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

PART I FINANCIAL INFORMATION

Item 1. Financial Statements.

FutureFuel Corp.

Consolidated Balance Sheets

(Dollars in thousands)

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

 FutureFuel Corp.

Consolidated Statements of Operations and Comprehensive Income

(Dollars in thousands, except per share amounts)

(Unaudited)

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

FutureFuel Corp.

Consolidated Statements of Stockholders’ Equity

(Dollars in thousands)

(Unaudited)

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

FutureFuel Corp.

Consolidated Statements of Cash Flows

(Dollars in thousands)

(Unaudited) 

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

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

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 proposed accounting standard.

In July 2023, the FASB issued Proposed Accounting Standards Update (ASU) No. 2023-ED500 Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, which aims to provide investors with more useful information about an entity’s expenses by improving disclosures on income statement expenses.  The amendments in this Proposed ASU would require public business entities to disclose disaggregated information about specific categories underlying certain income statement expense line items. The Company is evaluating this proposed accounting standard.

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 through, among other things, an available employee retention tax credit.  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. 

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  September 30, 2023 and  December 31, 2022 consist of unbilled revenue from one customer and cash due from another customer and are recorded as accounts receivable in the consolidated balance sheets. Contract liabilities consist of advance payment arrangements related to material rights recorded as deferred revenue in the consolidated balance sheets. Increases to contract liabilities from cash received or due for a performance obligation of chemical segment plant expansions were $506 and $733 for the three months and $538 and $733 for the nine months ended September 30, 2023 and 2022, respectively. 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 was $444 and $2,037 for the three months and $2,402 and $5,211 for the nine months ended September 30, 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.

*Exclusive of the BTC of $13,084 and $8,970, respectively, and net of allowances for bad debt of $67 and $48, respectively, as of the dates noted.

Transaction price allocated to the remaining performance obligations:

At September 30, 2023, approximately $13,306 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 five 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 45 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.

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:

Timing of revenue:

As of September 30, 2023 and  December 31, 2022, $4,010 and $4,473 of bill-and-hold revenue had not shipped, respectively. 

The carrying values of inventory were as follows as of:

A LIFO liquidation of $151and $2,124 occurred in the nine and twelve months ended September 30, 2023 and December 31, 2022, respectively. The liquidation in 2023 related to the reduction of biodiesel inventory and the liquidation in 2022 related to the exit from pipeline business.

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 loss of $14,068 and $1,373 (realized loss of $7,286 and gain of $2,150) for the three and nine months ended September 30, 2023, respectively, and a gain of $4,688 and loss of $21,917 (realized gain of $4,023 and loss of $24,970) for the three and nine months ended September 30, 2022, 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 $5,079 and $2,088 at September 30, 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.

During the three months ended  September 30, 2023, FutureFuel held no marketable equity and trust preferred (debt) securities. The previous sale of these securities was recorded as a component of net income with a gain of $575 in the nine months ended September 30, 2023. 

At December 31, 2022, FutureFuel had investments in certain marketable equity and trust preferred (debt) securities which had a fair market value of $37,126.  These investments were classified as current assets in the consolidated balance sheet.  The trust preferred securities held at December 31, 2022 were designated as being available-for-sale.  Accordingly, these securities were recorded at fair value of $3,675.

In accordance with ASC 321, the change in the fair value of marketable equity securities (preferred and other equity instruments) is reported as a component of net income. The change in the fair value of marketable equity securities (preferred and other equity instruments) for the three and nine months ended September 30, 2022 was a loss of $602 and $7,940, respectively.

The aggregate fair value of debt securities with unrealized losses totaled $2,627 at  December 31, 2022. Sales of debt securities were $0 in the nine months ended September 30, 2022.

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, 2023 and  December 31, 2022. 

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

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 thereto, 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.

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 September 30, 2023 or December 31, 2022.

The following table summarizes the income tax provision.  

The Company’s income tax provision for the three and nine months ended September 30, 2023 comprises only small amounts of current state taxes.  No deferred tax benefits on ongoing tax losses have been recognized, reflecting management’s determination that none of the net deferred tax assets generated on its 2023 tax losses are more likely than not to be realized.  The three-month period in 2022 similarly reflected immaterial state taxes and miscellaneous items, while the nine-month period included the cumulative impact of valuation allowances recorded against certain existing deferred tax assets.

