In recent years, general economic inflation has not had a material adverse impact on our costs and, as described elsewhere herein, we have passed some price increases along to our customers. However, we are subject to certain market risks as described below.
Market risk represents the potential loss arising from adverse changes in market rates and prices. Commodity price risk is inherent in the chemical and biofuels business both with respect to input (electricity, coal, raw materials, biofuel feedstocks, etc.) and output (manufactured chemicals and biofuels).
We seek to mitigate our market risks associated with the manufacturing and sale of chemicals by entering into term sale contracts that include contractual market price adjustment protections to allow changes in market prices of key raw materials to be passed on to the customer. Such price protections are not always obtained, however, so raw material price risk remains a significant risk.
In order to manage price risk caused by market fluctuations in biofuel prices, we may enter into exchange traded commodity futures and options contracts. We account for these derivative instruments in accordance with Topic 815, Derivatives and Hedging. Under this standard, the accounting for changes in the fair value of a derivative instrument depends upon whether it has been designated as an accounting hedging relationship and, further, on the type of hedging relationship. To qualify for designation as an accounting hedging relationship, specific criteria must be met and appropriate documentation maintained. We had no derivative instruments that qualified under these rules as designated accounting hedges in 2021 or 2020. Changes in the fair value of our derivative instruments are recognized at the end of each accounting period and recorded in the consolidated statement of operations as a component of cost of goods sold.
Our immediate recognition of derivative instrument gains and losses can cause net income to be volatile from period to period due to the timing of the change in value of the derivative instruments relative to the sale of biofuel being sold. As of December 31, 2021 and 2020, the fair values of our derivative instruments were in a (liability) asset position in the amount of ($485) and $124, respectively.
Our gross profit will be impacted by the prices we pay for raw materials and conversion costs (costs incurred in the production of chemicals and biofuels) for which we do not possess contractual market price adjustment protection. These items are principally comprised of crude corn oil and yellow grease and petrodiesel. The availability and price of these items are subject to wide fluctuations due to unpredictable factors such as weather conditions, overall economic conditions, governmental policies, commodity markets, and global supply and demand.
We prepared a sensitivity analysis of our exposure to market risk with respect to key raw materials and conversion costs for which we do not possess contractual market price adjustment protections based on average prices in 2021. We included only those raw materials and conversion costs for which a hypothetical adverse change in price would result in a 1% or greater decrease in gross profit. Assuming that the prices of the associated finished goods could not be increased and assuming no change in quantities sold, a hypothetical 10% change in the average price of the commodities listed below would result in the following change in annual gross profit.
(a) Volume requirements and average price information are based upon volumes used and prices obtained for the twelve months ended December 31, 2021. Volume requirements may differ materially from these quantities in future years as our business evolves.
We had no borrowings as of December 31, 2021 or 2020, and, as such, we were not exposed to interest rate risk for those years. Due to the relative insignificance of transactions denominated in a foreign currency, we consider our foreign currency risk to be immaterial.
To the Shareholders and the Board of Directors of FutureFuel Corp.
We have audited the accompanying consolidated balance sheets of FutureFuel Corp. and its subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income and comprehensive income, cash flows, and change in stockholders’ equity for each of the three years in the period ended December 31, 2021, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 15, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there were no critical audit matters.
We have served as the Company’s auditor since 2019.
St. Louis, Missouri
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
1) | Description of business and operations |
FutureFuel Corp. (the “Company”) is a Delaware corporation with its wholly owned subsidiaries, FutureFuel Chemical Company; FFC Grain, L.L.C.; FutureFuel Warehouse Company, L.L.C.; and Legacy Regional Transport, L.L.C.
The Company’s sole operating facility is FutureFuel Chemical Company located in Batesville, Arkansas, a manufacturer of specialty and performance chemicals and biofuels.
2) | Significant accounting policies and basis of presentation |
Financial Presentation
The consolidated financial statements of FutureFuel Corp. and subsidiaries are prepared in conformity with accounting principles generally accepted ("GAAP") in the United States and include amounts that are based upon management estimates and judgments which could differ from actual future results. Intercompany transactions and balances are eliminated in consolidation. Certain reclassifications were made to prior year amounts to conform to the 2021 presentation.
Cash and cash equivalents
Cash equivalents consist of highly liquid investments with original maturities of three months or less and are carried at cost, which approximates market. The Company places its temporary cash investments with high credit quality financial institutions. At times, bank deposits may be in excess of the Federal Deposit Insurance Corporation insurance limit.
Accounts receivable, allowance for doubtful accounts, and credit risk
Accounts receivable are recorded at the invoiced amount and only bear interest if outstanding beyond the agreed upon payment terms. The Company has established procedures to monitor credit risk and has not experienced significant credit losses in prior years. Accounts receivable have been reduced by an allowance for amounts that may be uncollectible in the future. This estimated allowance is based upon management’s evaluation of the collectability of individual invoices and is based upon management’s evaluation of the financial condition of its customers and historical bad debt experience. Write-offs are recorded at the time a customer receivable is deemed uncollectible.
The Company adopted ASU 2016-13, Financial Instruments - Credit Losses, Measurement of Credit Losses on Financial Instruments on January 1, 2020 on a modified retrospective approach. This methodology reflects expected credit losses based on a broader range of reasonable and supportable information to inform credit loss estimates. The adoption did not have a material impact on the company’s consolidated financials
Customer concentrations
For the twelve months ended December 31, 2021, 2020, and 2019, significant portions of the Company’s sales were made to a relatively small number of customers. Sales to three biodiesel customers totaled $133,231 (41% of total revenue) in 2021, sales to one customer totaled $25,460 (12% of revenue) and $22,351 (11% of total revenue) in 2020 and 2019, respectively. Receivables for the significant customers at December 31, 2021 and 2020, was 28% and 2% of total receivables, respectively.
No chemical customers represented a greater than 10% of total sales revenue in 2021 or 2020. In 2019, one customer and its affiliates, represented approximately 22% of chemicals revenue (11% of total revenues). We sell multiple products to various affiliates of this 2019 significant customer under both long-term and short-term contracts. One product contract was not renewed at December 31, 2020 representing 17% and 10% of chemical revenue (7% and 5% of total revenue) for 2020 and 2019, respectively. Another product contract was not renewed at December 31, 2019 representing 15% of chemical revenue in 2019 (7% of total revenue).
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
Inventory
Inventories are valued at the lower of cost or market. The Company determines the cost of raw materials, work in process, and finished goods inventories by the last-in, first-out ("LIFO") method. The cost of all other inventories is determined by the average cost method, which approximates the first-in, first-out ("FIFO") method. The Company writes-down its inventories for estimated obsolescence or unmarketable inventory equal to the difference between the carrying value of inventory and the estimated market value based upon assumptions about future demand and market conditions.
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 2021 or 2020. The Company has elected the normal purchase and normal sales exception for certain feedstock purchase contracts and supply agreements.
Marketable securities
Investments consist of marketable equity and debt securities stated at fair value. The debt securities are designated as available-for-sale securities at the time of purchase based upon the intended holding period. Gains and losses from the sale of marketable securities and the changes in the fair value of equity securities are recognized as “gains (losses) on marketable securities” as a component of other income (expense) in the consolidated statements of income and comprehensive income. The cost basis used for all marketable securities is specific identification. Changes in the fair value of debt securities are recognized in “accumulated other comprehensive income” on the consolidated balance sheets, unless the Company determines that an unrealized loss is other-than-temporary. If the Company determines that an unrealized loss is other-than-temporary, the Company recognizes the loss as a component of other income (expense).
