UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 20182019

OR

For the transition period from

Commission file number: 0-52577

(Exact Name of Registrant as Specified in Its Charter)

8235 Forsyth Blvd., Suite 400

St. Louis, Missouri 63105

(Address of Principal Executive Offices)

(314) 854-8352 

(Registrant’s Telephone Number, Including Area Code)

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.

Yes √ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes √ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

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 ☐ No √

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of May 10, 2018: 43,741,670 

2019: 43,743,243 

Organization

FutureFuel Corp. (“FutureFuel”), through its wholly-owned subsidiary, FutureFuel Chemical Company (“FutureFuel Chemical”), owns and operates a chemical production facility located on approximately 2,200 acres of land six miles southeast of Batesville in north central Arkansas fronting the White River (the “Batesville Plant”). FutureFuel Chemical manufactures diversified chemical products, biobased products comprised of biofuels, and biobased specialty chemical products. FutureFuel Chemical’s operations are reported in two segments: chemicals and biofuels.

The chemicals segment manufactures a diversified portfolio of chemical products that are sold to third party customers. The majority of the revenues from the chemicals segment are derived from the custom manufacturing of specialty chemicals for specific customers.

The biofuels business segment primarily produces and sells biodiesel. FutureFuel Chemical also sells petrodiesel in blends with the company’s biodiesel and, from time to time, with no biodiesel added. Finally, FutureFuel Chemical is a shipper of refined petroleum products on common carrier pipelines and buys and sells petroleum products to maintain an active shipper status on these pipelines.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared by FutureFuel in accordance and consistent with the accounting policies stated in FutureFuel’s 20172018 audited consolidated financial statements and should be read in conjunction with the 20172018 audited consolidated financial statements of FutureFuel.

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-Q10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the 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 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.

The biodiesel blenders’ tax creditBlenders’ Tax Credit (“BTC”) provides a $1.00$1.00 per gallon tax credit to the blender of biomass-based diesel with at least 0.1% petroleum-based diesel fuel.  When in effect, FutureFuel is the blender of record and recognizes the credit as a reduction to cost of goods sold.  The BTC expired on December 31, 2016 and was not reinstated for 2017 until it was signed into law as part of The Bipartisan Budget Act of 2018 passed by Congress on February 9, 2018.  As this actAct was passed into law in 2018, FutureFuel recognized a receivable of $42,428 as of March 31, 2018 and a net estimated pretax benefit from the reinstatement in the biofuels segment of $28,869$28,869 (a reduction in sales revenue of $13,559$13,559 for customer rebates ("(“BTC Rebates"Rebates”) upon reinstatement and a reduction in cost of goods sold of $42,428)$42,428). The gallons related to this credit were sold in the twelve months ended December 31, 2017.

As part of the law from which the BTC was reinstated, small agri-biodiesel producers with production capacity not in excess of 60 million gallons were eligible for an additional tax credit of $0.10$0.10 per gallon on the first15 million gallons of agri-biodiesel sold (the “Small Agri-biodiesel Producer Tax Credit”).  The benefit of the Small Agri-biodiesel Producer Tax Credit was recognized as a benefit in the tax provision in the first three months of the period ended March 31, 2018.

Neither the BTC nor the Small Agri-biodiesel Producer Tax Credit have been passed into law for 2018.

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)  

Neither the BTC nor the Small Agri-biodiesel Producer Tax Credit have been passed into law for gallons blended and sold in 2018 or 2019.  

The carrying values of inventory were as follows as of:  

FutureFuel is exposed to certain risks relating to its ongoing business operations. Commodity price risk is the primary risk managed by using derivative instruments. Regulated fixed price futures and option contracts are utilized to manage the price risk associated with future purchases of feedstock used in FutureFuel’s biodiesel production along with physical feedstock and finished product inventories attributed to this process.

FutureFuel recognizes all derivative instruments as either assets or liabilities at fair value in its consolidated balance sheets. FutureFuel’s derivative instruments do not qualify for hedge accounting under the specific guidelines of ASC 815-20-25,815-20-25, Derivatives and Hedging. Hedging. None of the derivative instruments are designated and accounted for as hedges primarily as a result of the extensive record keeping requirements.

The fair value of FutureFuel’s derivative instruments is determined based on the closing prices of the derivative instruments on relevant commodity exchanges at the end of an accounting period. Realized gains and losses on derivative instruments and changes in fair value of the derivative instruments are recorded in the statements of operations as a component of cost of goods sold, and amounted to a loss of $162$1,476 and a gain of $1,279$162 for the three months ended March 31, 2018 2019 and 2017,2018, respectively.

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

At March 31, 2018 2019 and December 31, 2017, 2018, FutureFuel had investments in certain preferred stock, trustdebt securities (trust preferred securities and exchange traded debt instruments,instruments) and in preferred stock and other equity instruments. These investments are classified as current assets in the consolidated balance sheets. FutureFuel has designated thesethe debt securities as being available-for-sale. Accordingly, they are recorded atFor the three months ended, March 31, 2019 and 2018, the change in the fair value with the unrealized gains and losses, net of taxes,equity securities was reported as gains/(losses) on marketable securities as a component of stockholders’ equity.net income.

