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FutureFuel Corp. - Quarter Report: 2023 March (Form 10-Q)

ff20230331b_10q.htm
 

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 March 31, 2023

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

 

ff20200331_10qimg001.jpg

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware  

 

20-3340900

(State or Other Jurisdiction of 

 

(IRS Employer Identification No.)

Incorporation or Organization) 

 

 

   
8235 Forsyth Blvd., Suite 400, St Louis, Missouri   63105
(Address of Principal Executive Offices) (Zip Code)
   
 (314) 854-8352  
 (Registrant’s Telephone Number, Including Area Code) 

                                             

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

FF

NYSE

 

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

 

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

 

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

 

Large accelerated filer   ☐  

 

Accelerated filer 

 

Non-accelerated filer     ☐  

 

Smaller reporting company

☐ 

 

 

 

Emerging growth company

 

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of May 9, 2023: 43,763,243 

 

 

 

 

 

PART I FINANCIAL INFORMATION

   

Item 1. Financial Statements.

 

FutureFuel Corp.

Consolidated Balance Sheets

(Dollars in thousands)

 

  March 31, 2023  December 31, 2022 

Assets

        

Cash and cash equivalents

 $

145,058

  $175,640 

Accounts receivable, inclusive of the blenders’ tax credit of $7,037 and $8,970, and net of allowances for bad debt of $74 and $48, respectively

  25,921   26,198 

Accounts receivable – related parties

  6   6 

Inventory

  69,234   26,761 

Income tax receivable

  1,936   1,959 

Prepaid expenses

  3,169   3,694 

Prepaid expenses – related parties

  12   12 

Marketable securities

  37,681   37,126 

Other current assets

  8,481   2,380 

Total current assets

  

291,498

   273,776 

Property, plant and equipment, net

  76,899   76,941 

Other assets

  4,881   5,252 

Total noncurrent assets

  81,780   82,193 

Total Assets

 $373,278  $355,969 

Liabilities and Stockholders Equity

        

Accounts payable, inclusive of the blenders’ tax credit rebates due customers of $890 and $890, respectively

 $29,009  $28,546 

Accounts payable – related parties

  7,824   7,799 

Deferred revenue – current

  3,664   3,772 

Dividends payable

  7,877   10,503 

Accrued expenses and other current liabilities

  5,207   5,477 

Accrued expenses and other current liabilities – related parties

  -   1 

Total current liabilities

  53,581   56,098 

Deferred revenue – non-current

  13,913   15,079 

Other noncurrent liabilities

  1,686   1,792 

Total noncurrent liabilities

  15,599   16,871 

Total liabilities

  69,180   72,969 

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, 43,763,243 and 43,763,243 issued and outstanding as of March 31, 2023 and December 31, 2022

  4   4 

Accumulated other comprehensive income (loss)

  16   (1

)

Additional paid in capital

  282,489   282,489 

Retained earnings

  21,589   508 

Total stockholders’ equity

  304,098   283,000 

Total Liabilities and Stockholders Equity

 $373,278  $355,969 

 

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

 

1

 

 

 FutureFuel Corp.

Consolidated Statements of Operations and Comprehensive Income

(Dollars in thousands, except per share amounts)

(Unaudited)

 

  Three Months Ended March 31, 
  2023  2022 

Revenue

 $74,161  $42,074 

Revenue – related parties

  20   187 

Cost of goods sold

  51,936   47,219 

Cost of goods sold – related parties

  10   1,260 

Distribution

  558   884 

Distribution – related parties

  54   53 

Gross profit (loss)

  21,623   (7,155)

Selling, general, and administrative expenses

        

Compensation expense

  1,138   656 

Other expense

  1,009   963 

Related party expense

  153   154 

Research and development expenses

  1,072   679 

Total operating expenses

  3,372   2,452 

Income (loss) from operations

  18,251   (9,607)

Interest and dividend income

  2,336   664 

Interest expense

  (33)  (32)

Gain (loss) on marketable securities

  533   (4,127)
Other income  1   - 

Other income (expense)

  2,837   (3,495)

Income (loss) before taxes

  21,088   (13,102)

Income tax provision (benefit)

  7   (704)

Net income (loss)

 $21,081  $(12,398)
         

Earnings (loss) per common share

        

Basic

 $0.48  $(0.28)

Diluted

 $

0.48

  $(0.28)

Weighted average shares outstanding

        

Basic

  43,763,243   43,763,243 

Diluted

  43,766,536   43,763,243 
         

Comprehensive income (loss)

        

Net income (loss)

 $21,081  $(12,398)

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

  22   (62)

Income tax effect

  (5)  13 

Total other comprehensive income (loss), net of tax

  17   (49)

Comprehensive income (loss)

 $21,098  $(12,447)

  

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

 

2

 

 

FutureFuel Corp.

