FutureFuel Corp. - Quarter Report: 2019 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 (Mark One)

 

√	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2019

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from __________ to ___________
	Commission file number: 0-52577

 

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware		20-3340900
(State or Other Jurisdiction of		(IRS Employer Identification No.)
Incorporation or Organization)
8235 Forsyth Blvd., Suite 400, St Louis, Missouri		63105
(Address of Principal Executive Offices)		(Zip Code)

  (314) 854-8352 

(Registrant’s Telephone Number, Including Area Code)

 

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

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	FF	NYSE

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes √ No ☐

 

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

 

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

 

Large accelerated filer   ☐		Accelerated filer	√
Non-accelerated filer  ☐		Smaller reporting company	☐
(do not check if a smaller reporting company)		Emerging growth company	☐

 

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 8, 2019: 43,743,243  

 

 

 

		(Unaudited)
		September 30, 2019				December 31, 2018
Assets
Cash and cash equivalents		$	235,945			$	214,972
Accounts receivable, net of allowance for bad debts of $0			20,820				16,294
Accounts receivable – related parties			22				1,844
Inventory			42,789				39,296
Income tax receivable			367				6,858
Prepaid expenses			510				1,767
Prepaid expenses – related parties			12				12
Marketable securities			75,583				79,888
Deferred financing costs			72				144
Other current assets			870				1,255
Total current assets			376,990				362,330
Property, plant and equipment, net			100,320				103,575
Intangible assets			1,408				1,408
Deferred financing costs			-				36
Other noncurrent assets			5,548				3,806
Total noncurrent assets			107,276				108,825
Total Assets		$	484,266			$	471,155
Liabilities and Stockholders’ Equity
Accounts payable		$	25,632			$	19,981
Accounts payable – related parties			972				1,689
Deferred revenue – short-term			5,232				4,581
Dividends payable			2,625				10,498
Accrued expenses and other current liabilities			5,227				2,742
Total current liabilities			39,688				39,491
Deferred revenue – long-term			19,394				20,319
Noncurrent deferred income tax liability			17,813				18,026
Other noncurrent liabilities			2,244				4,241
Total noncurrent liabilities			39,451				42,586
Total liabilities			79,139				82,077
Commitments and contingencies
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, none issued and outstanding			-				-
Common stock, $0.0001 par value, 75,000,000 shares authorized, 43,743,243, issued and outstanding at September 30, 2019 and December 31, 2018			4				4
Accumulated other comprehensive income (loss)			200				(20	)
Additional paid in capital			282,166				282,145
Retained earnings			122,757				106,949
Total stockholders’ equity			405,127				389,078
Total Liabilities and Stockholders’ Equity		$	484,266			$	471,155

---

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2019				2018				2019				2018
Revenue		$	65,332			$	80,588			$	182,830			$	223,184
Revenue – related parties			352				834				2,219				2,321
Cost of goods sold			54,037				61,559				155,603				146,916
Cost of goods sold – related parties			4,455				5,651				12,314				15,682
Distribution			1,687				1,512				5,006				4,329
Distribution – related parties			43				47				132				147
Gross profit			5,462				12,653				11,994				58,431
Selling, general, and administrative expenses
Compensation expense			661				933				1,996				3,054
Other expense			561				476				1,609				1,482
Related party expense			132				138				391				416
Research and development expenses			833				877				2,327				2,843
Total operating expenses			2,187				2,424				6,323				7,795
Income from operations			3,275				10,229				5,671				50,636
Interest and dividend income			2,718				2,543				7,830				6,688
Interest expense			(43	)			(43	)			(130	)			(129	)
Gain (loss) on marketable securities			1,424				815				5,177				(3,273	)
Other income (expense)			262				(87	)			149				(264	)
Other income			4,361				3,228				13,026				3,022
Income before taxes			7,636				13,457				18,697				53,658
Income tax provision			1,014				4,012				2,889				2,336
Net income		$	6,622			$	9,445			$	15,808			$	51,322
Earnings per common share
Basic		$	0.15			$	0.22			$	0.36			$	1.17
Diluted		$	0.15			$	0.22			$	0.36			$	1.17
Weighted average shares outstanding
Basic			43,743,243				43,724,195				43,743,243				43,719,215
Diluted			43,743,243				43,732,920				43,745,153				43,725,370
Comprehensive income
Net income		$	6,622			$	9,445			$	15,808			$	51,322
Other comprehensive income (loss) from unrealized net gains (losses) on available-for-sale debt securities			1				(27	)			279				(46	)
Income tax effect			-				6				(59	)			10
Total unrealized gains (losses), net of tax			1				(21	)			220				(36	)
Comprehensive income		$	6,623			$	9,424			$	16,028			$	51,286