See Notes 7 and 8 for further information on marketable securities and fair value measurements.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
Fair value measurements
The Company records recurring and non-recurring financial assets and liabilities as well as all non-financial assets and liabilities subject to fair value measurement at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. These fair value principles prioritize valuation inputs across three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company's assumptions used to measure assets and liabilities at fair value. An asset or liability's classification within the various levels is determined based on the lowest level input that is significant to the fair value measurement.
Property, plant, and equipment
Property, plant, and equipment is carried at cost. Maintenance and repairs are charged to earnings; replacements and betterments are capitalized. When the Company retires or otherwise disposes of an asset, it removes the cost of such asset and related accumulated depreciation from the accounts. The Company records any profit and loss on retirement or other disposition in earnings.
Depreciation expense is calculated based on historical cost and the estimated useful lives of the assets, generally using the straight-line method with the following useful lives:
Building & building equipment (years) | 20 | – | 39 |
Machinery and equipment (years) | 3 | – | 33 |
Transportation equipment (years) | 5 | – | 33 |
Other (years) | 5 | – | 33 |
Intangible assets
Intangible assets are carried at cost. Amortization expense for definite-lived intangible assets is generally determined using a straight-line method over the estimated useful life of the asset.
Impairment of assets
Long-lived tangible assets
The Company evaluates the carrying value of long-lived tangible assets when events or changes in circumstances indicate that the carrying value may not be recoverable. Such events and circumstances include, but are not limited to, significant decreases in the market value of the asset, adverse changes in the extent or manner in which the asset is being used, significant changes in business climate, or current or projected cash flow losses associated with the use of the assets. The carrying value of a long-lived asset is considered impaired when the total projected undiscounted cash flows from such assets are separately identifiable and are less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. For long-lived assets to be held for use in future operations and for tangible assets, fair value is determined primarily using either the projected cash flows discounted at a rate commensurate with the risk involved or an appraisal. For long-lived assets to be disposed of by sale or other than sale, fair value is determined in a similar manner, except that fair values are reduced for disposal costs.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
Indefinite-lived intangible assets
Intangible assets with indefinite lives are not amortized but are reviewed for impairment at least annually or whenever events or circumstances indicate the carrying value of the asset may not be recoverable. The Company performs annual impairment tests of the intangible assets during the fourth quarter of each fiscal year and assesses qualitative factors to determine the likelihood of impairment. The Company’s qualitative analysis includes, but is not limited to, assessing the changes in macroeconomic conditions, legal and regulatory environment, industry and market conditions, financial performance, and any other relevant events or circumstances specific to the intangible asset. If it is more likely than not that the fair value of the intangible asset is greater than the carrying value, no further testing is required. Otherwise, the Company will apply the quantitative impairment test method. In 2021, the Company made the strategic decision regarding the intangible asset which involved a sale in part and an impairment of the intangible asset's remaining value. See Note 10 for further details.
Asset retirement obligations and environmental costs
The Company establishes reserves for closure/post-closure costs associated with the environmental and other assets it maintains, which include, but are not limited to, waste management units, such as a chemical waste destructor, storage tanks, and boilers. When these types of assets are constructed or installed, a liability is established with a corresponding asset for the future costs anticipated to be associated with the closure of the site based on an expected life of the environmental assets, the applicable regulatory closure requirements, and the Company’s environmental policies and practices. These expenses are charged into earnings over the estimated useful life of the assets. Currently, the Company estimates the useful life of each individual asset up to 27 years. Changes made in estimates of the asset retirement obligation costs or the estimate of the useful lives of these assets are reflected in earnings as an increase or decrease in the period such changes are made.
Environmental costs are capitalized if they extend the life of the related property, increase its capacity, and/or mitigate or prevent future contamination. The cost of operating and maintaining environmental control facilities is charged to expense.
Litigation
The Company and its operations from time to time may be parties to or targets of lawsuits, claims, investigations, and proceedings including product liability, personal injury, patent and intellectual property, commercial, contract, environmental, health and safety, and environmental matters, which are handled and defended in the ordinary course of business. The Company accrues a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, the Company accrues the minimum amount.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
Revenue recognition
In accordance with ASC Topic 606, Revenue from Contracts with Customers, the Company recognizes revenue when performance obligations of the customer contract are satisfied. The Company sells to customers through master sales agreements or standalone purchase orders. The majority of the Company’s 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 is satisfied. Accordingly, the Company recognizes revenue when control is transferred to the customer, which is when products are considered to meet customer specification per the customer contract and title and risk of loss are transferred. This typically occurs at the time of shipment or delivery; or for certain contracts, this occurs upon delivery of the material to a Company storage location, ready for customer pickup and separated from other Company inventory. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products and is generally based upon a negotiated price. The Company sells its products directly to customers generally under agreements with payment terms of 30 to 75 days for chemical segment customers and 2 to 10 days for biofuels segment customers.
The Company applies the practical expedient 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 the Company has the right to invoice for services performed.
Revenue within the biofuel segment includes a reduction for customer rebate amounts from the retroactive reinstatement of the BTC passed in law in December 2019. See Note 3 for details. Also included is the revenue from biodiesel RINs upon the transfer of the RIN to the buyer. RINs are renewable identification numbers under the Renewable Fuel Standard (“RFS2”) used to incent the use of renewable fuels domestically. RINs are generated at 1.5 RINs per gallon of biodiesel produced and sold. Revenue is recognized from RINs when transferred to the buyer in the government provided tracking system. No cost is incurred in the generation of a RIN.
Taxes collected from customers remitted to governmental authorities were excluded from revenue. Shipping and handling fees related to sales transactions were billed to customers and recorded as sales revenue.
Cost of goods sold and distribution
Cost of goods sold consists of raw and packaging materials, direct manufacturing costs, depreciation, analytical lab costs, inbound freight, purchasing, and other indirect costs necessary to manufacture products. Biodiesel cost of goods sold also includes a credit for the one dollar per gallon BTC for blending biodiesel with petroleum diesel when in law. In December 2019, the tax credit was retroactively reinstated for all of 2018 and 2019, through December 31, 2022. See Note 3 for further discussion.
Distribution expense includes outbound freight costs, depreciation of distribution equipment, and other indirect costs necessary to distribute product.
Selling, general, and administrative expenses
Selling, general, and administrative expenses include personnel costs associated with sales, marketing, and administration; legal and related costs; consulting and professional service fees; advertising expenses; and other similar costs.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
Research and development expenses
Research and development expenses include direct salaries, depreciation of equipment, material expenditures, contractor fees, and other indirect costs. All costs identified as research and development costs are charged to expense when incurred.
Comprehensive income
Comprehensive income is comprised of net income and other comprehensive income (loss) (“OCI”). Comprehensive income comprises all changes in stockholders’ equity from transactions and other events and circumstances from non-owner sources. The Company’s OCI comprises unrealized gains and losses resulting from its investments in marketable debt securities classified as available-for-sale (see Note 7).
Unrealized gains and losses are determined using the specific identification method and are classified in OCI.
Income taxes
The income tax (benefit) provision is determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The provision for (benefit from) income taxes represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred taxes result from differences between the financial and tax bases of the Company's assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.
