# FutureFuel Corp.: Form 10-Q for the period ended Jun 30, 2022

- Company: [FutureFuel Corp.](/companies/ff.md) (CIK 1337298)
- Form: 10-Q
- Filed: 2022-08-08
- Accepted by EDGAR: Aug 8, 2022, 16:48 ET
- Period: 2022-06-30
- Accession: 0001437749-22-019391
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1337298/000143774922019391/ff20220630b_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1337298/000143774922019391/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-04-01 to 2022-06-30 | $117.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2022-01-01 to 2022-06-30 | $160.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Gross profit | 3 months, 2022-04-01 to 2022-06-30 | $977.0k | us-gaap:GrossProfit |
| Gross profit | 6 months, 2022-01-01 to 2022-06-30 | −$6.2m | us-gaap:GrossProfit |
| Research and development | 3 months, 2022-04-01 to 2022-06-30 | $755.0k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2022-01-01 to 2022-06-30 | $1.4m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2022-04-01 to 2022-06-30 | −$1.5m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2022-01-01 to 2022-06-30 | −$11.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-04-01 to 2022-06-30 | $33.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2022-01-01 to 2022-06-30 | $65.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-04-01 to 2022-06-30 | −$938.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2022-01-01 to 2022-06-30 | −$1.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-04-01 to 2022-06-30 | −$3.1m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2022-01-01 to 2022-06-30 | −$15.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-04-01 to 2022-06-30 | −$0.07 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2022-01-01 to 2022-06-30 | −$0.35 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-04-01 to 2022-06-30 | −$0.07 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2022-01-01 to 2022-06-30 | −$0.35 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-04-01 to 2022-06-30 | 43,763,243 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2022-01-01 to 2022-06-30 | 43,763,243 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2022-01-01 to 2022-06-30 | −$1.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2022-01-01 to 2022-06-30 | $1.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2022-01-01 to 2022-06-30 | $5.3m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2022-06-30 | $129.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-06-30 | $252.8m | us-gaap:AssetsCurrent |
| Total assets | at 2022-06-30 | $337.4m | us-gaap:Assets |
| Current liabilities | at 2022-06-30 | $60.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-06-30 | $74.6m | us-gaap:Liabilities |
| Shareholders' equity | at 2022-06-30 | $262.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 32,518 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 chemical 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 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.

Within the United States Environmental Protection Agency (EPA) Renewable Fuel Standard (RFS), we generate 1.5 Renewable Identification Numbers (RINs) for each gallon of biodiesel sold in the United States with a classification of a D4 RIN. RINs are used to monitor the level of renewable fuel traded in a given year in accordance with RFS 2 within the EPA moderated transaction system (EMTS). We do not assign cost of goods sold to the generation of RINs as the physical fuel generates the full cost. We do not purchase RINs. As of June 30, 2022, we held 2.8 million D4 RINs with a market value of $4,943.

### COVID-19

During the COVID-19 pandemic, our objectives have been to protect the well-being of our employees, support our customers, obtain materials from our suppliers, and maintain our manufacturing operations. While the pandemic has reduced the overall level of activity across much of the economy, we have largely met these objectives.

As the pandemic has evolved, we have seen its effects disrupt supply chains and labor markets in often unpredictable ways. The three principles areas where COVID-19 may still negatively impact our financial performance are customer demand, raw material procurement, and our ability to operate our manufacturing facility.

*Customer Demand –* Several of our major chemical customers sell the products we produce for them into markets that have been impacted by COVID-19, particularly the energy and automotive markets. However, demand on the whole has recovered from the immediate disruption caused by COVID-19, although it has not yet returned to pre-pandemic volumes. COVID-19 is only one of many factors influencing the energy markets at the moment and we closely align our biodiesel production to match that demand when margins are positive.

*Supply Chain Impact –* Our initial concern was that supplier shutdowns might result in raw material or input shortages and negatively impact our ability to manufacture products and meet our customers’ demands. While we have managed supply such that our operations have not been significantly hindered by shortages, timing of deliveries and supply chain disruptions have on occasion tempered demand from our customers.

*Operations Impact -* Two years into the pandemic, we have shown that our mitigation measures have been pragmatic and effective, even at the height of the Omicron variant. However, each wave has presented different challenges and we will remain agile and flexible in our response to any future variant or surge. 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.

