# FutureFuel Corp.: Form 10-Q for the period ended Jun 30, 2019

- Company: [FutureFuel Corp.](/companies/ff.md) (CIK 1337298)
- Form: 10-Q
- Filed: 2019-08-09
- Accepted by EDGAR: Aug 9, 2019, 16:16 ET
- Period: 2019-06-30
- Accession: 0001437749-19-016239
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1337298/000143774919016239/ff20190630_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1337298/000143774919016239/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-04-01 to 2019-06-30 | $70.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2019-01-01 to 2019-06-30 | $119.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Gross profit | 3 months, 2019-04-01 to 2019-06-30 | $3.3m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2019-01-01 to 2019-06-30 | $6.5m | us-gaap:GrossProfit |
| Research and development | 3 months, 2019-04-01 to 2019-06-30 | $788.0k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2019-01-01 to 2019-06-30 | $1.5m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2019-04-01 to 2019-06-30 | $1.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2019-01-01 to 2019-06-30 | $2.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-04-01 to 2019-06-30 | $44.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2019-01-01 to 2019-06-30 | $87.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-04-01 to 2019-06-30 | $917.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2019-01-01 to 2019-06-30 | $1.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-04-01 to 2019-06-30 | $3.7m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2019-01-01 to 2019-06-30 | $9.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-04-01 to 2019-06-30 | $0.08 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2019-01-01 to 2019-06-30 | $0.21 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-04-01 to 2019-06-30 | $0.08 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2019-01-01 to 2019-06-30 | $0.21 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-04-01 to 2019-06-30 | 43,743,243 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2019-01-01 to 2019-06-30 | 43,746,109 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2019-01-01 to 2019-06-30 | $13.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2019-01-01 to 2019-06-30 | $4.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2019-01-01 to 2019-06-30 | $5.2m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2019-06-30 | $222.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-06-30 | $368.5m | us-gaap:AssetsCurrent |
| Total assets | at 2019-06-30 | $477.7m | us-gaap:Assets |
| Current liabilities | at 2019-06-30 | $35.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-06-30 | $79.2m | us-gaap:Liabilities |
| Shareholders' equity | at 2019-06-30 | $398.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 30,806 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, 2019 | 2018 | Dollar% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $70,864 | $88,336 | $(17,472) | (19.8%) |
| Income from operations | $1,185 | $5,840 | $(4,655) | (79.7%) |
| Net income | $3,687 | $6,051 | $(2,364) | (39.1%) |
| Earnings per common share: |  |  |  |  |
| Basic | $0.08 | $0.14 | $(0.06) | (42.9%) |
| Diluted | $0.08 | $0.14 | $(0.06) | (42.9%) |
| Capital expenditures and intangibles (net of customer reimbursements and regulatory grants) | $451 | $536 | $(85) | (15.9%) |
| Adjusted EBITDA | $3,384 | $11,667 | $(8,283) | (71.0%) |

|  | Six Months Ended June 30, 2019 | 2018 | Dollar% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $119,365 | $144,083 | $(24,718) | (17.2%) |
| Income from operations | $2,396 | $40,407 | $(38,011) | (94.1%) |
| Net income | $9,186 | $41,877 | $(32,691) | (78.1%) |
| Earnings per common share: |  |  |  |  |
| Basic | $0.21 | $0.96 | $(0.75) | (78.1%) |
| Diluted | $0.21 | $0.96 | $(0.75) | (78.1%) |
| Capital expenditures and intangibles (net of customer reimbursements and regulatory grants) | $874 | $897 | $(23) | (2.6%) |
| Adjusted EBITDA | $8,799 | $49,264 | $(40,465) | (82.1%) |

