# FutureFuel Corp.: Form 10-Q for the period ended Jun 30, 2020

- Company: [FutureFuel Corp.](/companies/ff.md) (CIK 1337298)
- Form: 10-Q
- Filed: 2020-08-07
- Accepted by EDGAR: Aug 7, 2020, 20:35 ET
- Period: 2020-06-30
- Accession: 0001437749-20-017111
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1337298/000143774920017111/ff20200630_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1337298/000143774920017111/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-04-01 to 2020-06-30 | $47.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2020-01-01 to 2020-06-30 | $100.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Gross profit | 3 months, 2020-04-01 to 2020-06-30 | $911.0k | us-gaap:GrossProfit |
| Gross profit | 6 months, 2020-01-01 to 2020-06-30 | $17.3m | us-gaap:GrossProfit |
| Research and development | 3 months, 2020-04-01 to 2020-06-30 | $768.0k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2020-01-01 to 2020-06-30 | $1.6m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2020-04-01 to 2020-06-30 | −$1.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2020-01-01 to 2020-06-30 | $12.8m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-04-01 to 2020-06-30 | $31.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2020-01-01 to 2020-06-30 | $87.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-04-01 to 2020-06-30 | −$4.9m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2020-01-01 to 2020-06-30 | −$18.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-04-01 to 2020-06-30 | $15.2m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2020-01-01 to 2020-06-30 | $34.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-04-01 to 2020-06-30 | $0.35 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2020-01-01 to 2020-06-30 | $0.78 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-04-01 to 2020-06-30 | $0.35 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2020-01-01 to 2020-06-30 | $0.78 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-04-01 to 2020-06-30 | 43,743,740 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2020-01-01 to 2020-06-30 | 43,743,491 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2020-01-01 to 2020-06-30 | $84.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2020-01-01 to 2020-06-30 | $2.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2020-01-01 to 2020-06-30 | $136.5m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2020-06-30 | $187.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-06-30 | $354.5m | us-gaap:AssetsCurrent |
| Total assets | at 2020-06-30 | $456.8m | us-gaap:Assets |
| Current liabilities | at 2020-06-30 | $48.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-06-30 | $86.9m | us-gaap:Liabilities |
| Shareholders' equity | at 2020-06-30 | $369.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 36,944 characters.

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

### Unless otherwise stated, all dollar amounts are in thousands.

### Overview

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

### Coronavirus Disease 2019 (“COVID-19”)

In March 2020, the World Health Organization categorized COVID-19 as a pandemic. COVID-19 continues to spread throughout the United States and other countries across the world, and the duration and severity of its effects remain unknown. Our priority remains to protect the well-being of our employees, support our customers, obtain materials from our suppliers, and maintain our manufacturing operations. We have been able to continue supplying our products to our customers to date, however, some customers have reduced their near-term demand. We have also been able to find alternative sources for raw materials and inputs to meet our near-term supply requirements.

We continue to closely monitor the impact of COVID-19 on all aspects of our business, including its impact on our customers, employees, and suppliers. The extent to which COVID-19 impacts our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and are difficult to predict; these developments include, but are not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or address its impact, U.S. and foreign government actions to respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.

Because the magnitude and duration of the COVID-19 pandemic and its economic consequences are unclear, the pandemic’s impact on our performance is difficult to predict. The three principle areas we anticipate COVID-19 to negatively impact our financial performance are our customer demand, our ability to procure raw materials and inputs from suppliers, and our ability to operate our manufacturing facility.

*Customer Demand –* Several of our major chemical customers sell the products we produce for them in markets that have been significantly impacted by COVID-19. The energy and automotive markets in particular have drastically been impacted starting in April which we anticipate will reduce chemicals segment revenue the remainder of the year based on current estimates. Low diesel prices and a Renewable Identification Number (RIN) market that has stagnated on uncertainty of required mandates has similarly reduced the value of our finished product. The duration of this impact of COVID-19 is clearly difficult to forecast. We currently expect these markets to recover over time. However, the speed at which these market sectors rebound is highly uncertain and will be determined by reopening of economies and restoration of consumer confidence.