COVID-19 will be with us for some time, either as an on-going outbreak or as a future threat. As such, we may continue to experience materially adverse impacts on our financial condition and results of operations.

### Summary of Financial Results

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

|  | Three Months Ended June 30, 2022 | 2021 | Dollar% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $117,796 | $74,118 | $43,678 | 59% |
| Loss from operations | $(1,515) | $(2,003) | $488 | (24%) |
| Net (loss) income | $(3,104) | $3,481 | $(6,585) | n/a |
| (Loss) earnings per common share: |  |  |  |  |
| Basic | $(0.07) | $0.08 | $(0.15) | n/a |
| Diluted | $(0.07) | $0.08 | $(0.15) | n/a |
| Adjusted EBITDA | $18,709 | $4,668 | $14,041 | (301%) |

|  | Six Months Ended June 30, 2022 | 2021 | Dollar% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $160,057 | $115,634 | $44,423 | 38% |
| Loss from operations | $(11,122) | $(15,061) | $3,939 | 26% |
| Net loss | $(15,502) | $(5,292) | $(10,210) | (193%) |
| Loss per common share: |  |  |  |  |
| Basic | $(0.35) | $(0.12) | $(0.23) | (192%) |
| Diluted | $(0.35) | $(0.12) | $(0.23) | (192%) |
| Adjusted EBITDA | $20,807 | $(3,157) | $(23,964) | n/a |

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. 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 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, 2022 | 2021 | Six Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Net (loss) income | $(3,104) | $3,481 | $(15,502) | $(5,292) |
| Depreciation | 2,706 | 2,623 | 5,276 | 5,231 |
| Interest and dividend income | (747) | (790) | (1,411) | (1,795) |
| Non-cash interest expense and amortization of deferred financing costs | 33 | 31 | 65 | 63 |
| Losses on disposal of property and equipment | 44 | - | 50 | - |
| Loss on derivative instruments | 17,476 | 5,404 | 26,605 | 8,029 |
| (Loss) gain on marketable securities | 3,239 | (1,612) | 7,366 | (537) |
| Income tax benefit | (938) | (4,469) | (1,642) | (8,856) |
| Adjusted EBITDA | $18,709 | $4,668 | $20,807 | $(3,157) |

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

|  | Six Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: |
| Net cash used in operating activities | $(1,910) | $(2,349) |
| Benefit for deferred income taxes | 1,672 | 8,881 |
| Interest and dividend income | (1,411) | (1,795) |
| Income tax benefit | (1,642) | (8,856) |
| Loss on derivative instruments | 26,605 | 8,029 |
| Change in fair value of derivative instruments | 2,388 | (1,136) |
| Change in operating assets and liabilities, net | (4,895) | (4,615) |
| Impairment of intangible asset | - | (1,315) |
| Other | - | (1) |
| Adjusted EBITDA | $20,807 | $(3,157) |

17

### Results of Operations

#### Consolidated

|  | Three Months Ended June 30, 2022 | 2021 | Change Amount% |  | Six Months Ended June 30, 2022 | 2021 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $117,796 | $74,118 | $43,678 | 58.9% | $160,057 | $115,634 | $44,423 | 38.4% |
| Volume/product mix effect |  |  | (4,552) | (6.1%) |  |  | (14,730) | (12.7%) |
| Price effect |  |  | 48,230 | 65.1% |  |  | 59,153 | 51.2% |
| Gross profit (loss) | 977 | (43) | 1,020 | n/a | (6,178) | (10,779) | 4,601 | 42.7% |
| Operating expenses | (2,492) | (1,960) | (532) | 27.1% | (4,944) | (4,282) | (662) | 15.5% |
| Other (expense) income | (2,527) | 1,015 | (3,542) | n/a | (6,022) | 913 | (6,935) | n/a |
| Income tax benefit | (938) | (4,469) | (3,531) | (79%) | (1,642) | (8,856) | 7,214 | (81.5%) |
| Net (loss) income | $(3,104) | $3,481 | $(6,585) | n/a | $(15,502) | $(5,292) | $(10,210) | (192.9%) |

Consolidated revenue in the three and six months ended June 30, 2022 increased $44 million compared to the three and six months ended June 30, 2021. This increase resulted from increased sales prices in the biofuels segment, and to a lesser extent, from increased prices in the chemicals segment. This increase was partially reduced by lower sales volumes in biofuels for both the three-and six-month periods and from lower sales volumes in the chemical segment in the three-month period ending June 30, 2022.