18

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, 2019 | 2018 | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Adjusted EBITDA | $3,384 | $11,667 | $8,799 | $49,264 |
| Depreciation | (2,747) | (2,756) | (5,472) | (5,512) |
| Non-cash stock-based compensation | - | (107) | - | (214) |
| Interest and dividend income | 2,750 | 2,153 | 5,112 | 4,145 |
| Non-cash interest expense (including amortization of deferred financing costs) | (44) | (43) | (87) | (86) |
| Losses on disposal of property and equipment | (8) | (32) | (11) | (37) |
| Gains/(losses) on derivative instruments | 443 | (3,109) | (1,033) | (3,271) |
| Gains/(losses) on marketable securities | 826 | 281 | 3,753 | (4,088) |
| Income tax (expense)/benefit | (917) | (2,003) | (1,875) | 1,676 |
| Net income | $3,687 | $6,051 | $9,186 | $41,877 |

19

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

|  | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| Adjusted EBITDA | $8,799 | $49,264 |
| Benefit for deferred income taxes | (445) | (3,885) |
| Impairment of fixed assets | 130 | 171 |
| Interest and dividend income | 5,112 | 4,145 |
| Income tax (expense)/benefit | (1,875) | 1,676 |
| Losses on derivative instruments | (1,033) | (3,271) |
| Change in fair value of derivative instruments | (297) | (1,559) |
| Changes in operating assets and liabilities, net | 3,137 | 18,819 |
| Other | (1) | - |
| Net cash provided by operating activities | $13,527 | $65,360 |

20

### Results of Operations

#### Consolidated

|  | Three Months Ended June 30, 2019 | 2018 | Change Amount% |  | Six Months Ended June 30, 2019 | 2018 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $70,864 | $88,336 | $(17,472) | (19.8)% | $119,365 | $144,083 | $(24,718) | (17.2)% |
| Volume/product mix effect |  |  | $(10,753) | (12.2)% |  |  | $(27,570) | (19.1)% |
| Price effect |  |  | $(6,719) | (7.6)% |  |  | $2,852 | 2.0% |
| Gross profit | $3,270 | $8,271 | $(5,001) | (60.5)% | $6,532 | $45,778 | $(39,246) | (85.7)% |

Consolidated sales revenue in the three and six months ended June 30, 2019 decreased $17,472 and $24,718, respectively, compared to the three and six months ended June 30, 2018. This decrease primarily resulted from decreased sales volumes in biodiesel and chemicals. In addition, in the three-month period ended June 30, 2019, sales revenue was reduced by lower average selling prices in our biofuel segment. Partially offsetting the six-month period decrease was higher average selling prices in the biofuels segment of $2,191, as compared with the same period in 2018. The prior year period was unfavorably impacted by rebates to customers that resulted from the retroactive reinstatement of the 2017 blenders’ tax credit (BTC) passed into law on February 9, 2018. The BTC has not been reinstated beyond 2017, therefore, these rebates did not reoccur in 2019. Please see Note 2 for additional discussion.

Gross profit in the three and six months ended June 30, 2019 decreased $5,001 and $39,246, respectively, compared to the three and six months ended June 30, 2018. This decrease was primarily from the biofuel segment with the prior year period benefiting from the aforementioned BTC which was not in law in 2019. Also negatively impacting gross profit in the current periods was reduced sales volumes in both the biofuels segment and chemical segment. Partially offsetting these decreases in gross profit was the favorable impact of the change in the unrealized and realized activity in derivative instruments with a gain of $443 in the three months ended June 30, 2019 as compared to a loss of $3,109 in the three months ended June 30, 2018 and a loss of $1,033 in the six months ended June 30, 2019, as compared to a loss of $3,271 in the same period of 2018. Additionally, gross profit was favorably impacted in the three and six months ended June 30, 2019, as compared to the three and six months ended June 30, 2018, by the adjustment in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. This adjustment increased gross profit of $287 and $1,924 in the three and six months ended June 30, 2019 as compared to a decrease in gross profit of $2,330 and $1,998 in the three and six months ended June 30, 2018, respectively.

#### Operating Expenses

Operating expenses decreased $346 and $1,235 in the three and six months ended June 30, 2019, as compared to the three and six months ended June 30, 2018. This decrease was primarily from reduced compensation expense.