The Company recognizes income tax positions that meet the more likely than not threshold and accrues interest related to unrecognized income tax positions, which is recorded as a component of the income tax provision.
Recently adopted accounting standards
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." The amendments simplify the accounting for income taxes by removing certain exceptions for investments, intra-period allocations and interim calculations and adding guidance to reduce complexity in accounting for income taxes. The new standard was adopted on January 1, 2021 on a prospective basis and had an immaterial effect on the financials.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
Recently issued accounting pronouncements
Reference Rate Reform (ASU No. 2020-04)
In March 2020, the FASB issued an accounting standard update to provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions affected by reference rate reform, if certain criteria are met. The amendments in this update are effective for all entities from January 1, 2020 through December 31, 2022. The Company is in the process of evaluating the adoption of this optional accounting standards update as certain exceptions provided under this guidance may be applicable to future reference rate reform related transitions.
3) | Government tax credits |
Reinstatement of the Biodiesel Blenders' Tax Credit and Small Agri-Biodiesel Producer Tax Credit
The 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. When the tax credit is enacted and in effect, the Company is the blender of record and recognizes the credit as a reduction to cost of goods sold.
The Further Consolidated Appropriations Act of 2020 was passed by Congress and signed into law on December 20, 2019, retroactively reinstating the BTC for 2018 and 2019 and extending it through December 31, 2022. As this act was passed into law in 2019, the Company recognized its impact in 2019 for both periods within the Company’s 2019 financial results. The Company recorded a gross profit from the BTC of $57,872, that was comprised of $26,571 and $31,301 for 2019 and 2018, respectively. The BTC was in law throughout 2021 and 2020. Its impact was recognized as a component of gross profit in 2021 and 2020 as applicable sales were made.
As part of each law from which the BTC mentioned above was reinstated, small agri-biodiesel producers with production capacity not in excess of 60 million gallons were eligible for an additional income 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 and recognized $1,500 for 2021, 2020, and 2019 in the same accounting period as the benefit from the BTC as described above. The benefit of this credit is recognized as a component of income tax (benefit) provision.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
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 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 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 resulting from revenue recognized through bill-and-hold arrangements. The contract assets for 2021 and 2020 consist of unbilled revenue from only one customer and are recorded as accounts receivable in the consolidated balance sheets. Contract liabilities consist of advance payments related to material rights recorded as deferred revenue in the consolidated balance sheets. Increases to contract liabilities from cash received for a performance obligation of chemical segment plant expansions were $1,114 and $4,051 in 2021 and 2020, respectively. Contract liabilities are reduced as the Company transfers product to the customer under the renewal option approach. Revenue recognized in the chemical segment from the contract liability reductions were $3,824 and $4,520 in 2021 and 2020, respectively. These contract asset and liability balances are reported on the consolidated balance sheets on a contract-by-contract basis at the end of each reporting period.
The following table provides the balances of receivables, contract assets, and contract liabilities from contracts with customers.
Contract balances
Contract Assets and Liabilities | | December 31, | |
| | 2021 | | | 2020 | |
Trade receivables, included in accounts receivable* | | $ | 20,780 | | | $ | 12,279 | |
Contract assets, included in accounts receivable | | | 362 | | | | 808 | |
Contract liabilities, included in Deferred revenue - short-term | | | 5,944 | | | | 3,769 | |
Contract liabilities, included in Deferred revenue - long-term | | | 13,059 | | | | 17,943 | |
*Exclusive of the BTC of $8,232 and $8,300, respectively, and net of allowances for bad debt of $67 and $63, respectively, as of the dates noted.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
Transaction price allocated to the remaining performance obligations
As of December 31, 2021, approximately $19,003 of revenue is expected to be recognized in the future from remaining performance obligations. The Company expects to recognize this revenue ratably based upon the expected sales over the expected term of its long-term contracts which range from two to five years. Approximately 31% of this revenue is expected to be recognized over the next 12 months, and 69% is expected to be recognized between one and five years. These amounts are subject to change based upon changes in the estimated contract life, estimated quantities, and most-likely expected sales price over the contract life. See Note 2 for further information.
Disaggregation of revenue - contractual and non-contractual | | | | | | | | |
| | Twelve months ended | |
| | December 31, | |
| | 2021 | | | 2020 | |
Contract revenue from customers with > 1-year arrangement | | $ | 25,918 | | | $ | 25,831 | |
Contract revenue from customer with < 1-year arrangement | | | 295,246 | | | | 180,469 | |
Revenue from non-contractual arrangements | | | 222 | | | | 222 | |
BTC rebates | | | - | | | | (2,017 | ) |
Total revenue | | $ | 321,386 | | | $ | 204,505 | |
Timing of revenue | | | | | | | | |
| | Twelve months ended | |
| | December 31, | |
| | 2021 | | | 2020 | |
Bill-and-hold revenue | | $ | 34,695 | | | $ | 32,779 | |
Non-bill-and-hold revenue | | | 286,691 | | | | 171,726 | |
Total revenue | | $ | 321,386 | | | $ | 204,505 | |
Bill-and-hold transactions consisted of four specialty chemical customers in 2021, two in 2020, and three in 2019 whereby revenue was recognized in accordance with contractual agreements based on product produced, readied for use and loaded into customer provided containers. These sales were subject to written monthly purchase orders with revenue recognized upon production and loading into customer provided containers. The inventory was segregated from other Company inventory as it 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 transactions are similar to other specialty chemical customers. Sales revenue under bill-and-hold arrangements totaled $34,695, $32,779, and $51,700, for the years ended December 31, 2021, 2020, and 2019, respectively. Of the bill and hold sales revenue recognized, $3,154 and $2,628 had not been shipped for the years ended December 31, 2021 and 2020, respectively. These balances do not include contract assets that have not been billed or shipped as described above.
The Company’s revenues for the years ended December 31, 2021, 2020, and 2019 attributable to the United States and foreign countries (based upon the billing addresses of its customers) were as follows.
| | Twelve months ended December 31: | |
| | 2021 | | | 2020 | | | 2019 | |
United States | | $ | 320,148 | | | $ | 203,365 | | | $ | 203,470 | |
All Foreign Countries | | | 1,238 | | | | 1,140 | | | | 1,756 | |
Total | | $ | 321,386 | | | $ | 204,505 | | | $ | 205,226 | |
For the years ended December 31, 2021, 2020, and 2019, no revenues from a single foreign country were greater than 1% of total revenues.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
The carrying values of inventory were as follows as of December 31:
| | 2021 | | | 2020 | |
At average cost (approximates current cost) | | | | | | | | |
Finished goods | | $ | 12,132 | | | $ | 15,452 | |
Work in process | | | 462 | | | | 1,632 | |
Raw and indirect materials | | | 30,117 | | | | 22,674 | |
| | | 42,711 | | | | 39,758 | |
LIFO reserve | | | (15,791 | ) | | | (5,869 | ) |
Total inventory | | $ | 26,920 | | | $ | 33,889 | |
In 2021, a LIFO liquidation resulted in a decrease of $3,836 to "Cost of goods sold". In 2020, a LIFO liquidation resulted in a $424 increase to "Cost of goods sold" as the liquidation of prior year costs were higher as compared to 2020 costs.
