UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Amendment No. 1)
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended |
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from __________ to ___________ | |
| Commission file number: |
(Exact Name of Registrant as Specified in Its Charter)
| | | |
| (State or Other Jurisdiction of | (IRS Employer Identification No.) | |
| Incorporation or Organization) | ||
| | | |
| (Address of Principal Executive Offices) | (Zip Code) | |
| ( | ||
| (Registrant’s Telephone Number, Including Area Code) | ||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| | | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | | ☑ |
| Non-accelerated filer | ☐ | Smaller reporting company | |
| Emerging growth company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 9, 2023:
Explanatory Note
FutureFuel Corp. (sometimes referred to as the “Company,” “we,” “us,” or “our,” and includes our wholly-owned subsidiaries) is filing this Amendment No. 1 on Form 10-Q/A (“Amendment No. 1”) to amend and restate certain items presented in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2023, which was initially filed with the U.S. Securities and Exchange Commission (the “SEC”) on November 9, 2023 (the “Original Form 10-Q”). This Amendment No. 1 contains our unaudited restated interim financial statements as of, and for the three months and nine months ended, September 30, 2023, which have been restated to correct certain errors with respect to the statement of cash flows included in the Original Form 10-Q, as described in further detail below. In addition, we intend to file or have filed an amendment (collectively with this Amendment No. 1, the “Amendments”) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”) and the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 (the “Q2.2023 Form 10-Q”), respectively, to correct similar errors contained in the statements of cash flows included in each such original filing. All material restatement information that relates to these errors will be included in the Amendments.
This Amendment No. 1 also includes amendments to and restates and revises the following items of the Original Form 10-Q:
| • | Part I — Item 1. Financial Statements |
| • | Part I — Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| • | Part I — Item 4. Controls and Procedures |
| • | Part II — Item 6. Exhibits |
In accordance with applicable SEC rules, this Amendment No. 1 includes new certifications specified in Rule 13a-14 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), from our Chief Executive Officer and Chief Financial Officer dated as of the date of this filing.
Other than as described above, this Amendment No. 1 does not reflect adjustments for events occurring after the filing of the Original Form 10-Q except to the extent that they are otherwise required to be included and discussed herein. See below for a detailed discussion of the effect of the restatement on the financial statements included in this Amendment No. 1.
Pursuant to Rule 12b-15 under the Exchange Act, this Amendment No. 1 contains only the items and exhibits to the Original Form 10-K that are being amended and restated, and unaffected items and exhibits are not included herein. Except as noted herein, the information included in the Original Form 10-Q remains unchanged. This Amendment No. 1 continues to describe the conditions as of the date of the Original Form 10-Q, and except as contained herein, we have not updated or modified the disclosures contained in the Original Form 10-Q to reflect any events that have occurred after the Original Form 10-Q. Accordingly, forward-looking statements included in this Amendment No. 1 may represent management’s views as of the Original Form 10-Q and should not be assumed to be accurate as of any date thereafter. This Amendment No. 1 should be read in conjunction with the Company’s filings made with the SEC subsequent to the filing of the Original Form 10-Q, including any amendment to those filings.
Background of the Restatement
As previously disclosed in the Company’s Current Report on Form 8-K filed with the SEC on May 9, 2024, management and the audit committee (the “Audit Committee”) of the Board of Directors of the Company, after consultation with the Company’s independent registered public accounting firm, RSM US LLP (“RSM”), determined on May 8, 2024, that certain of its previously issued financial statements, specifically its previously-issued statements of cash flows: (i) for the year ended December 31, 2023, included in the 2023 Form 10-K; (ii) for the nine months ended September 30, 2023, included in the Original Form 10-Q; and (iii) for the six months ended June 30, 2023, included in the Q2.2023 Form 10-Q, contained errors, should no longer be relied on and should be corrected by restating the affected statements of cash flows by filing the Amendments. The consolidated balance sheets, consolidated statements of operations and comprehensive income and consolidated statements of stockholders’ equity included in the consolidated financial statements in this Amendment No. 1, and, other than the addition of Note 15 related to the restatement, the accompanying notes to such financial statements, were not affected by this error.
The restated financial statements contained in this Amendment No. 1 correct the following errors:
The correction relates solely to the reported amount of “Other assets” and the resulting total amount of “Net Cash Flows From Operating Activities” and the reported amount of “Collateralization of derivative instruments” and the resulting total amount of “Net Cash Flows from Investing Activities” in the consolidated statement of cash flows for the nine months ended September 30, 2023. The correction does not impact the Company’s overall cash position, its consolidated balance sheets, its consolidated statements of operations and comprehensive income, or its consolidated statements of stockholders’ equity as of and for the periods ended September 30, 2023. Further, in this Amendment No. 1, the Company has included supplemental information regarding the restatement in Note 15, Restatement, to the consolidated financial statements.
Internal Control Considerations
Management has reassessed its evaluation of the effectiveness of its internal control over financial reporting as of September 30, 2023 as further described in Part I, Item 4 of this Amendment No. 1, and concluded that a material weakness existed and that internal control over financial reporting was not effective as of September 30, 2023.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
FutureFuel Corp.
Consolidated Balance Sheets
(Dollars in thousands)
| September 30, 2023 | December 31, 2022 | |||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, inclusive of the blenders’ tax credit of $ and $, and net of allowances for bad debt of $ and $, respectively | ||||||||
| Accounts receivable – related parties | ||||||||
| Inventory | ||||||||
| Income tax receivable | ||||||||
| Prepaid expenses | ||||||||
| Prepaid expenses – related parties | ||||||||
| Marketable securities | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Other assets | ||||||||
| Total noncurrent assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Accounts payable, inclusive of the blenders’ tax credit rebates due customers of $ and $, respectively | $ | $ | ||||||
| Accounts payable – related parties | ||||||||
| Deferred revenue – current | ||||||||
| Dividends payable | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Accrued expenses and other current liabilities – related parties | ||||||||
| Total current liabilities | ||||||||
| Deferred revenue – non-current | ||||||||
| Other noncurrent liabilities | ||||||||
| Total noncurrent liabilities | ||||||||
| Total liabilities | ||||||||
| Preferred stock, $ par value, shares authorized, issued and outstanding | ||||||||
| Common stock, $ par value, shares authorized, and issued and outstanding as of September 30, 2023 and December 31, 2022 | ||||||||
| Accumulated other comprehensive loss | ( | ) | ||||||
| Additional paid in capital | ||||||||
| Retained earnings | ||||||||
| Total stockholders’ equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
FutureFuel Corp.