Gross profit in the three months ended June 30, 2022 increased $1.0 million as compared to the same periods of 2021. The increase primarily resulted from improved margins from the biofuels segment. Mostly offsetting this increase was the change in the activity in derivative instruments with a loss of $17.5 million in the current three-month period, as compared to $5.4 million in the same period of 2021. We experienced unprecedented volatility in the heating oil futures market which resulted in losses that were not fully recoverable on fuel sold. We have since amended our derivative strategy to help mitigate reoccurrence.

Gross profit for the six months ended June 30, 2022 increased $4.6 million as compared to the same period of 2021. This increase primarily resulted from improved margins from biofuels and the prior year period included exorbitantly high natural gas prices experienced in the February 2021 from Winter Storm Uri. Mostly offsetting this increase was the change in the activity in derivative instruments with a loss of $26.6 million in the current six-month period (from the unprecedented volatility noted previously), as compared to $8.0 million in the same period of 2021.

Also impacting gross profit in both the three-and six-month periods ended June 30, 2022 as compared to the same period of 2021, was the change in 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, 2022 and 2021, this adjustment decreased gross profit $5.3 million and $3.1 million, respectively. In the six months ended June 30, 2022 and 2021, this adjustment decreased gross profit $4.8 million and $7.0 million, respectively. The change for the six months ended June 30, 2022 was inclusive of a liquidation of LIFO inventory from our biofuel segment as stated in note 4 to our consolidated financial statements.

*Operating* e*xpenses*

Operating expenses increased $0.5 million and $0.7 million in the three and six months ended June 30, 2022, as compared to the same periods of 2021. This increase was primarily from increased administrative fees and compensation expense.

#### Other (expense) income

Other (expense) income reduced income $3.5 million and $6.9 million in the three and six months ended June 30, 2022 as compared to the same periods of 2021. This reduction in both periods was primarily from unrealized losses on marketable securities. In addition, an impairment charge for an intangible asset reduced other income in the prior year periods by $1.4 million.

#### Income tax benefit

The Company’s effective tax rate for the six months ended June 30, 2022 was unfavorably impacted by the assessment that the carryforwards of its 2022 net operating loss and tax credits would not more likely than not be realizable in full. Because the tax benefit of the year-to-date loss is greater than the anticipated realizable value of tax benefit of the full year loss, the year-to-date benefit has been limited to the anticipated full year benefit pursuant to ASC 740. In contrast, because the Company was unable to reliably estimate its annual effective tax rate for the three and six months ended June 30, 2021, the tax benefit was determined by applying an actual year-to-date effective rate to year-to-date pretax income. The effective tax rate for the three and six months ended June 30, 2021 reflected the positive effects of certain tax credits and incentives, the most significant of which are the BTC and Small Agri-biodiesel Producer Tax Credit. While the Company remains eligible for these credits in 2022, realizability concerns have limited their impacts on the effective rate.

Additionally, the net income tax benefit for the six months ended June 30, 2022 was unfavorably impacted by the recognition of tax expense for valuation allowances against various tax attributes existing at January 1, 2022. The Company evaluates its deferred tax assets quarterly and records a valuation allowance to reduce these assets to the amount that is more likely than not to be realized. During the first six months of 2022, based on all available evidence, the Company determined that portions of its deferred tax assets for carryforwards of capital losses, state tax credits, and state net operating losses expiring in the next ten years are not more likely than not to be realized.

#### Chemical Segment

|  | Three Months Ended June 30, 2022 | 2021 | Change Amount% |  | Six Months Ended June 30, 2022 | 2021 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $18,194 | $15,547 | $2,647 | 17.0% | $39,755 | $31,657 | $8,098 | 25.6% |
| Volume/product mix effect |  |  | $(1,316) | (8.5%) |  |  | $(126) | (0.4%) |
| Price effect |  |  | $3,963 | 25.5% |  |  | $8,224 | 26.0% |
| Gross profit | $4,196 | $4,285 | $(89) | (2.1%) | $9,614 | $2,984 | $6,630 | 222.2% |

Chemical revenue in the three and six months ended June 30, 2022 increased 17% or $2.6 million and 25.6% or $8.1 million compared to the three and six months ended June 30, 2021. Revenue from our custom chemicals (unique chemicals produced under contract for specific customers) for the three and six months ended June 30, 2022 totaled $12.3 million and $28.0 million, no change from the three-month comparative period and an increase of $5.0 from the six-month comparative period in 2021, respectively. The improvement in the six-month period was driven mostly from higher selling prices. Performance chemicals (composed of multi-customer products which are sold to the open market based on specification) revenue was $5.9 million and $11.8 million, an increase of $2.6 million and $3.1 million as compared to the same periods of 2021, respectively. The increase in the current year periods was from higher sales volume of glycerin partially offset by a weaker market for our monomer additive.

