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

- Company: [FutureFuel Corp.](/companies/ff.md) (CIK 1337298)
- Form: 10-Q
- Filed: 2019-11-08
- Accepted by EDGAR: Nov 8, 2019, 17:19 ET
- Period: 2019-09-30
- Accession: 0001437749-19-022190
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1337298/000143774919022190/ff20190930_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1337298/000143774919022190/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-07-01 to 2019-09-30 | $65.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2019-01-01 to 2019-09-30 | $185.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Gross profit | 3 months, 2019-07-01 to 2019-09-30 | $5.5m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2019-01-01 to 2019-09-30 | $12.0m | us-gaap:GrossProfit |
| Research and development | 3 months, 2019-07-01 to 2019-09-30 | $833.0k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2019-01-01 to 2019-09-30 | $2.3m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2019-07-01 to 2019-09-30 | $3.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2019-01-01 to 2019-09-30 | $5.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-07-01 to 2019-09-30 | $43.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2019-01-01 to 2019-09-30 | $130.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-07-01 to 2019-09-30 | $1.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2019-01-01 to 2019-09-30 | $2.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-07-01 to 2019-09-30 | $6.6m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2019-01-01 to 2019-09-30 | $15.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-07-01 to 2019-09-30 | $0.15 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2019-01-01 to 2019-09-30 | $0.36 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-07-01 to 2019-09-30 | $0.15 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2019-01-01 to 2019-09-30 | $0.36 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-07-01 to 2019-09-30 | 43,743,243 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2019-01-01 to 2019-09-30 | 43,745,153 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2019-01-01 to 2019-09-30 | $24.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2019-01-01 to 2019-09-30 | $6.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2019-01-01 to 2019-09-30 | $7.9m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2019-09-30 | $235.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-09-30 | $377.0m | us-gaap:AssetsCurrent |
| Total assets | at 2019-09-30 | $484.3m | us-gaap:Assets |
| Current liabilities | at 2019-09-30 | $39.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-09-30 | $79.1m | us-gaap:Liabilities |
| Shareholders' equity | at 2019-09-30 | $405.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 31,679 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 and biofuels. Within the chemical 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, 2019 | 2018 | Dollar% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $65,684 | $81,422 | $(15,738) | (19.3%) |
| Income from operations | $3,275 | $10,229 | $(6,954) | (68.0%) |
| Net income | $6,622 | $9,445 | $(2,823) | (29.9%) |
| Earnings per common share: |  |  |  |  |
| Basic | $0.15 | $0.22 | $(0.07) | (31.8%) |
| Diluted | $0.15 | $0.22 | $(0.07) | (31.8%) |
| Capital expenditures (net of customer reimbursements) | $572 | $642 | $(70) | (10.9%) |
| Adjusted EBITDA | $6,834 | $13,661 | $(6,827) | (50.0%) |

|  | Nine Months Ended September 30, 2019 | 2018 | Dollar% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $185,049 | $225,505 | $(40,456) | (17.9%) |
| Income from operations | $5,671 | $50,636 | $(44,965) | (88.8%) |
| Net income | $15,808 | $51,322 | $(35,514) | (69.2%) |
| Earnings per common share: |  |  |  |  |
| Basic | $0.36 | $1.17 | $(0.81) | (69.2%) |
| Diluted | $0.36 | $1.17 | $(0.81) | (69.2%) |
| Capital expenditures (net of customer reimbursements) | $1,446 | $1,539 | $(93) | (6.0%) |
| Adjusted EBITDA | $15,633 | $63,184 | $(47,551) | (75.3%) |

20

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

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

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

|  | Three Months Ended September 30, 2019 | 2018 | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Net income | $6,622 | $9,445 | $15,808 | $51,322 |
| Depreciation | 3,620 | 2,732 | 9,092 | 8,502 |
| Non-cash stock-based compensation | 21 | 107 | 21 | 321 |
| Interest and dividend income | (2,718) | (2,543) | (7,830) | (6,688) |
| Non-cash interest expense and amortization of deferred financing costs | 43 | 43 | 130 | 130 |
| (Gain) loss on disposal of property and equipment | (22) | 4 | (11) | 41 |
| (Gain) loss on derivative instruments | (322) | 676 | 711 | 3,947 |
| (Gain) loss on marketable securities | (1,424) | (815) | (5,177) | 3,273 |
| Income tax provision | 1,014 | 4,012 | 2,889 | 2,336 |
| Adjusted EBITDA | $6,834 | $13,661 | $15,633 | $63,184 |

