# FutureFuel Corp.: Form 10-Q for the period ended May 15, 2017

- Company: [FutureFuel Corp.](/companies/ff.md) (CIK 1337298)
- Form: 10-Q
- Filed: 2017-08-09
- Accepted by EDGAR: Aug 9, 2017, 16:06 ET
- Period: 2017-05-15
- Accession: 0001437749-17-014280
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1337298/000143774917014280/ff20170515_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1337298/000143774917014280/

## Management's discussion and analysis

As filed, 29,158 characters.

**All dollar amounts expressed as numbers in this M D&A are in thousands (except per share amounts).**

### Certain tables may not add due to rounding.

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

### Overview

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

### Summary of Financial Results

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

|  | Three months ended June 30, 2017 | 2016 | Dollar% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $68,048 | $67,879 | $169 | 0.2% |
| Income/(loss) from operations | $(626) | $5,376 | $(6,002) | (111.6%) |
| Net income | $834 | $14,224 | $(13,390) | (94.1%) |
| Earnings per common share: |  |  |  |  |
| Basic | $0.02 | $0.33 | $(0.31) | (93.9%) |
| Diluted | $0.02 | $0.33 | $(0.31) | (93.9%) |
| Capital expenditures and intangibles (net of customer reimbursements and regulatory grants) | $715 | $1,357 | $(642) | (47.3%) |
| Adjusted EBITDA | $2,079 | $13,581 | $(11,502) | (84.7%) |
|  | **Six months ended June 30,** |  |  |  |
|  |  |  | **Dollar%** |  |
|  | **2017** | **2016** | **Change** | **Change** |
| Revenues | $122,159 | $114,514 | $7,645 | 6.7% |
| Income from operations | $2,849 | $13,905 | $(11,056) | (79.5%) |
| Net income | $4,230 | $24,793 | $(20,563) | (82.9%) |
| Earnings per common share: |  |  |  |  |
| Basic | $0.10 | $0.57 | $(0.47) | (82.5%) |
| Diluted | $0.10 | $0.57 | $(0.47) | (82.5%) |
| Capital expenditures and intangibles (net of customer reimbursements and regulatory grants) | $1,557 | $2,135 | $(578) | (27.1%) |
| Adjusted EBITDA | $7,648 | $26,283 | $(18,635) | (70.9%) |

14

We use adjusted EBITDA as a key operating metric to measure both performance and liquidity. Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA is not a substitute for operating income, net income, or cash flow from operating activities (each as determined in accordance with GAAP) as a measure of performance or liquidity. Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of results as reported under GAAP. We define adjusted EBITDA as net income before interest, income taxes, depreciation, and amortization expenses, excluding, when applicable, non-cash stock-based compensation expenses, public offering expenses, acquisition-related transaction costs, purchase accounting adjustments, losses on disposal of property and equipment, gains or losses on derivative instruments, and other non-operating income or expenses. Information relating to adjusted EBITDA is provided so that investors have the same data that we employ in assessing the overall operation and liquidity of our business. Our calculation of adjusted EBITDA may be different from similarly titled measures used by other companies; therefore, the results of our calculation are not necessarily comparable to the results of other companies.

Adjusted EBITDA allows our chief operating decision makers to assess the performance and liquidity of our business on a consolidated basis to assess the ability of our operating segments to produce operating cash flow to fund working capital needs, to fund capital expenditures and to pay dividends. In particular, our management believes that adjusted EBITDA permits a comparative assessment of our operating performance and liquidity, relative to a performance and liquidity based on GAAP results, while isolating the effects of 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.

We enter into 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.

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

|  | Three months ended June 30, 2017 | 2016(1) | Six months ended June 30, 2017 | 2016(1) |
| --- | ---: | ---: | ---: | ---: |
| Adjusted EBITDA | $2,079 | $13,581 | $7,648 | $26,283 |
| Depreciation | (2,912) | (2,671) | (5,808) | (5,329) |
| Non-cash stock-based compensation | (273) | (477) | (750) | (954) |
| Interest and dividend income | 1,991 | 1,464 | 3,714 | 2,809 |
| Interest expense | (43) | (42) | (86) | (85) |
| Losses on disposal of property and equipment | (46) | (22) | (77) | (137) |
| Gains/(losses) on derivative instruments | 524 | (5,139) | 1,803 | (6,178) |
| Gains/(losses) on marketable securities | (438) | 613 | (569) | (405) |
| Income tax (expense)/benefit | (48) | 6,917 | (1,645) | 8,789 |
| Net income | $834 | $14,224 | $4,230 | $24,793 |