Gross profit for the chemical segment for the three months ended June 30, 2022 decreased $0.1 primarily from product mix. For the six months ended June 30, 2022, gross profit increased $6.6 million when compared to the same periods of 2021 from increased sales as noted above and the absence of the unusually high natural gas price in the prior year period.

#### Biofuels Segment

|  | Three Months Ended June 30, 2022 | 2021 | Change Amount% |  | Six Months Ended June 30, 2022 | 2021 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $99,602 | $58,571 | $41,031 | 70.1% | $120,302 | $83,977 | $36,325 | 43.3% |
| Volume/product mix effect |  |  | $(3,236) | (5.5%) |  |  | $(14,604) | (17.4%) |
| Price effect |  |  | $44,267 | 75.6% |  |  | $50,929 | 60.6% |
| Gross (loss) profit | $(3,219) | $(4,328) | $1,109 | 25.6% | $(15,792) | $(13,763) | $(2,029) | (14.7%) |

Biofuels revenue in the three and six months ended June 30, 2022 increased 70.1% or $41.0 million and $36.3 million as compared to the same periods of 2021, respectively. The biodiesel and biodiesel blend volumes decreased as compared to the prior year periods, primarily from the availability of economical feedstock. Offsetting these volume decreases as compared to the same period of 2021, was higher selling prices with the overall increase in the fuel market.

A significant portion of our biodiesel sold was to two major refiner/blender in the three and six months ended June 30, 2022 and 2021. 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 $3.2 million in the three months ended June 30, 2022, an improvement of $1.1 million as compared to the same period of 2021. The increase primarily resulted from improved margins from the biofuels segment. Mostly offsetting this increase was the change in the activity in derivative instruments with a loss of $17.5 million in the current three-month period, as compared to $5.4 million in the same period of 2021. We experienced unprecedented volatility in the heating oil futures market which resulted in losses that were not fully recoverable on fuel sold. We have since amended the execution of our derivative strategy to help mitigate reoccurrence. Also reducing gross profit 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 of 2021; this adjustment decreased gross profit this period $4.6 million as compared to a decrease in gross profit of $2.8 million in the same prior year period.

Gross losses were $15.8 million in the six months ended June 30, 2022, an increased loss of $2.0 million from the same period in 2021. This increased loss resulted primarily from: i) the change in the activity in derivative instruments with a loss of $26.6 million and $8.0 million in the first six months of 2022 and 2021, respectively and ii) 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 of 2021; this adjustment decreased gross profit this period $3.7 million as compared to a decrease in gross profit of $6.0 million in the same prior year period. Partially offsetting this increased loss was the unfavorable impact in the prior year of Winter Storm Uri which dramatically increased the price of natural gas and consequently reduced sales volumes when production was curtailed to minimize natural gas consumption.

In regards to our derivative activity, we recognize all derivative instruments as either assets or liabilities at fair value in our consolidated balance sheets. The realized and unrealized derivative gains and losses are recorded as cost of goods sold. 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.

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

|  | Asset (Liability) June 30, 2022 Contract Quantity | Fair Value | December 31, 2021 Contract Quantity | Fair Value |
| --- | ---: | ---: | ---: | ---: |
| Regulated fixed price future commitments (in thousand barrels) | 190 | $1,902 | 142 | $(485) |

\*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 for the three and six months ended June 30, 2022 and 2021 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. Revenues under bill-and-hold arrangements were $7,983 and $17,259 for the three and months ended June 30, 2022.