In the three and nine months ended September 30, 2023 and 2022, FutureFuel used the treasury method in computing earnings per share.

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

For the three and nine months ended September 30, 2023, 41,534 and 42,080 options to purchase FutureFuel’s common stock were excluded, respectively, in the computation of diluted earnings per share as all were anti-dilutive. In the three and nine months ended September 30, 2022, 44,000 and 30,667 options were excluded, respectively.

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 and purchases of biodiesel, petrodiesel, blends, and other petroleum products with these related parties along with the associated expense from storage and terminalling services provided by these related parties. During the three months ended September 30, 2023, a settlement was reached on the previously disclosed natural gas dispute.  See Note 14 Legal Matters.

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 biofuel 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. Biofuel revenues also include the sale of biodiesel blends with petrodiesel; petrodiesel with no biodiesel added; internally generated, separated Renewable Identification Numbers (“RINs”); and biodiesel production byproducts. 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.

As of September 30, 2023, FutureFuel held 4.2 million of RINs in inventory with a fair market value of $6,971 and no cost. Comparatively, at September 30, 2022, FutureFuel held 8.1 million of RINs in inventory with a fair market value of $12,752 and no cost.

Summary of business by segment

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.

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

During the three months ended September 30, 2023, the parties to the previously disclosed natural gas dispute and the Company entered into a settlement agreement to resolve the matter completely. Based on such settlement, the Company released $882 of the previously accrued expense.

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 biofuel 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 or D6 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 September 30, 2023, we held 4.2 million D4 and D6 RINs with a fair market value of $6,971. Comparatively, as of September 30, 2022, we held 8.1 million RINs with a fair market value of $12,752.   

Summary of Financial Results

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

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, non-cash 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 non-cash gains and losses on derivative instruments (which can cause net income to appear volatile from period to period relative to the sale of the underlying physical product).

We utilize commodity derivative instruments primarily to protect our operations from downward movements in commodity prices, and to provide greater certainty of cash flows associated with sales of our commodities. We enter into hedges, and we utilize mark-to-market accounting to account for these instruments. Thus, our results in any given period can be impacted, and sometimes significantly, by changes in market prices relative to our contract price along with the timing of the valuation change in the derivative instruments relative to the sale of biofuel. We include the mark-to-market or non-cash portion of 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 held marketable securities of certain debt securities (trust preferred stock) and in preferred stock and other equity instruments during the nine months ended September 30, 2023, (but sold all investments during the three months ended June 30, 2023). The realized and unrealized gains and losses on these marketable securities fluctuated from period to period. We included this item as an adjustment as we believed it provided 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. 

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

Results of Operations 

Consolidated

Consolidated revenue in the three and nine months ended September 30, 2023 decreased $1,389 and $1,957 compared to the three and nine months ended September 30, 2022, respectively. In the three- and nine-month periods ended September 30,2023, chemical segment sales volumes declined $3,763 and $2,294, respectively, on weakened glycerin markets and the timing of recognition of capital recovery.  Partially improving chemical sales in both the three- and nine-month comparison periods was a favorable product mix and revenue from new custom chemical contracts.  Biofuel segment net sales increased $2,270 and $820, respectively, in the three- and nine-month comparison periods on higher sales volumes mostly offset by lower average prices.  D4 RIN prices dropped significantly during the quarter as renewable diesel volumes increased in the market.

Gross profit in the three months ended September 30, 2023 decreased $16,115 as compared to the same period of 2022, from: (i) the spread in biofuel price and feedstock price narrowed (inclusive of the effect of the D4 RIN price decline); (ii) the change in the activity in derivative instruments with a realized loss of $7,286 in the current three-month period as compared to a realized gain of $4,023 in the same three-months of the prior year; (iii) the change in the mark-to-market derivative position which was an unrealized loss of $6,782 as compared to an unrealized gain of $665 in the three months ended September 30, 2023 and 2022, respectively; (iv) the reduction from the timing of recognition of capital recovery; and (v) the change in the adjustment in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. The adjustment in item (v) increased gross profit $2,528 in the three months ended September 30, 2023 as compared to $6,133 in 2022. These contrasting results in items (i) and (ii) reflect the impact of price movements in the biodiesel market during the course of each year compared to when we committed to our feedstock acquisition.  In 2022, prices rose sharply as a consequence of the conflict in Ukraine and we recorded mark-to-market losses on the derivative instruments we use to hedge our biodiesel margins. The losses were then offset by significant gains in physical sales in the period.  In 2023, biodiesel prices fell in the first half of the year and then rose in the third quarter.  This generated derivative gains for the first half of the year and now mark-to-market losses in the third quarter against committed sales in the fourth quarter.

