FutureFuel Corp. - Quarter Report: 2015 June (Form 10-Q)

UNITED STATES

  SECURITIES AND EXCHANGE COMMISSION

  Washington, D.C. 20549

FORM 10-Q

(Mark One)

Commission file number: 0-52577

FUTUREFUEL CORP.

(Exact Name of Registrant as Specified in Its Charter)

8235 Forsyth Blvd., Suite 400

St. Louis, Missouri  63105

(Address of Principal Executive Offices)

(314) 854-8385

(Registrant’s Telephone Number, Including Area Code)

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

Yes  √  No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  √  No  ☐

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 10, 2015: 43,722,388

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

The following sets forth our unaudited consolidated balance sheet as at June 30, 2015, our audited consolidated balance sheet as at December 31, 2014, our unaudited consolidated statements of operations and comprehensive income for the three-month and six-month periods ended June 30, 2015 and June 30, 2014, and our unaudited consolidated statements of cash flows for the six-month periods ended June 30, 2015 and June 30, 2014.

FutureFuel Corp.

Consolidated Balance Sheets

As of June 30, 2015 and December 31, 2014

(Dollars in thousands)

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

FutureFuel Corp.

Consolidated Statements of Operations and Comprehensive Income

For the Three Months Ended June 30, 2015 and 2014

(Dollars in thousands, except per share amounts)

(Unaudited)

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

FutureFuel Corp.

Consolidated Statements of Operations and Comprehensive Income

For the Six Months Ended June 30, 2015 and 2014

(Dollars in thousands, except per share amounts)

(Unaudited)

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

FutureFuel Corp.

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2015 and 2014

(Dollars in thousands)

(Unaudited)

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

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations 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.

Results of Operations 

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

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

(Dollars in thousands other than per share amounts)

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 our 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, whose immediate recognition can cause net income to be volatile from period to period due to the timing of the valuation change in the derivative instruments relative to the sale of biofuel.

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

(Dollars in thousands) 

Revenues

Revenues for the three months ended June 30, 2015 were $104,598,000 as compared to revenues for the three months ended June 30, 2014 of $68,039,000, an increase of 54%. Revenues from biofuels were $71,910,000, an increase of $36,480,000 from the second quarter of 2014 and accounted for 69% of total revenues in the second quarter of 2015 as compared to 52% in the second quarter of 2014. Revenues from chemicals were $32,688,000 in the second quarter of 2015, relatively unchanged from the second quarter of 2014 at $32,609,000 and accounted for 31% of total revenues in the second quarter of 2015 as compared to 48% in the second quarter of 2014. Within the chemicals segment, revenues for the three months ended June 30, 2015 changed as follows compared to the three months ended June 30, 2014: (i) revenues from the proprietary herbicides and associated intermediates increased 75% relative to the revenues recognized in the prior period ; (ii) revenues from an industrial intermediate utilized in the antimicrobial industry and other custom chemicals increased 25%; (iii) revenues from the bleach activator decreased 41% and (iv) revenues from the performance chemicals product group decreased 14%.

Revenue from the bleach activator has historically been the most significant component of our chemicals segment’s revenue base, however, it accounted for only 6% of total revenues for the three months ended June 30, 2015 as compared to 16% of total revenues in June 30, 2014. The future volume of and revenues from the bleach activator will depend on consumer demand for powder laundry detergents relative to liquid detergents and the availability of substitute products. Revenues for the bleach activator decreased on reduced volumes in the three months ended June 30, 2015. On March 18, 2015, the primary bleach activator customer sent a notice of termination of our supply contract with that customer effective December 31, 2015. While the termination of our existing supply contract will adversely affect future revenue, discussions with our customer to extend our business relationship beyond that date are ongoing.

With respect to the proprietary herbicide and associated intermediates, sales volume increased 200% for the three months ended June 30, 2015 as compared to the three months ended June 30, 2014. Revenue increased 75% due to product mix. The results for the three months ended June 30, 2014 reflected the phasing out of the legacy proprietary herbicide customer and the ramp up to target production of a replacement herbicide intermediate product.

Revenues from the industrial intermediate utilized in the antimicrobial industry and other custom chemical products increased 25% in the second quarter of 2015 as compared to the second quarter of 2014. Increased sales volumes from increased demand of two existing products primarily accounted for the increase.

Revenues from performance chemicals customers decreased 14% for the second quarter of 2015 as compared to the second quarter of 2014 and accounted for approximately 4% of total revenues for the three months ended June 30, 2015. The decrease was due in part to decreased demand from various customers for three products.