15

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

|  | Six months ended June 30, 2017 | 2016(1) |
| --- | ---: | ---: |
| Adjusted EBITDA | $7,648 | $26,283 |
| Provision for deferred income taxes | (1,763) | (4,969) |
| Impairment of fixed assets | 9 | 178 |
| Interest and dividend income | 3,714 | 2,809 |
| Income tax (expense)/benefit | (1,645) | 8,789 |
| Gains/(losses) on derivative instruments | 1,803 | (6,178) |
| Change in fair value of derivative instruments | 318 | 4,869 |
| Changes in operating assets and liabilities, net | 17,876 | 14,310 |
| Other | (1) | (63) |
| Net cash provided by operating activities | $27,959 | $46,028 |

(1) Prior year adjusted EBITDA reconciliations have been modified to be consistent with current year presentations.

### Results of Operations

#### Consolidated

|  | Three months ended June 30, 2017 | 2016 | Change Amount% |  | Six months ended June 30, 2017 | 2016 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $68,048 | $67,879 | $169 | 0.2% | $122,159 | $114,514 | $7,645 | 6.7% |
| Volume/product mix effect |  |  | $(11,693) | (17.2%) |  |  | $(16,510) | (14.4%) |
| Price effect |  |  | $11,862 | 17.5% |  |  | $24,155 | 21.1% |
| Gross profit | $1,798 | $7,972 | $(6,174) | (77.4%) | $7,928 | $19,025 | $(11,097) | (58.3%) |

Consolidated sales revenue in the three and six months ended June 30, 2017 increased $169 and $7,645 compared to the three and six months ended June 30, 2016. This increase primarily resulted from higher prices in the biofuel segment. However, for the three months ended June 30, 2017, higher prices in the biofuel segment were mostly offset by reduced biofuel sales volumes driven in part by the expiration of the federal blenders’ tax credit (“BTC”). Also, partially offsetting the increase in the three months ended June 30, 2017, chemical segment revenue declined 5% as compared to the prior year period.

Gross profit in the three and six months ended June 30, 2017 decreased $6,174 and $11,097, compared to the three and six months ended June 30, 2016. In the biofuel segment, this decrease largely resulted from the absence of the BTC which expired on December 31, 2016 and from losses incurred on common carrier pipelines. We also experienced a reduction in chemical sales volume for the three months ended June 30, 2017 as compared to the prior year period.

Another significant impact to the reduction in gross profit in the three and six months ended June 30, 2017 as compared to the prior year periods was the adjustment in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. This adjustment reduced gross profit $3,271 and $5,148 in the three and six months ended June 30, 2017 and decreased gross profit $3,319 in the three months ended June 30, 2016 and increased gross profit $2,257 in the six months ended June 30, 2016.

Partially offsetting these declines was the change in the unrealized and realized activity in derivative instruments. In the three and six months ended June 30, 2017, the gain was $524 and $1,803, respectively as compared to a loss in the three and six months ended June 30, 2016 of $5,139 and $6,178. In addition, the change in the lower of cost or market adjustment in the three and six months ended June 30, 2017 was a benefit as compared to the prior year periods. In the three and six months ended June 30, 2017, the lower of cost or market adjustment was $957 in comparison to $1,895 in the three and six months ended June 30, 2016

#### Operating Expenses

Operating expenses decreased $172 and $41 in the three and six months ended June 30, 2017, respectively, as compared to the three and six months ended June 30, 2016. This reduction in both periods was from lower compensation cost partially offset by higher research and development expense.

#### Provision/(Benefit) for Income Taxes

The effective tax rate for the three and six months ended June 30, 2017, reflects our expected tax rate on reported operating income before income tax. Our effective tax rate in the three and six months ended June 30, 2017, reflects the elimination of certain tax credits and incentives for 2017.

The effective tax rate for the three and six months ended June 30, 2016, reflects our expected tax rate on reported operating income earnings before income tax. Our effective tax rate in the three and six months ended June 30, 2016, reflects the positive effect of the reinstatement of the certain tax credits and incentives for 2016. In addition, during the second quarter of 2016, FutureFuel booked a tax benefit related to the reversal of a state’s treatment of the taxability of the tax credits and incentives.

Unrecognized tax benefits totaled $2,056 at June 30, 2017 and December 31, 2016.