Gross profit for the nine months ended September 30, 2023 was $16,901 as compared to $13,807 in the nine months ended September 30, 2022.  This increase resulted from (i) the change in our realized derivative gains of $2,150 in the current nine-month period as compared to realized losses of $24,970 in the prior nine-month period given the explanation noted in the three-month comparative period, 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 $6,023 in the current nine-month period as compared to $1,308 in the prior nine-month period.

Operating expenses

Operating expenses increased $478 and $1,897 in the three and nine months ended September 30, 2023, as compared to the three and nine months ended September 30, 2022. This increase was primarily from increased compensation and legal expense.

Other income (expense)

Other income (expense) increased income $1,904 and $12,502 in the three and nine months ended September 30, 2023, respectively, as compared to the same periods of 2022. In the current three-month period interest income was $2,527 as compared to dividend and interest income of $1,210 and a loss of $590 on marketable securities in the same period of 2022. In the current nine-month period, marketable securities were sold with realized gains of $575 and interest income was $6,595 as compared to unrealized losses on marketable securities of $7,366 and interest and dividends income of $2,621, in the same period of 2022.

Income tax provision (benefit)

The Company’s income tax provision for the three and nine months ended September 30, 2023 comprises only small amounts of current state taxes. No deferred tax benefits on ongoing tax losses have been recognized, reflecting management’s determination that none of the net deferred tax assets generated on its 2023 tax losses are more likely than not to be realized.  The three-month period in 2022 similarly reflected immaterial state taxes and miscellaneous items, while the nine-month period included the cumulative impact of valuation allowances recorded against certain existing deferred tax assets.

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.

Chemical Segment

Chemical revenue in the three and nine months ended September 30, 2023 decreased 17.0% or $3,659 and 4.5% or $2,777, respectively, compared to the same comparative periods of 2022. Revenue for our custom chemicals (unique chemicals produced under contract for specific customers) for the three and nine months ended September 30, 2023 totaled $14,454 and $46,650, a decrease of $1,593 and an increase of $2,622 from the same periods in 2022, respectively. Custom chemicals sales revenue was reduced in the current reporting periods as compared to the prior year periods from the timing of recognition of upfront capital reimbursements from customers. The reduction in sales revenue from the recognition of deferred revenue was $1,978 and $3,174 in the three and nine months ended September 30, 2023 as compared to the same periods of 2022. (See Note 3 to our consolidated financial statements). Also reducing sales revenue were lower volumes of chemicals sold into the energy market. Partially offsetting these reductions were sales from two new contracts in the agricultural market. Performance chemicals (composed of multi-customer products which are sold to the open market based on specification) revenue was $3,393 and $11,834, a decrease of $2,066 and $5,399 from the three and nine months ended September 30, 2022, respectively. This decrease was mostly from lower sales of glycerin as markets softened on increased imports.  

Gross profit for the chemical segment for the three months ended September 30, 2023, decreased $1,484 when compared to the same period of 2022. This decrease was primarily from: (i) the timing of recognition of upfront capital payments as noted above; (ii) reduced glycerin sales; 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 $234 as compared to $710 in the same period of 2022.

Gross profit for the chemical segment for the nine months ended September 30, 2023 increased $3,941 when compared to the same period of 2022 from:  (i) product mix, 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 $1,105 in the nine months ended September 30, 2023 as compared to a decrease in gross profit of $463 in the same comparative period of 2022.  Partially reducing this increase in gross profit was the timing of recognition of upfront capital payments as noted above.