FutureFuel’s marketableavailable for sale debt securities were comprised of the following at March 31, 2018 2019 and December 31, 2017:

2018: 

The aggregate fair value of instrumentsdebt securities with unrealized losses totaled $19,470 and $14,103$254 at March 31, 2018 2019, and the aggregate fair value of debt securities with unrealized losses totaled $2,540 at December 31, 2017, respectively.2018. As of March 31, 2018 and December 31, 2017, 2019, FutureFuel had investments in marketabledebt securities with a total value of $4,357 and $2,903, respectively,$254 that were in an unrealized loss position for a greater than 12-montha 12-month period. As of December 31, 2018, FutureFuel had investments in debt securities with a total value of $187 that were in an unrealized loss position for a greater than 12-month period. The unrealized loss position for those securities was $143$7 and $124, respectively.$19, respectively, at March 31, 2019 and December 31, 2018.  Those loss positions represented a minimal reduction for the securities and are expected to fully recover given changes in market value.

Accrued expensesThe adjusted cost basis and other current liabilities, including those associated with related parties, consistedfair value of the following at:  

debt securities at March 31, 2019, by contractual maturity, are shown below.

The following table shows the recognized change in equity securities sold and the change in unrealized fair value:

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

Accrued expenses and other current liabilities, including those associated with related parties, consisted of the following at:   

On April 16, 2015, FutureFuel, with FutureFuel Chemical as the borrower, and certain of FutureFuel’s other subsidiaries, as guarantors, entered into a $150,000$150,000 secured and committed credit facility with the lenders party thereto, Regions Bank as administrative agent and collateral agent, and PNC Bank, N.A., as syndication agent. On May 25, 2016, FutureFuel increased the credit facility by $15,000.$15,000. The credit facility consists of a five-yearfive-year revolving credit facility in a dollar amount of up to $165,000,$165,000, which includes a sublimit of $30,000$30,000 for letters of credit and $15,000$15,000 for swingline loans (collectively, the “Credit Facility”).

The interest rate floats at the following margins over LIBOR or base rate based upon the leverage ratio from time to time:

The terms of the Credit Facility contain certain covenants and conditions including a maximum consolidated leverage ratio, a minimum consolidated fixed charge coverage ratio, and a minimum liquidity requirement. FutureFuel was in compliance with such covenants as of March 31, 2018.2019.

There were no borrowings under this credit agreement at March 31, 2018 2019 or December 31, 2017.2018.

The following table summarizesFASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the provisionbalance sheet for income taxes.

all leases with a term longer than 12 months. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments under the leases.

The Company adopted the new lease standard January 1, 2019 under the modified retrospective transition approach using the effective taxdate as our date of initial application with the practical expedient election for short term lease exemption (leases shorter than 12 months are exempt from this standard) with the election to not separate lease and non-lease components for all leases.

FutureFuel leases railcars under multi-year arrangements primarily for delivery of feedstock and biodiesel within its Biofuels segment. The lease fees are fixed, with no option to purchase, and no upfront fees nor residual value guarantees. All railcar leases are direct and no subleases exist. FutureFuel determines lease existence and classification at inception when an agreement conveys the right to control identified property for a period of time in exchange for consideration. The Company’s leases have remaining terms from two to five years with a weighted average remaining term of 4 years. As operating leases do not provide a readily determinable implicit interest rate, for the three months ended March 31, 2018 reflects our expected taxCompany uses an incremental borrowing rate based on reported operating income before income tax includinginformation available at the positive effectcommencement date in determining present value of the retroactive reinstatementlease payments. On January 1, 2019, a ROU asset was reported as other noncurrent assets of the 2017 BTC$1,641 and Small Agri-biodiesel Producer Tax Credit. Our effective tax rate in the three months ended March 31, 2017 does not reflect the BTCother current liabilities and Small Agri-biodiesel Producer Tax Credit recognized in 2018 because these creditsother noncurrent liabilities of $370 and incentives were retroactively extended through December 31, 2017 on February 9, 2018. This rate is not expected to continue for the remainder of 2018 as these credits only benefited the three months ended March 31, 2018.

$1,271, respectively.

NotestoConsolidatedFinancialStatementsofFutureFuelCorp.

(Dollarsinthousands,exceptpershareamounts)

(Unaudited)

Unrecognized tax benefits totaled $0 at March 31, 2018 and December 31, 2017.

FutureFuel records interest and penalties, net, as a component of income tax expense. At March 31, 2018 and December 31, 2017, FutureFuel recorded $0 in accruals for interest or tax penalties.