---

 

		For the Nine Months Ended September 30, 2019
										Accumulated
										Other				Additional								Total
		Common Stock								Comprehensive				paid-in				Retained				Stockholders’
		Shares				Amount				Income				Capital				Earnings				Equity
Balance - December 31, 2018			43,743,243			$	4			$	(20	)		$	282,145			$	106,949			$	389,078
Other comprehensive income			-				-				202				-				-				202
Net income			-				-				-				-				5,499				5,499
Balance - March 31, 2019			43,743,243			$	4			$	182			$	282,145			$	112,448			$	394,779
Other comprehensive income			-				-				17				-				-				17
Net income			-				-				-				-				3,687				3,687
Balance - June 30, 2019			43,743,243			$	4			$	199			$	282,145			$	116,135			$	398,483
Stock based compensation, net of tax			-				-				-				21				-				21
Other comprehensive income			-				-				1				-				-				1
Net income			-				-				-				-				6,622				6,622
Balance - September 30, 2019			43,743,243			$	4			$	200			$	282,166			$	122,757			$	405,127

		For the Nine Months Ended September 30, 2018
										Accumulated
										Other				Additional								Total
		Common Stock								Comprehensive				paid-in				Retained				Stockholders’
		Shares				Amount				Income				Capital				Earnings				Equity
Balance - December 31, 2017 - As previously reported			43,741,670			$	4			$	8,433			$	281,964			$	61,195			$	351,596
Prior period adjustment: Change in accounting principles			-				-				(8,273	)			-				3,094				(5,179	)
Balance - January 1, 2018 - As adjusted			43,741,670			$	4			$	160			$	281,964			$	64,289			$	346,417
Stock based compensation, net of tax			-				-				-				107				-				107
Other comprehensive loss			-				-				(58	)			-				-				(58	)
Net income			-				-				-				-				35,826				35,826
Balance - March 31, 2018			43,741,670			$	4			$	102			$	282,071			$	100,115			$	382,292
Stock based compensation, net of tax			1,007				-				-				107				-				107
Other comprehensive income			-				-				43				-				-				43
Net income			-				-				-				-				6,051				6,051
Balance - June 30, 2018			43,742,677			$	4			$	145			$	282,178			$	106,166			$	388,493
Stock based compensation, net of tax			566				-				-				(69	)			-				(69	)
Other comprehensive loss			-				-				(21	)			-				-				(21	)
Net income			-				-				-				-				9,445				9,445
Balance - September 30, 2018			43,743,243			$	4			$	124			$	282,109			$	115,611			$	397,848