*Supply Chain Impact –* Supplier shutdowns may result in raw material or input shortages and negatively impact our ability to manufacture products and meet our customers’ demand. In our biofuels segment, we are seeing significant contraction among many of our feedstock suppliers. Closures and idling of restaurants (used cooking oil source), ethanol plants (corn oil source), rendering and poultry plants (tallow and grease source) have impacted our traditional supply chain. In addition, supply shortages may impact the timing of when customer facilities reopen and/or increase production and the speed at which customers ramp up production, negatively impacting demand for our products. Lower demand increases the risk that certain suppliers may face financial issues, potentially impacting their ability to supply.

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*Operations Impact* - Our manufacturing is generally considered critical services and our plant remains open to meet customer demand. In an effort to contain the spread of COVID-19, maintain the well-being of our employees, ensure compliance with governmental requirements or respond to declines in demand from customers, we have had, where possible, employees work from home and temporarily closed portions of our offices. We continue to take actions to help prevent the spread of COVID-19 at work including social distancing, expanding cleaning and sanitization, adjusting work hours and temperature checks. To date we have had no negative impact on our ability to operate the plant safely and in a way that meets our customers’ demands.

Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts on our financial condition and results of operations. For more information on the risks associated with COVID-19, refer to Part II, Item 1A, "*Risk Factors*" herein.

### Summary of Financial Results

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

|  | Three Months Ended June 30, 2020 | 2019\* | Dollar% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $47,422 | $70,864 | $(23,442) | (33.1%) |
| (Loss) income from operations | $(1,139) | $1,185 | $(2,324) | (196.2%) |
| Net income | $15,159 | $3,687 | $11,472 | 311.1% |
| Earnings per common share: |  |  |  |  |
| Basic | $0.35 | $0.08 | $0.27 | 337.5% |
| Diluted | $0.35 | $0.08 | $0.27 | 337.5% |
| Capital expenditures (net of customer reimbursements) | $563 | $451 | $112 | 24.8% |
| Adjusted EBITDA | $2,652 | $3,514 | $(862) | (24.5%) |

|  | Six Months Ended June 30, 2020 | 2019\* | Dollar% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $100,504 | $119,365 | $(18,861) | (15.8%) |
| Income from operations | $12,840 | $2,396 | $10,444 | 435.9% |
| Net income | $34,202 | $9,186 | $25,016 | 272.3% |
| Earnings per common share: |  |  |  |  |
| Basic | $0.78 | $0.21 | $0.57 | 271.4% |
| Diluted | $0.78 | $0.21 | $0.57 | 271.4% |
| Capital expenditures (net of customer reimbursements) | $1,133 | $874 | $259 | 29.6% |
| Adjusted EBITDA | $12,829 | $8,929 | $3,900 | 43.7% |

\* Prior year amounts have been restated for comparison.

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.

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Adjusted EBITDA allows our chief operating decision makers to assess the performance and liquidity of our business on a consolidated basis to assess the ability of our operating segments to produce operating cash flow to fund working capital needs, to fund capital expenditures, and to pay dividends. In particular, our management believes that adjusted EBITDA permits a comparative assessment of our operating performance and liquidity, relative to a performance and liquidity based on GAAP results. This measure isolates the effects of certain items, including depreciation and amortization (which may vary among our operating segments without any correlation to their underlying operating performance), non-cash stock-based compensation expense (which is a non-cash expense that varies widely among similar companies), and 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 June 30, 2020 | 2019\* | Six Months Ended June 30, 2020 | 2019\* |
| --- | ---: | ---: | ---: | ---: |
| Net income | $15,159 | $3,687 | $34,202 | $9,186 |
| Depreciation | 2,858 | 2,877 | 5,862 | 5,602 |
| Non-cash stock-based compensation | - | - | 49 | - |
| Interest and dividend income | (1,519) | (2,750) | (3,486) | (5,112) |
| Non-cash interest expense and amortization of deferred financing costs | 31 | 44 | 87 | 87 |
| Losses on disposal of property and equipment | - | 8 | 2 | 11 |
| (Gain) loss on derivative instruments | 935 | (443) | (5,922) | 1,033 |
| Loss (gain) on marketable securities | (1,573) | (826) | 8,486 | (3,753) |
| Other income | (8,350) | - | (8,350) | - |
| Income tax (benefit) provision | (4,889) | 917 | (18,101) | 1,875 |
| Adjusted EBITDA | $2,652 | $3,514 | $12,829 | $8,929 |