Revenues from biofuels increased $36,480,000 from the second quarter of 2014 to $71,910,000 in the second quarter of 2015. Revenues from biofuels benefited in the second quarter of 2015 from the sale of refined petroleum products on common carrier pipelines. Such sales totaled $28,186,000 and $784,000 in the three months ended June 30 of 2015 and 2014, respectively. We also experienced a 75% increase in the sales volume of biodiesel and diesel in the second quarter of 2015 as compared to the second quarter of 2014, however, the average selling price was significantly depressed. Reduced regulatory uncertainty associated with the EPA's proposed volumes for biomass-based diesel supported this volume growth for biodiesel, however, margins were depressed by the global declines in fuel prices.

Cost of Goods Sold and Distribution

Total cost of goods sold and distribution for the second quarter of 2015 were $99,054,000 as compared to $61,461,000 for the second quarter of 2014, an increase of 61%, which compares to a 54% increase in revenues for the period.

Cost of goods sold and distribution for the three months ended June 30, 2015 for our chemicals segment totaled $22,676,000 as compared to $25,478,000 for the three months ended June 30, 2014. On a percentage basis, chemicals segment cost of goods sold and distribution decreased approximately 11% for the three months ended June 30, 2015 compared to the three months ended June 30, 2014. This compares against flat chemical segment revenue for the same comparison periods. This difference was largely the result of product mix and improved yields on two product lines, including the benefit of the new proprietary herbicide plant which had startup problems in the second quarter of 2014.

Cost of goods sold and distribution for the second quarter of 2015 in our biofuels segment were $76,378,000 as compared to $35,983,000 for the second quarter of 2014. On a percentage basis, cost of goods sold and distribution increased 112% versus a 103% increase in revenues. The higher increase in cost of goods sold as compared to the change in revenues was attributed to the following: (i) the change in hedging losses incurred during the second quarter of 2015 of $3,056,000 as compared to $232,000 in the second quarter of 2014; (ii) a significant amount of RIN inventory existing at the end of the second quarter of 2015 at an average market value of $0.86 per RIN as compared to fewer RINs held at the end of the second quarter of 2014 at an average market value of $0.57 per RIN; and (iii) a disproportionate decline in biodiesel prices compared to feedstock prices.

Operating Expenses

Operating expenses were $2,367,000 and $2,407,000 in the three months ended June 30, 2015 and 2014, respectively.

Provision for Income Taxes 

The effective tax rate for the three months ended June 30, 2015 and June 30, 2014 reflects our expected tax rate on reported operating earnings before income tax and reflects the elimination of the small agri-biodiesel producer tax credit and the elimination of the tax credit for increasing research activities. Additionally, the effective tax rate for the three months ended June 30, 2015 reflects changes in estimates concerning FutureFuel’s unrecognized tax benefits. FutureFuel’s effective tax rate for the three months ended June 30, 2015 is lower than it would have been otherwise. This reduced rate is not expected to continue for the remainder of 2015.

Net Income

Net income for the quarter ended June 30, 2015 decreased 29% to $3,793,000 from $5,347,000 during the same quarter in 2014, due primarily to the (i) losses on derivative instruments and (ii) the increase in RIN inventory in our biofuels segment, which was mitigated by improved margins from the chemicals segment and gains on marketable securities for the current quarter.

Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

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

(Dollars in thousands other than per share amounts)

See the discussion above regarding our use of adjusted EBITDA.

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

(Dollars in thousands)

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

(Dollars in thousands) 

Revenues

Revenues for the six months ended June 30, 2015 were $158,685,000 as compared to revenues for the six months ended June 30, 2014 of $150,236,000, an increase of 6%. Revenues from biofuels were $91,791,000, an increase of 5% or $4,440,000 from the first six months of 2014 and accounted for 58% of total revenues in the first six months of 2015 and 2014. Revenues from chemicals increased 6% and accounted for 42% of total revenues in the first six months of 2015 and 2014. Within the chemicals segment, revenues for the six months ended June 30, 2015 changed as follows compared to the six months ended June 30, 2014: (i) revenues from the proprietary herbicides and associated intermediates increased 97%; (ii) revenues from an industrial intermediate utilized in the antimicrobial industry and other custom chemicals increased 26%; (iii) revenues from the bleach activator decreased 34% and (iv) revenues from the performance chemicals product group decreased 4%.

With respect to the proprietary herbicide and associated intermediates, revenue increased 97% for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014. The results for the six months ended June 30, 2014 reflected the phasing out of the legacy proprietary herbicide customer along with a challenged start for new product production.