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		Nine Months Ended September 30,
		2019				2018
Cash flows from operating activities
Net income		$	15,808			$	51,322
Adjustments to reconcile net income to net cash from operating activities:
Depreciation			9,092				8,502
Amortization of deferred financing costs			108				108
Benefit for deferred income taxes			(273	)			(3,609	)
Change in fair value of equity securities			(6,621	)			5,597
Change in fair value of derivative instruments			(357	)			(2,290	)
Loss (gain) on the sale of investments			1,444				(2,324	)
Stock based compensation			21				321
(Gain) loss on disposal of property and equipment			(11	)			41
Noncash interest expense			22				22
Changes in operating assets and liabilities:
Accounts receivable			(4,526	)			3,031
Accounts receivable – related parties			1,822				(2,382	)
Inventory			(3,493	)			(4,251	)
Income tax receivable			6,491				6,458
Prepaid expenses			1,257				1,190
Other assets			221				(247	)
Accounts payable			5,951				13,018
Accounts payable – related parties			(717	)			1,949
Accrued expenses and other current liabilities			1,904				5,385
Deferred revenue			(274	)			(2,672	)
Other noncurrent liabilities			(3,511	)			-
Net cash provided by operating activities			24,358				79,169
Cash flows from investing activities
Collateralization of derivative instruments			852				2,384
Purchase of marketable securities			(19,200	)			(19,664	)
Proceeds from the sale of marketable securities			28,962				33,942
Proceeds from the sale of property and equipment			13				22
Capital expenditures			(6,139	)			(3,084	)
Net cash provided by investing activities			4,488				13,600
Cash flows from financing activities
Minimum tax withholding on stock options exercised and awards vested			-				(176	)
Payment of dividends			(7,873	)			(7,872	)
Net cash used in financing activities			(7,873	)			(8,048	)
Net change in cash and cash equivalents			20,973				84,721
Cash and cash equivalents at beginning of period			214,972				114,627
Cash and cash equivalents at end of period		$	235,945			$	199,348
Cash paid for interest		$	-			$	-
Cash paid for income taxes		$	1,076			$	1,506
Noncash investing and financing activities:
Noncash capital expenditures		$	42			$	-
Noncash operating leases		$	432			$	-

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1 )	NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

Organization

 

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

 

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

 

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

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared by FutureFuel in accordance and consistent with the accounting policies stated in FutureFuel’s 2018 audited consolidated financial statements and should be read in conjunction with the 2018 audited consolidated financial statements of FutureFuel. Certain reclassifications were made to prior year amounts to conform to the 2019 presentation.

 

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

 

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

 

The biodiesel Blenders’ Tax Credit (“BTC”) provides a $1.00 per gallon tax credit to the blender of biomass-based diesel with at least 0.1% petroleum-based diesel fuel.  When in effect, FutureFuel is the blender of record and recognizes the credit as a reduction to cost of goods sold.  The BTC expired on December 31, 2016 and was not reinstated for 2017 until it was signed into law as part of The Bipartisan Budget Act of 2018 passed by Congress on February 9, 2018.  As this Act was passed into law in 2018, FutureFuel recognized a net estimated pretax benefit from the reinstatement in the biofuels segment of $28,865 (a reduction in revenue of $13,559 for customer rebates (“BTC Rebates”) upon reinstatement and a reduction in cost of goods sold of $42,424). The gallons related to this credit were sold in the twelve months ended December 31, 2017.

  

As part of the law from which the BTC was reinstated, small agri-biodiesel producers with production capacity not in excess of 60 million gallons were eligible for an additional tax credit of $0.10 per gallon on the first 15 million gallons of agri-biodiesel sold (the “Small Agri-biodiesel Producer Tax Credit”).  The benefit of the Small Agri-biodiesel Producer Tax Credit was recognized as a $1,500 benefit in the income tax provision in the nine-month period ended September 30, 2018.

 

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

 

 

 Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)  

 

 

3 )	REVENUE RECOGNITION

 

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

 

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

 

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

 

 

Contract Assets and Liabilities:

 

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

 

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

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

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

 

 

 

 

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

 

 

Transaction price allocated to the remaining performance obligations:

 

At September 30, 2019, approximately $20,224 of revenue is expected to be recognized from remaining performance obligations. FutureFuel expects to recognize this revenue ratably over expected sales over the expected term of its long-term contracts which range from one to five years. Approximately 25% of this revenue is expected to be recognized over the next 12 months, and 75% is expected to be recognized between one and five years. These amounts are subject to change based upon changes in the estimated contract life and estimated quantities to be sold over the contract life.