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

|  | Six Months Ended June 30, 2020 | 2019\* |
| --- | ---: | ---: |
| Net cash provided by operating activities | $84,201 | $13,527 |
| Benefit for deferred income taxes | (699) | 445 |
| Interest and dividend income | (3,486) | (5,112) |
| Income tax (benefit) provision | (18,101) | 1,875 |
| (Gain) loss on derivative instruments | (5,922) | 1,033 |
| Change in fair value of derivative instruments | (198) | 297 |
| Change in operating assets and liabilities, net | (34,617) | (3,137) |
| Other income | (8,350) | - |
| Other | 1 | 1 |
| Adjusted EBITDA | $12,829 | $8,929 |

\*Prior year amounts have been restated for comparison

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### Results of Operations

#### Consolidated

|  | Three Months Ended June 30, 2020 | 2019 | Change Amount% |  | Six Months Ended June 30, 2020 | 2019 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $47,422 | $70,864 | $(23,442) | (33.1%) | $100,504 | $119,365 | $(18,861) | (15.8%) |
| Volume/product mix effect |  |  | $(6,980) | (9.8%) |  |  | $5,782 | 4.8% |
| Price effect |  |  | $(16,462) | (23.2%) |  |  | $(24,643) | (20.6%) |
| Gross profit | $911 | $3,270 | $(2,359) | (72.1%) | $17,310 | $6,532 | $10,778 | 165.0% |

Consolidated revenue in the three and six months ended June 30, 2020, decreased $23,442 and $18,861, compared to the three and six months ended June 30, 2019. The decrease in the three months ended June 30, 2020 primarily resulted from lower selling prices in the biofuel segment of $19,473 which was negatively impacted by supply demand imbalance and lower sales volume in the chemical segment of $6,032 from an agrochemical product we no longer make. The decrease in the six months ended June 30, 2020 primarily resulted from lower prices in the biofuel segment of $27,116 and lower sales volume in the chemical segment of $5,153. Partially offsetting this decrease in the six-month comparison period was higher sales volumes in the biofuels segment of $10,935 given the favorable market conditions with the reinstatement of the blenders' tax credit ("BTC").

Gross profit in the three months ended June 30, 2020 decreased $2,359 compared to the three months ended June 30, 2019. This decrease was driven by lower prices in the biofuels segment and lower volumes in both the chemicals and biofuels segments resulting from reduced demand from the weakened global fuel market and the impact of the COVID-19 pandemic as well as an agrochemical product we no longer make. Gross profit was also reduced by the change in the unrealized and realized activity in derivative instruments with a loss of $935 in the three months ended June 30, 2020 and a gain of $443 in the three months ended June 30, 2019.

Gross profit in the six months ended June 30, 2020 increased $10,778 compared to the six months ended June 30, 2019. This increase primarily resulted from: i) the BTC being in effect for the current period versus not being in effect in the prior six-month period; and ii) the change in the unrealized and realized activity in derivative instruments with a gain of $5,922 in the six months ended June 30, 2020 and a loss of $1,033 in the six months ended June 30, 2019. Also benefiting gross profit in both the three and six months ended June 30, 2020 and 2019 was the adjustment in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. In the three months ended June 30, 2020 and 2019, this adjustment increased gross profit $1,575 and $287, respectively. In the six months ended June 30, 2020 and 2019, this adjustment increased gross profit $2,893 and $1,924, respectively.

