40

 

Critical Accounting Policies and Practices

 

Allowance for Doubtful Accounts

 

We reduce our accounts receivable by amounts that may be uncollectible in the future. This estimated allowance is based upon management’s evaluation of the collectability of individual invoices and is based upon management’s evaluation of the financial condition of our customers and historical bad debt experience. This estimate is subject to change based upon the changing financial condition of our customers. At December 31, 2020 and 2019, we recorded an allowance for doubtful accounts of $63 and $0, respectively. We historically have not experienced significant problems in collecting our receivables, and we do not expect this to change going forward.

 

Depreciation

 

Depreciation is provided for using the straight-line method over the associated assets’ estimated useful lives. We primarily base our estimate of an asset’s useful life on our experience with other similar assets. The actual useful life of an asset may differ significantly from our estimate for such reasons as the asset’s build quality, the manner in which the asset is used, or changes in the business climate. We monitor the estimated useful lives of our assets.

 

Indefinite-lived intangible asset

 

Intangible assets with indefinite lives are not amortized but are reviewed for impairment at least annually or whenever events or circumstances indicate the carrying value of the asset may not be recoverable. The Company performs annual impairment tests of the intangible assets during the fourth quarter of each fiscal year and assesses qualitative factors to determine the likelihood of impairment. The Company’s qualitative analysis includes, but is not limited to, assessing the changes in macroeconomic conditions, legal and regulatory environment, industry and market conditions, financial performance, and any other relevant events or circumstances specific to the intangible asset. If it is more likely than not that the fair value of the intangible asset is greater than the carrying value, no further testing is required. Otherwise, the Company will apply the quantitative impairment test method. In performing the Company's qualitative analysis, the Company determined that it was more likely than not that the indefinite-lived intangible asset's fair value was greater than the carrying value.

 

Asset Retirement Obligations

 

We establish reserves for closure/post-closure costs associated with the environmental and other assets we maintain. Environmental assets include waste management units, such as a chemical waste destructor, storage tanks, and boilers. When these types of assets are constructed or installed, a reserve is established for the future costs anticipated to be associated with the closure of the site based on an expected life of the environmental assets, the applicable regulatory closure requirements, and our environmental policies and practices. These expenses are charged into earnings over the estimated useful life of the assets. The future costs anticipated to be associated with the closure of the site are based upon estimated current costs for such activities adjusted for anticipated future inflation rates. Unanticipated changes in either of these two variables or changes in the anticipated timing of closure/post-closure activities may significantly affect the established reserves. As of December 31, 2020 and December 31, 2019, we recorded a reserve for closure/post-closure liabilities of $1,331 and $1,288, respectively. We monitor this reserve and the assumptions used in its calculation. As deemed necessary, we have made changes to this reserve balance and anticipate that future changes will occur.

 

41

 

Revenue Recognition

 

On January 1, 2018, we adopted Topic 606, Revenue from Contracts with Customers using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under Topic 605.

 

Certain long-term contracts had an upfront non-refundable payment considered a material right. The Company applied the renewal option approach in allocating the transaction price to the material right. For each of these contracts, the Company estimated the expected contractual volumes to be sold at the most likely expected sales price as a basis for allocating the transaction price to the material right. Each estimate will be updated quarterly on a prospective basis. These custom chemical contracts have payment terms of 30 days. See Notes 2 and 4 of our consolidated financial statements for additional discussion.

 

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

 

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

 

Revenue from bill-and-hold transactions in which a performance obligation exists is recognized when the total performance obligation has been met and control of the product has transferred. Bill-and-hold transactions for 2020 and 2019 were related to custom chemicals customers whereby revenue was recognized in accordance with contractual agreements based upon product being produced and ready for use by the customer. These sales were subject to written monthly purchase orders with agreement that production was reasonable. The product was custom manufactured and stored at the customer’s request and could not be sold to another buyer. Credit and payment terms for bill-and-hold customers are similar to other custom chemicals customers. Sales revenue under bill-and-hold arrangements were $32,779, $51,700, and $44,924 for the years ended December 31, 2020, 2019, and 2018, respectively. At December 31, 2020 and 2019, $2,628 and $3,255, respectively, was included in revenue for products that had not been shipped. These amounts do not include Contract Assets of $808 and $1,067 that have not been billed nor shipped at December 31, 2020 and 2019, respectively.