Revenues from the industrial intermediate utilized in the antimicrobial industry and other custom chemical products increased 26% in the first six months of 2015 as compared to the first six months of 2014. Increased sales volumes of two existing products accounted for the increase.

Revenue from the bleach activator accounted for 9% of total revenues for the six months ended June 30, 2015 as compared to 15% in the six months ended June 30, 2014. The future volume of and revenues from the bleach activator will depend on consumer demand for powder laundry detergents relative to liquid detergents and the availability of substitute products. Revenues for the bleach activator decreased on reduced volumes in the six months ended June 30, 2015, and our primary bleach activator customer advised us on March 18, 2015 that it would be terminating our supply contract at the end of 2015. Although the termination of our existing supply contract will adversely affect future revenue, discussions with our customer to extend our business relationship beyond that date are ongoing.

Revenues from performance chemicals customers decreased 4% for the first six months of 2015 as compared to the first six months of 2014 and accounted for approximately 6% of total revenues for the six months ended June 30, 2015. The decrease was due in part to reduced demand from various customers for three products which was partially offset by increased demand for two products.

Revenues from biofuels increased to $91,791,000 in the first six months of 2015 as compared to $87,351,000 in the first six months of 2014. Revenues from biofuels benefited in part from the sale of refined petroleum products on common carrier pipelines. Such sales totaled $31,543,000 and $1,478,000 in the first six months of 2015 and 2014, respectively. This increase was offset by a 2% lower sales volume of biodiesel and diesel in the first six months of 2015 as compared to the first six months of 2014, primarily as a result of reduced overall demand from our major customers and a significant average selling price reduction in the weakened renewable energy market, which tracked a global decline in fuel prices.

Cost of Goods Sold and Distribution

Total cost of goods sold and distribution for the first six months of 2015 were $139,827,000 as compared to $134,056,000 for the first six months of 2014, an increase of 4%, which compares to a 6% increase in revenues for the period.

Cost of goods sold and distribution for the six months ended June 30, 2015 for our chemicals segment totaled $46,029,000 as compared to $46,720,000 for the six months ended June 30, 2014. On a percentage basis, chemicals segment cost of goods sold and distribution decreased approximately 1% for the six months ended June 30, 2015 compared to the six months ended June 30, 2014. This compares against a 6% increase in chemical segment revenue for the same comparison periods. This difference was largely a result of product mix and the benefit of the new proprietary herbicide plant which had startup problems in the first six months of 2014, and the benefit from adjustments in our inventory carrying value as determined utilizing the LIFO method of inventory accounting. Regarding LIFO, significant deflation from the pricing indices we used resulted in a reduction to cost of goods sold of $1,042,000 in the 6 months ended June 30, 2015 and resulted in an increase in cost of goods sold of $388,000 in the 6 months ended June 30, 2014.

Cost of goods sold and distribution for the first six months of 2015 in our biofuels segment were $93,798,000 as compared to $87,336,000 for the first six months of 2014. On a percentage basis, cost of goods sold and distribution increased 7% versus a 5% increase in revenues.  This change was attributed to i) higher hedging losses in the first half of 2015 of $2,337,000 as compared to hedging losses of $294,000 in the first half of 2014 and ii) the significant RIN inventory that was generated in the first half of 2015 and not sold compared to RIN inventory held in the first half of 2014 and not sold. Benefiting cost of goods sold were adjustments in our inventory carrying value as determined utilizing the LIFO method of inventory accounting. Regarding LIFO, significant deflation from the pricing indices we used resulted in a reduction to cost of goods sold of $2,282,000 in the six months ended June 30, 2015 and resulted in an increase in cost of goods sold of $344,000 in the six months ended June 30, 2014.

Operating Expenses

Operating expenses increased 8% to $4,904,000 in the first six months of 2015 from $4,558,000 in the first six months of 2014. This increase was attributable to stock based compensation granted in May and September during 2014. No stock based compensation has been granted in 2015.

Provision for Income Taxes

The effective tax rate for the six months ended June 30, 2015 and June 30, 2014 reflects our expected tax rate on reported operating earnings before income tax and reflects the elimination of the small agri-biodiesel producer tax credit and the elimination of the tax credit for increasing research activities. Additionally, the effective tax rate for the six months ended June 30, 2015 reflects changes in estimates concerning FutureFuel’s unrecognized tax benefits. FutureFuel’s effective tax rate for the six months ended June 30, 2015 is lower than it would have been otherwise. This reduced rate is not expected to continue for the remainder of 2015.

Net Income

Net income for the six months ended June 30, 2015 increased 3% to $11,924,000 from $11,621,000 during the same period in 2014, due primarily to improved profit in the chemicals segment, and mostly offset by losses on derivative instruments, the increase in RIN inventory in the biofuels segment, reduced gains on marketable securities, and interest income.