#### Operating Expenses

Operating expenses decreased nominally in the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. In the six months ended June 30, 2020 operating expenses increased $334 as compared to the same period in the prior year. This increase was primarily from increased compensation expenses.

#### Other Income

During the three months ended June 30, 2020, the Company reached a legal resolution of a prior year contractual matter for which an accrual of $8,350 was relieved as other income.

#### Income Tax Provision

The effective tax rate for the three months ended June 30, 2020 reflects the positive effect of the reinstatement of certain tax credits and incentives for 2020, the most significant of which were the BTC and Small Agri-biodiesel Producer Tax Credit. The BTC and Small Producer Agri-biodiesel Producer Credit were retroactively extended for 2018 and 2019 on December 20, 2019 and further extended through December 31, 2022. On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) (“CARES Act”). The CARES Act provides that Net Operating Losses (“NOLs”) arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 shall be treated as a carryback to each of the 5 preceding taxable years unless the taxpayer elects to forego the carryback. This enacted NOL provision had a positive effect on the effective tax rate for the three and six months ended June 30, 2020 as FutureFuel will be able to carryback its 2019 federal NOL to a year with a higher tax rate rather than forward to a year with a lower tax rate.

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The effective tax rate for the three months ended June 30, 2019 reflects the unfavorable effect of the BTC and Small Producer Agri-biodiesel Producer Credit not being in the law for the first half of 2019. The rate was also favorably impacted from a retroactive research and development credit for a prior year in a state where FutureFuel does significant business.

There were no unrecognized tax benefits at June 30, 2020 or December 31, 2019.

FutureFuel recorded interest and penalties, net, as a component of income tax provision and had accrued balances of $13 and ($557) at June 30, 2020 and December 31, 2019, respectively.

#### Net Income

Net income for the three and six months ended June 30, 2020 increased $11,472 and $25,016, respectively, as compared to the same periods in 2019. This increase resulted primarily from biodiesel tax credits and incentives that were in effect in the three and six months ended June 30, 2020 that were not in effect for 2019 (see Note 2) and tax benefits in effect in the first half of 2020 not in effect for the same period in 2019 (see the income tax provision discussion above). In the three and six months ended June 30, 2020, income was also benefited by other income from the resolution of a prior year contractual matter. Partially offsetting this increase in the six month period was the unrealized loss on equity securities.

#### Chemicals Segment

|  | Three Months Ended June 30, 2020 | 2019 | Change Amount% |  | Six Months Ended June 30, 2020 | 2019 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $22,838 | $25,859 | $(3,021) | (11.7%) | $50,531 | $53,211 | $(2,680) | (5.0%) |
| Volume/product mix effect |  |  | $(6,032) | (23.3%) |  |  | $(5,153) | (9.6%) |
| Price effect |  |  | $3,011 | 11.6% |  |  | $2,473 | 4.6% |
| Gross profit | $7,577 | $7,181 | $396 | 5.5% | $15,591 | $14,490 | $1,101 | 7.6% |

Chemical revenue in the three and six months ended June 30, 2020 decreased $3,021 and $2,680 as compared to the three and six months ended June 30, 2019. Revenue for our custom chemicals (unique chemicals produced for specific customers) for the three and six months ended June 30, 2020 totaled $18,041 and $41,801, a decrease of $3,924 and $3,864 from the same period in 2019. Decreased revenue in the three and six months ended June 30 as compared to the prior three and six-month period were mostly driven by: i) an agrochemical product we no longer manufacture; ii) a slowdown in near-term business in both automotive and energy related applications resulting from COVID-19; and iii) the phase out of a laundry detergent additive. Partially offsetting the decrease of other custom chemical revenue in the three and six months ended June 30, 2020 and 2019 was the change in accelerated amortization of deferred revenue from customer contracts of $1,722 and $1,698, respectively. This acceleration was primarily from fulfillment of the performance obligation on an herbicide intermediate product we will no longer make. Performance chemicals (composed of multi-customer products which are sold based on specification) revenue was $4,797 and $8,730 in the three and six months ended June 30, 2020, an increase of $903 and $1,184 from the three and six months ended June 30, 2019. This increase was primarily from product mix on higher prices of glycerin based on a reduced supply of imported material and increased demand given COVID-19.