#### Net Income

Net income for the three and six months ended June 30, 2017 decreased $13,390 and $20,563, respectively, as compared to the same periods in 2016. The decrease resulted from the lack of the benefit of tax credits and incentives in effect in the three and six months ended June 30, 2016 which was not in effect in the three and six months ended June 30, 2017. Additionally, the adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting negatively impacted net income in the three and six months ended June 30, 2017 and in comparison, negatively impacted net income in the three months ended June 30, 2016 and benefited net income in the six months ended June 30, 2016.

#### Chemicals Segment

|  | Three months ended June 30, 2017 | 2016 | Change Amount% |  | Six months ended June 30, 2017 | 2016 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $23,351 | $24,563 | $(1,212) | (4.9%) | $49,708 | $49,631 | $77 | 0.2% |
| Volume/product mix effect |  |  | $(1,172) | (4.8%) |  |  | $(163) | (0.3%) |
| Price effect |  |  | $(40) | (0.2%) |  |  | $240 | 0.5% |
| Gross profit | $5,332 | $6,297 | $(965) | (15.3%) | $12,341 | $14,869 | $(2,528) | (17.0%) |

Sales revenue in the three months ended June 30, 2017 decreased by $1,212 compared to the three months ended June 30, 2016. Sales revenue for our custom chemicals (unique chemicals produced for specific customers) for the three months ended June 30, 2017 totaled $19,644, an increase of $243 from the comparable period in 2016. This increase was primarily attributed to increased sales volumes in the agrochemical and energy markets and accelerated amortization of deferred revenue from headwinds of global competition partially offset by the reduced price and volume of the laundry detergent additive. Performance chemicals (comprised of multi-customer products which are sold based on specification) sales revenues were $3,707 in the three months ended June 30, 2017, a decrease of $1,455 from the three months ended June 30, 2016. This decrease was primarily from a temporary reduction in sales volumes of a monomer product related to equipment modifications at one of our key customer’s facilities.

Sales revenue in the six months ended June 30, 2017 increased $77 compared to the three months ended June 30, 2016. This increase was primarily attributed to increased sales volume in the agrochemical and energy markets and increased amortization of deferred revenue mostly offset by the reduced price and volume of the laundry detergent additive. Performance chemical sales revenue were down $1,826 to $8,112. This decrease was primarily from reduced sales volumes of a polymer modifier product and glycerin products.

Gross profit for the chemicals segment for the three and six months ended June 30, 2017 decreased by $965 and $2,528 when compared to the three and six months ended June 30, 2016. Gross profits were decreased by the change in adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. This adjustment decreased gross profit $837 and $1,256 in the three and six months ended June 30, 2017, respectively, compared a decrease of $515 and an increase of $1,023 in the three and six months ended June 30, 2016, respectively. Also impacting gross profit in the three and six months ended June 30, 2017, to a lesser extent, was the change in product mix.

#### Biofuels Segment

|  | Three months ended June 30, 2017 | 2016 | Change Amount% |  | Six months ended June 30, 2017 | 2016 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $44,697 | $43,316 | $1,381 | 3.2% | $72,451 | $64,883 | $7,568 | 11.7% |
| Volume/product mix effect |  |  | $(10,521) | (24.3%) |  |  | $(16,347) | (25.2%) |
| Price effect |  |  | $11,902 | 27.5% |  |  | $23,915 | 36.9% |
| Gross profit | $(3,534) | $1,675 | $(5,209) | 311.0% | $(4,413) | $4,156 | $(8,569) | (206.2%) |

Biofuels sales revenue in the three and six months ended June 30, 2017 increased $1,381 and $7,568 when compared to the three and six months ended June 30, 2016. This increase was primarily from a favorable price variance on biodiesel, biodiesel RINS, and biodiesel blends. The sale of separated, internally generated RINs, comprised a larger component of revenue in the current quarter and six-month period as compared to the prior periods. Partially offsetting this increase was a reduction in pipeline sales which totaled $0 and $0 in the three and six months ended June 30, 2017 and $2,678 and $5,881 in the three and six months ended June 30 2016, respectively.

Revenue from common carrier pipelines varies as its revenue recognition depends upon whether a transaction is bought from and sold to the same party. Purchases and sales of inventory with the same counterparty that are entered into in contemplation of one another (including buy/sell agreements) are combined and recorded on a net basis. Additionally, revenue from common carrier pipelines fluctuates with market conditions.