Critical Accounting Estimates

Revenue Recognition

For most product sales, revenue is recognized when product is shipped from our facilities and risk of loss and title have passed to the customer, which is in accordance with our customer contracts and the stated shipping terms. Nearly all custom manufactured products are manufactured under written contracts. 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. However, all of our products are tested for quality before shipment, and historically returns have been inconsequential. We do not offer rebates or warranties.

Revenue from bill and hold transactions in which a performance obligation exists is recognized when the total performance obligation has been met and title to the product has transferred. Bill and hold transactions for the three months ended June 30, 2015 and 2014 related to specialty chemical customers whereby revenue was recognized in accordance with contractual agreements based upon product being produced and ready for use. These sales were subject to written monthly purchase orders with agreement that production was reasonable. The inventory 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 specialty chemical customers. Sales revenue under bill and hold arrangements were $15,216,000 and $18,204,000 for the six months ended June 30, 2015 and 2014, respectively.

Liquidity and Capital Resources 

Our net cash provided by (used in) operating activities, investing activities, and financing activities for the six months ended June 30, 2015 and 2014 are set forth in the following chart.

(Dollars in thousands)

Operating Activities

Cash from operating activities increased from $2,842,000 of cash provided by operating activities in the first six months of 2014 to $34,860,000 of cash provided by operating activities in the first six months of 2015. This increase was primarily attributable to the change in our accounts receivable, including accounts receivable from related parties. In the first six months of 2015, the change in accounts receivable, including accounts receivable from related parties, increased cash provided by operating activities by $26,526,000. In the first six months of 2014, the change in accounts receivable, including accounts receivable from related parties, increased cash from operating activities by $9,527,000. The decrease in accounts receivable balances in 2015 was primarily related to the cash received for the BTC that was retroactively reinstated in December 2014 to January 1, 2014. The decrease in accounts receivable balances in 2014 was primarily related to the timing and amount of sales made on a common carrier pipeline. Reducing this increase to cash from operating activities was an increase in inventory balances for the first six months of 2015 as compared to the increase in inventory balances for the first six months of 2014. In the first six months of 2015, inventory purchases decreased cash from operating activities by $10,635,000. In the first six months of 2014, changes in inventory carrying values decreased cash from operating activities by $25,177,000. The smaller increase in the inventory carrying value in the first six months of 2015 was primarily due to the timing and amount of purchases made on a common carrier pipeline.

Investing Activities

Cash used in investing activities was $10,590,000 in the first six months of 2015 as compared to cash provided by investing activities in the first six months of 2014 of $5,646,000. This change was primarily the result of net sales of marketable securities in the first six months of 2015 compared to the first six months of 2014. Such net sales totaled $14,698,000 in the first six months of 2014 and such net sales totaled $191,000 in the first six months of 2015. Our capital expenditures and customer reimbursements for capital expenditures are summarized in the following table:

(Dollars in thousands)

Financing Activities

Cash used in financing activities decreased from $10,399,000 for the first six months of 2014 to $5,990,000 of cash used in financing activities in the first six months of 2015. This change is primarily the result of a decrease in cash used for dividend payments. In the first six months of 2014, dividends paid totaled $10,434,000. In the first six months of 2015, dividends paid totaled $5,247,000. Cash used for financing costs for the first six months of 2015 were $721,000 and no such costs existed in the first six months of 2014.

Credit Facility

Effective April 16, 2015, we entered into a new $150 million secured committed credit facility with a syndicated group of commercial banks. The loan is a revolving facility the proceeds of which may be used for our working capital, capital expenditures, and general corporate purposes. The facility terminates on April 16, 2020 and replaces a $50 million asset-based line of credit with a commercial bank that was terminated upon commencement of the new line. See Note 6 – “Borrowing” in the Notes to our condensed consolidated financial statements for additional information regarding our Credit Agreement.

We intend to fund future capital requirements for our businesses from cash flow 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 the first two quarters of 2015, we paid a regular cash dividend in the amount of $0.06 per share on our common stock. The regular cash dividend amounted to $2,623,000 in the first quarter of 2015 and $2,624,000 in the second quarter of 2015, for aggregate dividend payments of $5,247,000 in the first six months of 2015.

In the first two quarters of 2014, we paid a regular cash dividend in the amount of $0.12 per share on our common stock. The regular cash dividend amounted to $5,201,000 in the first quarter of 2014 and $5,233,000 in the second quarter of 2014, for aggregate dividend payments of $10,434,000 in the first six months of 2014.