6) | Derivative instruments |
Realized and unrealized gains and losses on derivative instruments and changes in fair value of the derivative instruments are recorded in the consolidated statements of income as a component of cost of goods sold and amounted to a loss of $10,377, gain of $4,379, and a loss of $1,301 for the years ended December 31, 2021, 2020, and 2019, respectively.
The volumes and carrying values of the Company’s derivative instruments were as follows at December 31:
| | Asset/ (Liability) | |
| | 2021 | | | 2020 | |
| | Contract Quantity | | | Fair Value | | | Contract Quantity | | | Fair Value | |
Regulated fixed price future commitments, included in other current assets (in thousand barrels) | | | 142 | | | $ | (485 | ) | | | 250 | | | $ | 124 | |
The margin account maintained with a broker to collateralize these derivative instruments carried an account balance of $1,684 and $933 at December 31, 2021 and 2020, respectively, and is classified as other current assets in the consolidated balance sheet.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
At December 31, 2021 and 2020, the Company had investments in certain marketable equity and debt securities which had a fair market value of $47,190 and $64,404, respectively. These investments are classified as current assets in the consolidated balance sheets.
The Company has designated the trust preferred securities as being available-for-sale. Accordingly, these securities were recorded at fair value of $3,902 and $3,940 at December 31, 2021 and 2020, respectively, with the unrealized gains of $226 and $264, net of taxes, as a component of stockholders’ equity.
For the years ended December 31, 2021, 2020, and 2019, in accordance with ASC 321, the change in the fair value of equity securities (preferred and other equity instruments) was reported as (loss) gain on marketable securities as a component of net income in the amount of $(904), $(246), and $6,281, respectively.
In 2021, 2020, and 2019, the Company recategorized a net gain of $0, $99, and $0, respectively, from accumulated other comprehensive income to a component of net income as a result of sales of available-for-sale securities.
As of December 31, 2021, the contractual maturities of debt securities with an adjusted cost basis of $3,676 and fair value of $3,902 were greater than 10 years.
8) | 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 the Company. Unobservable inputs are inputs that reflect the Company’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.
Marketable securities and derivative instruments were fair value measurements using inputs considered as Level 1. The Company had no Level 2 or Level 3 securities.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
9) | Property, plant, and equipment |
Property, plant, and equipment consisted of the following at December 31:
| | 2021 | | | 2020 | |
Land and land improvements | | $ | 5,924 | | | $ | 5,924 | |
Buildings and building equipment | | | 27,229 | | | | 27,187 | |
Machinery and equipment | | | 180,498 | | | | 179,923 | |
Construction in progress | | | 1,024 | | | | 256 | |
Accumulated depreciation | | | (131,774 | ) | | | (121,746 | ) |
Total | | $ | 82,901 | | | $ | 91,544 | |
Depreciation expense totaled $10,452, $11,150, and $12,087 for the years ended December 31, 2021, 2020, and 2019, respectively.
In April 2015, the Company acquired additional historical line space on a pipeline for $1,408. The acquired line space was recorded as an intangible asset with an indefinite life as there was no foreseeable limit on the time period over which it is expected to contribute to cash flows. In April of 2021, FutureFuel made the strategic decision to reduce its status as a regular shipper on the pipeline and sold a portion of its line space reducing the intangible asset value by $93. At that time it was also determined that the value of the remaining line space had declined. As a result, an impairment charge was recorded in Other Expense for $1,315 to further reduce the intangible asset carrying value to $0. The carrying value of the intangible asset was $0 and $1,408 as of December 31, 2021 and 2020, respectively.
Other assets primarily comprise supplies and parts which are not expected to be used in the twelve-month period subsequent to the consolidated balance sheet date. The balance related to these items totaled $4,425 and $4,127 at December 31, 2021 and 2020, respectively.
12) | Accrued expenses and other current liabilities |
Accrued expenses and other current liabilities consisted of the following at December 31:
| | 2021 | | | 2020 | |
Accrued employee liabilities | | $ | 3,347 | | | $ | 2,609 | |
Accrued property, franchise, motor fuel and other taxes | | | 1,912 | | | | 1,730 | |
Lease liability, current | | | 644 | | | | 491 | |
Other | | | 178 | | | | 247 | |
Total | | $ | 6,081 | | | $ | 5,077 | |
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
On March 30, 2020, FutureFuel, with FutureFuel Chemical as the borrower and certain of FutureFuel’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 five-year revolving credit facility in a dollar amount of up to $100,000, which includes a sublimit of $30,000 for letters of credit and $15,000 for swingline loans (collectively, the “Credit Facility”). The Credit Facility expires on March 30, 2025. The primary amendments from the Prior Credit Agreement were a reduction in the facility by $65,000, a reduction in the facility’s applicable interest rate by 0.25%, a reduction in the commitment fee, and elimination of the minimum consolidated fixed charge coverage ratio.
The interest rate floats at the following margins over LIBOR or base rate based upon the leverage ratio from time to time:
Consolidated Leverage Ratio | | Adjusted LIBOR Rate Loans and Letter of Credit Fee | | | Base Rate Loans | | | Commitment Fee | |
< 1.00:1.0 | | | | 1.00% | | | 0.00% | | | 0.15% | |
≥ 1.00:1.0 | And | < 1.50:1.0 | | 1.25% | | | 0.25% | | | 0.15% | |
≥ 1.50:1.0 | And | < 1.50:1.0 | | 1.50% | | | 0.50% | | | 0.20% | |
≥ 2.00:1.0 | And | < 1.50:1.0 | | 1.75% | | | 0.75% | | | 0.20% | |
≥ 2.50:1.0 | | | | 2.00% | | | 1.00% | | | 0.25% | |
The terms of the Credit Facility contain certain negative covenants and conditions including a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio.
There were no borrowings under the Credit Agreement at December 31, 2021 or 2020.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted to provide emergency assistance for individuals, families and businesses affected by the coronavirus pandemic. Under the CARES Act, certain subsidiaries of FutureFuel entered into a loan with Saint Louis Bank pursuant to the Paycheck Protection Program (“PPP”) totaling $8,180 on April 10, 2020. At the time that FutureFuel applied for the PPP loan, it qualified to receive the funds pursuant to the then published eligibility requirements. Receipt of the PPP loan ensured continued operation as part of the nation’s critical infrastructure. However, the Small Business Administration and Treasury Department subsequently issued new guidance that cast doubt on the ability of public companies to qualify for a PPP loan. As a result, FutureFuel repaid the full amount of the PPP loan on May 5, 2020.
At December 31, 2021 and 2020, the Company had $86 and $119 outstanding with a domestic financing company for computer technology under a 3-year financing agreement.
14) | Asset retirement obligations and environmental reserves |
The Batesville plant generates hazardous and non-hazardous wastes, the treatment, storage, transportation, and disposal of which are regulated by various governmental agencies. In addition, the Batesville plant may be required to incur costs for environmental and closure and post-closure costs under the Resource Conservation and Recovery Act. The Company’s liability for asset retirement obligations and environmental contingencies was $1,363 and $1,331 as of December 31, 2021 and 2020, respectively. These amounts are recorded in other noncurrent liabilities in the accompanying consolidated balance sheet. The accretion expense for 2021 and 2020 was $32 and $43, respectively. The periodic review of the asset retirement obligation calculations resulted in an addition to the reserve of $0 in 2021 and 2020.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
15) | Lease commitments and purchase obligations |
The Company 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 or residual value guarantees. All railcar leases are direct, and no subleases exist. The Company determines lease existence and classification at inception when an agreement conveys the right to control the identified property for a period of time in exchange for consideration. These leases have remaining terms from one to two years with a weighted average remaining term of 1.7 years. As operating leases do not provide a readily determinable implicit interest rate, the Company uses an incremental borrowing rate based on information available at the commencement date in determining present value of the lease payments.