#### Provision for Income Taxes

The effective tax rate for the three months ended June 30, 2019 and 2018 reflects our expected tax rate on reported operating income before income tax. The three-month effective rate ended June 30, 2019 is expected to continue for the remainder of the year.

The effective tax rate for the six months ended June 30, 2019 was favorably impacted by FutureFuel being granted a retroactive research and development credit for a prior year in a state where it does significant business. Comparatively, the six months ended June 30, 2018, reflects the favorable effect of the BTC and Small Agri-biodiesel Producer Tax Credit (2017 BTC was reinstated in the three months ended March 31, 2018), which were not in law in 2019.

Unrecognized tax benefits totaled $2,804 at June 30, 2019 and December 31, 2018.

FutureFuel records interest and penalties, net, as a component of provision for income taxes. FutureFuel accrued balances of $734 and $681 at June 30, 2019 and December 31, 2018, respectively, for interest and penalties.

#### Net Income

Net income for the three and six months ended June 30, 2019 decreased $2,364 and $32,691, respectively, as compared to the same periods in 2018. The decrease in the three-month period resulted primarily from lower sales volumes of agro/energy chemicals and biodiesel. The decrease in the six-month period resulted primarily from the absence of biodiesel tax credits and incentives that were in law in the prior year and not in effect for 2019.

#### Chemicals Segment

|  | Three Months Ended June 30, 2019 | 2018 | Change Amount% |  | Six Months Ended June 30, 2019 | 2018 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $25,859 | $31,527 | $(5,668) | (18.0)% | $53,211 | $60,608 | $(7,397) | (12.2)% |
| Volume/product mix effect |  |  | $(5,787) | (18.4)% |  |  | $(8,058) | (13.3)% |
| Price effect |  |  | $119 | 0.4% |  |  | $661 | 1.1% |
| Gross profit | $7,181 | $8,016 | $(835) | (10.4)% | $14,490 | $15,572 | $(1,082) | (6.9)% |

Sales revenue in the three months ended June 30, 2019 decreased 18% or $5,668 compared to the three months ended June 30, 2018. Sales revenue for our custom chemicals (unique chemicals produced for specific customers) for the three months ended June 30, 2019 totaled $21,965, a decrease of $5,107 from the same period in 2018. This decrease was primarily attributed to decreased sales volumes in the agrochemical and energy markets and included a planned shutdown of a process line to expand capacity. Performance chemicals (comprised of multi-customer products which are sold based on specification) sales revenues were $3,894 in the three months ended June 30, 2019, a decrease of $561 from the three months ended June 30, 2018. This decrease was primarily from reduced sales volume of glycerin and slower sales of a polymer modifier used in the carpet industry.

Sales revenue in the six months ended June 30, 2019 decreased 12% or $7,397 compared to the six months ended June 30, 2018. Sales revenue for our custom chemicals (unique chemicals produced for specific customers) for the six months ended June 30, 2019 totaled $45,665, a decrease of $4,827 from the same period in 2018. This decrease was primarily attributed to decreased sales volumes in the agrochemical and energy markets and included a planned shutdown of a process line to expand capacity. Performance chemicals (comprised of multi-customer products which are sold based on specification) sales revenues were $7,546 in the six months ended June 30, 2019, a decrease of $2,570 from the six months ended June 30, 2018. This decrease was primarily from reduced sales volume of glycerin and slower sales of a polymer modifier used in the carpet industry.

Gross profit for the chemicals segment for the three and six months ended June 30, 2019 decreased $835 and $1,082, respectively, when compared to the same period of 2018. This decrease was driven mostly by sales volume declines in the agrochemical and energy market as discussed above. Partially offsetting this decline was improved throughput in our custom chemicals due to production scheduling for annual maintenance, favorable product mix of products we campaign, and a benefit from the change in adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. The change in this adjustment increased the chemical segment gross profit in the three and six month periods ending June 30, 2019 by $217 and $744, respectively, as compared to a decrease in gross profit of $627 and $438, in the same respective periods of 2018.