Consolidated Statements of Operations and Comprehensive Income
(Dollars in thousands, except per share amounts)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Revenue – related parties | ||||||||||||||||
| Cost of goods sold | ||||||||||||||||
| Cost of goods sold – related parties | ( | ) | ( | ) | ||||||||||||
| Distribution | ||||||||||||||||
| Distribution – related parties | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Selling, general, and administrative expenses | ||||||||||||||||
| Compensation expense | ||||||||||||||||
| Other expense | ||||||||||||||||
| Related party expense | ||||||||||||||||
| Research and development expenses | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income from operations | ||||||||||||||||
| Interest and dividend income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| (Loss) gain on marketable securities | ( | ) | ( | ) | ||||||||||||
| Other expense | ( | ) | ( | ) | ||||||||||||
| Other income (expense) | ( | ) | ||||||||||||||
| Income before taxes | ||||||||||||||||
| Income tax provision | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Earnings per common share | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
| Weighted average shares outstanding | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
| Comprehensive income | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Other comprehensive (loss) income from unrealized net (losses) gains on available-for-sale debt securities | ( | ) | ( | ) | ||||||||||||
| Income tax effect | ( | ) | ||||||||||||||
| Total other comprehensive (loss) income, net of tax | ( | ) | ( | ) | ||||||||||||
| Comprehensive income | $ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
FutureFuel Corp.
Consolidated Statements of Stockholders’ Equity
(Dollars in thousands)
(Unaudited)
| For the Nine Months Ended September 30, 2023 | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Other | Additional | Total | ||||||||||||||||||||||
| Common Stock | Comprehensive | paid-in | Retained | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | (Loss) Income | Capital | Earnings | Equity | |||||||||||||||||||
| Balance - December 31, 2022 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
| Other comprehensive gain | - | |||||||||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Balance - March 31, 2023 | $ | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance - June 30, 2023 | $ | $ | $ | $ | $ | |||||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Balance - September 30, 2023 | $ | $ | $ | $ | $ | |||||||||||||||||||
| For the Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Other | Additional | Total | ||||||||||||||||||||||
| Common Stock | Comprehensive | paid-in | Retained | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Income (Loss) | Capital | Earnings | Equity | |||||||||||||||||||
| Balance - December 31, 2021 | $ | $ | $ | $ | $ | |||||||||||||||||||
| Cash dividends declared, $ per common share | - | ( | ) | ( | ) | |||||||||||||||||||
| Other comprehensive loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance - March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Other comprehensive loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance - June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Balance - September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
FutureFuel Corp.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2023 (Restated) | 2022 | |||||||
| Cash flows from operating activities | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash from operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization of deferred financing costs | ||||||||
| Benefit for deferred income taxes | ( | ) | ||||||
| Change in fair value of equity securities | ( | ) | ||||||
| Change in fair value of derivative instruments | ( | ) | ||||||
| Loss on the sale of investments | ||||||||
| Stock based compensation | ||||||||
| Loss on disposal of property and equipment | ||||||||
| Noncash interest expense | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Accounts receivable – related parties | ||||||||
| Inventory | ) | |||||||
| Income tax receivable | ||||||||
| Prepaid expenses | ||||||||
| Prepaid expenses - related parties | ( | ) | ||||||
| Other assets | ||||||||
| Accounts payable | ( | ) | ||||||
| Accounts payable – related parties | ( | ) | ||||||
| Accrued expenses and other current liabilities | ( | ) | ||||||
| Accrued expenses and other current liabilities – related parties | ( | ) | ||||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Other noncurrent liabilities | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities | ||||||||
| Collateralization of derivative instruments | ( | ) | ||||||
| Proceeds from the sale of marketable securities | ||||||||
| Proceeds from the sale of property and equipment | ||||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash flows from financing activities | ||||||||
| Payment of dividends | ( | ) | ( | ) | ||||
| Deferred financing costs | ( | ) | ||||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Net change in cash and cash equivalents | ||||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Noncash investing and financing activities: | ||||||||
| Noncash capital expenditures | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
(Unaudited)
| 1) | SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared by FutureFuel Corp. ("FutureFuel" or "the Company") in accordance and consistent with the accounting policies stated in the Company's 2022 Annual Report on Form 10-K, inclusive of the audited consolidated financial statements and should be read in conjunction with these consolidated financial statements.
In the opinion of FutureFuel, all normal recurring adjustments necessary for a fair presentation have been included in the unaudited consolidated financial statements. The unaudited consolidated financial statements have been prepared in compliance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the unaudited consolidated financial statements do not include all the information and footnotes required by GAAP for complete financial statements, and do include amounts that are based upon management estimates and judgments. Future actual results could differ from such current estimates. The unaudited consolidated financial statements include assets, liabilities, revenues, and expenses of FutureFuel and its direct and indirect wholly owned subsidiaries; namely, FutureFuel Chemical Company; FFC Grain, L.L.C.; FutureFuel Warehouse Company, L.L.C.; and Legacy Regional Transport, L.L.C. Intercompany transactions and balances have been eliminated in consolidation.
Recent Accounting Standards
No new accounting standards have been adopted recently.
Proposed Accounting Standards
In March 2023, the Financial Accounting Standards Board (the "FASB") issued Proposed Accounting Standards Update (ASU) No. 2023-ED100 Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which aims to address requests for improved income tax disclosures from investors that use the financial statements to make capital allocation decisions. The amendments in this Proposed ASU, if adopted, would address the investor requests for more transparency of income tax information and would apply to all entities that are subject to income taxes. The Company is in the process of evaluating this proposed accounting standard.
In July 2023, the FASB issued Proposed Accounting Standards Update (ASU) No. 2023-ED500 Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, which aims to provide investors with more useful information about an entity’s expenses by improving disclosures on income statement expenses. The amendments in this Proposed ASU would require public business entities to disclose disaggregated information about specific categories underlying certain income statement expense line items. The Company is evaluating this proposed accounting standard.
| 2) | GOVERNMENT TAX CREDITS |
BIODIESEL BLENDERS’ TAX CREDIT AND SMALL AGRI-BIODIESEL PRODUCER TAX CREDIT
The biodiesel Blenders’ Tax Credit (“BTC”) provides a one dollar per gallon tax credit to the blender of biomass-based diesel with at least 0.1% petroleum-based diesel fuel. The BTC will expire December 31, 2024 based on current law. The Company records this credit as a reduction to cost of goods sold.