Consolidated Statements of Stockholders’ Equity

(Dollars in thousands)

(Unaudited)

 

   

For the Three Months Ended March 31, 2023

 
                   

Accumulated

                         
                   

Other

   

Additional

           

Total

 
   

Common Stock

   

Comprehensive

   

paid-in

   

Retained

   

Stockholders’

 
   

Shares

   

Amount

   

 (Loss) Income

   

Capital

   

Earnings

   

Equity

 

Balance - December 31, 2022

    43,763,243     $ 4     $ (1 )   $ 282,489     $ 508     $ 283,000  

Other comprehensive gain

            -       17       -       -       17  

Net income

            -       -       -       21,081       21,081  

Balance - March 31, 2023

    43,763,243     $ 4     $ 16     $ 282,489     $ 21,589     $ 304,098

 

 

  

For the Three Months Ended March 31, 2022

 
          

Accumulated

             
          

Other

  

Additional

      

Total

 
  

Common Stock

  

Comprehensive

  

paid-in

  

Retained

  

Stockholders’

 
  

Shares

  

Amount

  

Income (Loss)

  

Capital

  

Earnings

  

Equity

 

Balance - December 31, 2021

  43,763,243  $4  $178  $282,443  $6,303  $288,928 
Cash dividends declared, $0.24 per common share
      -   -   -   (10,503)  (10,503)

Other comprehensive loss

      -   (49)  -   -   (49)

Net loss

      -   -   -   (12,398)  (12,398)

Balance - March 31, 2022

  43,763,243  $4  $129  $282,443  $(16,598) $265,978 

 

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

 

3

 

 

FutureFuel Corp.

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited) 

 

    Three Months Ended March 31,  
    2023     2022  

Cash flows from operating activities

               

Net income (loss)

  $ 21,081     $ (12,398 )

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

               

Depreciation

    2,551       2,570  

Amortization of deferred financing costs

    24       24  

Benefit for deferred income taxes

    (5 )     (719 )

Change in fair value of equity securities

    (533 )     4,100  

Change in fair value of derivative instruments

    (4,902 )     (1,536 )

Loss on the sale of investments

    -       27  

Loss on disposal of property and equipment

    -       6  

Noncash interest expense

    8       8  

Changes in operating assets and liabilities:

               

Accounts receivable

    277       11,268  

Accounts receivable – related parties

    -       58  

Inventory

    (42,473 )     (10,700 )

Income tax receivable

    23       15  

Prepaid expenses

    525       631  
Prepaid expenses - related parties     -       (8 )

Other assets

    (5,165 )     38  

Accounts payable

    413       (730 )

Accounts payable – related parties

    25       57  

Accrued expenses and other current liabilities

    (270 )     (917 )

Accrued expenses and other current liabilities – related parties

    (1 )     (1 )

Deferred revenue

    (1,274 )     (2,269 )

Other noncurrent liabilities

    (114 )     (100 )

Net cash used in operating activities

    (29,810 )     (10,576 )

Cash flows from investing activities

               

Collateralization of derivative instruments

    4,327       (2,664 )

Proceeds from the sale of marketable securities

    -       250  

Proceeds from the sale of property and equipment

    -       56  

Capital expenditures

    (2,459 )     (977 )

Net cash provided by (used in) investing activities

    1,868       (3,335 )

Cash flows from financing activities

               

Payment of dividends

    (2,626 )     (2,626 )
Deferred financing costs     (14 )     -  

Net cash used in financing activities

    (2,640 )     (2,626 )

Net change in cash and cash equivalents

    (30,582 )     (16,537 )

Cash and cash equivalents at beginning of period

    175,640       137,521  

Cash and cash equivalents at end of period

  $ 145,058     $ 120,984  
                 

Cash paid for interest

  $ -     $ -  

Cash paid for income taxes

  $ -     $ -  

Noncash investing and financing activities:

               

Cash dividends declared, not paid

  $ 7,877     $ 7,877  

Noncash capital expenditures

  $ 258     $ 174  

 

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

 

4

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

1)

SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared by FutureFuel Corp. ("FutureFuel" or "the Company") in accordance and consistent with the accounting policies stated in the Company's 2022 Annual Report on Form 10-K, inclusive of the audited consolidated financial statements and should be read in conjunction with these consolidated financial statements.

 

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

 

Recent Accounting Standards

 

No new accounting standards have been adopted recently.

 

Proposed Accounting Standards  

 

In  March 2023, the Financial Accounting Standards Board (the "FASB") issued Proposed Accounting Standards Update (ASU) No. 2023-ED100 Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which aims to address requests for improved income tax disclosures from investors that use the financial statements to make capital allocation decisions. The amendments in this Proposed ASU, if adopted, would address the investor requests for more transparency of income tax information and would apply to all entities that are subject to income taxes. The Company is in the process of evaluating this accounting standard.

 

  

 

2)

GOVERNMENT TAX CREDITS

 

BIODIESEL BLENDERS TAX CREDIT AND SMALL AGRI-BIODIESEL PRODUCER TAX CREDIT

 

The biodiesel Blenders’ Tax Credit (“BTC”) provides a one dollar per gallon tax credit to the blender of biomass-based diesel with at least 0.1% petroleum-based diesel fuel.  The BTC will expire December 31, 2024 based on current law.  The Company records this credit as a reduction to cost of goods sold.

 

Within the law of the BTC, small agri-biodiesel producers with production capacity not in excess of 60 million gallons are eligible for an additional tax credit of $0.10 per gallon on the first 15 million gallons of agri-biodiesel sold (the “Small Agri-biodiesel Producer Tax Credit”). The Company was eligible for this credit as part of the tax provision.

 

CARES ACT EMPLOYEE RETENTION TAX CREDIT

 

The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), was enacted on March 27, 2020, to encourage eligible employers to retain employees on their payroll.  The Consolidated Appropriations Act, effective January 1, 2021 broadened the eligibility of the credit.  FutureFuel has applied for this credit and will recognize the benefit of the credit once reasonable assurance can be made as to the retention of the credit. 

 

5

 

 

 Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

3)

 REVENUE RECOGNITION

 

The majority of 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.