Gross profit for the chemicals segment for the three and six months ended June 30, 2020, increased $396 and $1,101, respectively, when compared to the same periods of 2019. This increase was driven primarily from the acceleration of amortization of deferred revenue from an herbicide intermediate product we will no longer make. In the three and six months ended June 30, 2020 and 2019, the change in amortization of the deferred revenue from customer contracts increased gross profit of $1,722 and $1,698, respectively. Partially offsetting this benefit was the unfavorable product mix variance without the production of the agrochemical product and the volume effects of COVID-19 on our business.

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#### Biofuels Segment

|  | Three Months Ended June 30, 2020 | 2019 | Change Amount% |  | Six Months Ended June 30, 2020 | 2019 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $24,584 | $45,005 | $(20,421) | (45.4%) | $49,973 | $66,154 | $(16,181) | (24.5%) |
| Volume/product mix effect |  |  | $(948) | (2.1%) |  |  | $10,935 | 16.5% |
| Price effect |  |  | $(19,473) | (43.3%) |  |  | $(27,116) | (41.0%) |
| Gross (loss) profit | $(6,666) | $(3,911) | $(2,755) | 70.4% | $1,719 | $(7,958) | $9,677 | (121.6%) |

Biofuels revenue in the three and six months ended June 30, 2020 decreased $20,421 and $16,181 as compared to the same periods of 2019, respectively. The biodiesel and biodiesel blend prices decreased as compared to the prior year periods primarily from industry wide challenges in the fuel market. Global fuel markets were impacted by reduced demand for oil caused by the economic impact of the COVID-19 pandemic and the decision by foreign oil producing nations not to cut supply. These factors resulted in significant declines in petroleum and biodiesel oil prices. For the three months ended June 30, 2020 sales volume declined given the weakened market, however, for the six-month comparison period, sales volume improved $10,935.

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 did not change in the three-month comparison period. In the six-month comparison period, revenue increased $169.

One major refiner/blender customer within our biofuels segment was greater than 10% of revenue in 2020 and 2019. 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 this customer would have a material adverse effect on our biofuels segment or on us as a whole because: (i) we believe that we could readily sell our biodiesel to other customers as potential demand from other customers for biodiesel exceeds our production capacity; (ii) our sales to these customers are not under fixed terms and the customers have no fixed obligation to purchase any minimum quantities except as stipulated by short-term purchase orders; and (iii) the prices we receive from these customers are based upon then-market rates, as would be the case with sales of this commodity to other customers.

Biofuels gross loss was $6,666 in the three months ended June 30, 2020, as compared to a gross loss of $3,911 in the same period of 2019, primarily from reduced sales volumes and lower margins given global market conditions as well as a lower of cost or market adjustment of $530 at June 30, 2020 and none for the same period in 2019. Partially reducing this gross loss was the change in the activity in derivative instruments with a loss of $935 in the three months ended June 30, 2020, as compared to a gain of $443 in the same period of 2019. In addition, gross profit was benefited in both three-month periods ended June 30, 2020 and 2019 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 $1,317 and $70, respectively.

Biofuels gross profit was $1,719 in the six months ended June 30, 2020, as compared to a gross loss of $7,958 in the same period of 2019, primarily from the change in the activity in derivative instruments with a gain of $5,922 in the six months ended June 30, 2020 as compared to a loss of $1,033 in the same period of 2019. Also benefiting gross profit in both three-month periods ended June 30, 2020 and 2019 was 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 $2,134 and $1,180, respectively.

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

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

|  | Asset (Liability) June 30, 2020 Contract Quantity Short | Fair Value | December 31, 2019 Contract Quantity Short | Fair Value |
| --- | ---: | ---: | ---: | ---: |
| Regulated fixed price future commitments\* | 415 | $(465) | 140 | $(267) |

\*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. See Note 3 to our consolidated financial statements.