The Company computes earnings per share using the two-class method in accordance with ASC Topic No.260, “Earnings per Share.” The two-class method is an allocation of earnings between the holders of common stock and a company’s participating security holders. Outstanding non-vested shares of restricted stock contain non-forfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. The Company had no other participating securities at March 31, 2018 or 2017.

Contingently issuable shares associated with outstanding service-based restricted stock units were not included in the earnings per share calculations for the three-month periods ended March 31, 2018 or 2017 as the vesting conditions had not been satisfied.

Basic and diluted earnings per common share were computed as follows: 

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

Supplemental balance sheet information related to leases as of March 31, 2019:

Maturities of lease liabilities as of March 31, 2019:

The following table summarizes the provision for income taxes.   

The effective tax rate for the three months ended March 31, 2019 reflects the unfavorable effect of the BTC and Small Agri-biodiesel Producer Tax Credit not being reinstated into law for 2019 (2017 BTC was reinstated in the three months ended March 31, 2018). The 2019 effective rate was favorably impacted by FutureFuel being granted a retroactive research and development credit for a prior year in a state where it does significant business. This three-month effective rate is expected to increase for the remainder of 2019.

NotestoConsolidatedFinancialStatementsofFutureFuelCorp.

(Dollarsinthousands,exceptpershareamounts)

(Unaudited)

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

FutureFuel records interest and penalties, net, as a component of provision for income taxes. FutureFuel accrued balances of $665 and $681 at March 31, 2019 and December 31, 2018, respectively, for interest and penalties.

In the first three months ended March 31, 2019, FutureFuel used the treasury method in computing earnings per share as all shares with participating security holders had vested. During 2018, FutureFuel had unvested participating shares and computed earnings per share using the two-class method in accordance with ASC Topic No. 260, “Earnings per Share.” The two-class method is an allocation of earnings between the holders of common stock and a company’s participating security holders. Outstanding unvested shares of restricted stock contain non-forfeitable rights to dividends and, therefore, are considered participating securities for purposes of computing earnings per share pursuant to the two-class method. There were no other participating securities at March 31, 2019 or 2018.

Contingently issuable shares associated with outstanding service-based restricted stock units were not included in the earnings per share calculations for the three-month period ended March 31, 2018 as the vesting conditions had not been satisfied. There were no outstanding service-based restricted stock units for the three months ended March 31, 2019.

Basic and diluted earnings per common share were computed as follows: 

Certain options to purchase FutureFuel’s common stock were not included in the computation of diluted earnings per share for the three months ended March 31, 2018and 2017 because they were anti-dilutive in the periods.period. The weighted average number of options excluded on this basis was 30,000 and 30,000 for the three-months ended March 31, 2018.  For the three months ended March 31, 2018, and 2017, respectively. 2019, no options were excluded on a weighted average basis.

NotestoConsolidatedFinancialStatementsofFutureFuelCorp.

(Dollarsinthousands,exceptpershareamounts)

(Unaudited)

FutureFuel has two reportable segments organized along similar product groups – chemicals and biofuels.

Chemicals

FutureFuel’s chemicals segment manufactures diversified chemical products that are sold externally to third party customers. This segment is comprised of two components: “custom manufacturing” (manufacturing chemicals for specific customers) and “performance chemicals” (multi-customer specialty chemicals).

Biofuels

FutureFuel’s biofuels business 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. Biofuels revenues also include the sale of biodiesel blends with petrodiesel, petrodiesel with no biodiesel added, internally generated, separated RINs,Renewable Identification Numbers (“RINs”), biodiesel production byproducts, and the purchase and sale of other petroleum products on common carrier pipelines.  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. Such method of selling results 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 RIN sale has been completed, which may lead to variability in reported operating results.

Summary of long-lived assets and revenues by geographic area

All of FutureFuel’s long-lived assets are located in the United States.

Most of FutureFuel’s sales are transacted with control and title passing at the time of shipment from the Batesville Plant, although some sales are transacted with control and title passing at the delivery point. While many of FutureFuel’s chemicals are utilized to manufacture products that are shipped, further processed, and/or consumed throughout the world, the chemical products, with limited exceptions, generally leave the United States only after ownership has transferred from FutureFuel to the customer. FutureFuel is rarely the exporter of record, never the importer of record into foreign countries, and is not always aware of the exact quantities of its products that are moved into foreign markets by its customers. FutureFuel does track the addresses of its customers for invoicing purposes and uses this address to determine whether a particular sale is within or outside the United States. FutureFuel’s revenues attributable to the United States and foreign countries (based upon the billing addresses of its customers) were as follows: 
 

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.

Notes to Consolidated Financial Statements of FutureFuel Corp.

(Dollars in thousands, except per share amounts)

(Unaudited)

The following tables provide information by level for assets and liabilities that are measured at fair value, on a recurring basis, at March 31, 2018 2019 and December 31, 2017.2018.

The following tables summarize changes in accumulated other comprehensive income from unrealized gains and losses on available-for-sale securities in the three months ended March 31, 2018 2019 and 2017.2018.