Within the law of the BTC, small agri-biodiesel producers with production capacity not in excess of 60 million gallons are eligible for an additional tax credit of $0.10 per gallon on the first 15 million gallons of agri-biodiesel sold (the “Small Agri-biodiesel Producer Tax Credit”). The Company was eligible for this credit as part of the tax provision.
CARES ACT – EMPLOYEE RETENTION TAX CREDIT
The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), was enacted on March 27, 2020, to encourage eligible employers to retain employees on their payroll through, among other things, an available employee retention tax credit. The Consolidated Appropriations Act, effective January 1, 2021 broadened the eligibility of the credit. FutureFuel has applied for this credit and will recognize the benefit of the credit once reasonable assurance can be made as to the retention of the credit.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
(Unaudited)
| 3) | REVENUE RECOGNITION |
The majority of revenue is from short term contracts with revenue recognized when a single performance obligation to transfer product under the terms of a contract with a customer are satisfied.
Certain of the Company's custom chemical contracts within the chemical segment contain a material right as defined by ASC Topic 606, from the provision of a customer option to purchase future goods or services at a discounted price as a result of upfront payments provided by customers. Each contract also has a performance obligation to transfer products with 30-day payment terms. The Company recognizes revenue when the customer takes control of the inventory, either upon shipment or when the material is made available for pick up. If the customer is deemed to take control of the inventory prior to pick up, the Company recognizes the revenue as a bill-and-hold transaction in accordance with ASC Topic 606. The Company applies the renewal option approach in allocating the transaction price to these material rights and transfer of product. As a basis for allocating the transaction price to the material right and transfer of product, the Company estimates the expected life of the contract, the expected contractual volumes to be sold over that life, and the most likely expected sales price. Each estimate is updated quarterly on a prospective basis.
Contract Assets and Liabilities:
Contract assets consist of unbilled amounts typically resulting from revenue recognized through bill-and-hold arrangements. The contract assets at September 30, 2023 and December 31, 2022 consist of unbilled revenue from one customer and cash due from another customer and are recorded as accounts receivable in the consolidated balance sheets. Contract liabilities consist of advance payment arrangements related to material rights recorded as deferred revenue in the consolidated balance sheets. Increases to contract liabilities from cash received or due for a performance obligation of chemical segment plant expansions were $
The following table provides the balances of receivables, contract assets, and contract liabilities from contracts with customers.
| Contract Assets and Liability Balances | September 30, 2023 | December 31, 2022 | ||||||
| Trade receivables, included in accounts receivable* | $ | $ | ||||||
| Contract assets, included in accounts receivable | $ | $ | ||||||
| Contract liabilities, included in deferred revenue - short-term | $ | $ | ||||||
| Contract liabilities, included in deferred revenue - long-term | $ | $ | ||||||
*Exclusive of the BTC of $
Transaction price allocated to the remaining performance obligations:
At September 30, 2023, approximately $
The Company applies the practical expedient in ASC 606-10-50-14 and excludes the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less; and (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
(Unaudited)
The following tables provide revenue from customers disaggregated by the type of arrangement and by the timing of the recognized revenue.
Disaggregation of revenue - contractual and non-contractual:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Contract revenue from customers with > 1-year arrangements | $ | $ | $ | $ | ||||||||||||
| Contract revenue from customers with < 1-year arrangements | ||||||||||||||||
| Revenue from non-contractual arrangements | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
Timing of revenue:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Bill-and-hold revenue | $ | $ | $ | $ | ||||||||||||
| Non-bill-and-hold revenue | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
As of September 30, 2023 and December 31, 2022, $
| 4) | INVENTORY |
The carrying values of inventory were as follows as of:
| September 30, 2023 | December 31, 2022 | |||||||
| At average cost (approximates current cost) | ||||||||
| Finished goods | $ | $ | ||||||
| Work in process | ||||||||
| Raw materials and supplies | ||||||||
| LIFO reserve | ( | ) | ( | ) | ||||
| Total inventory | $ | $ | ||||||
A LIFO liquidation of $
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
(Unaudited)
| 5) | DERIVATIVE INSTRUMENTS |
The Company records all derivative instruments at fair value. Fair value is determined by using the closing prices of the derivative instruments on the New York Mercantile Exchange at the end of an accounting period. Changes in the fair value of derivative instruments are recognized at the end of each accounting period and recorded in the statement of income as a component of cost of goods sold.
In order to manage commodity price risk caused by market fluctuations in biofuel prices, future purchases of feedstock used in biodiesel production, physical feedstock, finished product inventories attributed to the process, and other petroleum products purchased or sold, the Company may enter into exchange-traded commodity futures and options contracts. The Company accounts for these derivative instruments in accordance with ASC 815-20-25, Derivatives and Hedging. Under this standard, the accounting for changes in the fair value of a derivative instrument depends upon whether it has been designated as an accounting hedging relationship and, further, on the type of hedging relationship. To qualify for designation as an accounting hedging relationship, specific criteria must be met and appropriate documentation maintained. The Company had no derivative instruments that qualified under these rules as designated accounting hedges in 2023 or 2022. The Company has elected the normal purchase and normal sales exception for certain feedstock purchase contracts and supply agreements.
Realized gains and losses on derivative instruments and changes in fair value of the derivative instruments are recorded in the consolidated statements of operations as a component of cost of goods sold and amounted to a loss of $
The volumes and carrying values of FutureFuel’s derivative instruments were as follows at:
| Asset (Liability) | ||||||||||||||||
| September 30, 2023 | December 31, 2022 | |||||||||||||||
| Contract Quantity | Fair Value | Contract Quantity | Fair Value | |||||||||||||
| Regulated fixed price future commitments, included in other current assets (in thousand barrels) | $ | ( | ) | $ | ( | ) | ||||||||||
The margin account maintained with a broker to collateralize these derivative instruments carried an account balance of $
| 6) | MARKETABLE SECURITIES |
During the three months ended September 30, 2023, FutureFuel held no marketable equity and trust preferred (debt) securities. The previous sale of these securities was recorded as a component of net income with a gain of $
At December 31, 2022, FutureFuel had investments in certain marketable equity and trust preferred (debt) securities which had a fair market value of $
In accordance with ASC 321, the change in the fair value of marketable equity securities (preferred and other equity instruments) is reported as a component of net income. The change in the fair value of marketable equity securities (preferred and other equity instruments) for the three and nine months ended September 30, 2022 was a loss of $
The aggregate fair value of debt securities with unrealized losses totaled $
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
(Unaudited)
| 7) | FAIR VALUE MEASUREMENTS |
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Fair value accounting pronouncements also include a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of FutureFuel. Unobservable inputs are inputs that reflect FutureFuel’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following tables provide information by level for assets and liabilities that are measured at fair value, on a recurring basis, at September 30, 2023 and December 31, 2022.