A portion of our biodiesel sold in 2017 was to three major refiners/blenders in 2017 and one major refiner in 2016. No assurances can be given that we will continue to sell to such major companies, or, if we do sell, the volume we will sell or the profit margin we will realize. We do not believe that the loss of these customers would have a material adverse effect on our biofuels segment or on us as a whole in that: (i) unlike our custom manufacturing products, biodiesel is a commodity with a large potential customer base; (ii) we believe that we could readily sell our biodiesel to other customers as potential demand from other customers for biodiesel exceeds our production capacity; (iii) our sales to 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 (iv) 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 in the three and six months ended June 30, 2017 decreased $5,209 and $8,569 when compared to the three and six months ended June 30, 2016. Cost of goods sold increased as a result of the absence of the blenders’ tax credit which expired December 31, 2016 and was in effect in the prior year’s period. Gross profits were benefited by the change in adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting in the three months ended June 30, 2017 as compared to the same period of 2016. The LIFO adjustment decreased gross profit $2,435 and $2,804, in the three months ended June 30, 2017 and 2016, respectively. The LIFO adjustment decreased gross profit $3,893 in the six months ended June 30, 2017 and increased gross profit in the six months ended June 30, 2016 $1,234. The LIFO adjustment resulted in a lower of cost or market adjustment of $938 in the three and six months ended June 30, 2016 and $957 in the three and six months ended, June 30, 2017, respectively.

Biofuels gross profit was benefited by the change in the activity in derivative instruments. The unrealized and realized gain from derivative instruments activity was $524 and $1,803 in the three and six months ended June 30, 2017 and an unrealized and realized loss of $5,139 and $6,178 for the three and six months ended June 30, 2016. In order to better manage the commodity 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 accounting standards whereby the fair value of FutureFuel’s derivative instruments is determined based on the closing prices of the derivative instruments on relevant commodity exchanges at the end of an accounting period. Realized gains and losses on derivative instruments and changes in fair value of the derivative instruments are recorded in the statement of operations as a component of cost of goods sold within the biofuels segment.

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

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

|  | June 30, 2017 Quantity (contracts) Short | Fair Value | December 31, 2016 Quantity (contracts) Short | Fair Value |
| --- | ---: | ---: | ---: | ---: |
| Regulated options, included in other current assets\* | 75 | $(520) | - | $- |
| Regulated fixed price future commitments, included in other current assets\* | 35 | $(58) | 135 | $(258) |

\*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.

### Critical Accounting Estimates

#### Revenue Recognition

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

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 title to the product has transferred. Bill and hold transactions for the three and six months ended June 30, 2017 and 2016 were related to specialty chemicals customers whereby revenue was recognized in accordance with contractual agreements based upon product being produced and ready for use. These sales were subject to written monthly purchase orders with agreement that production was reasonable. The inventory was custom manufactured and stored at the customer’s request and could not be sold to another buyer. Credit and payment terms for bill and hold customers are similar to other specialty chemicals customers. Sales revenue under bill and hold arrangements were $3,460 and $4,019 for the three months ended June 30, 2017 and 2016, and $7,958 and $10,344 for the six months ended June 30, 2017 and 2016, respectively.

### Liquidity and Capital Resources

Our net cash provided by (used in) operating activities, investing activities, and financing activities for the six months ended June 30, 2017 and 2016 are set forth in the following chart.

|  | Six months ended June 30, 2017 | 2016 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $27,959 | $46,028 |
| Net cash used in investing activities | $(10,774) | $(21,040) |
| Net cash used in financing activities | $(105,447) | $(5,437) |

#### Operating Activities

Cash from operating activities decreased from $46,028 of cash provided by operating activities in the first six months of 2016 to $27,959 of cash provided by operating activities in the first six months of 2017. This decrease was primarily attributable to the decrease in net income.

#### Investing Activities

Cash used in investing activities was $10,774 in the first six months of 2017 compared to $21,040 used in the first six months of 2016. This change was primarily the result of net purchases of marketable securities in the first six months of 2017 compared to the first six months of 2016. Such net purchases totaled $9,054 and $15,775, in the first six months of 2017 and 2016, respectively. Our capital expenditures and customer reimbursements for capital expenditures are summarized in the following table:

|  | Six months ended June 30, 2017 | 2016 |
| --- | ---: | ---: |
| Cash paid for capital expenditures and intangibles | $1,686 | $2,254 |
| Cash received as reimbursement of capital expenditures | $(129) | $(119) |
| Cash paid, net of reimbursement, for capital expenditures | $1,557 | $2,135 |

#### Financing Activities

Cash used in financing activities increased to $105,447 in the first six months of 2017 from $5,437 in the first six months of 2016. This change is primarily the result of payments of dividends on our common stock in the first six months of 2017 compared to the first six months of 2016. The payment of dividends totaled $105,438 and $5,246 in the first six months of 2017 and 2016, respectively.