 

Taxes collected from customers and remitted to governmental authorities are recorded on a net basis within cost of goods sold. Shipping and handling fees related to sales transactions were billed to customers and recorded as sales revenue.

 

Income Taxes

 

The provision for (benefit from) income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for (benefit from) income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax bases of the Company's assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

 

The Company recognizes income tax positions that meet the more likely than not threshold and accrues interest related to unrecognized income tax positions which is recorded as a component of the income tax provision.

 

Liquidity and Capital Resources

 

Our net cash provided by (used in) operating activities, investing activities, and financing activities for the years ended December 31, 2020, 2019, and 2018 are set forth in the following table.

 

(Dollars in thousands) 

 

   

2020

   

2019

   

2018

 

Net cash provided by operating activities

  $ 96,403     $ 34,638     $ 85,613  

Net cash provided by investing activities

  $ 474     $ 4,219     $ 25,406  

Net cash used in financing activities

  $ (142,086 )   $ (10,498 )   $ (10,674

)

 

42

 

Operating Activities

 

Cash provided by operating activities increased from $34,638 in 2019 to $96,403 in 2020, a net increase of $61,765. This increase was attributed to the decrease in accounts receivable, including accounts receivable - related parties, of $188,769; the 2019 balance included the BTC of $97,295. Primarily offsetting the increase in cash from operations was: (i) the decrease in accounts payable, including accounts payable – related parties, of $90,092, $39,423 of rebates owed to customers for the BTC and (ii) the decrease in net income in 2020 compared to 2019 of $41,617.

 

Cash provided by operating activities decreased from $85,613 in 2018 to $34,638 in 2019, a net decrease of $50,975. This decrease was attributed to: (i) the increase in accounts receivable, including accounts receivable - related parties, of $100,728, inclusive of the BTC of $97,295 for 2019 and 2018 and (ii) the increase in the fair value of equity securities of $19,521. Primarily offsetting the decrease in cash from operations was: (i) the increase in accounts payable, including accounts payable – related parties, of $39,270, $39,423 of credit to customer for the BTC and (ii) the increase in net income in 2019 compared to 2018 of $35,023.

 

Investing Activities

 

Cash provided by investing activities was $474 in 2020 compared to $4,219 in 2019 for a net decrease in cash from investing activities of $3,745. This decrease was primarily attributable to a $6,558 decrease in the net sales of marketable securities in 2020 compared to the net sales of marketable securities in 2019. Such net sales totaled $4,730 in 2020, as compared to total net sales of $11,288 in 2019. Reduced capital expenditures increased cash from investing activities by $2,507.

 

Cash provided by investing activities was $4,219 in 2019 compared to $25,406 in 2018 for a net decrease in cash from investing activities of $21,187. This decrease was primarily attributable to a $17,283 decrease in the net sales of marketable securities in 2019 compared to the net sales of marketable securities in 2018. Such net sales totaled $11,288 in 2019, as compared to total net sales of $28,571 in 2018. The net decrease in cash from investing activities was also impacted by the increase in the cash used in capital expenditures of $2,104.

 

Our capital expenditures and customer reimbursements are summarized in the table below.

 

   

2020

   

2019

   

2018

 

Cash paid for capital expenditures

  $ 4,464     $ 6,971     $ 4,867  

Cash received from customers as reimbursement of capital expenditures*

  $ (2,040 )   $ (4,728 )   $ (2,659 )

Cash paid for capital expenditures, net of customer reimbursements

  $ 2,424     $ 2,243     $ 2,208  

 

*This receipt of cash was reported as an increase in deferred revenue in cash flows from operations (see Note 4 of the consolidated financial statements for further discussion).