| Asset (Liability) | ||||||||||||||||
| Fair Value Measurements Using | ||||||||||||||||
| Fair Value at | Inputs Considered as: | |||||||||||||||
| Description | September 30, 2023 | Level 1 | Level 2 | Level 3 | ||||||||||||
| Derivative instruments | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||
| Asset (Liability) | ||||||||||||||||
| Fair Value Measurements Using | ||||||||||||||||
| Fair Value at | Inputs Considered as: | |||||||||||||||
| Description | December 31, 2022 | Level 1 | Level 2 | Level 3 | ||||||||||||
| Derivative instruments | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||
| Preferred stock and other equity instruments | $ | $ | $ | $ | ||||||||||||
| Trust preferred stock | $ | $ | $ | $ | ||||||||||||
| 8) | ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES |
Accrued expenses and other current liabilities consisted of the following at:
| September 30, 2023 | December 31, 2022 | |||||||
| Accrued employee liabilities | $ | $ | ||||||
| Accrued property, franchise, motor fuel and other taxes | ||||||||
| Lease liability, current | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
(Unaudited)
| 9) | BORROWINGS |
On March 30, 2020, the Company, with FutureFuel Chemical Company as the borrower and certain of the Company’s other subsidiaries as guarantors, amended and restated its credit agreement (the “Credit Agreement”) originally entered into on April 16, 2015 (as amended, the “Prior Credit Agreement”) with the lenders party thereto, Regions Bank as administrative agent and collateral agent, and PNC Bank, N.A., as syndication agent. The Credit Agreement consists of a -year revolving credit facility in a dollar amount of up to which includes a sublimit of $
On March 1, 2023, the Company entered into a First Amendment to the Credit Agreement (the “First Amendment”). The First Amendment primarily amends the Credit Agreement to transition the Credit Facility from LIBOR to the Secured Overnight Financing Rate (“SOFR”) and other conforming changes, in each case as more specifically set forth in the First Amendment. The First Amendment does not modify the aggregate amount, or expiration date, of the Credit Facility. We do not expect the transition from LIBOR to have a material impact on the Credit Facility. Pursuant to the First Amendment, the interest rate floats at the following margins over SOFR or base rate based upon our leverage ratio.
| Adjusted SOFR Rate Loans and | ||||||||||||
| Consolidated Leverage Ratio | Letter of Credit Fee | Base Rate Loans | Commitment Fee | |||||||||
| < 1.00:1.0 | | % |
| % | | % | ||||||
| ≥ 1.00:1.0 And < 1.50:1.0 | | % | | % | | % | ||||||
| ≥ 1.50:1.0 And < 2.00:1.0 | | % | | % | | % | ||||||
| ≥ 2.00:1.0 And < 2.50:1.0 | | % | | % | | % | ||||||
| ≥ 2.50:1.0 |
| % | | % | | % | ||||||
The terms of the Credit Facility contain certain negative covenants and conditions including a maximum consolidated leverage ratio and a consolidated minimum interest coverage ratio.
There were
| 10) | INCOME TAX PROVISION |
The following table summarizes the income tax provision.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Income tax provision | $ | $ | $ | $ | ||||||||||||
| Effective tax rate | % | % | % | % | ||||||||||||
The Company’s income tax provision for the three and nine months ended September 30, 2023 comprises only small amounts of current state taxes.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
(Unaudited)
| 11) | EARNINGS PER SHARE |
In the three and nine months ended September 30, 2023 and 2022, FutureFuel used the treasury method in computing earnings per share.
Basic and diluted earnings per common share were computed as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Denominator: | ||||||||||||||||
| Weighted average shares outstanding – basic | ||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||
| Stock options and other awards | ||||||||||||||||
| Weighted average shares outstanding – diluted | ||||||||||||||||
| Basic earnings per share | $ | $ | $ | $ | ||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | ||||||||||||
For the three and nine months ended September 30, 2023,
| 12) | RELATED PARTY TRANSACTIONS |
FutureFuel enters into transactions with companies affiliated with or controlled by a director and significant shareholder. Revenues, expenses, prepaid amounts, and unpaid amounts related to these transactions are captured in the accompanying consolidated financial statements as related party line items.
Related party revenues are the result of sales of biodiesel, petrodiesel, blends, other petroleum products, and other similar or related products to these related parties.
Related party cost of goods sold and distribution are the result of sales and purchases of biodiesel, petrodiesel, blends, and other petroleum products with these related parties along with the associated expense from storage and terminalling services provided by these related parties. During the three months ended September 30, 2023, a settlement was reached on the previously disclosed natural gas dispute. See Note 14 Legal Matters.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
(Unaudited)
| 13) |
SEGMENT INFORMATION |
FutureFuel has
Chemicals
FutureFuel’s chemical segment manufactures diversified chemical products that are sold externally to third party customers. This segment is composed of
Biofuels
FutureFuel’s biofuel segment primarily manufactures and markets biodiesel. Biodiesel revenues are generated through the sale of biodiesel to customers through FutureFuel’s distribution network at the Batesville Plant, through distribution facilities available at leased oil storage facilities, and through a network of remotely located tanks. Biofuel revenues also include the sale of biodiesel blends with petrodiesel; petrodiesel with no biodiesel added; internally generated, separated Renewable Identification Numbers (“RINs”); and biodiesel production byproducts. Biodiesel selling prices and profitability can at times fluctuate based on the timing of unsold, internally generated RINs. FutureFuel does not allocate production costs to internally generated RINs, and, from time to time, can enter into sales of biodiesel on a “RINs-free” basis, resulting in FutureFuel maintaining possession of the applicable RINs from the sale. The benefit derived from the eventual sale of the RINs is not reflected in results of operations until such time as the RINs sale has been completed, which may lead to variability in reported operating results.