#### Credit Facility

Effective April 16, 2015, we entered into a new $150,000 secured committed credit facility with a syndicated group of commercial banks. On May 25, 2016, we increased the facility $15,000. 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 April 16, 2020. See Note 6 – “Borrowings” in our consolidated financial statements ended June 30, 2017 for additional information regarding our Credit Agreement.

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

#### Dividends

In the first two quarters of 2017, we paid a regular cash dividend in the amount of $0.06 per share on our common stock. The regular cash dividend amounted to $2,625 per quarter in the first and second quarters of 2017. In the first quarter of 2017, we also paid a special cash dividend of $2.29 per share on our common stock. This special cash dividend amounted to $100,188. Total cash dividends paid were $105,438 in the first six months of 2017.

In the first two quarters of 2016, we paid a regular cash dividend in the amount of $0.06 per share on our common stock. The regular cash dividend amounted to $2,623 in the first quarter of 2016 and $2,623 in the second quarter of 2016, for aggregate dividend payments of $5,246 in the first six months of 2016.

#### Capital Management

As a result of our initial equity offering, our subsequent positive operating results, the exercise of warrants, and the issuance of shares in our at-the-market offering, we accumulated excess working capital. Some of this excess working capital has been paid out as special and regular cash dividends. Additionally, regular cash dividends will be paid in 2017, 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 June 30, 2017 and December 31, 2016, we also had investments in certain preferred stock, trust preferred securities, exchange traded debt instruments, and other equity instruments. We classify these investments as current assets in the accompanying consolidated balance sheets and designate them as being “available-for-sale.” Accordingly, they are recorded at fair value, with the unrealized gains and losses, net of taxes, reported as a component of stockholders’ equity. The fair value of these preferred stock, trust preferred securities, exchange traded debt instruments, and other equity instruments totaled $120,728 and $106,146 at June 30, 2017 and December 31, 2016, respectively.

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

### Off- Balance Sheet Arrangements

We engage in two types of hedging transactions. First, we hedge our biofuels sales through the purchase and sale of futures contracts and options on futures contracts of energy commodities. This activity was captured on our balance sheet at June 30, 2017 and December 31, 2016. Second, we hedge our biofuels feedstock through the execution of purchase contracts and supply agreements with certain vendors. These hedging transactions are recognized in earnings and were not recorded on our balance sheet at June 30, 2017 or December 31, 2016 because they do not meet the definition of a derivative 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.

## Market risk

As filed, 4,847 characters.

**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 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. We had no derivative instruments that qualified under these rules as designated accounting hedges in the first three months of 2017 or 2016. Changes in the fair value of our derivative instruments are recognized at the end of each accounting period and recorded in the statement of operations as a component of cost of goods sold within the biodiesel segment.

Our immediate recognition of derivative instrument gains and losses can cause net income to be volatile from period to period due to the timing of the change in value of the derivative instruments relative to the volume of biofuel being sold. As of June 30, 2017 and December 31, 2016, the fair values of our derivative instruments were a net liability in the amount of $578 and $258, respectively.

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

We prepared a sensitivity analysis of our exposure to market risk with respect to key raw materials and conversion costs for which we do not possess contractual market price adjustment protections, based on average prices for the first three months of 2017. 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 | 157,091 | LB | 10% | $ 4,524 | 57.1% |
| Ultra Low Sulfur Diesel | 5,937 | GAL | 10% | $ 940 | 11.9% |
| Methanol | 51,015 | LB | 10% | $ 837 | 10.6% |
| Electricity | 58 | MWH | 10% | $ 261 | 3.3% |
| Natural Gas | 672 | MCF | 10% | $ 230 | 2.9% |
| Sodium Methylate | 5,233 | LB | 10% | $ 213 | 2.7% |
| Coal | 19 | Ton | 10% | $ 121 | 1.5% |
| (a) Volume requirements and average price information are based upon volumes used and prices obtained for the six months ended June 30, 2017. Volume requirements may differ materially from these quantities in future years as our business evolves. |  |  |  |  |  |

We had no borrowings as of June 30, 2017 or December 31, 2016 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.

## Controls and procedures

As filed, 1,067 characters.

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 as of June 30, 2017 were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

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

## Risk factors

As filed, 198 characters.

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, 2016 filed with the SEC on March 16, 2017.

Filed Aug 9, 2017.
Source: SEC EDGAR, the filing index for accession 0001437749-17-014280. Last ingested by Listed: Nov 10, 2026, 02:55 ET. No prices; not investment advice.