 

Financing Activities

 

Cash used in financing activities increased from $10,498 in 2019 to $142,086 in 2020, a net increase of $131,588. This increase resulted from the payment of special dividends in 2020 of $131,230.

 

Cash used in financing activities decreased from $10,674 in 2018 to $10,498 in 2019, a net decrease of $176. This decrease was due to the decrease in the minimum tax withholding on stock compensation in 2019 compared to 2018.

 

Capital Expenditure Commitments

 

We had no material capital projects that generated commitments as of December 31, 2020.

 

Historically, we finance capital requirements for our business with cash flows from operations and have not had the need to incur bank indebtedness to finance any of our operations during the periods discussed herein.

 

43

 

Credit Facility

 

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’s credit limit 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.

 

We will be permitted to use net proceeds of any borrowings under the Credit Facility for working capital and other general corporate purposes. No borrowings were made under the Credit Agreement or the Prior Credit Agreement as of December 31, 2020 and 2019. See Note 13 of the consolidated financial statements for additional information regarding our Credit Agreement.

 

The Credit Facility contains certain affirmative and negative covenants, including negative covenants that limit or restrict, among other things, indebtedness, liens and encumbrances, dividends, burdensome agreements, mergers and fundamental changes, assets sales, investments, transactions with affiliates, changes in fiscal years, and other matters customarily restricted in such agreements.

 

The interest rate floats at the following margins over LIBOR or base rate based upon our leverage ratio. The material financial covenants, ratios, or tests contained in the Credit Facility are i) a consolidated leverage ratio as of the end of any fiscal quarter less than or equal to 3.00 to 1.0; and ii) a consolidated interest coverage ratio as of the end of any fiscal quarter of greater than or equal to 1.25 to 1.0.

 

We do not expect the transition from LIBOR to have a material impact on our credit facility or any new agreement we might enter into.

 

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%  

 

Certain of our subsidiaries have entered into guarantees of payment on behalf of the Company for amounts outstanding under the Credit Facility. In addition, we and certain subsidiaries have entered into a pledge and security agreement with the bank to secure the obligations under the Credit Facility. Pursuant to the pledge and security agreement, we and certain of our subsidiaries have pledged certain collateral, including but not limited to, interests in intellectual property rights and certain equity interests in our subsidiaries.

 

We intend to fund future capital requirements for our businesses from cash flow generated by us as well as from existing cash, cash investments, and, if the need should arise, borrowings under our credit facility. We do not believe there will be a need to issue any securities to fund such capital requirements.

 

Dividends

 

In 2020, we paid regular cash dividends aggregating $0.24 per share on our common stock with record dates and payment dates as previously discussed. The regular cash dividends totaled $10,498. On March 23, 2020, we also declared a special cash dividend of $3.00 per share on our common stock. This special cash dividend paid on April 17, 2020, amounted to $131,230. Total cash dividends paid in 2020 were $141,728. On December 3, 2020, we declared normal quarterly dividends of $0.06 per share on our common stock with record dates and payment dates as previously discussed. Dividends declared, but not paid, were accrued at December 31, 2020.

 

In 2019, we paid regular cash dividends aggregating $0.24 per share on our common stock with record dates and payment dates as previously discussed. The regular cash dividends totaled $10,498. Dividends declared, but not paid, were accrued at December 31, 2019.

 

In 2018, we paid regular cash dividends aggregating $0.24 per share on our common stock with record dates and payment dates as previously discussed. The regular cash dividends totaled $10,498. On November 19, 2018, we declared normal quarterly dividends of $0.06 per share on our common stock with record dates and payment dates as previously discussed. Dividends declared, but not paid, were accrued at December 31, 2018.