 

Certain of the Company's custom chemical contracts within the chemical segment contain a material right as defined by ASC 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. The Company recognizes revenue when the customer takes control of the inventory, either upon shipment or when the material is made available for pick up. If the customer is deemed to take control of the inventory prior to pick up, the Company recognizes the revenue as a bill-and-hold transaction in accordance with ASC Topic 606. The Company applies the renewal option approach in allocating the transaction price to these material rights and transfer of product. As a basis for allocating the transaction price to the material right and transfer of product, the Company estimates the expected life of the contract, the expected contractual volumes to be sold over that life, and the most likely expected sales price. Each estimate is updated quarterly on a prospective basis.

 

Contract Assets and Liabilities:

 

Contract assets consist of unbilled amounts typically resulting from revenue recognized through bill-and-hold arrangements. The contract assets at March 31, 2023 and December 31, 2022 consist of unbilled revenue from one customer and are recorded as accounts receivable in the consolidated balance sheets. Contract liabilities consist of advance payments related to material rights recorded as deferred revenue in the consolidated balance sheets. Increases to contract liabilities from cash received for a performance obligation of chemical segment plant expansions was $0 for the three months ended March 31, 2023 and 2022. Contract liabilities are reduced as the Company transfers product to the customer under the renewal option approach. Revenue recognized in the chemical segment from the contract liability reductions were $1,219 and $2,213 in the three months ended March 31, 2023 and 2022, respectively. These contract asset and liability balances are reported on the consolidated balance sheets on a contract-by-contract basis at the end of each reporting period.

 

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

 

Contract Assets and Liability Balances

 

March 31, 2023

  

December 31, 2022

 

Trade receivables, included in accounts receivable*

 $17,794  $16,459 

Contract assets, included in accounts receivable

 $1,096  $775 

Contract liabilities, included in deferred revenue - short-term

 $3,457  $3,565 

Contract liabilities, included in deferred revenue - long-term

 $10,493  $11,605 

 

*Exclusive of the BTC of $7,037 and $8,970, respectively, and net of allowances for bad debt of $74 and $48, respectively, as of the dates noted.

 

Transaction price allocated to the remaining performance obligations:

 

At March 31, 2023, approximately $13,950 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 three to four years. Approximately 25% of this revenue is expected to be recognized over the next 12 months, and 75% is expected to be recognized over the subsequent 36 months. These amounts are subject to change based upon changes in the estimated contract life and estimated quantities to be sold over the contract life.

 

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

6

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

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

 

Disaggregation of revenue - contractual and non-contractual:

 

  Three Months Ended March 31, 
  2023  2022 

Contract revenue from customers with > 1 year arrangements

 $10,465  $10,142 

Contract revenue from customers with < 1 year arrangements

  63,661   32,064 

Revenue from non-contractual arrangements

  55   55 

Total revenue

 $74,181  $42,261 

 

Timing of revenue:

 

  Three Months Ended March 31, 
  2023  2022 

Bill-and-hold revenue

 $10,590  $9,276 

Non-bill-and-hold revenue

  63,591   32,985 

Total revenue

 $74,181  $42,261 

 

As of March 31, 2023 and December 31, 2022, $3,651 and $4,473 of bill-and-hold revenue had not shipped, respectively. 

 

 

4)

INVENTORY

 

The carrying values of inventory were as follows as of:

 

  

March 31, 2023

  

December 31, 2022

 

At average cost (approximates current cost)

        

Finished goods

 $43,052  $11,719 

Work in process

  1,040   879 

Raw materials and supplies

  41,093   33,897 
   85,185   46,495 

LIFO reserve

  (15,951)  (19,734)

Total inventory

 $69,234  $26,761 

 

No liquidation occurred in the three months ended March 31, 2023 and 2022.

 

7

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

5)

DERIVATIVE INSTRUMENTS

 

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

 

In order to manage commodity price risk caused by market fluctuations in biofuel prices, future purchases of feedstock used in biodiesel production, physical feedstock, finished product inventories attributed to the process, and other petroleum products purchased or sold, the Company may enter into exchange-traded commodity futures and options contracts. The Company accounts for these derivative instruments in accordance with ASC 815-20-25, Derivatives and Hedging. Under this standard, the accounting for changes in the fair value of a derivative instrument depends upon whether it has been designated as an accounting hedging relationship and, further, on the type of hedging relationship. To qualify for designation as an accounting hedging relationship, specific criteria must be met and appropriate documentation maintained. The Company had no derivative instruments that qualified under these rules as designated accounting hedges in 2023 or 2022. The Company has elected the normal purchase and normal sales exception for certain feedstock purchase contracts and supply agreements.

 

Realized gains and losses on derivative instruments and changes in fair value of the derivative instruments are recorded in the consolidated statements of operations as a component of cost of goods sold and amounted to a gain of $8,307 and a loss of $9,129 for the three months ended March 31, 2023 and 2022, respectively.

 

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

 

   

Asset (Liability)

 
   

March 31, 2023

   

December 31, 2022

 
   

Contract

Quantity 

   

Fair Value

   

Contract Quantity 

   

Fair Value

 

Regulated fixed price future commitments, included in other current assets (in thousand barrels)

    575     $ 4,760       305     $ (142 )

 

The margin account maintained with a broker to collateralize these derivative instruments carried an account balance of ($2,329) and $2,088 at March 31, 2023 and December 31, 2022, 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.

 

 

6)

MARKETABLE SECURITIES

 

At March 31, 2023 and December 31, 2022, FutureFuel had investments in certain marketable equity and trust preferred (debt) securities which had a fair market value of $37,681 and $37,126, respectively.  These investments are classified as current assets in the consolidated balance sheets. 