### Liquidity and Capital Resources

Our net cash from operating activities, investing activities, and financing activities for the three months ended June 30, 2022 and 2021 are set forth in the following table.

|  | Six Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: |
| Net cash used in operating activities | $(1,910) | $(2,349) |
| Net cash (used in) provided by investing activities | $(1,206) | $16,248 |
| Net cash used in financing activities | $(5,251) | $(114,427) |

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 used in operating activities was $1,910 in the first six months of 2022 as compared to $2,349 in the same period of 2021. This increase in cash was attributable to the change in inventory, demonstrating a cash inflow of $14,961; the change in benefit for deferred income taxes of $7,253; and the change in fair value of equity securities of $7,117 also demonstrating cash inflows. Partially offsetting cash inflow was a net change in accounts payable, including accounts payable-related parties, demonstrating a cash outflow of $11,536 primarily from the timing of vendor payments, and the change in net income of $10,254 also demonstrating a cash out flow.

#### Investing Activities

Cash used by investing activities was $1,206 in the six months ended June 30, 2022 as compared to cash provided by investing activities of $16,248 in the six months ended June 30, 2021. Of the $17,454 of change, $18,453 was the result of a decrease in net sales of marketable securities. Such net sales totaled $250 in the first six months of 2022, compared to $18,703 in net sales in the first six months of 2021. The remaining change resulted from an increase in the collateralization of derivative instruments of $2,443 and an increase in capital expenditures of $1,407.

#### Financing Activities

Cash used in financing activities was $5,251 and $114,427 in the six months ended June 30, 2022 and 2021, respectively, for payments of dividends on our common stock. This change resulted from the payment of a special dividend of $109,408 in the first six months of 2021.

#### Credit Facility

We have a credit agreement with a syndicated group of commercial banks for $100,000 as amended on March 30, 2020. 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 9 to our consolidated financial statements 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 three and six months of 2022 and 2021, 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 $2,625 in each of the periods in 2022 and $2,624 in each of the periods of 2021. On May 10, 2021 we declared a special cash dividend of $2.50 per share and paid $109,408 on June 4, 2021.

#### 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 dividends will be paid in 2022, 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, 2022 and December 31, 2021, we also had investments in certain preferred stock, debt securities, 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 $39,426 and $47,190 at June 30, 2022 and December 31, 2021, 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 in our consolidated balance sheets at June 30, 2022 and December 31, 2021. 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, 2022 or December 31, 2021 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.

## Market risk

As filed, 4,557 characters.

**All dollar amounts expressed as numbers in these Market Risk Disclosures are in thousands (except per share amounts).**

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 2022 or 2021. 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 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 June 30, 2022 and December 31, 2021, the fair values of our derivative instruments were a net asset of $1,902 and a net liability of $485, 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 three months of 2022. 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 | 160,076 | LB | 10.0% | 10,533 | 170.5% |
| Methanol | 25,317 | LB | 10.0% | 524 | 8.5% |
| Natural gas | 703 | MCF | 10.0% | 449 | 7.3% |
| Electricity | 51 | MWH | 10.0% | 282 | 4.6% |
| Sodium methylate | 4,786 | LB | 10.0% | 238 | 3.9% |
| Coal | 14 | TON | 10.0% | 139 | 2.3% |
| Caustic soda | 3,802 | LB | 10.0% | 75 | 1.2% |

(a) Volume requirements and average price information are based upon volumes used and prices obtained for the six months ended June 30, 2022. Volume requirements may differ materially from these quantities in future years as our business evolves.

We had no borrowings at June 30, 2022 or December 31, 2021 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, 2,656 characters.

***Management’s Evaluation of our Disclosure Controls and Procedures***

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 March 31, 2022 were not effective as described below 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.

In the course of preparing the Company’s financial statements for the Form 10-Q, our management concluded that the following is a material weakness in internal control over financial reporting.

The Company’s income tax provision for the three months ended March 31, 2022 was prepared by a related party who failed to properly calculate the income tax valuation allowance and this error was not identified upon review.

A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of its financial statements would not be prevented or detected on a timely basis. These deficiencies could result in misstatements to our financial statements that would be material and would not be prevented or detected on a timely basis.

To remediate this deficiency, we plan to utilize a third party to review the valuation allowance for the life of the net operating losses, as well as timely completion of review controls.

Notwithstanding the identified material weaknesses, management believes that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly in all material respects our consolidated financial position, results of operations and cash flows for the period presented.

### Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended June 30, 2022 that have materially affected, or are 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, 2021 filed with the SEC on March 15, 2022.

Filed Aug 8, 2022.
Source: SEC EDGAR, the filing index for accession 0001437749-22-019391. Last ingested by Listed: Oct 27, 2026, 16:17 ET. No prices; not investment advice.