Following are supplemental income statement and cash flow information related to leases.
| | Twelve Months Ended | |
| | December 31, | |
| | 2021 | | | 2020 | |
Operating lease expense | | $ | 887 | | | $ | 841 | |
Short-term lease expense | | $ | 23 | | | $ | 106 | |
Cash paid for operating leases | | $ | 887 | | | $ | 841 | |
Right of use assets obtained in exchange for lease obligations | | $ | 269 | | | $ | 442 | |
Weighted average discount rate, per annum | | | 3.6 | % | | | 3.7 | % |
On December 31, 2021 and 2020, a ROU asset was reported as other noncurrent assets of $956 and $1,311, other current liabilities of $644 and $491, and other noncurrent liabilities of $312 and $820, respectively.
Following are maturities of lease liabilities at December 31, 2021.
2022 | | $ | 669 | |
2023 | | | 294 | |
2024 | | | 25 | |
Total | | | 988 | |
Less: imputed interest | | | (32 | ) |
Present value of lease liabilities | | $ | 956 | |
Purchase obligations
The Company has entered into contracts for the purchase of goods and services including contracts for feedstocks for biodiesel, expansion of the Company’s specialty chemicals segment, and related infrastructure with less than one year terms.
The Company holds one non-cancelable obligation for software maintenance with payment obligations presented as follows.
2022 | | $ | 37 | |
2023 - 2026 | | | 117 | |
Total | | $ | 154 | |
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
16) | Income tax (benefit) provision |
The following table summarizes the income tax (benefit) provision for the years ended:
| | 2021 | | | 2020 | | | 2019 | |
Income before taxes - U.S. | | $ | 15,930 | | | $ | 31,778 | | | $ | 79,795 | |
Income tax provision: | | | | | | | | | | | | |
Federal | | | | | | | | | | | | |
Current | | | 142 | | | | (14,234 | ) | | | (2,811 | ) |
Deferred | | | (10,417 | ) | | | 1,120 | | | | (4,006 | ) |
State and other | | | | | | | | | | | | |
Current | | | (13 | ) | | | 59 | | | | (430 | ) |
Deferred | | | (37 | ) | | | (1, 731 | ) | | | (1,139 | ) |
Total | | $ | (10,325 | ) | | $ | (14,786 | ) | | $ | (8,386 | ) |
Differences between the income tax (benefit) provision computed using the U.S. federal statutory income tax rate were as follows:
| | 2021 | | | 2020 | | | 2019 | |
Amount computed using the statutory rate of 21% for 2021, 2020, and 2019 | | | 21.0 | % | | | 21.0 | % | | | 21.0 | % |
Agri-biodiesel production credit | | | (7.4 | ) | | | (3.7 | ) | | | (3.0 | ) |
Federal BTC benefit | | | (75.2 | ) | | | (38.7 | ) | | | (23.4 | ) |
State BTC benefit | | | (8.9 | ) | | | (3.8 | ) | | | (5.8 | ) |
Credit for increasing research activities | | | (0.7 | ) | | | (0.5 | ) | | | (0.2 | ) |
Dividends received deduction | | | (1.6 | ) | | | (0.9 | ) | | | (0.4 | ) |
State income taxes, net | | | 3.5 | | | | (0.5 | ) | | | 4.0 | |
State research credits | | | - | | | | (1.0 | ) | | | (0.9 | ) |
Deferred state rate change | | | 5.0 | | | | - | | | | (1.6 | ) |
CARES Act | | | - | | | | (17.4 | ) | | | - | |
Other | | | (0.5 | ) | | | (1.0 | ) | | | (0.2 | ) |
Income tax (benefit) provision | | | (64.8 | )% | | | (46.5 | )% | | | (10.5 | )% |
The income tax benefit in 2021 is $10,325 or an effective tax rate of (64.8%) as compared to an income tax benefit of $14,786 or an effective tax rate of (46.5%) in 2020 and an income tax benefit of $8,386 or an effective tax rate of (10.5%) in 2019.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (Pub.L. 116-136) (“CARES Act”). The CARES Act, among other things, provides that Net Operating Losses (“NOLs”) arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 shall be treated as a carryback available to offset 100% of taxable income in each of the 5 preceding taxable years unless the taxpayer elects to forego the carryback. The Company’s effective tax rate for the year 2020 was positively impacted by its ability to carry back both its 2019 and 2020 federal NOLs in full to tax years with 35% marginal tax rates, rather than forward to years with anticipated 21% tax rates. In the fourth quarter of 2020, the Company filed a refund claim of $7,695 and accrued an additional refund claim of $1,211, subsequently filed in January 2021, relating to the carryback of its NOL generated in 2019. Refunds in the amount of $7,695 were subsequently received in 2021; the $1,211 remains outstanding as of December 31, 2021. In the fourth quarter of 2021, the Company filed a refund claim of $8,463 relating to the carryback of its NOL generated in 2020. None of these refunds have been received as of December 31, 2021. States in which the Company conducts the majority of its business have not conformed to the CARES Act’s enhanced NOL carryback provisions, and the anticipated benefits of these state NOL carryforwards are accordingly classified as deferred tax assets.
On December 20, 2019 certain tax credits and incentives were reinstated and retroactively extended for 2018 and 2019 and further extended through December 31, 2022, the most significant of which were the BTC and Small Agri-biodiesel Producer Tax Credit. Based on technical guidance from the Internal Revenue Service, the Company excludes the portion of the BTC not used to satisfy excise tax liabilities from income.
The Company’s effective tax rates for the years 2021 and 2020 reflect the positive effect of the BTC and Small Agri-biodiesel Producer Tax Credit. The Company’s effective tax rate for the year 2019 reflected the positive effect of the reinstatement of these credits for both 2018 and 2019. See Note 3 for a discussion of the impact of the BTC for the years ended December 31, 2021, 2020, and 2019. The 2019 effective tax rate was also favorably impacted by the Company being granted a retroactive research and development credit for a prior year in the state of Arkansas.