21

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

|  | Nine Months Ended September 30, 2019 | 2018 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $24,358 | $79,169 |
| Benefit for deferred income taxes | 273 | 3,609 |
| Interest and dividend income | (7,830) | (6,688) |
| Income tax provision | 2,889 | 2,336 |
| Loss on derivative instruments | 711 | 3,947 |
| Change in fair value of derivative instruments | 357 | 2,290 |
| Changes in operating assets and liabilities, net | (5,125) | (21,479) |
| Adjusted EBITDA | $15,633 | $63,184 |

22

### Results of Operations

#### Consolidated

|  | Three Months Ended September 30, 2019 | 2018 | Change Amount% |  | Nine Months Ended September 30, 2019 | 2018 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenue | $65,684 | $81,422 | $(15,738) | (19.3%) | $185,049 | $225,505 | $(40,456) | (17.9%) |
| Volume/product mix effect |  |  | $(11,108) | (13.6%) |  |  | $(38,678) | (17.2%) |
| Price effect |  |  | $(4,630) | (5.7%) |  |  | $(1,778) | (0.7%) |
| Gross profit | $5,462 | $12,653 | $(7,191) | (56.8%) | $11,994 | $58,431 | $(46,437) | (79.5%) |

Consolidated revenue in the three- and nine-months ended September 30, 2019 decreased $15,738 and $40,456, respectively, compared to the three- and nine-months ended September 30, 2018. This decrease primarily resulted from decreased sales volumes and decreased prices of biodiesel in the three- and nine-month periods ended September 30, 2019. In addition, in the nine-month period ended September 30, 2019, revenue was reduced by lower sales volumes in the chemical segment. Partially reducing the nine-month price effect was prior year rebates paid 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 nine-months ended September 30, 2019 decreased $7,191 and $46,437, respectively, compared to the three- and nine-months ended September 30, 2018. This decrease was primarily from the biofuels 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 were reduced sales volumes and average selling price in the biofuels segment. Additionally, chemical segment sales volumes reduced gross profit in the nine-month period. 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 $322 in the three months ended September 30, 2019 as compared to a loss of $676 in the three months ended September 30, 2018 and a loss of $711 in the nine months ended September 30, 2019, as compared to a loss of $3,947 in the same period of 2018. Additionally, gross profit was favorably impacted in the three- and nine-months ended September 30, 2019, as compared to the three- and nine-months ended September 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 by $557 and $2,480 in the three- and nine-months ended September 30, 2019 as compared to a decrease in gross profit of $623 and $2,621 in the three- and nine-months ended September 30, 2018, respectively.

#### Operating Expenses

Operating expenses decreased $237 and $1,472 in the three- and nine-months ended September 30, 2019, as compared to the three- and nine-months ended September 30, 2018. This decrease was primarily from reduced compensation expense on accrued bonuses related to the benefit of the 2017 BTC reinstated in the three and nine-month period ended September 30, 2018.

#### Income tax provision

The effective tax rate for the three-and nine-months ended September 30, 2019 included a benefit from income tax settlements for 2014, 2015, and 2016 Internal Revenue Service audits. The effective tax rate for the nine-months ended September 30, 2019 was also favorably impacted by a retroactive research and development credit for a prior year in a state where we had significant business.

The nine-month period ended September 30, 2018 included the favorable effect of the BTC and Small Agri-biodiesel Producer Tax Credit (2017 BTC which was reinstated in the three months ended March 31, 2018). These tax credits were not in law in 2019.

There were no unrecognized tax benefits at September 30, 2019 and there were unrecognized tax benefits of $2,804 at December 31, 2018. As mentioned in the previous paragraph, we settled the 2014, 2015, and 2016 IRS audits through resolution of issues previously provided for as unrecognized tax benefits.

We recorded interest and penalties, net, as a component of income tax provision with accrued balances of $748 and $681 at September 30, 2019 and December 31, 2018, respectively.

#### Net Income

Net income for the three- and nine-months ended September 30, 2019 decreased $2,823 and $35,514, respectively, as compared to the same periods in 2018. The decrease in the three-month period resulted primarily from lower sales volumes and lower prices of biodiesel. The decrease in the nine-month period resulted primarily from the absence of biodiesel tax credits and incentives that benefited the prior year and were not in effect for 2019 and to a lesser extent, lower sales volumes in the chemical segment.