As of September 30, 2023, FutureFuel held
Summary of business by segment
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Revenue |
||||||||||||||||
| Custom chemicals |
$ | $ | $ | $ | ||||||||||||
| Performance chemicals |
||||||||||||||||
| Chemical revenue |
||||||||||||||||
| Biofuel revenue |
||||||||||||||||
| Total Revenue |
$ | $ | $ | $ | ||||||||||||
| Segment gross profit |
||||||||||||||||
| Chemical |
$ | $ | $ | $ | ||||||||||||
| Biofuel |
( |
) | ( |
) | ( |
) | ||||||||||
| Total gross profit |
$ | $ | $ | $ | ||||||||||||
Depreciation is allocated to segment cost of goods sold based on plant usage. The total assets and capital expenditures of FutureFuel have not been allocated to individual segments as large portions of these assets are shared to varying degrees by each segment, causing such an allocation to be of little value.
| 14) | LEGAL MATTERS |
From time to time, FutureFuel and its operations are parties to, or targets of, lawsuits, claims, investigations, regulatory matters, and proceedings, which are being handled and defended in the ordinary course of business. While FutureFuel is unable to predict the outcomes of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any such pending matters will have a material adverse effect on its overall financial condition, results of operations, or cash flows.
During the three months ended September 30, 2023, the parties to the previously disclosed natural gas dispute and the Company entered into a settlement agreement to resolve the matter completely. Based on such settlement, the Company released $
| 15) | RESTATEMENT |
The Company identified a correction required to be made to its consolidated statements of cash flows for the nine months ended September 30, 2023. The correction relates solely to the reported amount of “Other assets” and the resulting total amount of “Net Cash Flows From Operating Activities” and the reported amount of “Collateralization of derivative instruments” and the resulting total amount of “Net Cash Flows from Investing Activities” in the consolidated statement of cash flows for the nine months ended September 30, 2023. The correction does not impact the Company’s overall cash position, its consolidated balance sheets, its consolidated statements of operations and comprehensive income, or its consolidated statements of stockholders’ equity as of and for the period ended September 30, 2023.
A summary of the impact on the consolidated statement of cash flows is as follows:
| Nine Months Ended September 30, 2023 | ||||||||||||
| As Originally Reported | Adjustment | As Restated | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Other assets | $ | ( | ) | $ | $ | |||||||
| Net cash provided by operating activities | $ | $ | $ | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Collateralization of derivative instruments | $ | $ | ( | ) | $ | ( | ) | |||||
| Net cash provided by (used in) investing activities | $ | $ | ( | ) | $ | |||||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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.
Effect of Restatement
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations reflects correction of the errors described in the Explanatory Note with respect to the statement of cash flows included in the Original Form 10-Q. For additional information and a detailed discussion of the corrected errors, refer to the Explanatory Note and the Background of the Restatement.
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 biofuel 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 or D6 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. As of September 30, 2023, we held 4.2 million D4 and D6 RINs with a fair market value of $6,971. Comparatively, as of September 30, 2022, we held 8.1 million RINs with a fair market value of $12,752.
Summary of Financial Results
Set forth below is a summary of certain consolidated financial information for the periods indicated.
| Three Months Ended September 30, |
||||||||||||||||
| Dollar |
% |
|||||||||||||||
| 2023 |
2022* |
Change |
Change |
|||||||||||||
| Revenue |
$ | 116,752 | $ | 118,141 | $ | (1,389 | ) | (1 | )% | |||||||
| Income from operations |
$ | 297 | $ | 16,890 | $ | (16,593 | ) | (98 | )% | |||||||
| Net income |
$ | 2,776 | $ | 15,780 | $ | (13,004 | ) | (82 | )% | |||||||
| Earnings (loss) per common share: |
||||||||||||||||
| Basic |
$ | 0.06 | $ | 0.36 | $ | (0.30 | ) | (83 | )% | |||||||
| Diluted |
$ | 0.06 | $ | 0.36 | $ | (0.30 | ) | (83 | )% | |||||||
| Adjusted EBITDA* |
$ | 9,659 | $ | 18,829 | $ | (9,170 | ) | (49 | )% | |||||||
| Nine Months Ended September 30, |
||||||||||||||||
| Dollar |
% |
|||||||||||||||
| 2023 |
2022* |
Change |
Change |
|||||||||||||
| Revenue |
$ | 276,241 | $ | 278,198 | $ | (1,957 | ) | (1 | )% | |||||||
| Income from operations |
$ | 6,965 | $ | 5,768 | $ | 1,197 | 21 | % | ||||||||
| Net income |
$ | 13,998 | $ | 278 | $ | 13,720 | 4935 | % | ||||||||
| Earnings per common share: |
||||||||||||||||
| Basic |
$ | 0.32 | $ | 0.01 | $ | 0.31 | 3100 | % | ||||||||
| Diluted |
$ | 0.32 | $ | 0.01 | $ | 0.31 | 3100 | % | ||||||||
| Adjusted EBITDA* |
$ | 18,230 | $ | 10,643 | $ | 7,587 | 71 | % | ||||||||
* Adjusted EBITDA restated for the three and nine months of 2022 consistent with 2023 reporting to exclude cash (realized) gains and losses on derivative instruments.
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, non-cash 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 non-cash 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 the mark-to-market or non-cash portion of 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 held marketable securities of certain debt securities (trust preferred stock) and in preferred stock and other equity instruments during the nine months ended September 30, 2023, (but sold all investments during the three months ended June 30, 2023). The realized and unrealized gains and losses on these marketable securities fluctuated from period to period. We included this item as an adjustment as we believed it provided a relevant indicator of the underlying performance of our business in a given period.
The following table reconciles net income, the most directly comparable GAAP performance financial measure, with adjusted EBITDA.
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2023 |
2022* |
2023 |
2022* |
|||||||||||||
| Net income |
$ | 2,776 | $ | 15,780 | $ | 13,998 | $ | 278 | ||||||||
| Depreciation |
2,581 | 2,574 | 7,736 | 7,850 | ||||||||||||
| Non-cash stock-based compensation |
- | 46 | - | 46 | ||||||||||||
| Interest and dividend income |
(2,527 | ) | (1,210 | ) | (6,595 | ) | (2,621 | ) | ||||||||
| Non-cash interest expense and amortization of deferred financing costs |
35 | 7 | 101 | 72 | ||||||||||||
| Loss on disposal of property and equipment |
- | 10 | 8 | 60 | ||||||||||||
| Unrealized loss (gain) on derivative instruments |
6,782 | (665 | ) | 3,523 | (3,053 | ) | ||||||||||
| Loss (gain) on marketable securities |
- | 590 | (575 | ) | 7,956 | |||||||||||
| Income tax provision |
12 | 1,697 | 34 | 55 | ||||||||||||
| Adjusted EBITDA* |
$ | 9,659 | $ | 18,829 | $ | 18,230 | $ | 10,643 | ||||||||
The following table reconciles cash flows from operations, the most directly comparable GAAP liquidity financial measure, with adjusted EBITDA.
| Nine Months Ended September 30, |
||||||||
| (Restated) | ||||||||
| 2023 |
2022* |
|||||||
| Net cash provided by operating activities |
$ | 8,458 | $ | 44,127 | ||||
| Benefit for deferred income taxes |
- | 255 | ||||||
| Interest and dividend income |
(6,595 | ) | (2,621 | ) | ||||
| Income tax provision |
34 | 55 | ||||||
| Change in operating assets and liabilities, net |
16,334 | (31,174 | ) | |||||
| Other |
(1 | ) | 1 | |||||
| Adjusted EBITDA* |
$ | 18,230 | $ | 10,643 | ||||
* Adjusted EBITDA restated for the three and nine months of 2022 consistent with 2023 reporting to exclude cash (realized) gains and losses on derivative instruments.
