# FutureFuel Corp.: Form 10-Q for the period ended Sep 30, 2018

- Company: [FutureFuel Corp.](/companies/ff.md) (CIK 1337298)
- Form: 10-Q
- Filed: 2018-11-09
- Accepted by EDGAR: Nov 9, 2018, 16:34 ET
- Period: 2018-09-30
- Accession: 0001437749-18-020310
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1337298/000143774918020310/ff20180930_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1337298/000143774918020310/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-07-01 to 2018-09-30 | $81.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2018-01-01 to 2018-09-30 | $225.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2018-07-01 to 2018-09-30 | $61.6m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2018-01-01 to 2018-09-30 | $146.9m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2018-07-01 to 2018-09-30 | $12.7m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2018-01-01 to 2018-09-30 | $58.4m | us-gaap:GrossProfit |
| Research and development | 3 months, 2018-07-01 to 2018-09-30 | $877.0k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2018-01-01 to 2018-09-30 | $2.8m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2018-07-01 to 2018-09-30 | $10.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2018-01-01 to 2018-09-30 | $50.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-07-01 to 2018-09-30 | $43.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2018-01-01 to 2018-09-30 | $129.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-07-01 to 2018-09-30 | $4.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2018-01-01 to 2018-09-30 | $2.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-07-01 to 2018-09-30 | $9.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2018-01-01 to 2018-09-30 | $51.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-07-01 to 2018-09-30 | $0.22 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2018-01-01 to 2018-09-30 | $1.17 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-07-01 to 2018-09-30 | $0.22 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2018-01-01 to 2018-09-30 | $1.17 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-07-01 to 2018-09-30 | 43,732,920 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2018-01-01 to 2018-09-30 | 43,725,370 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2018-01-01 to 2018-09-30 | $79.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2018-01-01 to 2018-09-30 | $3.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2018-01-01 to 2018-09-30 | $7.9m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2018-09-30 | $199.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-09-30 | $373.7m | us-gaap:AssetsCurrent |
| Total assets | at 2018-09-30 | $483.2m | us-gaap:Assets |
| Current liabilities | at 2018-09-30 | $52.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-09-30 | $85.4m | us-gaap:Liabilities |
| Shareholders' equity | at 2018-09-30 | $397.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 31,746 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 September 30, 2018 | 2017 | Dollar% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $81,422 | $77,606 | $3,816 | 4.9% |
| Income from operations | $10,229 | $3,200 | $7,029 | 219.7% |
| Net income | $9,445 | $3,334 | $6,111 | 183.3% |
| Earnings per common share: |  |  |  |  |
| Basic | $0.22 | $0.08 | $0.14 | 175.0% |
| Diluted | $0.22 | $0.08 | $0.14 | 175.0% |
| Capital expenditures and intangibles (net of customer reimbursements and regulatory grants) | $642 | $856 | $(214) | (25.0%) |
| Adjusted EBITDA | $13,661 | $9,553 | $4,108 | 43.0% |

|  | Nine months ended September 30, 2018 | 2017 | Dollar% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $225,505 | $199,765 | $25,740 | 12.9% |
| Income from operations | $50,636 | $6,049 | $44,587 | 737.1% |
| Net income | $51,322 | $7,564 | $43,758 | 578.5% |
| Earnings per common share: |  |  |  |  |
| Basic | $1.17 | $0.17 | $1.00 | 588.2% |
| Diluted | $1.17 | $0.17 | $1.00 | 588.2% |
| Capital expenditures and intangibles (net of customer reimbursements and regulatory grants) | $1,539 | $2,413 | $(874) | (36.2%) |
| Adjusted EBITDA | $62,926 | $17,201 | $45,725 | 265.8% |