 

The Company has designated the trust preferred securities as being available-for-sale.  Accordingly, these securities were recorded at fair value of $3,697 and $3,675 at March 31, 2023 and December 31, 2022, respectively, with the unrealized gain of $21 and unrealized loss of $1, net of taxes, as a component of stockholders' equity. 

 

In accordance with ASC 321, the change in the fair value of marketable equity securities (preferred and other equity instruments) for the three months ended March 31, 2023 and 2022, was reported as a component of net income as a gain of $533 and a loss of $4,100, respectively. 

 

The aggregate fair value of debt securities with unrealized losses totaled $1,676 and $2,627 at March 31, 2023 and  December 31, 2022, respectively.

 

The Company determined an allowance for credit losses for these debt securities was not necessary as of March 31, 2023. The large financial institutions have strong credit ratings with no recent history of defaulting on outstanding obligations, nor is the Company aware of any long-term credit risk related to delinquency under these obligations.

 

There were no sales of debt securities in the three months ended March 31, 2023 or 2022.

 

The debt securities held at March 31, 2023, had a contractual maturity of greater than ten years.

 

8

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

7)

 FAIR VALUE MEASUREMENTS

 

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

 

The following tables provide information by level for assets and liabilities that are measured at fair value, on a recurring basis, at March 31, 2023 and December 31, 2022. 

 

   

Asset (Liability)

 
           

Fair Value Measurements Using

 
   

Fair Value at

   

Inputs Considered as:

 

Description

 

March 31, 2023

   

Level 1

   

Level 2

   

Level 3

 

Derivative instruments

  $ 4,760     $ 4,760     $ -     $ -  

Preferred stock and other equity instruments

  $ 33,984     $ 33,984     $ -     $ -  

Trust preferred stock 

  $ 3,697     $ 3,697     $ -     $ -  

 

   

Asset (Liability)

 
           

Fair Value Measurements Using

 
   

Fair Value at

   

Inputs Considered as:

 

Description

 

December 31, 2022

   

Level 1

   

Level 2

   

Level 3

 

Derivative instruments

  $ (142 )   $ (142 )   $ -     $ -  

Preferred stock and other equity instruments

  $ 33,450     $ 33,450     $ -     $ -  

Trust preferred stock 

  $ 3,676     $ 3,676     $ -     $ -  

 

 

8)

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

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

 

  

March 31, 2023

  

December 31, 2022

 

Accrued employee liabilities

 $3,119  $3,287 

Accrued property, franchise, motor fuel and other taxes

  1,086   1,165 

Lease liability, current

  571   630 

Other

  431   395 

Total

 $5,207  $5,477 

 

9

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

9)

BORROWINGS

 

On March 30, 2020, the Company, with FutureFuel Chemical Company as the borrower and certain of the Company’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.

 

On  March 1, 2023, the Company entered into a First Amendment to the Credit Agreement (the “First Amendment”). The First Amendment primarily amends the Credit Agreement to transition the Credit Facility from LIBOR to the Secured Overnight Financing Rate (“SOFR”) and other conforming changes, in each case as more specifically set forth in the First Amendment. The First Amendment does not modify the aggregate amount, or expiration date, of the Credit Facility. We do not expect the transition from LIBOR to have a material impact on the Credit Facility. Pursuant to the First Amendment, the interest rate floats at the following margins over SOFR or base rate based upon our leverage ratio.

 

Consolidated Leverage Ratio

 

Adjusted SOFR Rate Loans and

Letter of Credit Fee

  

Base Rate Loans

  

Commitment Fee

 

< 1.00:1.0

 

 

  1.00%   0.00%   0.15% 

≥ 1.00:1.0

And

< 1.50:1.0

  1.25%   0.25%   0.15% 

≥ 1.50:1.0

And

< 2.00:1.0

  1.50%   0.50%   0.20% 

≥ 2.00:1.0

And

< 2.50:1.0

  1.75%   0.75%   0.20% 

≥ 2.50:1.0

 

 

  2.00%   1.00%   0.25% 

 

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

 

There were no borrowings under the Credit Agreement at March 31, 2023 or December 31, 2022.

 

 

10)

INCOME TAX PROVISION

 

The following table summarizes the income tax provision.  

 

  Three Months Ended March 31, 
  2023  2022 

Income tax provision (benefit)

 $7  $(704)

Effective tax rate

  0.0%  5.4%

 

The Company’s effective tax rate for the three months ended March 31, 2023 reflects management’s assessment that none of the tax benefits anticipated to be generated in 2023 are realizable.  Accordingly, valuation allowances have been recorded such that net deferred tax assets both generated in 2023 and anticipated at year-end are $0.  The net deferred tax asset at December 31, 2022 was also $0. The net income tax benefit for the three months ended March 31, 2022 was unfavorably impacted by the recognition of tax expense for valuation allowances against various tax attributes existing at January 1, 2022.

 

The Company evaluates its deferred tax assets quarterly and records a valuation allowance to reduce these assets to the amount that is more likely than not to be realized. During the first quarter of 2023, based on all available evidence, the Company determined that its assets for net operating loss, capital loss, and tax credit carryforwards as well as its other deferred tax assets are more likely than not realizable only to the extent of its deferred liabilities.  Accordingly, its net deferred tax asset after application of valuation allowance at March 31, 2023 is $0. During the first quarter of 2022, based on all available evidence, the Company determined that portions of its deferred tax assets for carryforwards of capital losses, state tax credits, and state net operating losses expiring in the next ten years are not more likely than not to be realized.