Results of Operations
Consolidated
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||||||||||
| Change |
Change |
|||||||||||||||||||||||||||||||
| 2023 |
2022 |
Amount |
% |
2023 |
2022 |
Amount |
% |
|||||||||||||||||||||||||
| Revenues |
$ | 116,752 | $ | 118,141 | $ | (1,389 | ) | (1.2 | )% | $ | 276,241 | $ | 278,198 | $ | (1,957 | ) | (0.7 | )% | ||||||||||||||
| Volume/product mix effect |
$ | 9,882 | 8.4 | % | $ | 43,904 | 15.8 | % | ||||||||||||||||||||||||
| Price effect |
$ | (11,271 | ) | (9.5 | )% | $ | (45,861 | ) | (16.5 | )% | ||||||||||||||||||||||
| Gross profit |
$ | 3,870 | $ | 19,985 | $ | (16,115 | ) | (80.6 | )% | $ | 16,901 | $ | 13,807 | $ | 3,094 | 22.4 | % | |||||||||||||||
| Operating expenses |
(3,573 | ) | (3,095 | ) | (478 | ) | 15.4 | % | (9,936 | ) | (8,039 | ) | (1,897 | ) | 23.6 | % | ||||||||||||||||
| Other income (expense) |
2,491 | 587 | 1,904 | 324.4 | % | 7,067 | (5,435 | ) | 12,502 | n/a | ||||||||||||||||||||||
| Income tax provision |
12 | 1,697 | (1,685 | ) | (99.3 | )% | 34 | 55 | (21 | ) | (38.2 | )% | ||||||||||||||||||||
| Net income |
$ | 2,776 | $ | 15,780 | $ | (13,004 | ) | (82.4 | )% | $ | 13,998 | $ | 278 | $ | 13,720 | 4935.3 | % | |||||||||||||||
Consolidated revenue in the three and nine months ended September 30, 2023 decreased $1,389 and $1,957 compared to the three and nine months ended September 30, 2022, respectively. In the three- and nine-month periods ended September 30,2023, chemical segment sales volumes declined $3,763 and $2,294, respectively, on weakened glycerin markets and the timing of recognition of capital recovery. Partially improving chemical sales in both the three- and nine-month comparison periods was a favorable product mix and revenue from new custom chemical contracts. Biofuel segment net sales increased $2,270 and $820, respectively, in the three- and nine-month comparison periods on higher sales volumes mostly offset by lower average prices. D4 RIN prices dropped significantly during the quarter as renewable diesel volumes increased in the market.
Gross profit in the three months ended September 30, 2023 decreased $16,115 as compared to the same period of 2022, from: (i) the spread in biofuel price and feedstock price narrowed (inclusive of the effect of the D4 RIN price decline); (ii) the change in the activity in derivative instruments with a realized loss of $7,286 in the current three-month period as compared to a realized gain of $4,023 in the same three-months of the prior year; (iii) the change in the mark-to-market derivative position which was an unrealized loss of $6,782 as compared to an unrealized gain of $665 in the three months ended September 30, 2023 and 2022, respectively; (iv) the reduction from the timing of recognition of capital recovery; and (v) the change in the adjustment in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. The adjustment in item (v) increased gross profit $2,528 in the three months ended September 30, 2023 as compared to $6,133 in 2022. These contrasting results in items (i) and (ii) reflect the impact of price movements in the biodiesel market during the course of each year compared to when we committed to our feedstock acquisition. In 2022, prices rose sharply as a consequence of the conflict in Ukraine and we recorded mark-to-market losses on the derivative instruments we use to hedge our biodiesel margins. The losses were then offset by significant gains in physical sales in the period. In 2023, biodiesel prices fell in the first half of the year and then rose in the third quarter. This generated derivative gains for the first half of the year and now mark-to-market losses in the third quarter against committed sales in the fourth quarter.
Gross profit for the nine months ended September 30, 2023 was $16,901 as compared to $13,807 in the nine months ended September 30, 2022. This increase resulted from (i) the change in our realized derivative gains of $2,150 in the current nine-month period as compared to realized losses of $24,970 in the prior nine-month period given the explanation noted in the three-month comparative period, and (ii) the change in the adjustment in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. This adjustment increased gross profit $6,023 in the current nine-month period as compared to $1,308 in the prior nine-month period.
Operating expenses
Operating expenses increased $478 and $1,897 in the three and nine months ended September 30, 2023, as compared to the three and nine months ended September 30, 2022. This increase was primarily from increased compensation and legal expense.
Other income (expense)
Other income (expense) increased income $1,904 and $12,502 in the three and nine months ended September 30, 2023, respectively, as compared to the same periods of 2022. In the current three-month period interest income was $2,527 as compared to dividend and interest income of $1,210 and a loss of $590 on marketable securities in the same period of 2022. In the current nine-month period, marketable securities were sold with realized gains of $575 and interest income was $6,595 as compared to unrealized losses on marketable securities of $7,366 and interest and dividends income of $2,621, in the same period of 2022.
Income tax provision (benefit)
The Company’s income tax provision for the three and nine months ended September 30, 2023 comprises only small amounts of current state taxes. No deferred tax benefits on ongoing tax losses have been recognized, reflecting management’s determination that none of the net deferred tax assets generated on its 2023 tax losses are more likely than not to be realized. The three-month period in 2022 similarly reflected immaterial state taxes and miscellaneous items, while the nine-month period included the cumulative impact of valuation allowances recorded against certain existing deferred tax assets.
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.