Capital Management

As a result of our initial equity offering, our subsequent positive operating results, the exercise of warrants, and the issuance of shares in our at-the-market offering, we accumulated excess working capital. Some of this excess working capital has been paid out as special and regular cash dividends. Additionally, regular cash dividends will be paid in 2015, as previously reported. 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 the periods ended June 30, 2015 and December 31, 2014, we also had investments in certain preferred stock, trust preferred securities, exchange traded debt instruments, and other equity instruments. 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, exchange traded debt instruments, and other equity instruments totaled $85,943,000 and $87,720,000 at June 30, 2015 and December 31, 2014, respectively.

Lastly, we maintain depositary 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 balance sheet at June 30, 2015 and December 31, 2014. Second, we hedge our biofuels feedstock through the execution of purchase contracts and supply agreements with certain vendors. These hedging transactions are recognized in earnings and were not recorded on our balance sheet at June 30, 2015 or December 31, 2014 as they do not meet the definition of a derivative instrument as defined under accounting principles generally accepted in the U.S. The purchase of biofuels feedstock generally involves two risk 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.

Item 3. 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, biofuels feedstock, 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, and some raw material price risk remains significant.

In order to manage price risk caused by market fluctuations in biofuels prices, we may enter into exchange traded commodity futures and options contracts. We account for these derivative instruments in accordance with ASC 815-20-25, Derivatives and Hedging, Hedging-General, Recognition. 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 the first six months of 2015 or 2014. Changes in the fair value of our derivative instruments are recognized at the end of each accounting period and recorded in the statement of operations as a component of cost of goods sold within the biodiesel segment.

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 volume of biofuel being sold. As of June 30, 2015 and December 31, 2014, the fair values of our derivative instruments were a net liability in the amount of $5,353,000 and a net asset of $68,000, 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 for the first six months of 2015. 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 commodity listed below would result in the following change in gross profit.

(Volume and dollars in thousands)

We had no borrowings as of June 30, 2015 or December 31, 2014 and, as such, we were not exposed to interest rate risk for those periods. Due to the relative insignificance of transactions denominated in foreign currency, we consider our foreign currency risk to be immaterial.

Item 4. Controls and Procedures.

Under the supervision and with the participation of our chief executive officer and our principal financial officer and other senior management personnel, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e)) under the Securities Exchange Act of 1934, as amended (or the Exchange Act), as of the end of the period covered by this report. Based on that evaluation, our chief executive officer and our principal financial officer have concluded that these disclosure controls and procedures as of June 30, 2015 were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

There were no changes in our internal control over financial reporting during our last fiscal quarter that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. 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. However, from time to time, we may be a party to, or a target 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. However, adverse developments could negatively impact earnings or cash flows in future periods.

Item 1A. Risk Factors.

There have been no material changes to the risk factors we previously disclosed in Item 1A of our Form 10-K, Annual Report for the year ended December 31, 2014 filed with the SEC on March 13, 2015.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information. 

None.

Item 6. Exhibits.

Special Note Regarding Forward Looking Information

This report, and the documents incorporated by reference into this report, contain forward-looking statements. Forward-looking statements deal with our current plans, intentions, beliefs, and expectations, and statements of future economic performance. Statements containing such terms as “believe,” “do not believe,” “plan,” “expect,” “intend,” “estimate,” “anticipate,” and other phrases of similar meaning are considered to contain uncertainty and are forward-looking statements. In addition, from time to time we or our representatives have made or will make forward-looking statements orally or in writing. Furthermore, such forward-looking statements may be included in various filings that we make with the SEC, or in press releases, or in oral statements made by or with the approval of one of our authorized executive officers.

These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause actual results to differ include, but are not limited to, those set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in FutureFuel’s Form 10-K Annual Report for the year ended December 31, 2014 and in our future filings made with the SEC. You should not place undue reliance on any forward-looking statements contained in this report which reflect our management’s opinions only as of their respective dates. Except as required by law, we undertake no obligation to revise or publicly release the results of any revisions to forward-looking statements. The risks and uncertainties described in this report and in subsequent filings with the SEC are not the only ones we face. New factors emerge from time to time, and it is not possible for us to predict which will arise. There may be additional risks not presently known to us or that we currently believe are immaterial to our business. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. If any such risks occur, our business, operating results, liquidity, and financial condition could be materially affected in an adverse manner. You should consult any additional disclosures we have made or will make in our reports to the SEC on Forms 10-K, 10-Q, and 8-K, and any amendments thereto. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this report.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FUTUREFUEL CORP.

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