 

The effective tax rate for the three months ended March 31, 2023 and March 31, 2022 reflected the positive effects of certain tax credits and incentives, the most significant of which are the BTC and Small Agri-biodiesel Producer Tax Credit.  While the Company remains eligible for these benefits in 2023, realizability concerns have negated their impacts on the effective rate.

 

10

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

11)

EARNINGS PER SHARE

 

In the three months ended March 31, 2023 and 2022, FutureFuel used the treasury method in computing earnings per share.

 

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

 

    Three Months Ended March 31,  
    2023     2022  

Numerator:

               

Net income (loss)

  $ 21,081     $ (12,398 )

Denominator:

               

Weighted average shares outstanding – basic

    43,763,243       43,763,243  

Effect of dilutive securities:

               

Stock options and other awards

   

3,293

      -  

Weighted average shares outstanding – diluted

    43,766,536       43,763,243  
                 

Basic earnings (loss) per share

  $ 0.48     $ (0.28 )

Diluted earnings (loss) per share

  $ 0.48     $ (0.28 )


For the three months ended March 31, 2023 and 2022, 40,707 and 24,000 options to purchase FutureFuel’s common stock were excluded in the computation of diluted earnings per share as all were anti-dilutive. 

 

12)

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 storage and terminalling services provided by these related parties.

 

During 2021, a related party managed natural gas purchases for FutureFuel, initially paid for the natural gas, and subsequently invoiced FutureFuel for the same plus a nominal fee for such services.  The natural gas matter as discussed in Note 14, Legal Matters, is in reference to the natural gas supplier, not the related party.

 

11

 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

 

13)

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 composed of two components: “custom manufacturing” (manufacturing chemicals for specific customers) and “performance chemicals” (multi-customer specialty chemicals).

 

Biofuels

 

FutureFuel’s biofuels segment primarily manufactures and markets biodiesel. Biodiesel revenues are generated through the sale of biodiesel to customers through FutureFuel’s distribution network at the Batesville Plant, through distribution facilities available at leased oil storage facilities, and through a network of remotely located tanks. Biofuels revenues also include the sale of biodiesel blends with petrodiesel; 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 business by segment

 

  Three Months Ended March 31, 
  2023  2022 

Revenue

        

Custom chemicals

 $16,620  $15,715 

Performance chemicals

  5,261   5,846 

Chemicals revenue

  21,881   21,561 

Biofuels revenue

  52,300   20,700 

Total Revenue

 $74,181  $42,261 
         

Segment gross profit (loss)

        

Chemicals

 $8,623  $5,418 

Biofuels

  13,000   (12,573)

Total gross profit (loss)

 $21,623  $(7,155)

 

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

 

14)

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.

 

As a result of the extraordinary increase in natural gas prices, the Attorney General of Arkansas launched a civil investigative demand against several natural gas suppliers in 2021.  At this time, the company is disputing the February 2021 natural gas bill, and payment thereof is pending further investigation.

 

The natural gas expense was a component of Cost of goods sold-related parties in the Consolidated Statements of Operations and Comprehensive Income in the three months ended March 31, 2021.  However, as discussed in Note 12, Related Party Transactions, the natural gas supplier is not a related party of FutureFuel.

 

12

 

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

  

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations of FutureFuel Corp. (“FutureFuel”, “the Company”, “we”, or “our”) should be read together with our consolidated financial statements, including the notes thereto, set forth herein. This discussion contains forward-looking statements that reflect our current views with respect to future events and financial performance. Actual results may differ materially from those anticipated in these forward-looking statements. See “Forward-Looking Information” below for additional discussion regarding risks associated with forward-looking statements. 


Unless otherwise stated, all dollar amounts are in thousands.
 

Overview

 

Our company is managed and reported in two reporting segments: chemicals and biofuels. Within the chemical segment are two product groupings: custom chemicals and performance chemicals. The custom product group is composed of specialty chemicals manufactured for a single customer whereas the performance product group is composed of chemicals manufactured for multiple customers. The biofuels segment is composed of one product group. Management believes that the diversity of each segment strengthens the company in the ability to utilize resources and is committed to growing each segment.

 

Within the United States Environmental Protection Agency (EPA) Renewable Fuel Standard (RFS), we generate 1.5 Renewable Identification Numbers (RINs) for each gallon of biodiesel sold in the United States with a classification of a D4 RIN. RINs are used to monitor the level of renewable fuel traded in a given year in accordance with RFS 2 within the EPA moderated transaction system (EMTS).  We do not assign cost of goods sold to the generation of RINs as the physical fuel generates the full cost. As of March 31, 2023, we held 1.5 million D4 RINs with a market value of $2,357.   

 

13

 

 

Summary of Financial Results

 

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

 

    Three Months Ended March 31,  
                   

Dollar

   

%

 
    2023     2022    

Change

   

Change

 

Revenue

  $ 74,181     $ 42,261     $ 31,920       76 %

Income (loss) from operations

  $ 18,251     $ (9,607 )   $ 27,858       n/a  

Net income (loss)

  $ 21,081     $ (12,398 )   $ 33,479       n/a  

Earnings per common share:

                               

Basic

  $ 0.48     $ (0.28 )   $ 0.76       n/a  

Diluted

  $ 0.48     $ (0.28 )   $ 0.76       n/a  

Adjusted EBITDA

  $ 12,495     $ 2,098     $ 10,397       496 %

 

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

 

14

 

We utilize commodity derivative instruments primarily to protect our operations from downward movements in commodity prices, and to provide greater certainty of cash flows associated with sales of our commodities. We enter into hedges, and we utilize mark-to-market accounting to account for these instruments. Thus, our results in any given period can be impacted, and sometimes significantly, by changes in market prices relative to our contract price along with the timing of the valuation change in the derivative instruments relative to the sale of biofuel. We include this item as an adjustment as we believe it provides a relevant indicator of the underlying performance of our business in a given period.