The Company’s 2021 and 2019 effective tax rates reflect one-time benefits from state legislation enacted during each year which apply a lower tax rate to future reversals of deferred tax liabilities. Additionally, the 2021 effective tax rate reflects the negative impact to the Company’s overall state income tax position of its 2021 decision to phase out its shipments on the petroleum products common carrier pipelines as discussed at Note 10. This operational change shifts the Company’s business among various states such that its net deferred tax liabilities will be realized at higher rates.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
The significant components of deferred tax assets and liabilities were as follows as of December 31:
| | 2021 | | | 2020 | |
Deferred tax assets | | | | | | | | |
Compensation | | $ | 427 | | | $ | 270 | |
Inventory reserves | | | 685 | | | | 729 | |
Self-insurance | | | 100 | | | | 64 | |
Asset retirement obligation | | | 314 | | | | 291 | |
Deferred revenue | | | 5,295 | | | | 5,021 | |
Federal net operating loss carryforwards | | | 5,428 | | | | - | |
State net operating loss carryforwards | | | 2,311 | | | | 1,891 | |
Accrued expenses | | | 759 | | | | - | |
Stock based compensation | | | 14 | | | | 23 | |
Federal credit carryforwards | | | 3,598 | | | | 1,659 | |
State credit carryforwards | | | 676 | | | | 680 | |
Derivative instruments | | | 102 | | | | - | |
Capital loss carryforwards | | | 1,084 | | | | 1,225 | |
Intangible asset impairment | | | 168 | | | | - | |
Total deferred tax assets | | | 20,961 | | | | 11,853 | |
Deferred tax liabilities | | | | | | | | |
Available for sale securities | | | (47 | ) | | | (56 | ) |
LIFO inventory | | | (2,589 | ) | | | (2,748 | ) |
Depreciation | | | (18,266 | ) | | | (19,309 | ) |
Trading securities | | | (1,090 | ) | | | (1,285 | ) |
Prepaid expenses | | | (839 | ) | | | (701 | ) |
Derivative instruments | | | - | | | | (26 | ) |
Other | | | - | | | | (60 | ) |
Total deferred tax liabilities | | | (22,831 | ) | | | (24,185 | ) |
Net deferred tax liabilities | | $ | (1,870 | ) | | $ | (12,332 | ) |
The federal net operating loss carryforward as of December 31, 2021 represents the loss generated in 2021 and is available to reduce federal taxable income over an indefinite period. Utilization of this carryforward is limited to 80% of taxable income in any given year. State net operating loss carryforwards reflect losses generated in 2016 and 2019 through 2021 for state income tax purposes and have varying lives, with the majority expiring in 2024 and 2028.
Federal tax credit carryforwards include primarily the Small Agri-biodiesel Producer Credit generated in 2020 and 2021 and expiring in 2040 and 2041. State credit carryforwards comprise Arkansas In-house Research Credits generated in 2019 and 2020, expiring in 2028 and 2029.
Capital loss carryforwards were generated in 2019 and 2020 and will expire in 2024 and 2025. Amounts recorded are at their anticipated realizable values after application of an immaterial valuation allowance.
The following table summarizes the Company’s unrecognized tax positions.
| | 2021 | | | 2020 | | | 2019 | |
Balance at January 1 | | $ | - | | | $ | - | | | $ | 2,804 | |
Increases to tax positions taken in the current year | | | - | | | | - | | | | - | |
Increases to tax positions taken in a prior year | | | - | | | | - | | | | - | |
Decrease due to resolution of tax positions taken in a prior year | | | - | | | | - | | | | (2,804 | ) |
Balance at December 31 | | $ | - | | | $ | - | | | $ | - | |
The Company does not expect its unrecognized tax positions to change significantly over the next 12 months.
The Company records interest expense (income) and penalties, net, as a component of income tax (benefit) provision and had accrued interest and penalties of ($60), $27, and ($557) for December 31, 2021, 2020, and 2019, respectively. Liabilities for accrued interest and tax penalties on unrecognized tax benefits were $0 at both December 31, 2021 and 2020, respectively.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and with various state jurisdictions. In general, the Company is subject to U.S., state, and local examinations by tax authorities from 2017 forward. The Internal Revenue Service is currently auditing the Company’s 2018 federal return as part of the Joint Committee on Taxation's review of the Company's 2019 loss carryback claim.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
In the year ended December 31, 2021, 2020 and 2019, the Company used the treasury method in computing earnings per share as all shares with participating security holders had vested.
There were no outstanding service-based restricted stock units for the year ended December 31, 2021, 2020 or 2019.
Basic and diluted earnings per common share were computed as follows:
| | For the twelve months ended December 31: | |
| | 2021 | | | 2020 | | | 2019 | |
Numerator: | | | | | | | | | | | | |
Net income | | $ | 26,255 | | | $ | 46,564 | | | $ | 88,181 | |
Denominator: | | | | | | | | | | | | |
Weighted average shares outstanding – basic | | | 43,756,065 | | | | 43,743,243 | | | | 43,743,243 | |
Effect of dilutive securities: | | | | | | | | | | | | |
Stock options | | | 48 | | | | 907 | | | | 1,433 | |
Weighted average shares outstanding – diluted | | | 43,756,113 | | | | 43,744,150 | | | | 43,744,676 | |
| | | | | | | | | | | | |
Basic earnings per share | | $ | 0.60 | | | $ | 1.06 | | | $ | 2.02 | |
Diluted earnings per share | | $ | 0.60 | | | $ | 1.06 | | | $ | 2.02 | |
Certain options to purchase the Company’s common stock were not included in the computation of diluted earnings per share for the years ended December 31, 2021, 2020 and 2019 because they were anti-dilutive in the period. The weighted number of options excluded on this basis was 28,953, 43,500, and 35,000, respectively.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
18) | Stock-based compensation |
The Board of Directors of the Company adopted an omnibus incentive plan which was approved by the shareholders of the Company at its 2017 annual shareholder meeting on September 7, 2017 (the “Incentive Plan”). The purpose of the plan is to:
| ● | Encourage ownership in the Company by key personnel whose long-term employment with or engagement by the Company or its subsidiaries is considered essential to its continued progress and, thereby, encourage recipients to act in the Company’s shareholders’ interests and share in its success; |
| ● | Encourage such persons to remain in the Company’s employ or in the employ of its subsidiaries; and |
| ● | Provide incentives to persons who are not the Company employees to promote the Company’s success. |
The Incentive Plan authorizes the Company to issue stock options (including incentive stock options and nonqualified stock options), stock awards, and stock appreciation rights. Eligible participants in the plan include: (i) members of the Company’s board of directors and its executive officers; (ii) regular, active employees of the Company and any of its subsidiaries; and (iii) persons engaged by the Company or any of its subsidiaries to render services to the Company or its subsidiaries as an advisor or consultant.
Awards under the Incentive Plan are limited to shares of the Company’s common stock, which may be shares acquired by the Company, including shares purchased in the open market, or authorized but un-issued shares. Awards are limited to 10% of the issued and outstanding shares of the Company’s common stock in the aggregate.
The Incentive Plan became effective upon its approval by the Company’s shareholders on September 7, 2017 and continues in effect for a term of ten years thereafter unless amended and extended by the Company or unless otherwise terminated.
The Company recognizes compensation expense in its financial statements for stock-based options based upon the grant-date fair value over the requisite service period.
No stock awards were issued in 2021, 2020 or 2019.
No stock options were granted under the Incentive Plan in 2021. In January 2020 and September 2019, the Company granted a total of 24,000 and 10,000 stock options, respectively, to the Chief Operating Officer and a new member of the Board of Directors in each period, also respectively. The options awarded in each of the years have an exercise price equal to the mean between the highest and lowest quoted sales prices for the Company’s common stock as of the grant date as reported by the New York Stock Exchange. All options awarded in 2020 vested immediately upon grant and expire in January 2025. All options awarded in 2019 vested immediately upon grant and expire in September 2024. The Company has used the Black Scholes Merton option pricing model, which relies on certain assumptions, to estimate the fair value of the options it granted. The weighted average fair value of options granted was $2.05 and $2.24 per option in 2020 and 2019, respectively.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
All of the options exercised in 2021 were exercised on a cash basis. There were no stock options exercised in 2020 or 2019.