Chemical Segment
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||||||||||
| Change |
Change |
|||||||||||||||||||||||||||||||
| 2023 |
2022 |
Amount |
% |
2023 |
2022 |
Amount |
% |
|||||||||||||||||||||||||
| Revenues |
$ | 17,847 | $ | 21,506 | $ | (3,659 | ) | (17.0 | )% | $ | 58,484 | $ | 61,261 | $ | (2,777 | ) | (4.5 | )% | ||||||||||||||
| Volume/product mix effect |
$ | (3,763 | ) | (17.5 | )% | $ | (2,294 | ) | (3.7 | )% | ||||||||||||||||||||||
| Price effect |
$ | 104 | 0.5 | % | $ | (483 | ) | (0.8 | )% | |||||||||||||||||||||||
| Gross profit |
$ | 6,878 | $ | 8,362 | $ | (1,484 | ) | (17.7 | )% | $ | 21,917 | $ | 17,976 | $ | 3,941 | 21.9 | % | |||||||||||||||
Chemical revenue in the three and nine months ended September 30, 2023 decreased 17.0% or $3,659 and 4.5% or $2,777, respectively, compared to the same comparative periods of 2022. Revenue for our custom chemicals (unique chemicals produced under contract for specific customers) for the three and nine months ended September 30, 2023 totaled $14,454 and $46,650, a decrease of $1,593 and an increase of $2,622 from the same periods in 2022, respectively. Custom chemicals sales revenue was reduced in the current reporting periods as compared to the prior year periods from the timing of recognition of upfront capital reimbursements from customers. The reduction in sales revenue from the recognition of deferred revenue was $1,978 and $3,174 in the three and nine months ended September 30, 2023 as compared to the same periods of 2022. (See Note 3 to our consolidated financial statements). Also reducing sales revenue were lower volumes of chemicals sold into the energy market. Partially offsetting these reductions were sales from two new contracts in the agricultural market. Performance chemicals (composed of multi-customer products which are sold to the open market based on specification) revenue was $3,393 and $11,834, a decrease of $2,066 and $5,399 from the three and nine months ended September 30, 2022, respectively. This decrease was mostly from lower sales of glycerin as markets softened on increased imports.
Gross profit for the chemical segment for the three months ended September 30, 2023, decreased $1,484 when compared to the same period of 2022. This decrease was primarily from: (i) the timing of recognition of upfront capital payments as noted above; (ii) reduced glycerin sales; and (iii) the change in the adjustment in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. This adjustment increased gross profit $234 as compared to $710 in the same period of 2022.
Gross profit for the chemical segment for the nine months ended September 30, 2023 increased $3,941 when compared to the same period of 2022 from: (i) product mix, and (ii) the change in the adjustment in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. This adjustment increased gross profit $1,105 in the nine months ended September 30, 2023 as compared to a decrease in gross profit of $463 in the same comparative period of 2022. Partially reducing this increase in gross profit was the timing of recognition of upfront capital payments as noted above.
Biofuel Segment
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||||||||||
| Change |
Change |
|||||||||||||||||||||||||||||||
| 2023 |
2022 |
Amount |
% |
2023 |
2022 |
Amount |
% |
|||||||||||||||||||||||||
| Revenues |
$ | 98,905 | $ | 96,635 | $ | 2,270 | 2.3 | % | $ | 217,757 | $ | 216,937 | $ | 820 | 0.4 | % | ||||||||||||||||
| Volume/product mix effect |
$ | 13,645 | 14.1 | % | $ | 46,198 | 21.3 | % | ||||||||||||||||||||||||
| Price effect |
$ | (11,375 | ) | (11.8 | )% | $ | (45,378 | ) | (20.9 | )% | ||||||||||||||||||||||
| Gross (loss) profit |
$ | (3,008 | ) | $ | 11,623 | $ | (14,631 | ) | n/a | $ | (5,016 | ) | $ | (4,169 | ) | $ | (847 | ) | (20.3 | )% | ||||||||||||
Biofuels revenue in the three and nine months ended September 30, 2023 increased $2,270 and $820, respectively, as compared to the same periods of 2022. These increases resulted from increased sales volumes of 14% and 21%, mostly offset by reduced average prices of 12% and 21%, respectively. The lower prices were driven in part by the reduction in D4 RIN prices which according to S&P Global (September 29, 2023 authored by Phillip Herring and Melvin Lee), dropped 44.5% in 2023 due to an increase of renewable diesel production and a decline in biodiesel margins.
A significant portion of our biodiesel sold was to four major refiners/blenders in the three months ended September 30, 2023 and to two major refiners in the three months ended September 30, 2022 and in the nine months ended 2023 and 2022. No assurances can be given that we will continue to sell to such major refiners, or, if we do sell, the volume we will sell or the profit margin we will realize. We do not believe that the loss of these customers would have a material adverse effect on our biofuels segment or on us as a whole because: (i) we believe that we could readily sell our biodiesel to other customers on equivalent terms 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 $3,008 and $5,016 in the three and nine months ended September 30, 2023, respectively, a decrease in gross profit of $14,631 in the three-month comparative period, and an increased loss of $847 in the nine-month comparative period of 2022. In the current three months of 2023, the change in the activity in derivative instruments was a realized loss of $7,286 as compared to a realized gain of $4,023 in the same three months of the prior year. Also increasing gross losses was the change in the mark-to-market derivative position which was an unrealized loss of $6,782 as compared to an unrealized gain of $665 in the three months ended September 30, 2023 and 2022, respectively. As described previously, heating oil futures prices rose in the three months ended September 30, 2023 whereas they had fallen overall for the first six months of the year. This moved our derivatives position from a gain to a loss position that will be offset by sales later in the year. In addition to this, there has been a decline in margins driven by the effect of the D4 RIN price decline as previously noted and increases in feedstock prices.
Reducing gross profit in the three months ended September 30, 2023 was the change in the adjustment in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. This adjustment increased gross profit $2,294 in the three months ended September 30, 2023 as compared to $5,423 in the same comparative period of 2022. For the nine months ended September 30, 2023, the change increased gross profit $6,023 as compared to $1,771 in the same comparative period of 2022.
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) |
||||||||||||||||
| September 30, 2023 |
December 31, 2022 |
|||||||||||||||
| Contract Quantity |
Fair Value |
Contract Quantity |
Fair Value |
|||||||||||||
| Regulated fixed price future commitments (in thousand barrels) |
182 | $ | (3,665 | ) | 305 | $ | (142 | ) | ||||||||
*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 nine months ended September 30, 2023 and 2022 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 $10,149 and $31,504 for the three and nine months ended September 30, 2023, respectively.