19

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 September 30, 2018 | 2017 | Nine months ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Adjusted EBITDA | $13,661 | $9,553 | $62,926 | $17,201 |
| Depreciation | (2,732) | (2,927) | (8,244) | (8,735) |
| Non-cash stock-based compensation | (107) | (128) | (321) | (878) |
| Interest and dividend income | 2,543 | 1,965 | 6,688 | 5,679 |
| Non-cash interest expense (including amortization of deferred financing costs) | (43) | (43) | (130) | (129) |
| Losses on disposal of property and equipment | (4) | (68) | (41) | (145) |
| Losses on derivative instruments | (676) | (3,314) | (3,947) | (1,511) |
| Gains/(losses) on marketable securities | 815 | 26 | (3,273) | (543) |
| Provision for income taxes | (4,012) | (1,730) | (2,336) | (3,375) |
| Net income | $9,445 | $3,334 | $51,322 | $7,564 |

20

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

|  | Nine months ended September 30, 2018 | 2017 |
| --- | ---: | ---: |
| Adjusted EBITDA | $62,926 | $17,201 |
| Benefit for deferred income taxes | (3,609) | (1,303) |
| Impairment of fixed assets | 258 | 28 |
| Interest and dividend income | 6,688 | 5,679 |
| Provision for income taxes | (2,336) | (3,375) |
| Losses on derivative instruments | (3,947) | (1,511) |
| Change in fair value of derivative instruments | (2,290) | (60) |
| Changes in operating assets and liabilities, net | 21,479 | 19,781 |
| Net cash provided by operating activities | $79,169 | $36,440 |

21

### Results of Operations

#### Consolidated

|  | Three months ended September 30, 2018 | 2017 | Change Amount% |  | 2018 | Nine months ended September 30, 2017 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $81,422 | $77,606 | $3,816 | 4.9% | $225,505 | $199,765 | $25,740 | 12.9% |
| Volume/product mix effect |  |  | $(3,054) | (3.9%) |  |  | $18,288 | 9.2% |
| Price effect |  |  | $6,870 | 8.9% |  |  | $7,452 | 3.7% |
| Gross profit | $12,653 | $5,526 | $7,127 | 129.0% | $58,431 | $13,454 | $44,977 | 334.3% |

Consolidated sales revenue in the three and nine months ended September 30, 2018 increased 4.9% or $3,816 and 12.9% or $25,740, compared to the three and nine months ended September 30, 2017. The current three-month period was benefited $6,086 from higher biofuel prices and unfavorably affected by a volume reduction in pipeline trades. In the first nine months of 2018, sales revenue benefited from strong demand in the agricultural chemical and energy markets with higher sales volumes and prices in both segments. Within the chemical segment, in the current nine-month period, sales volume/product mix improved 11.0% or $8,543 in addition to an increase of $2,212 from higher average selling prices. The price increases were primarily from higher prices indexed to higher raw material prices. Within the biofuel segment, sales revenue increased $9,745 in the current nine-month period from improved sales volumes and product mix and $5,240 from higher average selling prices experienced in the fuel industry. Negatively influencing this price effect was the retroactive reinstatement of the 2017 blenders’ tax credit (BTC) passed into law on February 9, 2018. Please see Note 2 for additional discussion.

Gross profit in the three and nine months ended September 30, 2018 increased $7,127 and $44,977 compared to the three months and nine months ended September 30, 2017. The three-month increase was primarily from stronger margins in the biofuel segment. The nine-month increase was primarily from improved margins in the biofuel segment from the BTC which expired on December 31, 2016 and was retroactively reinstated for 2017 (but, not beyond 2017) on February 9, 2018 resulting in the benefit being recognized in 2018. Also benefiting gross profit in the nine-month period was increased sales volumes in both the chemicals and biofuels segments.

Gross profit was favorably impacted in the three and nine months ended September 30, 2018, as compared to the prior year period, by the adjustment in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. The change in this adjustment decreased gross profit $443 in the three months ended September 30, 2018 and increased gross profit $2,708 in the nine months ended September 30, 2018 as compared to the three and nine months ended September 30, 2017. Please see Note 3 for additional discussion.

Gross profit was favorably impacted by the change in the unrealized and realized activity in derivative instruments with a loss of $676 in the three months ended September 30, 2018, as compared to a loss of $3,314 in the prior year period. In the nine-month period, gross profit was impacted negatively by the change in unrealized and realized activity in derivative instruments with a loss of $3,947, as compared to a loss of $1,511, in the prior year period.