 

Additionally, we invest in marketable securities of certain debt securities (trust preferred stock) and in preferred stock and other equity instruments. The realized and unrealized gains and losses on these marketable securities can fluctuate significantly from period to period. We include this item as an adjustment as we believe it provides a relevant indicator of the underlying performance of our business in a given period.

 

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

 

    Three Months Ended March 31,  
    2023     2022  

Net income (loss)

  $ 21,081     $ (12,398 )

Depreciation

    2,551       2,570  

Interest and dividend income

    (2,336 )     (664 )

Non-cash interest expense and amortization of deferred financing costs

    32       32  

Loss on disposal of property and equipment

    -       6  

(Gain) loss on derivative instruments

    (8,307 )     9,129  

(Gain) loss on marketable securities

    (533 )     4,127  

Income tax provision (benefit)

    7       (704 )

Adjusted EBITDA

  $ 12,495     $ 2,098  

 

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

 

    Three Months Ended March 31,  
    2023     2022  

Net cash used in operating activities

  $ (29,810 )   $ (10,576 )

Benefit for deferred income taxes

    5       719  

Interest and dividend income

    (2,336 )     (664 )

Income tax provision (benefit)

    7       (704 )

(Gain) loss on derivative instruments

    (8,307 )     9,129  

Change in fair value of derivative instruments

    4,902       1,536  

Change in operating assets and liabilities, net

    48,034       2,658  

Adjusted EBITDA

  $ 12,495     $ 2,098  

 

15

 

Results of Operations 

 

Consolidated

 

   

Three Months Ended March 31,

 
                   

Change

 
    2023     2022    

Amount

   

%

 
                                 

Revenues

  $ 74,181     $ 42,261     $ 31,920       75.5 %

Volume/product mix effect

                  $ 17,944       42.5 %

Price effect

                  $ 13,976       33.1 %
                                 

Gross profit (loss)

  $ 21,623     $ (7,155 )   $ 28,778       n/a  
Operating expenses     (3,372 )     (2,452 )     (920 )     37.5 %
Other income (expense)     2,837       (3,495 )     6,332       n/a  
Income tax provision (benefit)     7       (704 )     711       n/a  
Net income (loss)   $ 21,081     $ (12,398 )   $ 33,479       n/a  

 

Consolidated revenue in the three months ended March 31, 2023 increased 75.5% or $31,920 compared to the three months ended March 31, 2022. This increase resulted from increased sales volume and price in the biofuels segment and to a lesser extent, from increased sales volume in the chemical segment which was partially offset by reduced sales prices in the chemical segment from product mix.

 

Gross profit in the three months ended March 31, 2023 was $21,623 as compared to a gross loss of $7,155 in the three months ended March 31, 2022. This increase primarily resulted from i) the change in the activity in derivative instruments with a gain of $8,307 in the three months ended March 31, 2023 and a loss of $9,129 in the same period of the prior year (these include realized gains and losses and a mark to market assessment against inventories yet to be sold -see note 5 of our consolidated financial statements). Affordable feedstocks were acquired and converted to biodiesel which will be sold mostly in the three months ended June 30 and September 30, 2023; and ii) the change in the adjustment in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting.  This adjustment increased gross profit $3,783 in the three months ended March 31, 2023 as compared to $481 in the prior year quarter.

 

Operating expenses

 

Operating expenses increased $920 in the three months ended March 31, 2023, as compared to the three-months ended March 31, 2022. This slight increase was primarily from increased compensation and legal expense.

 

Other income (expense)

 

Other income was $2,837 in the three months ended March 31, 2023, as compared to the same period of the prior year other expense of $3,495 which was primarily from: i) the change in unrealized gains on marketable securities in the current period as compared to unrealized losses in the same period of the prior year and ii) an increase in interest income.

 

Income tax provision (benefit)

 

The Company’s effective tax rate for the three months ended March 31, 2023 was unfavorably impacted by the assessment that net deferred tax assets would not more likely than not be realizable in full.  The effective tax rate for the three months ended March 31, 2023 reflected the positive effects of certain tax credits and incentives, the most significant of which are the BTC and Small Agri-biodiesel Producer Tax Credit. While the Company remains eligible for these credits in 2023, realizability concerns have negated their impacts on the effective rate. Additionally, the net income tax benefit for the three months ended March 31, 2022 was unfavorably impacted by the recognition of tax expense for valuation allowances against various tax attribute carryforwards existing at January 1, 2022.

 

The Company evaluates its deferred tax assets quarterly and records a valuation allowance to reduce these assets to the amount that is more likely than not to be realized.