#### Biofuels Segment

|  | Three Months Ended June 30, 2019 | 2018 | Change Amount% |  | Six Months Ended June 30, 2019 | 2018 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $45,005 | $56,809 | $(11,804) | (20.8)% | $66,154 | $83,475 | $(17,321) | (20.7)% |
| Volume/product mix effect |  |  | $(4,966) | (8.7)% |  |  | $(19,512) | (23.4)% |
| Price effect |  |  | $(6,838) | (12.0)% |  |  | $2,191 | 2.6% |
| Gross profit | $(3,911) | $255 | $(4,166) | (1633.5)% | $(7,958) | $30,206 | $(38,164) | (126.3)% |

Biofuels sales revenue in the three and six months ended June 30, 2019 decreased $11,804 and $17,321, respectively, as compared to the same periods of 2018. The biodiesel and biodiesel blend volumes decreased in both the three and six month periods as compared to the prior year primarily from the lack of sourcing profitable feedstock. In addition, in the three-months ending June 30, 2019 as compared to the same period of 2018, lower selling price reduced revenue 12% or $6,838. In the six-month period ended June 30, 2019 as compared to the same period of 2018, net sales prices increased revenue 2.6% or $2,191. In the six-month period ended June 30, 2018, sales revenue included rebates that resulted from the retroactive reinstatement of the 2017 BTC. These rebates represented a lower sales price in the six months ended June 30, 2018; these rebates were not present in the six-month period ending June 30, 2019. The BTC has not been reinstated beyond 2017. Please see Note 2 for additional discussion.

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 net transactions increased $121 in the six months ended June 30, 2019 as compared to the six months ended June 30, 2018.

A portion of our biodiesel sold was to one major refiner/blender in 2019 and 2018. 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) 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 months ended June 30, 2019 decreased $4,166 when compared to the same period of 2018. Gross profit was benefited in the three months ended June 30, 2018 by higher sales volumes. Partially benefiting gross profit in the three months ended June 30, 2019 the change in adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting as compared to the same period in 2018. This adjustment increased gross profit $70 in the three months ended June 30, 2019, compared to a decrease in gross profit of $1,703 in the three months ended June 30, 2018.

Biofuels gross profit was also benefited by the change in the activity in derivative instruments with a gain of $443 in the three months ended June 30, 2019, as compared to a loss of $3,109 in the same period of 2018. 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 Topic 815, *Derivatives and Hedging*. None of the derivative instruments are designated and accounted for as hedges due primarily to the extensive record keeping requirements.

In the six-month period ended June 30, 2019, biofuels gross profit decreased $38,164 when compared to the same period of 2018. The change was primarily from the retroactive reinstatement of the 2017 BTC, totaling $28,869, which benefited the first six months of 2018 and has not been reinstated past December 31, 2017. Further reducing gross profit was lower sales volumes in the six months of 2019 as compared to the same period of 2018. Gross profit was partially benefited in 2019, as compared to 2018, by the change in adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. This adjustment increased gross profit $1,180 in the six months ended June 30, 2019, as compared to a decrease of $1,560 in the six months ended June 30, 2018. In addition, Biofuels gross profit was impacted by the change in the activity in derivative instruments with a loss of $1,033 in the three months ended June 30, 2019, as compared to a loss of $3,271 in the same period of 2018.

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

|  | June 30, 2019 Contract quantity | Fair Value | December 31, 2018 Contract quantity Short | Fair Value |
| --- | ---: | ---: | ---: | ---: |
| Regulated options, included in other current assets | - | $- | 100 | $(484) |
| Regulated fixed price future commitments, included in other current assets | - | $- | 96 | $187 |

\*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

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. Please see Note 18 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.

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 six months ended June 30, 2019 and 2018 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 $12,006 and $13,373 for the three months ended June 30, 2019 and 2018, respectively. For the six months ended June 30, 2019 and 2018, bill and hold sales revenue was $23,762 and $20,894, respectively.