 

44

 

Capital Management

 

As a result of positive operating results, we accumulated excess working capital. We intend to retain the remaining cash to fund infrastructure and capacity expansion at our Batesville plant or to otherwise fund our future growth. Third parties have not placed significant restrictions on our working capital management decisions.

 

A significant portion of these funds were held in cash or cash equivalents at multiple financial institutions. In 2020, we also had investments in certain preferred stock and other equity instruments measured at fair value and changes in fair value recognized in net income. We also hold certain trust preferred securities. We classify these investments as current assets in the accompanying consolidated balance sheets and designate them as being “available-for-sale”. Accordingly, they are recorded at fair value with the unrealized gains and losses, net of taxes, reported as a component of stockholders’ equity. The fair value of these preferred stock, trust preferred securities, and other equity instruments, including accrued dividends and interest, totaled $3,940 as of December 31, 2020. The fair value of preferred stock, trust preferred securities, exchange traded debt, and other equity instruments, including accrued dividends and interest, totaled $5,479 as of December 31, 2019.

 

The unrealized losses on equity securities were $247 for 2020; unrealized gains on equity securities were $6,281 for 2019.

 

Lastly, we maintain depository accounts such as checking accounts, money market accounts, and other similar accounts at selected financial institutions.

 

Off-Balance Sheet Arrangements

 

We engage in two types of hedging transactions. First, we hedge our biofuels sales through the purchase and sale of futures contracts and options on futures contracts of energy commodities. This activity was captured on our consolidated balance sheets at December 31, 2020 and 2019. Second, we hedge our biofuels feedstock through the execution of purchase contracts and supply agreements with certain vendors which meet the normal purchase and normal sales exception of ASC 815 Derivatives and Hedging. These hedging transactions are recognized in earnings and do not qualify as a hedge accounting treatment on our consolidated balance sheets at December 31, 2020 or 2019, as they do not meet the definition of a hedge instrument as defined under GAAP. The purchase of biofuels feedstock generally involves two components: basis and price. Basis covers any refining or processing required as well as transportation. Price covers the purchases of the actual agricultural commodity. Both basis and price fluctuate over time. A supply agreement with a vendor constitutes a hedge when we have committed to a certain volume of feedstock in a future period and have fixed the basis for that volume.

 

Contractual Obligations

 

Purchase obligations include the purchase of biodiesel feedstock and various other infrastructure and capital repairs as follows:

 

Less than 1 year

  $ 9,584  

1-3 years

    925  

4-5 years

    6  

More than 5 years

    -  

Total

  $ 10,515  

 

A component of other noncurrent liabilities is a reserve for asset retirement obligations and environmental contingencies of $1,331 at December 31, 2020. We are liable for these asset retirement obligations and environmental contingencies only in certain events, primarily the closure of our Batesville, Arkansas facility. As such, we do not expect a payment related to these liabilities in the foreseeable future and therefore we have excluded this amount from the table above.

 

45

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

 

In recent years, general economic inflation has not had a material adverse impact on our costs and, as described elsewhere herein, we have passed some price increases along to our customers. However, we are subject to certain market risks as described below.

 

Market risk represents the potential loss arising from adverse changes in market rates and prices. Commodity price risk is inherent in the chemical and biofuels business both with respect to input (electricity, coal, raw materials, biofuel feedstocks, etc.) and output (manufactured chemicals and biofuels).

 

We seek to mitigate our market risks associated with the manufacturing and sale of chemicals by entering into term sale contracts that include contractual market price adjustment protections to allow changes in market prices of key raw materials to be passed on to the customer. Such price protections are not always obtained, however, so raw material price risk remains a significant risk.