Biofuel Segment

Biofuels revenue in the three and nine months ended September 30, 2023 increased $2,270 and $820, respectively, as compared to the same periods of 2022. These increases resulted from increased sales volumes of 14% and 21%, mostly offset by reduced average prices of 12% and 21%, respectively. The lower prices were driven in part by the reduction in D4 RIN prices which according to S&P Global (September 29, 2023 authored by Phillip Herring and Melvin Lee), dropped 44.5% in 2023 due to an increase of renewable diesel production and a decline in biodiesel margins.   

A significant portion of our biodiesel sold was to four major refiners/blenders in the three months ended September 30, 2023 and to two major refiners in the three months ended September 30, 2022 and in the nine months ended 2023 and 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 on equivalent terms 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 loss was $3,008 and $5,016 in the three and nine months ended September 30, 2023, respectively, a decrease in gross profit of $14,631 in the three-month comparative period, and an increased loss of $847 in the nine-month comparative period of 2022. In the current three months of 2023, the change in the activity in derivative instruments was a realized loss of $7,286 as compared to a realized gain of $4,023 in the same three months of the prior year. Also increasing gross losses was the change in the mark-to-market derivative position which was an unrealized loss of $6,782 as compared to an unrealized gain of $665 in the three months ended September 30, 2023 and 2022, respectively. As described previously, heating oil futures prices rose in the three months ended September 30, 2023 whereas they had fallen overall for the first six months of the year. This moved our derivatives position from a gain to a loss position that will be offset by sales later in the year.  In addition to this, there has been a decline in margins driven by the effect of the D4 RIN price decline as previously noted and increases in feedstock prices.

Reducing gross profit in the three months ended September 30, 2023 was 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 $2,294 in the three months ended September 30, 2023 as compared to $5,423 in the same comparative period of 2022.  For the nine months ended September 30, 2023, the change increased gross profit $6,023 as compared to $1,771 in the same comparative period of 2022. 

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:

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 and nine months ended September 30, 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 $10,149 and $31,504 for the three and nine months ended September 30, 2023, respectively.

Liquidity and Capital Resources

Our net cash from operating activities, investing activities, and financing activities for the nine months ended September 30, 2023 and 2022 are set forth in the following table.

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 provided by operating activities was $2,476 in the nine months ended September 30, 2023 as compared to $44,127 in the same period of 2022. This decrease in cash was primarily attributable to the change in accounts payable, including accounts payable - related parties, demonstrating a cash outflow of $25,771, primarily from the timing of vendor payments, the change in fair value of equity securities of $11,057, the change in inventory demonstrating a cash outflow of $10,939, and the change in accounts receivable, including accounts receivable - related parties, demonstrating a cash outflow of $8,933.   Partially offsetting these cash outflows was the change in net income of $14,965.

Investing Activities

Cash provided by investing activities was $35,698 in the nine months ended September 30, 2023 as compared to cash used in investing activities of $2,503 in the nine months ended September 30, 2022. Of the $38,201 change, $37,438 was the result of increased proceeds from the sale of marketable securities.  Cash was also provided by a decrease in the collateralization of derivative instruments of $2,126. Offsetting these increases in cash was an increase of capital expenditures of $1,302. 

Financing Activities

Cash used in financing activities was $7,891 and $7,877 in the nine months ended September 30, 2023 and 2022, respectively, primarily for payments of dividends on our common stock. 

Credit Facility

We have a credit agreement, as amended on March 30, 2020, with a syndicated group of commercial banks for $100,000. 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 first three quarters of 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 each of the quarters of 2023 and 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 period ended December 31, 2022, we also had investments in certain preferred stock, debt securities, and other equity instruments. We classified these investments as current assets in the accompanying consolidated balance sheets and designated the debt securities as being “available-for-sale.” Accordingly, the debt securities were 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 were recorded at fair value, with the unrealized gains and losses reported as a component of net income. We sold all marketable securities in the nine months ended September 30, 2023. The fair value of the debt securities and equity instruments totaled $0 and $37,126 at September 30, 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 September 30, 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 September 30, 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.

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, biofuel 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 sales 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 biofuel prices, we may enter into exchange-traded commodity futures and options contracts. We account for these derivative instruments in accordance with ASC 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 nine 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 September 30, 2023 and December 31, 2022, the fair value of our derivative instruments was a net liability of $3,665 and $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 nine 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.

We had no borrowings at September 30, 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.

Item 4. Controls and Procedures.

Management’s 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 September 30, 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 September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

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

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.

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.