#### Chemical Segment

|  | Three Months Ended September 30, 2019 | 2018 | Change Amount% |  | Nine Months Ended September 30, 2019 | 2018 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenue | $28,646 | $28,022 | $624 | 2.2% | $81,857 | $88,630 | $(6,773) | (7.6%) |
| Volume/product mix effect |  |  | $466 | 1.7% |  |  | $(7,592) | (8.6%) |
| Price effect |  |  | $158 | 0.6% |  |  | $819 | 0.9% |
| Gross profit | $8,488 | $8,898 | $(410) | (4.6%) | $22,978 | $24,470 | $(1,492) | (6.1%) |

Chemical revenue in the three months ended September 30, 2019 increased 2.2% or $624 compared to the three months ended September 30, 2018. Revenue for our custom chemicals (unique chemicals produced for specific customers) for the three months ended September 30, 2019 totaled $25,270, an increase of $1,297 from the same period in 2018. This increase was primarily attributed to the timing of products delivered. Performance chemicals (comprised of multi-customer products which are sold based on specification) revenue was $3,376 in the three months ended September 30, 2019, a decrease of $673 from the three months ended September 30, 2018. This decrease was primarily from reduced sales volume of glycerin and slower sales of a polymer modifier used in the carpet industry.

Chemical revenue in the nine months ended September 30, 2019 decreased 7.6% or $6,773 compared to the nine months ended September 30, 2018. Revenue for our custom chemicals (unique chemicals produced for specific customers) for the nine months ended September 30, 2019 totaled $70,935, a decrease of $3,530 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. During the current quarter, a custom agrochemical customer informed us that they would not renew their contract for 2020. For the three- and nine-month period, revenue from this customer totaled $4,877 and $12,195, respectively. Performance chemicals (comprised of multi-customer products which are sold based on specification) revenue was $10,922 in the nine months ended September 30, 2019, a decrease of $3,243 from the nine months ended September 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 chemical segment for the three- and nine-months ended September 30, 2019, decreased 4.6% or $410 and 6.1% or $1,492, 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 and partially offset by 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 nine-months ended September 30, 2019 by $836, as compared to a decrease in gross profit of $601, in the same period of 2018.

#### Biofuels Segment

|  | Three Months Ended September 30, 2019 | 2018 | Change Amount% |  | Nine Months Ended September 30, 2019 | 2018 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenue | $37,038 | $53,400 | $(16,362) | (30.6%) | $103,192 | $136,875 | $(33,683) | (24.6%) |
| Volume/product mix effect |  |  | $(11,574) | (21.6%) |  |  | $(31,086) | (22.7%) |
| Price effect |  |  | $(4,788) | (9.0%) |  |  | $(2,597) | (1.9%) |
| Gross (loss) profit | $(3,026) | $3,755 | $(6,781) | (180.6%) | $(10,984) | $33,961 | $(44,945) | (132.3%) |

Biofuels revenue in the three- and nine-months ended September 30, 2019 decreased $16,362 and $33,683, respectively, as compared to the same periods of 2018. The biodiesel and biodiesel blend volumes decreased in both the three- and nine-month period as compared to the prior year, primarily from the lack of sourcing profitable feedstock. In addition, in the three months ended September 30, 2019 as compared to the same period of 2018, lower selling price reduced revenue 9.0% or $4,788. In the nine-month period ended September 30, 2019 as compared to the same period of 2018, net sales prices decreased revenue 1.9% or $2,597. In the nine-month period ended September 30, 2018, revenue included rebates that resulted from the retroactive reinstatement of the 2017 BTC. These rebates represented a lower sales price in the nine months ended September 30, 2018; these rebates were not present in the nine-month period ended September 30, 2019. The BTC has not been reinstated beyond 2017. Please see Note 2 for additional discussion.

Biofuels 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 nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018.

A portion of our biodiesel sold was to one major refiner/blender in 2019 and two in 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 had a gross loss of $3,026 in the three months ended September 30, 2019, as compared to a gross profit of $3,755 in the same period of 2018, primarily on lower sales volumes and to a lesser extent, lower sales prices. Partially reducing the gross loss in the three months ended September 30, 2019 was 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 decreased gross loss $465 in the three months ended September 30, 2019, compared to a decrease in gross profit of $460 in the three months ended September 30, 2018.

Biofuels gross loss was also reduced by the change in the activity in derivative instruments with a gain of $322 in the three months ended September 30, 2019, as compared to a loss of $676 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 our 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.

We recognize all derivative instruments as either assets or liabilities at fair value in its consolidated balance sheet. Our derivative instruments do not qualify for hedge accounting under the specific guidelines of Topic 815, *Derivatives and Hedging*. None of the derivative instruments are designated and accounted for as hedges due primarily to the extensive record keeping requirements.