Liquidity and Capital Resources
Our net cash from operating activities, investing activities, and financing activities for the nine months ended September 30, 2023 and 2022 are set forth in the following table.
| Nine Months Ended September 30, |
||||||||
| 2023 |
2022 |
|||||||
| Net cash provided by operating activities |
$ | 8,458 | $ | 44,127 | ||||
| Net cash provided by (used in) investing activities |
$ | 29,716 | $ | (2,503 | ) | |||
| Net cash used in financing activities |
$ | (7,891 | ) | $ | (7,877 | ) | ||
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.
Operating Activities
Cash provided by operating activities was $8,458 in the nine months ended September 30, 2023 as compared to $44,127 in the same period of 2022. This decrease in cash was primarily attributable to the change in accounts payable, including accounts payable - related parties, demonstrating a cash outflow of $25,305, primarily from the timing of vendor payments, the change in fair value of equity securities of $11,057, the change in inventory demonstrating a cash outflow of $9,672, and the change in accounts receivable, including accounts receivable - related parties, demonstrating a cash outflow of $8,933. Partially offsetting these cash outflows was the change in net income of $13,720.
Investing Activities
Cash provided by investing activities was $29,716 in the nine months ended September 30, 2023 as compared to cash used in investing activities of $2,503 in the nine months ended September 30, 2022. Of the $32,219 change, $37,438 was the result of increased proceeds from the sale of marketable securities. Offsetting this increase in cash was an increase in cash out flow in the collateralization of derivative instruments of $3,856 and in capital expenditures of 1,302.
Financing Activities
Cash used in financing activities was $7,891 and $7,877 in the nine months ended September 30, 2023 and 2022, respectively, primarily for payments of dividends on our common stock.
Credit Facility
We have a credit agreement, as amended on March 30, 2020, 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 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 first three quarters of 2023 and 2022, 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 $2,626 in each of the quarters of 2023 and 2022. The declaration of these regular quarterly cash dividends was made in the three months ended December 31, 2022 and March 31, 2022, respectively.
Capital Management
As a result of our initial equity offering, our subsequent positive operating results, the exercise of warrants, and the issuance of shares in our at-the-market offering, we accumulated excess working capital. Some of this excess working capital has been paid out as special and regular cash dividends. Additionally, regular dividends will be paid in 2023, 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 period ended December 31, 2022, we also had investments in certain preferred stock, debt securities, and other equity instruments. We classified these investments as current assets in the accompanying consolidated balance sheets and designated the debt securities as being “available-for-sale.” Accordingly, the debt securities were 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 were recorded at fair value, with the unrealized gains and losses reported as a component of net income. We sold all marketable securities in the nine months ended September 30, 2023. The fair value of the debt securities and equity instruments totaled $0 and $37,126 at September 30, 2023 and December 31, 2022, 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 September 30, 2023 and December 31, 2022. 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 September 30, 2023 or December 31, 2022 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.
Item 4. Controls and Procedures.
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 concluded at the time the Original Form 10-Q was filed that these disclosure controls and procedures at September 30, 2023 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.
Subsequent to that evaluation, our chief executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2023, because of a material weakness in our internal control over financial reporting discussed below.
Material Weakness in Internal Control over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statement will not be prevented or detected on a timely basis. Management identified a material weakness in our internal control over financial reporting due to a deficiency in our review control over cash flows from investments within the statements of cash flows in accordance with applicable accounting guidance at the three months ended June 30, 2023 and September 30, 2023 and at the year-end December 31, 2023. Therefore, the Company has an ineffective financial reporting control over the review of the statement of cash flow. The control did not operate at a level precise enough to detect material errors in calculations and formulas and as a result did not detect material differences between the operating and investing sections of the statement of cash flow.
Remediation Plan
The Company’s management, under the oversight from the Audit Committee, is implementing additional review procedures to enhance our internal control over financial reporting with respect to the statement of cash flows. These review procedures include the development of a review checklist to ensure that we will apply the applicable accounting guidance under ASC 230, Statement of Cash Flows.
Notwithstanding the identified material weakness, management believes that the 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
Except as described above, 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 September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II INFORMATION
Item 6. Exhibits.
| Exhibit |
Description |
| 31(a). |
Rule 13a-15(e)/15d-15(e) Certification of chief executive officer |
| 31(b). |
Rule 13a-15(e)/15d-15(e) Certification of chief principal officer |
| 32. |
Section 1350 Certification of chief executive officer and principal financial officer |
| 101 |
Interactive Data Files** |
| 101.INS |
Inline XBRL Instance |
| 101.SCH |
Inline XBRL Taxonomy Extension Schema |
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation |
| 101.DEF |
Inline XBRL Taxonomy Extension Definition |
| 101.LAB |
Inline XBRL Taxonomy Extension Labels |
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation |
| 104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| ** |
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
Special Note Regarding Forward-Looking Information
This report, and the documents incorporated by reference into this report contain forward-looking statements. Forward-looking statements deal with our current plans, intentions, beliefs, and expectations, and statements of future economic performance. Statements containing such terms as “believe,” “do not believe,” “plan,” “expect,” “intend,” “estimate,” “anticipate,” and other phrases of similar meaning are considered to contain uncertainty and are forward-looking statements. In addition, from time to time we or our representatives have made or will make forward-looking statements orally or in writing. Furthermore, such forward-looking statements may be included in various filings that we make with the SEC, or in press releases, or in oral statements made by or with the approval of one of our authorized executive officers.
These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause actual results to differ include, but are not limited to, those set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in FutureFuel’s Form 10-K Annual Report for the year ended December 31, 2023 and in our future filings made with the SEC. You should not place undue reliance on any forward-looking statements contained in this report which reflect our management’s opinions only as of their respective dates. Except as required by law, we undertake no obligation to revise or publicly release the results of any revisions to forward-looking statements. The risks and uncertainties described in this report and in subsequent filings with the SEC are not the only ones we face. New factors emerge from time to time, and it is not possible for us to predict which will arise. There may be additional risks not presently known to us or that we currently believe are immaterial to our business. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. If any such risks occur, our business, operating results, liquidity, and financial condition could be materially affected in an adverse manner. You should consult any additional disclosures we have made or will make in our reports to the SEC on Forms 10-K, 10-Q, and 8-K, and any amendments thereto. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this report.
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| FUTUREFUEL CORP. |
||
| By: |
/s/ Tom McKinlay |
|
| Tom McKinlay, Chief Executive Officer |
||
| Date: May 10, 2024 |
||
| By: |
/s/ Rose M. Sparks |
|
| Rose M. Sparks, Chief Financial Officer |
||
| and Principal Financial Officer |
||
| Date: May 10, 2024 |
||