 

16

 

Chemical Segment

 

   

Three Months Ended March 31,

 
                   

Change

 
    2023    

2022

   

Amount

   

%

 
                                 

Revenues

  $ 21,881     $ 21,561     $ 320       1.5 %

Volume/product mix effect

                  $ 987       4.6 %

Price effect

                  $ (667 )     (3.1 %)
                                 

Gross profit

  $ 8,623     $ 5,418     $ 3,205       59.2 %

 

Chemical revenue in the three months ended March 31, 2023 increased 1.5% or $320 compared to the three months ended March 31, 2022. Revenue for our custom chemicals (unique chemicals produced under contract for specific customers) for the three months ended March 31, 2023 totaled $16,620, an increase of $905 from the same period in 2022. Custom chemicals used in the manufacture of industrial antioxidants experienced stronger volumes and higher selling prices.  In addition, new business from other custom products contributed $1,129, an increase of $893 from the prior year. Performance chemicals (composed of multi-customer products which are sold to the open market based on specification) revenue was $5,261, a decrease of $585 from the three months ended March 31, 2022. This decrease was from lower sales prices of glycerin partially offset by the production timing of certain products which are produced batch-wise during the course of the year.  

 

Gross profit for the chemical segment for the three months ended March 31, 2023, increased $3,205 when compared to the same period of 2022 primarily from favorable product mix as described above.   

 

17

 

Biofuels Segment

 

   

Three Months Ended March 31,

 
                   

Change

 
    2023    

2022

   

Amount

      %  
                                   

Revenues

  $ 52,300     $ 20,700     $ 31,600         152.6 %

Volume/product mix effect

                  $ 16,958         81.9 %

Price effect

                  $ 14,642         70.7 %
                                   

Gross profit (loss)

  $ 13,000     $ (12,573 )   $ 25,573         n/a  

 

Biofuels revenue in the three months ended March 31, 2023 increased 152.6% or $31,600 as compared to the same period of 2022. The biodiesel and biodiesel blend volumes increased as compared to the prior year, primarily from the absence of economical feedstock in the prior year period. In addition, selling prices increased with the overall improvement in the fuel industry and from improved RIN prices.   

     

A significant portion of our biodiesel sold was to three major refiners/blenders in the three months ended March 31, 2023 and to two major refiners in the first quarter of 2022.  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 because: (i) we believe that we could readily sell our biodiesel to other customers as potential demand from other customers for biodiesel exceeds our production capacity; (ii) our sales to these customers are not under fixed terms and the customers have no fixed obligation to purchase any minimum quantities except as stipulated by short-term purchase orders; and (iii) the prices we receive from these customers are based upon then-market rates, as would be the case with sales of this commodity to other customers.

 

Biofuels gross profit was $13,000 in the three months ended March 31, 2023, an increase of $25,573 from the gross loss of $12,573 in the same period of 2022.  This increased profit was from: i) the change in the activity in derivative instruments with a gain of $8,307 in the three months ended March 31, 2023, as compared to a loss of $9,129 in the three months ended March 31, 2022 (these include realized gains and losses and a mark to market assessment against inventories yet to be sold - see note 5 of our consolidated financial statements), ii) an increase in biodiesel margins, and iii) the change in the adjustment in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting.  This adjustment increased gross profit $2,614 in the three months ended March 31, 2023 as compared to $967 in the prior year quarter.  

 

In regards to our derivative activity, we recognize all derivative instruments as either assets or liabilities at fair value in our consolidated balance sheets. The realized and unrealized derivative gains and losses are recorded as cost of goods sold. Our derivative instruments do not qualify for hedge accounting under the specific guidelines of Topic 815, Derivatives and Hedging. None of the derivative instruments are designated and accounted for as hedges primarily due to the extensive record keeping requirements.  

 

The volumes and carrying values of our derivative instruments were as follows:

 

   

Asset (Liability)

 
   

March 31, 2023

   

December 31, 2022

 
   

Contract Quantity

   

Fair Value

   

Contract Quantity

   

Fair Value

 

Regulated fixed price future commitments (in thousand barrels)

    575     $ 4,760       305     $ (142 )

 

*All derivative instruments are entered into with the standard contract terms and conditions in accordance with major trading authorities of the New York Mercantile Exchange.

 

18

Critical Accounting Estimates

 

Revenue Recognition

 

The Company recognizes revenue under Topic 606, Revenue from Contracts with Customers. Certain long-term contracts had upfront non-cancellable payments considered material rights. The Company applied the renewal option approach in allocating the transaction price to the material rights. 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. Estimates are updated quarterly on a prospective basis. These custom chemical contracts have payment terms of 30 days. See Note 3 to our consolidated financial statements.

 

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 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 the RINs is not reflected in revenue until such time as the RIN sale has been completed.

 

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 the three months ended March 31, 2023 and 2022 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. Revenues under bill-and-hold arrangements were $10,590 and $9,276 for the three months ended March 31, 2023 and 2022, respectively.

 

19

 

Liquidity and Capital Resources

 

Our net cash from operating activities, investing activities, and financing activities for the three months ended March 31, 2023 and 2022 are set forth in the following table.

  

    Three Months Ended March 31,  
    2023     2022  

Net cash used in operating activities

  $ (29,810 )   $ (10,576 )

Net cash provided by (used in) investing activities

  $ 1,868     $ (3,335 )

Net cash used in financing activities

  $ (2,640 )   $ (2,626 )

 

We believe that existing cash balances and cash flow to be generated from operating activities and borrowing capacity under the amended and restated credit agreement will be sufficient to fund operations, product development, cash dividends, and capital requirements for the foreseeable future.

 

Operating Activities

 

Cash used in operating activities was $29,810 in the three months ended March 31, 2023 as compared to $10,576 in the same period of 2022. This decrease in cash was primarily attributable to the change in inventory demonstrating a cash outflow of $31,773, the change in accounts receivable, including accounts receivable - related parties, demonstrating a cash outflow of $11,049, primarily from the timing of customer payments, and the change in fair value of equity securities of $4,633.  Partially offsetting these cash outflows was the change in net income of $33,479.