In the nine-month period ended September 30, 2019, biofuels gross loss was $10,984 as compared to a gross profit of $33,961 in the same period of 2018. The change was primarily from the retroactive reinstatement of the 2017 BTC, totaling $28,865, which benefited the first nine months of 2018 and has not been reinstated past December 31, 2017. Further increasing gross loss were lower sales volumes in the nine months of 2019 as compared to the same period of 2018. Gross loss was partially reduced in 2019, by the change in adjustments in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. This adjustment reduced gross loss $1,645 in the nine months ended September 30, 2019, as compared to a reduction in gross profit of $2,020 in the nine months ended September 30, 2018. In addition, biofuels gross loss was reduced by the change in the activity in derivative instruments with a loss of $711 in the nine months ended September 30, 2019, as compared to a loss of $3,947 in the same period of 2018.

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

|  | September 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 | 10 | $60 | 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 nine-months ended September 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. Revenue under bill-and-hold arrangements were $14,417 and $11,576 for the three months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019 and 2018, bill-and-hold revenue were $38,179 and $32,470, respectively.

### Liquidity and Capital Resources

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

|  | 2019 | 2018 |
| --- | ---: | ---: |
| Net cash from operating activities | $24,358 | $79,169 |
| Net cash from investing activities | $4,488 | $13,600 |
| Net cash used in financing activities | $(7,873) | $(8,048) |

#### Operating Activities

Cash from operating activities decreased from $79,169 in the first nine months of 2018 to $24,358 in the first nine months of 2019. This $54,811 decrease was primarily attributable to the decrease of $35,514 in net income; a gain in the fair value of equity securities of $6,621 in the nine months ended September 30, 2019, as compared to a loss of $5,597 in the nine months ended September 30, 2018 for a total change of $12,218, and a lesser increase of $5,234 in accounts payable, including accounts payable - related parties, compared to the increase of $14,967 for the nine months ended September 30, 2018, for a net change of $9,733.

#### Investing Activities

Cash from investing activities decreased from $13,600 in the first nine months of 2018 to $4,488 in the first nine months of 2019. Of the $9,112 change, $4,516 was the result of decreased cash inflows from net sales of marketable securities in the first nine months of 2019 compared to net sales in the first nine months of 2018. Such net sales totaled $9,762, in the first nine months of 2019, compared to $14,278 in net sales in the first nine months of 2018. Our capital expenditures and customer reimbursements for capital expenditures for the nine months ended September 30, 2019 and 2018 are summarized in the following table:

|  | 2019 | 2018 |
| --- | ---: | ---: |
| Cash paid for capital expenditures | $6,139 | $3,084 |
| Cash received from customers as reimbursement of capital expenditures\* | $(4,693) | $(1,545) |
| Cash paid for capital expenditures, net of customer reimbursements | $1,446 | $1,539 |

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

#### Financing Activities

Cash used in financing activities was $7,873 and $8,048, in the nine months ended September 30, 2019 and 2018, respectively. This is primarily the result of payments of dividends on our common stock in the first nine 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 nine months of 2019 and 2018, we paid a regular quarterly cash dividend in the amount of $0.06 per share on our common stock. The regular cash dividend amounted to $7,873 and $7,872 in the nine-month periods ended September 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 September 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 $75,583 and $79,888 at September 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 September 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 September 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, 4,813 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 nine 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. At September 30, 2019 and December 31, 2018, the fair values of our derivative instruments were a net asset of $60 and liability of $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 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 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 | 256,495 | LB | 10.0% | 6,977 | 58.2% |
| Methanol | 117,689 | LB | 10.0% | 2,083 | 17.4% |
| Electricity | 90 | MWH | 10.0% | 500 | 4.2% |
| Natural Gas | 964 | MCF | 10.0% | 285 | 2.4% |
| Sodium Methylate | 6,951 | LB | 10.0% | 261 | 2.2% |
| Coal | 26 | Ton | 10.0% | 172 | 1.4% |
| Caustic soda | 9,438 | LB | 10.0% | 125 | 1.0% |

(a) Volume requirements and average price information are based upon volumes used and prices obtained for the nine months ended September 30, 2019. Volume requirements may differ materially from these quantities in future years as our business evolves.

We had no borrowings at September 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, 1,069 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 at September 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, 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, 2018 filed with the SEC on March 15, 2019.

Filed Nov 8, 2019.
Source: SEC EDGAR, the filing index for accession 0001437749-19-022190. Last ingested by Listed: Nov 10, 2026, 02:55 ET. No prices; not investment advice.