 

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

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

Disaggregation of revenue - contractual and non-contractual:

 

 

Timing of revenue:

 

 

 

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

 

4 )	LEASE COMMITMENTS AND SHORT-TERM CONTRACTS

 

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

 

The Company adopted the new lease standard January 1, 2019 under the modified retrospective transition approach using the effective date as the date of initial application with the practical expedient election for short-term lease exemption along with the election to not separate lease and non-lease components for all leases.

 

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

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

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

 

 

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

 

 

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

 

 

 

5 )

INVENTORY

 

The carrying values of inventory were as follows as of:   

 

  

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)  

 

 

6 )	DERIVATIVE INSTRUMENTS

 

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

 

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

 

The fair value of FutureFuel’s derivative instruments is determined based on the closing prices of the derivative instruments on relevant commodity exchanges at the end of an accounting period. Realized gains and losses on derivative instruments and changes in fair value of the derivative instruments are recorded in the statements of operations as a component of cost of goods sold, and amounted to a gain of $322 for the three months ended September 30, 2019 and a loss of $676 for the three months ended September 30, 2018, and a loss of $711 and $3,947 for the nine months ended September 30, 2019 and 2018, respectively.

 

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

 

 

The margin account maintained with a broker to collateralize these derivative instruments carried an account balance of $128 and $980 at September 30, 2019 and December 31, 2018, respectively, and was classified as other current assets in the consolidated balance sheets. The carrying values of the margin account and of the derivative instruments are included net, in other current assets.

 

 

7 )	MARKETABLE SECURITIES

 

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

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

  

AVAILABLE-FOR-SALE DEBT SECURITIES:

 

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

 

 

 

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

 

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

 

 

   

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

     

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

8 )	RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME:

 

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

 

 

 

 

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

 

 

 

9 )	FAIR VALUE MEASUREMENTS

 

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

 

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

 

 

 

 

 

10 )	INTANGIBLE ASSETS

 

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

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)  

 

 

11 )	ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

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

 

 

 

 

12 )	BORROWINGS

 

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

 

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

 

 

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

 

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

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)  

 

 

13)	LEGAL MATTERS

 

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

 

 

14 )	RELATED PARTY TRANSACTIONS

 

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

 

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

 

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

 

 

15 )	INCOME TAX PROVISION

 

The following table summarizes the income tax provision.  

 

 

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

 

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

 

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

 

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

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)  

 

 

16 )	EARNINGS PER SHARE

 

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

 

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

 

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

 

 

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

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)  

 

 

17 )	SEGMENT INFORMATION

 

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

 

Chemicals

 

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

 

Biofuels

 

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

 

Summary of long-lived assets and revenues by geographic area

 

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

 

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

 

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

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)  

 

Summary of business by segment

 

 

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

 

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)  

 

 

18 )	RECENTLY ISSUED ACCOUNTING STANDARDS

 

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

 

Standard

Description

Effective Date

Effect on the Financial Statements or Other Significant Matters

In August, 2018 the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract		These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the amendments require an entity (customer) in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The amendments also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals.		Annual periods beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted, including any interim period.		The Company plans to adopt the new guidance effective January 1, 2020.  The new guidance is expected to have minimal impact.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, Measurement of Credit Losses on Financial Instruments. In April and May of 2019, FASB issued ASU 2019-04 and 2019-05 related to codification improvements and targeted transition relief for ASU 2016-13		These amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.		Annual periods beginning after December 15, 2019. Earlier adoption was permitted, for annual periods beginning after December 15, 2018.		The Company is currently considering the potential impact of this standard on financial reporting and internal controls related to the implementation of the standard as it relates to accounts receivable and debt securities and plans to adopt the new guidance on the effective date of January 1, 2020. The new guidance is expected to have minimal impact.

 

 

 

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