#### Operating Expenses

Operating expenses increased $98 and $390 in the three and nine months ended September 30, 2018, respectively, as compared to the three and nine months ended September 30, 2017. This increase was primarily from an increase in purchased services and compensation.

#### Provision for Income Taxes

The effective tax rate for the three months ended September 30, 2018 and 2017 reflects our expected tax rate on reported operating income before income tax. This three-month effective rate is expected to materially continue for the remainder of 2018 absent the effect of the subsequent event impact as noted below.

The effective tax rate for the nine months ended September 30, 2018 reflects our expected tax rate on reported operating income before income tax including the positive effect of the retroactive reinstatement of the 2017 BTC and Small Agri-biodiesel Producer Tax Credit. Our effective tax rate in the nine months ended September 30, 2017 does not reflect the BTC and Small Agri-biodiesel Producer Tax Credit recognized in 2018 because these credits and incentives were retroactively extended through December 31, 2017 on February 9, 2018. This rate is not expected to continue for the remainder of 2018 as these credits only benefited the three months ended March 31, 2018 and nine months ended September 30, 2018.

Unrecognized tax benefits totaled $0 at both September 30, 2018 and December 31, 2017.

FutureFuel records interest and penalties, net, as a component of provision for income taxes. Interest and penalties included as a component of provision for income taxes amounted to $81 for the three and nine months ended September 30, 2018, and $29 and $402, for the three and nine months ended September 30 2017, respectively.

In a decision dated November 1, 2018, the United States Court of Appeals for the Federal Circuit affirmed a November 22, 2016 decision of the Federal Court of Claims pertaining to the income tax treatment of the blenders’ fuel mixture credit. Like the Federal Court of Claims before it, the Court of Appeals found that the mixture credit is a reduction in excise tax liability and, to the extent the mixture credit reduces excise tax liabilities, the mixture credit is a component of taxable income.

As a result of the November 1, 2018 decision, FutureFuel is assessing whether the recorded benefits associated with the mixture credit should be re-measured in the period of the decision. If FutureFuel determines that ASC 740, Income Tax’s recognition threshold of more-likely-than-not is no longer met because of the decision, FutureFuel may recognize additional income tax expense ranging from approximately $4,000 to $4,500 in the fourth quarter.

#### Net Income

Net income for the three and nine months ended September 30, 2018 increased $6,111 and $43,758 as compared to the same periods in 2017. The increase was from stronger sales volumes, a 14% reduction in the federal statutory tax rate, and biodiesel tax credits and incentives that were reinstated in the three months ended March 31, 2018 that were not in effect for 2017 (see Note 2).

#### Chemicals Segment

|  | Three months ended September 30, 2018 | 2017 | Change Amount% |  | Nine months ended September 30, 2018 | 2017 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $28,022 | $28,167 | $(145) | (0.5%) | $88,630 | $77,875 | $10,755 | 13.8% |
| Volume/product mix effect |  |  | $(929) | (3.3%) |  |  | $8,543 | 11.0% |
| Price effect |  |  | $784 | 2.8% |  |  | $2,212 | 2.8% |
| Gross profit | $8,898 | $8,060 | $838 | 10.4% | $24,470 | $20,401 | $4,069 | 19.9% |

Sales revenue in the three and nine months ended September 30, 2018 decreased $145 and increased $10,755, compared to the three and nine months ended September 30, 2017. Sales revenue for our custom chemicals (unique chemicals produced for specific customers) for the three months and nine months ended September 30, 2018 totaled $23,973 and $74,465, an increase of $380 and $9,276 from the comparable periods, respectively in 2017. In the three-month comparison period, revenue was unfavorably impacted by lower volumes from the timing of custom chemicals shipments. In the nine-month comparison period, sales revenue was benefited from higher volumes in the agrochemical and energy markets. To a lesser extent, the three and nine-month comparison periods were benefited from the change in the recognition of contract liabilities in deferred revenue for a few custom chemical contracts from the adoption of ASC 606. See Note 17 for additional discussion. Performance chemicals (comprised of multi-customer products, which are sold based on specification) sales revenues were $4,049 and $14,165, in the three and nine months ended September 30, 2018, a decrease of $525 and an increase of $1,479 from the three and nine months ended September 30, 2017, respectively. The change in the three-month period was related to timing of shipments for products campaigned. The nine-month comparison period was benefited by higher unit pricing for glycerin products based on improved market conditions.