 

In order to manage price risk caused by market fluctuations in biofuel prices, we may enter into exchange traded commodity futures and options contracts. We account for these derivative instruments in accordance with Topic 815, 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. We had no derivative instruments that qualified under these rules as designated accounting hedges in 2020 or 2019. Changes in the fair value of our derivative instruments are recognized at the end of each accounting period and recorded in the consolidated statement of operations as a component of cost of goods sold.

 

Our immediate recognition of derivative instrument gains and losses can cause net income to be volatile from period to period due to the timing of the change in value of the derivative instruments relative to the sale of biofuel being sold. As of December 31, 2020 and 2019, the fair values of our derivative instruments were in an asset (liability) position in the amount of $124 and ($267), respectively.

 

Our gross profit will be impacted by the prices we pay for raw materials and conversion costs (costs incurred in the production of chemicals and biofuels) for which we do not possess contractual market price adjustment protection. These items are principally comprised of crude corn oil and yellow grease and petrodiesel. The availability and price of these items are subject to wide fluctuations due to unpredictable factors such as weather conditions, overall economic conditions, governmental policies, commodity markets, and global supply and demand.

 

We prepared a sensitivity analysis of our exposure to market risk with respect to key raw materials and conversion costs for which we do not possess contractual market price adjustment protections based on average prices in 2020. We included only those raw materials and conversion costs for which a hypothetical adverse change in price would result in a 1% or greater decrease in gross profit. Assuming that the prices of the associated finished goods could not be increased and assuming no change in quantities sold, a hypothetical 10% change in the average price of the commodities listed below would result in the following change in annual gross profit.

 

(Volumes and dollars in thousands)

Item

 

Volume Requirements(a)

   

Units

   

Hypothetical

Adverse Change in

Price

   

Decrease in

Gross Profit

   

Percentage

Decrease

in Gross Profit

 

Biodiesel feedstocks

    60,648    

GAL

      10 %   $ 12,162       38.8 %

Methanol

    11,743    

GAL

      10 %   $ 1,020       3.3 %

Electricity

    102    

MWH

      10 %   $ 534       1.7 %

Sodium Methylate

    12,722    

LB

      10 %   $ 418       1.3 %

 

(a) Volume requirements and average price information are based upon volumes used and prices obtained for the twelve months ended December 31, 2020.  Volume requirements may differ materially from these quantities in future years as our business evolves.

 

We had no borrowings as of December 31, 2020 or 2019, and, as such, we were not exposed to interest rate risk for those years. Due to the relative insignificance of transactions denominated in a foreign currency, we consider our foreign currency risk to be immaterial.

 

46

 

Item 8.

Financial Statements and Supplementary Data.

 

Financial Statements.

 

The following sets forth our consolidated balance sheets as at December 31, 2020 and 2019 and our consolidated statements of income and comprehensive income, statements of cash flows, and statements of changes in stockholders’ equity for each of the three years in the period ended December 31, 2020, together with RSM US LLP’s report on the year ended December 31, 2020 and December 31, 2019 and RubinBrown LLP’s report on the year ended December 31, 2018.

 

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and the Board of Directors of FutureFuel Corp.

 

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of FutureFuel Corp. and its subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income and comprehensive income, cash flows, and change in stockholders’ equity for each of the two years in the period ended December 31, 2020, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 16, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

The critical audit matter described below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

Other income – Legal Resolution of Contractual Matter

As described in Note 24 to the consolidated financial statements, the Company recorded other income of $8.35 million related to the legal resolution of a contractual matter. The Company consulted legal counsel to support the legal resolution. The application of the legal resolution to certain contracts required management judgment. We identified the resolution of this contractual matter as a critical audit matter because auditing management’s conclusion and resultant recognition of other income involved significant auditor effort and judgment due to the legal nature of the matter.

 

Our audit procedures related to the Company’s accounting for the legal resolution of this contractual matter included the following, among others:

 

We obtained an understanding of the relevant controls over management’s accounting, and related financial reporting disclosure for the legal resolution of contractual matters and tested such controls for design and operating effectiveness.