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

Biodiesel selling prices can at times fluctuate based on the timing of unsold, internally generated RINs. From time to time, sales of biodiesel are on a “RINs-free” basis. Such method of selling results in applicable RINs being held. The value of the RINs is not reflected in revenue until such time as the RIN sale has been completed.

Revenue from bill-and-hold transactions in which a performance obligation exists is recognized when the total performance obligation has been met and control of the product has transferred. Bill-and-hold transactions 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 $7,335 and $12,006 for the three months ended June 30, 2020 and 2019, respectively. For the six months ended June 30, 2020 and 2019 bill and hold sales revenue was $17,488 and $23,762, respectively. As of June 30,2020, $4,105 of the three- and six-month bill and hold revenue had not shipped.

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### Liquidity and Capital Resources

Our net cash from operating activities, investing activities, and financing activities for the six months ended June 30, 2020 and 2019 are set forth in the following table.

|  | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $84,201 | $13,527 |
| Net cash used in investing activities | $(2,753) | $(379) |
| Net cash used in financing activities | $(136,956) | $(5,249) |

We believe that existing cash balances and cash flow to be generated from operating activities and borrowing capacity under the amended and restated credit agreement will be sufficient to fund operations, product development, cash dividends, and capital requirements for the foreseeable future. However, as the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, ability to meet debt covenants, access to sources of liquidity and financial condition.

#### Operating Activities

Cash provided by operating activities increased from $13,527 in the first six months of 2019 to $84,201 of cash provided in the first six months of 2020, for a net increase of $70,674. This increase was primarily attributable to the decrease in accounts receivable, including accounts receivable - related parties, of $86,376. The provision of this cash resulted from the receipt of $81,029 in the first half of 2020 primarily from BTC payments, as compared to a $5,347 decrease in accounts receivable for the same period in 2019. Offsetting these net cash inflows was a $30,660 net decrease in the accounts payable, calculated from the decrease of $29,702 in the first half of 2020 as compared to an increase in the same period in 2019 of $958. This cash outflow from accounts payable was also primarily related to BTC rebates due to customers and paid in 2020.

#### Investing Activities

Cash used in investing activities increased from $379 of cash used in the first six months of 2019 to $2,753 of cash used in investing activities in the first six months of 2020. The primary source of the increase in cash used was the result of a $3,785 increase in the collateralization of derivative instruments in the first six months of 2020 compared to the first six months of 2019. Offsetting this change was a decrease in capital expenditures of $1,900. Our capital expenditures and customer reimbursements for capital expenditures for the six months ended June 30, 2020 and 2019 are summarized in the following table:

|  | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: |
| Cash paid for capital expenditures | $2,759 | $4,659 |
| Cash received from customers as reimbursement of capital expenditures | $(1,626) | $(3,785) |
| Cash paid for capital expenditures, net of reimbursements | $1,133 | $874 |

#### Financing Activities

Cash used in financing activities was $136,956 and $5,249, in the six months ended June 30, 2020 and 2019, respectively. This $131,707 difference was primarily resulting from the payment of the special dividend of $131,230 on our common stock in the first six months of 2020. The remaining increase of $477 related to debt origination costs in the six months of 2020 from the amendment of our existing credit facility.

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#### Credit Facility

Effective March 30, 2020, we entered into an amended and restated credit agreement with a syndicated group of commercial banks for $100,000. The loan is a revolving facility, the proceeds of which may be used for our working capital, capital expenditures, and general corporate purposes. The facility terminates on March 30, 2025. See Note 10 to our consolidated financial statements for additional information regarding our Credit Agreement.

During the three months ended June 30, 2020, we applied for and received loan proceeds under the Paycheck Protection Program. On May 5, 2020, we repaid the loan in full.

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 three and six months of 2020 and 2019, we paid regular quarterly cash dividends in the amount of $0.06 per share on our common stock. The regular quarterly cash dividend amounted to $2,624 in each period. On March 23, 2020 we also declared a special cash dividend of $3.00 per share in the amount of $131,230 that was paid on April 17, 2020.