Gross profit for the chemicals segment for the three and nine months ended September 30, 2018, increased $838 and $4,069 when compared to the three and nine months ended September 30, 2017, respectively. This increase was driven primarily by higher volumes in the agrochemical and energy markets, and to a lesser extent, from a favorable product mix and the change in the recognition of contract liabilities in deferred revenue for a few customer chemical contracts given the adoption of ASC 606. See Note 17 for additional discussion.

#### Biofuels Segment

|  | Three months ended September 30, 2018 | 2017 | Change Amount% |  | Nine months ended September 30, 2018 | 2017 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $53,400 | $49,439 | $3,961 | 8.0% | $136,875 | $121,890 | $14,985 | 12.3% |
| Volume/product mix effect |  |  | $(2,125) | (4.3%) |  |  | $9,745 | 8.0% |
| Price effect |  |  | $6,086 | 12.3% |  |  | $5,240 | 4.3% |
| Gross profit | $3,755 | $(2,534) | $6,289 | 248.2% | $33,961 | $(6,947) | $40,908 | 588.9% |

Biofuels sales revenue in the three and nine months ended September 30, 2018 increased $3,961 and $14,985 when compared to the three and nine months ended September 30, 2017. This increase in the three-month comparison period was primarily from higher sales prices partially offset by lower pipeline sales volumes. The increase in the nine-month comparison period was benefited by an 8% volume increase and a net 4.3% price increase. The price increase was partially offset by the effect of the retroactive reinstatement of the 2017 BTC, as recorded in the first three months ended March 31, 2018 (see Note 2).

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. Revenue from pipeline transactions was $0 and $1,852, in the three and nine months ended September 30, 2018 and 2017, respectively.

A portion of our biodiesel sold in 2018 and 2017 was to a couple major refiners/blenders. No assurances can be given that we will continue to sell to such major refiner, 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 this customer 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 nine months ended September 30, 2018 increased $6,289 and $40,908 when compared to the three and nine months ended September 30, 2017. The increase in the three-month period was primarily from higher sales volumes and improved petroleum margins. The increase for the nine-month period was benefited from the recognition in the first quarter of 2018 of the retroactive reinstatement of the 2017 BTC totaling $28,869. Also benefitting gross profit in the nine-month comparison period was the change in adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting, which increased biofuels gross profit $2,256.

Biofuels gross profit improved in the three months ended September 30, 2018 as compared to same period in 2017 by the change in activity in derivative instruments with a loss of $676 as compared to a loss of $3,314, respectively. Gross profit was unfavorably impacted by this change in the nine-month comparison period of 2018 to 2017 with a loss of $3,947 and $1,511, respectively. 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:

|  | September 30, 2018 Number of contracts Short | Fair Value | December 31, 2017 Number of contracts Short | Fair Value |
| --- | ---: | ---: | ---: | ---: |
| Regulated options, included in other current assets | - | $- | 200 | $(2,428) |
| Regulated fixed price future commitments, included in other current assets | 31 | $(138) | - | $- |

\*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

On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under Topic 605.

Certain long-term contracts had an upfront non-cancellable payment considered a material right. The Company applied the renewal option approach in allocating the transaction price to the material right. 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. Each estimate will be updated quarterly on a prospective basis. These custom chemical contracts have payment terms of 30 days. Please see Note 17 for additional discussion.