### Liquidity and Capital Resources

Our net cash from operating activities, investing activities, and financing activities for the six months ended June 30, 2019 and 2018 are set forth in the following table.

|  | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| Net cash from operating activities | $13,527 | $65,360 |
| Net cash from investing activities | $(379) | $25,182 |
| Net cash from financing activities | $(5,249) | $(5,248) |

#### Operating Activities

Cash from operating activities decreased from $65,360 of cash provided by operating activities in the first six months of 2018 to $13,527 of cash provided in operating activities in the first six months of 2019. This $51,833 decrease was primarily attributable to the decrease of $32,691 in net income, the decrease in the change in accounts payable, including accounts payable - related parties, of $16,204 and the decrease in the change in the fair value of equity securities, of $11,305.

#### Investing Activities

Cash from investing activities decreased from $25,182 of cash provided by investing activities in the first six months of 2018 to $379 of cash used in investing activities in the first six months of 2019. Of this change, $21,669 was the result of decreased cash inflows from net sales of marketable securities in the first six months of 2019 compared to net sales in the first six months of 2018. Such net sales totaled $3,359, in the first six months of 2019, compared to $25,028 in net sales in the first six months of 2018. Our capital expenditures and customer reimbursements for capital expenditures for the six months ended June 30, 2019 and 2018, are summarized in the following table:

|  | Six Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| Cash paid for capital expenditures and intangibles | $4,659 | $1,103 |
| Cash received as reimbursement of capital expenditures\* | $(3,785) | $(206) |
| Cash paid, net of reimbursement, for capital expenditures | $874 | $897 |

\*This receipt of cash was reported as an increase in deferred revenue in cash flows from operations.

#### Financing Activities

Cash used in financing activities of $5,249 and $5,248, in the six months ended June 30, 2019 and 2018, respectively. This is the result of payments of dividends on our common stock in for the first six months of 2019 and 2018.

#### 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 the first six months of 2019 and 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 $5,249 and $5,248 in the six month periods ended June 30, 2019 and 2018, 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 cash dividends will be paid in 2019, 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, 2019 and December 31, 2018, 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 reported as a component of net income. The fair value of the debt securities and equity instruments totaled $80,560 and $79,888 at June 30, 2019 and December 31, 2018, 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, 2019 and December 31, 2018. 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, 2019 or December 31, 2018 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, 4,828 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 Topic 815, *Derivatives and Hedging.* Under this standard, the accounting for changes in the fair value of a derivative instrument depends upon whether it has been designated as an accounting hedging relationship and, further, on the type of hedging relationship. To qualify for designation as an accounting hedging relationship, specific criteria must be met and appropriate documentation maintained. We had no derivative instruments that qualified under these rules as designated accounting hedges in the first three months of 2019 or 2018. 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, 2019 and December 31, 2018, the fair values of our derivative instruments were a net liability in the amount of $0 and $297, 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 six months of 2019. 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 | 158,114 | LB | 10.0% | 4,301 | 60.8% |
| Methanol | 74,428 | LB | 10.0% | 1,377 | 21.1% |
| Electricity | 60 | MWH | 10.0% | 323 | 4.9% |
| Natural Gas | 650 | MCF | 10.0% | 201 | 3.1% |
| Sodium Methylate | 4,297 | LB | 10.0% | 168 | 2.6% |
| Coal | 19 | Ton | 10.0% | 121 | 1.9% |
| Caustic soda | 6,309 | LB | 10.0% | 83 | 1.3% |
| (a) Volume requirements and average price information are based upon volumes used and prices obtained for the six months ended June 30, 2019. Volume requirements may differ materially from these quantities in future years as our business evolves. |  |  |  |  |  |

We had no borrowings as of June 30, 2019 or December 31, 2018 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, 2019 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, 197 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, 2018 filed with the SEC on March 15, 2019.

Filed Aug 9, 2019.
Source: SEC EDGAR, the filing index for accession 0001437749-19-016239. Last ingested by Listed: Nov 10, 2026, 02:55 ET. No prices; not investment advice.