 

Investing Activities

 

Cash provided by investing activities was $1,868 in the three months ended March 31, 2023 as compared to cash used in investing activities of $3,335 in the three months ended March 31, 2022.  Of the $5,203 change, $6,991 was the result of a decrease in the collateralization of derivate instruments.  Offsetting this increase in cash was an increase in capital expenditures of $1,482 and a net decrease in the sales of marketable securities of $250. 

 

Financing Activities

 

Cash used in financing activities was $2,640 and $2,626 in the three months ended March 31, 2023 and 2022, respectively, primarily for payments of dividends on our common stock. 

 

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Credit Facility

 

We have a credit agreement with a syndicated group of commercial banks for $100,000 as amended on March 30, 2020. 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 March 30, 2025. See Note 9 to our 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 three months ended March 31, 2023 and 2022, we paid a regular quarterly cash dividend in the amount of $0.06 per share on our common stock. The regular cash dividend amounted to $2,626 in the three months ended March 31, 2023 and $2,626 in the three months ended March 31, 2022. The declaration of these regular quarterly cash dividends was made in the three months ended December 31, 2022 and March 31, 2022, respectively.

 

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 dividends will be paid in 2023, as previously reported. Third parties have not placed significant restrictions on our working capital management decisions.

 

A significant portion of these funds was held in cash or cash equivalents at multiple financial institutions. In the periods ended March 31, 2023 and December 31, 2022, we also had investments in certain preferred stock, debt securities, and other equity instruments. We classify these investments as current assets in the accompanying consolidated balance sheets and designate the debt securities as being “available-for-sale.” Accordingly, the debt securities are recorded at fair value, with the unrealized gains and losses, net of taxes, reported as a component of stockholders’ equity. We also held equity securities with readily available market values. These equity instruments are recorded at fair value, with the unrealized gains and losses reported as a component of net income. The fair value of the debt securities and equity instruments totaled $37,681 and $37,126 at March 31, 2023 and December 31, 2022, 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 in our consolidated balance sheets at March 31, 2023 and December 31, 2022. Second, we hedge our biofuels feedstock through the execution of purchase contracts and supply agreements with certain vendors or they meet the normal purchase and normal sales exception of ASC 815 Derivatives and Hedging. These hedging transactions are recognized in earnings and were not recorded in our consolidated balance sheets at March 31, 2023 or December 31, 2022 because they do not meet the definition of a hedge instrument as defined under GAAP. 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.

 

21

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

All dollar amounts expressed as numbers in these Market Risk Disclosures are in thousands (except per share amounts).

 

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 chemicals and biofuels business both with respect to inputs (electricity, coal, raw materials, biofuels feedstock, etc.) and outputs (manufactured chemicals and biofuels).

 

We seek to mitigate our market risks associated with the manufacturing and sale of chemicals by entering into long-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 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 the first three months of 2023 or 2022. 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 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. At March 31, 2023 and December 31, 2022, the fair values of our derivative instruments were a net asset of $4,760 and a net liability of $142, 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 composed of crude corn oil and yellow grease and petrodiesel. The availability and price of these items are subject to 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 three months of 2023. 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)

 

Item

 

Volume Requirements

(a)

 

Units

 

Hypothetical Adverse Change in Price

   

Decrease in Gross Profit

   

Percentage Decrease in Gross Profit

 

Biodiesel feedstocks

    104,119  

LB

    10 %     5,320       24.6 %
Methanol     15,281   LB     10 %     257       1.2 %

 

(a) Volume requirements and average price information are based upon volumes used and prices obtained for the three months ended March 31, 2023. Volume requirements may differ materially from these quantities in future years as our business evolves.

 

We had no borrowings at March 31, 2023 or December 31, 2022 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.

 

22

 

Item 4. Controls and Procedures.

 

Managements Evaluation of our Disclosure 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 (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 at March 31, 2023 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. 

 

Management believes that the consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly in all material respects our consolidated financial position, results of operations and cash flows for the period presented.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

  

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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, 2022 filed with the SEC on March 14, 2023.

 

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.

 

Exhibit

Description

31(a).

Rule 13a-15(e)/15d-15(e) Certification of chief executive officer

31(b).

Rule 13a-15(e)/15d-15(e) Certification of chief principal officer

32.

Section 1350 Certification of chief executive officer and principal financial officer

101

Interactive Data Files**

101.INS

Inline XBRL Instance

101.SCH

Inline XBRL Taxonomy Extension Schema

101.CAL

Inline XBRL Taxonomy Extension Calculation

101.DEF

Inline XBRL Taxonomy Extension Definition

101.LAB

Inline XBRL Taxonomy Extension Labels

101.PRE

Inline XBRL Taxonomy Extension Presentation

104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

**

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a  registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as  amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

   

24

 

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, 2022 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.

 

25

 

S I G N A T U R E S

 

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.  

 

 

 

 

By:  

/s/ Tom McKinlay

 

 

 

 

Tom McKinlay, Chief Executive Officer

 

 

 

 

Date: May 9, 2023

 

 

 

 

 

 

By:    

/s/ Rose M. Sparks

 

 

 

 

Rose M. Sparks, Chief Financial Officer

 

and Principal Financial Officer  

 

 

 

 

Date: May 9, 2023

 

 

 

 

26