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, 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 control of the product has transferred. Bill and hold transactions for the three months ended September 30, 2018 and 2017 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. Sales revenue under bill and hold arrangements were $11,602 and $4,519 for the three months ended September 30, 2018 and 2017, respectively. For the nine months ended September 30, 2018 and 2017, bill and hold revenue was $32,496 and $12,477, respectively.

### Liquidity and Capital Resources

Our net cash provided by (used in) operating activities, investing activities, and financing activities for the nine months ended September 30, 2018 and 2017 are set forth in the following chart.

|  | Nine months ended September 30, 2018 | 2017 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $79,169 | $36,440 |
| Net cash used in investing activities | $13,600 | $(14,252) |
| Net cash used in financing activities | $(8,048) | $(108,215) |

#### Operating Activities

Cash from operating activities increased from $36,440 of cash provided by operating activities in the first nine months of 2017 to $79,169 of cash provided by operating activities in the first nine months of 2018. This increase was primarily attributable to the increase of $43,758 in net income, the increase in the change in accounts payable, including accounts payable - related parties, of $10,762 offset by the decrease in the change in inventory of $12,821.

#### Investing Activities

Cash provided by investing activities increased $27,852, from cash used in investing activities of $14,252 in the first nine months of 2017 compared to $13,600 of cash provided by investing activities in the first nine months of 2018. Of this change, $25,160 was the result of net sales of marketable securities in the first nine months of 2018 compared to net purchases in the first nine months of 2017. Such net sales totaled $14,278, in the first nine months of 2018, compared to $10,882 in net purchases in the first nine months of 2017. Our capital expenditures and customer reimbursements for capital expenditures are summarized in the following table:

|  | Nine months ended September 30, 2018 | 2017 |
| --- | ---: | ---: |
| Cash paid for capital expenditures and intangibles | $3,084 | $2,614 |
| Cash received as reimbursement of capital expenditures | $(1,545) | $(201) |
| Cash paid, net of reimbursement, for capital expenditures | $1,539 | $2,413 |

#### Financing Activities

Cash used in financing activities decreased to $8,048 in the first nine months of 2018 from $108,215 in the first nine months of 2017. This change is the result of payments of dividends on our common stock in the first nine months of 2018 compared to the first nine months of 2017. The payment of dividends totaled $7,872 and $108,063 in the first nine months of 2018 and 2017, 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 7 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 each of the first three quarters of 2018, we paid a regular cash dividend in the amount of $0.06 per share on our common stock. The regular cash dividend amounted to $2,624 in each of such three quarters of 2018 for a total of $7,872. In each of the first three 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 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 $108,063 in the first nine months of 2017.

#### 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 2018, 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 September 30, 2018 and December 31, 2017, 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 the debt securities as being “available-for-sale.” Accordingly, the debt securities are recorded at fair value, with the unrealized gains and losses, net of taxes, reported as a component of stockholders’ equity. We also held equity securities with readily available market values. These equity instruments are recorded at fair value, with the unrealized gains and losses in net income. The fair value of the debt securities and equity instruments totaled $103,102 and $120,699 at September 30, 2018 and December 31, 2017, 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 September 30, 2018 and December 31, 2017. 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 September 30, 2018 or December 31, 2017 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, 4,588 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 nine months of 2018 or 2017. 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 September 30, 2018 and December 31, 2017, the fair values of our derivative instruments were a net liability in the amount of $138 and $2,428, 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 nine months of 2018. 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 feedstock | 310,928 | LB | 10% | $8,053 | 13.8% |
| Methanol | 113,984 | LB | 10% | $2,572 | 4.4% |

(a) Volume requirements and average price information are based upon volumes used and prices obtained for the nine months ended September 30, 2018. Volume requirements may differ materially from these quantities in future years as our business evolves.

We had no borrowings as of September 30, 2018 or December 31, 2017 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, 1,072 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 September 30, 2018 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, 2017 filed with the SEC on March 16, 2018.

Filed Nov 9, 2018.
Source: SEC EDGAR, the filing index for accession 0001437749-18-020310. Last ingested by Listed: Nov 10, 2026, 02:55 ET. No prices; not investment advice.