 

We obtained and evaluated legal counsel’s correspondence provided to the Company on the matter, verbally discussed the facts with management and legal counsel to verify our understanding of the legal resolution.

 

We obtained a sample of contracts related to the legal matter and performed the following procedures:

 

o

Read contracts for each selection

 

o

Agreed key terms and inputs to supporting schedules

 

o

Tested the mathematical accuracy of the calculations

 

We involved a subject matter professional to assist in analyzing the accounting treatment and adherence to applicable disclosure requirements.

 

 

/s/RSM US LLP

 

We have served as the Company’s auditor since 2019.

 

St. Louis, Missouri

March 16, 2021

 

47

 

Report Of Independent Registered Public Accounting Firm

 

To the shareholders and the Board of Directors of FutureFuel Corp.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of FutureFuel Corp. and subsidiaries (collectively, the Company) as of December 31, 2018, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the year then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 15, 2019 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

 

Adoption of New Accounting Pronouncements

 

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for revenue in 2018 due to the adoption of ASC Topic 606, Revenue from Contracts with Customers. As discussed in Note 2 to the consolidated financial statements, the Company changed how changes in the fair value of equity security investments are recognized in 2018 due to the adoption of ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

We served as the Company’s auditor from 2007 to 2018.

 

/s/RubinBrown LLP

 

Denver, Colorado

March 15, 2019

 

48

 

 

FutureFuel Corp.

Consolidated Balance Sheets

As of December 31, 2020 and 2019

(Dollars in thousands)

 

  

2020

  

2019

 

Assets

        

Cash and cash equivalents

 $198,122  $243,331 

Accounts receivable, inclusive of the blenders' tax credit of $8,300 and $97,295, and net of allowances for bad debt of $63 and $0, respectively

  21,387   110,264 

Accounts receivable – related parties

  1,426   4,602 

Inventory

  33,889   37,573 

Income tax receivable

  17,668   8,062 

Prepaid expenses

  3,967   1,932 

Prepaid expenses – related parties

  -   12 

Marketable securities

  64,404   73,620 

Other current assets

  1,742   1,493 

Total current assets

  342,605   480,889 

Property, plant and equipment, net

  91,544   98,597 

Intangible assets

  1,408   1,408 

Other assets

  5,747   5,611 

Total noncurrent assets

  98,699   105,616 

Total Assets

 $441,304  $586,505 

Liabilities and Stockholders Equity

        

Accounts payable, inclusive of the blenders' tax credit rebates due customers of $1,116 and $39,423, respectively

 $12,453  $61,299 

Accounts payable – related parties

  984   1,255 

Deferred revenue – current

  3,976   5,237 

Dividends payable

  10,498   10,498 

Accrued expenses and other current liabilities

  5,077   4,410 

Accrued expenses and other current liabilities – related parties

  -   64 

Total current liabilities

  32,988   82,763 

Deferred revenue – non-current

  21,861   21,291 

Noncurrent deferred income tax liability

  12,332   12,965 

Other noncurrent liabilities

  2,240   2,388 

Total noncurrent liabilities

  36,433   36,644 

Total liabilities

  69,421   119,407 

Commitments and contingencies:

          

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

  -   - 

Common stock, $0.0001 par value, 75,000,000 shares authorized, 43,743,243 issued and outstanding as of December 31, 2020 and 2019

  4   4 

Accumulated other comprehensive income

  208   296 

Additional paid in capital

  282,215   282,166 

Retained earnings

  89,456   184,632 

Total stockholders’ equity

  371,883   467,098 

Total Liabilities and Stockholders Equity

 $441,304  $586,505 

 

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

 

49

 

 

FutureFuel Corp.