The assumptions used in the determination of the fair value of the options granted are provided in the following table:
Assumptions | | 2021 Options | | | January 2020 Options | | | September 2019 Options | |
Expected volatility rate | | | n/a | | | | 31.53 | % | | | 31.28 | % |
Expected dividend yield | | | n/a | | | | 2.08 | % | | | 1.99 | % |
Risk-free interest rate | | | n/a | | | | 1.6 | % | | | 1.71 | % |
Expected forfeiture rate | | | n/a | | | | 0.00 | % | | | 0.00 | % |
Expected term in years | | | n/a | | | | 2.5 | | | | 2.6 | |
The volatility rate for the options granted in 2020 and 2019 were derived from the historical stock price volatility of the Company’s common stock over the same time period as the expected term of each stock option award. The volatility rate is derived by a mathematical formula using the daily closing stock price data over the expected term.
The expected dividend yield is calculated using the Company’s expected dividend amount at the date of the option grant over the expected term divided by the fair market value of the Company’s common stock.
For the years ended December 31, 2021, 2020, and 2019, total share-based compensation expense (before tax) totaled $0, $49, and $21, respectively. In the years ended December 31, 2020 and 2019, this balance was recorded as an element of selling, general, and administrative expenses. As of December 31, 2021 and 2020, there was no unrecognized compensation expense related to stock options.
A summary of the activity of the Company’s stock options and awards for the period beginning January 1, 2019 and ending December 31, 2021 is presented below.
| | | | | | Weighted Average | |
| | Options | | | Exercise Price | |
Outstanding at January 1, 2019 | | | 40,000 | | | $ | 14.55 | |
Granted | | | 10,000 | | | $ | 12.07 | |
Exercised | | | - | | | $ | - | |
Canceled, forfeited, or expired | | | - | | | $ | - | |
Outstanding at December 31, 2019 | | | 50,000 | | | $ | 14.05 | |
Granted | | | 24,000 | | | $ | 11.56 | |
Exercised | | | - | | | $ | - | |
Canceled, forfeited, or expired | | | (30,000 | ) | | $ | 13.99 | |
Outstanding at December 31, 2020 | | | 44,000 | | | $ | 12.73 | |
Granted | | | - | | | $ | - | |
Exercised | | | (20,000 | ) | | $ | 11.56 | |
Canceled, forfeited, or expired | | | - | | | $ | - | |
Outstanding at December 31, 2021 | | | 24,000 | | | $ | 13.71 | |
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
There were 4,330,167 options available for grant under the Incentive Plan and no further awards available under the Prior Plan at December 31, 2021. The following table provides the remaining contractual term and weighted average exercise prices of stock options outstanding and exercisable from the Incentive Plan at December 31, 2021.
| | | | Options Outstanding | | | Options Exercisable | |
| | | | | | | | Weighted | | | | | | | | | | | | | |
| | | | Number | | | Average | | | Weighted | | | Number | | | Weighted | |
| | | | Outstanding at | | | Remaining | | | Average | | | Exercisable at | | | Average | |
Exercise | | | December 31, | | | Contractual | | | Exercise | | | December 31, | | | Exercise | |
Price | | | 2021 | | | Life | | | Price | | | 2021 | | | Price | |
$ | 16.21 | | | | 10,000 | | | | 1.81 | | | $ | 16.21 | | | | 10,000 | | | $ | 16.21 | |
$ | 12.07 | | | | 10,000 | | | | 2.71 | | | $ | 12.07 | | | | 10,000 | | | $ | 12.07 | |
$ | 11.56 | | | | 4,000 | | | | 3.06 | | | $ | 11.56 | | | | 4,000 | | | $ | 11.56 | |
| | | | | 24,000 | | | | 2.39 | | | $ | 13.71 | | | | 24,000 | | | $ | 13.71 | |
The aggregate intrinsic values of total options outstanding and exercisable at December 31, 2021 and 2020 were $0 and $34, respectively. Intrinsic value is the amount by which the last trade price of the common stock closest to December 31, 2021 and 2020, respectively, exceeded the exercise price of the options granted.
Mr. Paul A. Novelly, executive chairman of the board, or his affiliates are entitled to demand that the Company register under the Securities Act of 1933, as amended (or the “Securities Act”), the resale of certain shares of the Company’s common stock beneficially owned by Mr. Novelly or his affiliates (including St. Albans Global Management, Limited Partnership, LLLP). If Mr. Novelly or his affiliates exercise their registration rights with respect to all of their shares of the Company’s common stock, there will be an additional 17,725,100 available for trading in the public market.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
20) | Employee benefit plans |
Defined contribution savings plan
The Company currently offers its employees a company 401(k) matching savings plan, which covers substantially all employees. Under this plan, the Company matches the amount of eligible employees’ contributions, subject to specified limits, up to 6% of earnings. Company contributions totaled $1,770, $1,906, and $1,771 for the years ended December 31, 2021, 2020, and 2019, respectively.
21) | Related party transactions |
The Company enters into transactions with companies affiliated with or controlled by a director or significant stockholder. Revenues, expenses, accounts receivable, prepaid amounts, and unpaid amounts related to these transactions are captured on the consolidated financial statements as related party line items. These related party transactions are summarized in the following table and further described below.
Related party balance sheet accounts
| | 2021 | | | 2020 | |
Accounts receivable | | | | | | | | |
Biodiesel, petrodiesel, blends and other petroleum products | | $ | 58 | | | $ | 1,426 | |
Total accounts receivable | | $ | 58 | | | $ | 1,426 | |
Prepaid expenses | | | | | | | | |
Administrative services and other | | $ | 4 | | | $ | - | |
Total prepaid expenses | | $ | 4 | | | $ | - | |
Accounts payable | | | | | | | | |
Natural gas and fuel purchases | | $ | 7,900 | | | $ | 973 | |
Travel and administrative services | | $ | 11 | | | $ | 11 | |
Total accounts payable | | $ | 7,911 | | | $ | 984 | |
Accrued liabilities | | | | | | | | |
Travel and administrative services | | $ | 1 | | | $ | - | |
Total accrued liabilities | | $ | 1 | | | $ | - | |
Related party income statement accounts
| | For the years ended December 31: | |
| | 2021 | | | 2020 | | | 2019 | |
Revenues | | | | | | | | | | | | |
Biodiesel, petrodiesel, blends and other petroleum products | | $ | 1,261 | | | $ | 1,976 | | | $ | 3,178 | |
Total revenues | | $ | 1,261 | | | $ | 1,976 | | | $ | 3,178 | |
Cost of goods sold | | | | | | | | | | | | |
Biodiesel, petrodiesel, blends, and other petroleum products | | $ | 5,233 | | | $ | 3,865 | | | $ | 12,647 | |
Natural gas purchases | | | 11,360 | | | | 3,025 | | | | 4,298 | |
Total cost of goods sold | | $ | 16,593 | | | $ | 6,890 | | | $ | 16,945 | |
Distribution | | | | | | | | | | | | |
Distribution and related services | | $ | 176 | | | $ | 177 | | | $ | 181 | |
Total distribution | | $ | 176 | | | $ | 177 | | | $ | 181 | |
Selling, general and administrative expenses | | | | | | | | | | | | |
Commodity trading advisory fees | | $ | 308 | | | $ | 308 | | | $ | 307 | |
Travel and administrative services | | | 221 | | | | 192 | | | | 280 | |
Income tax, consulting services and other | | | 120 | | | | 120 | | | | 120 | |
Total selling, general, and administrative expenses | | $ | 649 | | | $ | 620 | | | $ | 707 | |
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
Biodiesel, petrodiesel, blends, and other petroleum products
The Company enters into agreements to buy and sell biofuels (biodiesel, petrodiesel, biodiesel/petrodiesel blends, RINs, and biodiesel production byproducts) and other petroleum products, such as gasoline, with an affiliate from time to time. Such agreements are priced at the then-current market price of the product as determined from bids from other customers and/or market pricing services. Cost of goods sold related to these sales includes variable costs and allocated fixed costs. The revenue amounts presented in the table above result when the Company sells biodiesel, petrodiesel, blends, and other petroleum products to a related party regardless of who the material was purchased from. Likewise, cost of goods sold amounts result when biodiesel, petrodiesel, blends, and other petroleum products are purchased from a related party regardless of who the material was sold to.