#### 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 2020, 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. At June 30, 2020 and December 31, 2019, 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 $62,095 and $73,620 at June 30, 2020 and December 31, 2019, respectively.

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

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### Off-Balance Sheet Arrangements

We engage in two types of hedging transactions. First, we hedge our biofuels sales through the purchase and sale of futures contracts and options on futures contracts of energy commodities. This activity was captured in our consolidated balance sheets at June 30, 2020 and December 31, 2019. Second, we hedge our biofuels feedstock through the execution of purchase contracts and supply agreements with certain vendors or they meet the normal purchase and normal sales exception of ASC 815 *Derivatives and Hedging*. These hedging transactions are recognized in earnings and were not recorded in our consolidated balance sheets at June 30, 2020 or December 31, 2019 because they do not meet the definition of a hedge instrument as defined under GAAP. The purchase of biofuels feedstock generally involves two risk components: basis and price. Basis covers any refining or processing required as well as transportation. Price covers the purchases of the actual agricultural commodity. Both basis and price fluctuate over time. A supply agreement with a vendor constitutes a hedge when we have committed to a certain volume of feedstock in a future period and have fixed the basis for that volume.

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## Market risk

As filed, 4,654 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 six months of 2020 or 2019. Changes in the fair value of our derivative instruments are recognized at the end of each accounting period and recorded in the consolidated statement of operations as a component of cost of goods sold within the biofuels 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 June 30, 2020 and December 31, 2019, the fair values of our derivative instruments were a net liability of $465 and $267, respectively.

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

We prepared a sensitivity analysis of our exposure to market risk with respect to key raw materials and conversion costs for which we do not possess contractual market price adjustment protections, based on average prices for the first six months of 2020. 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.

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(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 | 215,852 | LB | 10% | $5,871 | 33.9% |
| Methanol | 35,908 | LB | 10% | $524 | 3.0% |
| Electricity | 53 | MWH | 10% | $319 | 1.8% |
| Sodium Methylate | 5,978 | MCF | 10% | $200 | 1.2% |

(a) Volume requirements and average price information are based upon volumes used and prices obtained for the six months ended June 30, 2020. Volume requirements may differ materially from these quantities in future years as our business evolves.

We had no borrowings at June 30, 2020 or December 31, 2019 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, 1,068 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 June 30, 2020 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.

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## Risk factors

As filed, 2,521 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, 2019 filed with the SEC on March 13, 2020, except for the addition of the Risk Factor below:

*We are subject to risks associated with public health threats and epidemics, including the novel coronavirus disease ("COVID-19").*

We are subject to risks associated with public health threats and epidemics, including the global health concerns relating to the COVID-19 pandemic. The global pandemic has adversely impacted and is likely to further adversely impact our business and markets, including our workforce and operations and the operations of our customers and suppliers. In particular, we may experience material financial or operational impacts, including:

- Significant volatility or reductions in demand for our products;
- Delays in obtaining regulatory clearances and approvals to market our products;
- The failure of third parties on which we rely to meet their obligations to the Company to supply the Company with methanol, which the Company requires for several manufacturing processes;
- The failure of third parties on which we rely to meet their other obligations to the Company, or significant disruptions in their ability to do so; or
- The inability to meet our customers’ needs due to disruptions to our operations or the operations of our third-party suppliers, contractors, logistics partners or customers including disruptions to production, development, manufacturing, administrative and supply operations and arrangements.

The extent to which the COVID-19 global pandemic and measures taken in response thereto impact our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict; these developments include, but are not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or address its impact, U.S. and foreign government actions to respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts on our financial condition and our results of operations and many of our known risks described in the “*Risk Factors”* section of our Annual Report on Form 10-K for the year ended December 31, 2019 may be heightened.

Filed Aug 7, 2020.
Source: SEC EDGAR, the filing index for accession 0001437749-20-017111. Last ingested by Listed: Nov 10, 2026, 02:55 ET. No prices; not investment advice.