Consolidated Statements of Income and Comprehensive Income

For the Years Ended December 31, 2020, 2019, and 2018

(Dollars in thousands, except per share amounts)

 

  

2020

  

2019

  

2018

 

Revenue

 $202,529  $202,048  $286,949 

Revenue – related parties

  1,976   3,178   4,069 

Cost of goods sold

  158,730   107,028   191,859 

Cost of goods sold – related parties

  6,890   16,945   19,495 

Distribution

  7,401   6,933   6,075 

Distribution – related parties

  177   181   191 

Gross profit

  31,307   74,139   73,398 

Selling, general, and administrative expenses

            

Compensation expense

  2,760   3,028   3,809 

Other expense

  2,600   1,904   1,936 

Related party expense

  620   707   690 

Research and development expenses

  2,988   3,191   3,524 

Total operating expenses

  8,968   8,830   9,959 

Income from operations

  22,339   65,309   63,439 

Interest and dividend income

  5,648   10,050   9,183 

Interest expense

  (151)  (173)  (173)

(Loss) gain on marketable securities

  (4,375)  4,619   (12,011)

Other income (expense)

  8,317   (10)  (261)

Other income (expense)

  9,439   14,486   (3,262)

Income before income taxes

  31,778   79,795   60,177 

Income tax (benefit) provision

  (14,786)  (8,386)  7,019 

Net income

 $46,564  $88,181  $53,158 
             

Earnings per common share

            

Basic

 $1.06  $2.02  $1.22 

Diluted

 $1.06  $2.02  $1.22 

Weighted average shares outstanding

            

Basic

  43,743,243   43,743,243   43,725,333 

Diluted

  43,744,150   43,744,676   43,731,192 
             

Comprehensive Income

 

2020

  

2019

  

2018

 

Net income

 $46,564  $88,181  $53,158 

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

  (111)  400   (229)

Income tax effect

  23   (84)  49 

Total unrealized (losses) gains, net of tax

  (88)  316   (180)

Comprehensive income

 $46,476  $88,497  $52,978 

 

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

 

50

 

 

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2020, 2019, and 2018

(Dollars in thousands)

 

  

2020

  

2019

  

2018

 

Cash flows from operating activities

            

Net income

 $46,564  $88,181  $53,158 

Adjustments to reconcile net income to net cash provided by operating activities:

            

Depreciation

  11,150   12,087   11,227 

Amortization of deferred financing costs

  108   144   144 

Benefit for deferred income taxes

  (610)  (5,145)  (1,253)

Change in fair value of equity securities

  246   (6,281)  13,238 

Change in fair value of derivative instruments

  (390)  (30)  (2,130)

Loss (gain) on the sale of investments

  4,129   1,662   (1,227)

Stock based compensation

  49   21   357 

(Gain) loss on disposal of property and equipment

  31   (11)  41 

Noncash interest expense

  43   29   28 

Changes in operating assets and liabilities:

            

Accounts receivable

  88,865   (93,970)  5,679 

Accounts receivable – related parties

  3,176   (2,758)  (1,679)

Inventory

  3,684   1,723   4,458 

Income tax receivable

  (9,606)  (1,204)  79 

Prepaid expenses

  (2,035)  (165)  (107)

Prepaid expenses – related party

  12   -   - 

Other assets

  658   206   (342 

Accounts payable

  (48,639)  41,453   1,243 

Accounts payable – related parties

  (271)  (434)  506 

Accrued expenses and other current liabilities

  456   1,087   274 

Accrued expenses and other current liabilities – related parties

  (64)  64   - 

Deferred revenue

  (691)  1,628   (1,258)

Other noncurrent liabilities

  (462)  (3,649)  3,177 

Net cash provided by operating activities

  96,403   34,638   85,613 

Cash flows from investing activities

            

Collateralization of derivative instruments

  158   (111)  1,680 

Purchase of marketable securities

  (5,073)  (20,131)  (19,664)

Proceeds from the sale of marketable securities

  9,803   31,419   48,235 

Proceeds from the sale of property and equipment

  50   13   22 

Capital expenditures

  (4,464)  (6,971)