Natural gas purchases
The Company uses natural gas to generate steam for its manufacturing process and to support certain of its air and waste treatment utilities. This natural gas is purchased through an affiliate provider of natural gas marketing services. Expenses related to these purchases include the cost of the natural gas only; transportation charges are paid to an independent third party. The natural gas matter as discussed in Note 24, Legal Matters, is in reference to the natural gas supplier, not the related party.
Distribution and related services
Distribution and related services comprise barge transportation and related unloading charges for petrodiesel that were arranged and paid for by an affiliate and subsequently rebilled to the Company. Additionally, the Company leases oil storage capacity from an affiliate under a storage and throughput agreement. This agreement provides for the storage of biodiesel, diesel or biodiesel/petrodiesel blends, methanol, and biodiesel feedstocks in above-ground storage tankage at designated facilities of the affiliate. Expenses related to this agreement include monthly lease charges, generally on a per-barrel basis, and associated heating, throughput, and other customary terminalling charges.
Commodity trading advisory fees
The Company entered into a commodity trading advisory agreement with an affiliate. Pursuant to the terms of this agreement, the affiliate provides advice to the Company concerning the purchase, sale, exchange, conversion, and/or hedging of commodities as requested from time to time.
Travel and administrative services
The Company reimburses an affiliate for legal, trading, travel and other administrative services incurred on its behalf. Such reimbursement is performed at cost with the affiliate realizing no profit on the transaction.
Income tax and consulting services
An affiliate provides professional services to the Company, primarily in the area of income tax preparation and consulting. The Company also receives certain finance and accounting expertise from this affiliate as requested. Expenses related to these services comprise an agreed quarterly fee plus reimbursement of expense, at cost and are reported as selling, general, and administrative expenses.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
The Company has two reportable segments organized along similar product lines – chemicals and biofuels. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 2.
Chemicals
The Company’s chemicals segment manufactures diversified chemical products that are sold to third party customers. This segment comprises two product groups: “custom manufacturing” (manufacturing chemicals for specific customers) and “performance chemicals” (multi-customer specialty chemicals).
Biofuels
The Company’s biofuels segment manufactures and markets biodiesel. Biodiesel revenues are generated through the sale of biodiesel to customers through the Company’s distribution network at the Batesville plant, through distribution facilities available at leased oil storage facilities, and through a network of remotely located tanks. Results of the biofuels business segment also reflect the sale of biodiesel blends with petrodiesel, petrodiesel with no biodiesel added, RINs, biodiesel production byproducts, and the purchase and sale of other petroleum products on common carrier pipelines.
Summary of business by segment
| | Twelve months ended December 31, | |
| | 2021 | | | 2020 | | | 2019 | |
Revenue | | | | | | | | | | | | |
Custom chemicals | | $ | 50,675 | | | $ | 63,894 | | | $ | 90,962 | |
Performance chemicals | | | 16,867 | | | | 15,284 | | | | 13,865 | |
Chemicals revenue | | | 67,542 | | | | 79,178 | | | | 104,827 | |
Biofuels revenue | | | 253,844 | | | | 125,327 | | | | 100,399 | |
Total Revenue | | $ | 321,386 | | | $ | 204,505 | | | $ | 205,226 | |
| | | | | | | | | | | | |
Segment gross profit | | | | | | | | | | | | |
Chemicals | | $ | 13,970 | | | $ | 25,518 | | | $ | 29,923 | |
Biofuels | | | 9,567 | | | | 5,789 | | | | 44,216 | |
Total gross profit | | $ | 23,537 | | | $ | 31,307 | | | $ | 74,139 | |
Depreciation is allocated to segment cost of goods sold based on plant usage. The total assets and capital expenditures of the Company 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.
Notes to Consolidated Financial Statements of FutureFuel Corp.
(Dollars in thousands, except per share amounts)
23) | Quarterly financial information (unaudited) |
| | Quarter | |
| | 1st | | | 2nd | | | 3rd | | | 4th | |
2021 | | | | | | | | | | | | | | | | |
Revenues | | $ | 41,516 | | | $ | 74,118 | | | $ | 98,682 | | | $ | 107,070 | |
Gross (loss) profit | | $ | (10,736 | ) | | $ | (43 | ) | | $ | 8,192 | | | $ | 26,124 | |
Net (loss) income | | $ | (8,773 | ) | | $ | 3,481 | | | $ | 9,202 | | | $ | 22,345 | |
Net income per common share: | | | | | | | | | | | | | | | | |
Basic | | $ | (0.20 | ) | | $ | 0.08 | | | $ | 0.21 | | | $ | 0.51 | |
Diluted | | $ | (0.20 | ) | | $ | 0.08 | | | $ | 0.21 | | | $ | 0.51 | |
| | | | | | | | | | | | | | | | |
2020 | | | | | | | | | | | | | | | | |
Revenues | | $ | 53,082 | | | $ | 47,422 | | | $ | 54,138 | | | $ | 49,863 | |
Gross profit | | $ | 16,399 | | | $ | 911 | | | $ | 6,446 | | | $ | 7,551 | |
Net income | | $ | 19,043 | | | $ | 15,159 | | | $ | 6,890 | | | $ | 5,472 | |
Net income per common share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.44 | | | $ | 0.35 | | | $ | 0.16 | | | $ | 0.13 | |
Diluted | | $ | 0.44 | | | $ | 0.35 | | | $ | 0.16 | | | $ | 0.13 | |
Earnings per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly amounts will not necessarily equal the total for the year.
The Company is not a party to, nor is any of its property subject to, any material pending legal proceedings, other than ordinary routine litigation incidental to its business. However, from time to time, the Company may be a party to, or a target of, lawsuits, claims, investigations, and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which the Company expects to be handled and defended in the ordinary course of business. While the Company is unable to predict the outcome of any matters currently pending, the Company does not believe 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. However, adverse developments could negatively impact earnings or cash flows in future periods.
As a result of the extraordinary increase in natural gas prices in February 2021, the Attorney General of Arkansas launched a civil investigative demand against several natural gas suppliers. At this time the Company is disputing the February 2021 natural gas bill and payment thereof is pending further investigation.
The natural gas expense was a component of Cost of goods sold-related parties in the Consolidated Statements of Operations and Comprehensive Income in the period ended December 31, 2021. However, as discussed in Note 21, Related Party Transactions, the "ultimate" natural gas supplier is not a related party of FutureFuel.
During the twelve months ended December 31, 2020, the Company reached a legal resolution of a prior year contractual matter for which an accrual of $8,350 was relieved as other income.