Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations of FutureFuel Corp. (“FutureFuel”, “the Company”, “we”, or “our”) should be read together with our consolidated financial statements, including the notes thereto, set forth herein. This discussion contains forward-looking statements that reflect our current views with respect to future events and financial performance. Actual results may differ materially from those anticipated in these forward-looking statements. See “Forward-Looking Information” below for additional discussion regarding risks associated with forward-looking statements.
Unless otherwise stated, all dollar amounts are in thousands.
Overview
Our Company is managed and reported in two reporting segments: chemicals and biofuels. Within the chemical segment are two product groupings: custom chemicals and performance chemicals. The custom product group is composed of specialty chemicals manufactured for a single customer whereas the performance product group is composed of chemicals manufactured for multiple customers. The biofuel segment is composed of one product group. Management believes that the diversity of each segment strengthens the company in the ability to utilize resources and is committed to growing each segment.
Within the United States Environmental Protection Agency (“EPA”) Renewable Fuel Standard (“RFS”), we generate 1.5 Renewable Identification Numbers (“RINs”) for each gallon of biodiesel sold in the United States with a classification of a D4 or D6 RIN. RINs are used to monitor the level of renewable fuel traded in a given year in accordance with RFS 2 within the EPA moderated transaction system. We do not assign cost of goods sold to the generation of RINs as the physical fuel generates the full cost. As of September 30, 2024, we held 5.0 million D4 and D6 RINs with a fair market value of $2,556. Comparatively, as of September 30, 2023, FutureFuel held 4.2 million RINs with a fair market value of $6,971, and at December 31, 2023, 4.3 million RINs were held with a fair market value of $6,567.
15
Summary of Financial Results
Set forth below is a summary of certain consolidated financial information for the periods indicated.
Three Months Ended September 30,
Dollar
%
2024
2023
Change
Change
Revenue
$
51,140
$
116,752
$
(65,612
)
(56
)%
(Loss) income from operations
$
(2,888
)
$
297
$
(3,185
)
na
Net (loss) income
$
(1,195
)
$
2,776
$
(3,971
)
na
(Loss) earnings per common share:
Basic
$
(0.03
)
$
0.06
$
(0.09
)
na
Diluted
$
(0.03
)
$
0.06
$
(0.09
)
na
Adjusted EBITDA
$
(973
)
$
9,659
$
(10,632
)
na
Nine Months Ended September 30,
Dollar
%
2024
2023
Change
Change
Revenue
$
181,830
$
276,241
$
(94,411
)
(34
)%
Income from operations
$
4,761
$
6,965
$
(2,204
)
(32
)%
Net income
$
12,706
$
13,998
$
(1,292
)
(9
)%
Earnings per common share:
Basic
$
0.29
$
0.32
$
(0.03
)
(9
)%
Diluted
$
0.29
$
0.32
$
(0.03
)
(9
)%
Adjusted EBITDA
$
13,042
$
18,230
$
(5,188
)
(28
)%
We use adjusted EBITDA as a key operating metric to measure both performance and liquidity. Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA is not a substitute for operating income, net income, or cash flow from operating activities (each as determined in accordance with GAAP) as a measure of performance or liquidity. Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of results as reported under GAAP. We define adjusted EBITDA as net income before interest, income taxes, depreciation, and amortization expenses, excluding, when applicable, non-cash stock-based compensation expenses, public offering expenses, acquisition-related transaction costs, purchase accounting adjustments, losses on disposal of property and equipment, non-cash gains or losses on derivative instruments, and other non-operating income or expenses. Information relating to adjusted EBITDA is provided so that investors have the same data that we employ in assessing the overall operation and liquidity of our business. Our calculation of adjusted EBITDA may be different from similarly titled measures used by other companies; therefore, the results of our calculation are not necessarily comparable to the results of other companies.
Adjusted EBITDA allows our chief operating decision makers to assess the performance and liquidity of our business on a consolidated basis to assess the ability of our operating segments to produce operating cash flow to fund working capital needs, to fund capital expenditures, and to pay dividends. In particular, our management believes that adjusted EBITDA permits a comparative assessment of our operating performance and liquidity, relative to performance and liquidity based on GAAP results. This measure isolates the effects of certain items, including depreciation and amortization (which may vary among our operating segments without any correlation to their underlying operating performance), non-cash stock-based compensation expense (which is a non-cash expense that varies widely among similar companies), and non-cash gains and losses on derivative instruments (which can cause net income to appear volatile from period to period relative to the sale of the underlying physical product).
16
We utilize commodity derivative instruments primarily to attempt to mitigate the effect of commodity price volatility and to provide greater certainty of cash flows associated with sales of our commodities. We utilize mark-to-market accounting to account for these instruments. Thus, our results in any given period can be impacted, sometimes significantly, by changes in market prices relative to our contract price along with the timing of the valuation change in the derivative instruments relative to the sale of biofuel. We include the mark-to-market or non-cash portion of this item as an adjustment to adjusted EBITDA as we believe it provides a relevant indicator of the underlying performance of our business in a given period.
Additionally, we held marketable securities of certain debt securities (trust preferred stock) and in preferred stock and other equity instruments during the nine months ended September 30, 2023, but sold all marketable security investments during the three months ended June 30, 2023. The realized and unrealized gains and losses on these marketable securities fluctuated from period to period. We included this item as an adjustment to adjusted EBITDA in the prior year period as we believed it provided a relevant indicator of the underlying performance of our business.
The following table reconciles net income, the most directly comparable GAAP performance financial measure, with adjusted EBITDA.
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Net (loss) income
$
(1,195
)
$
2,776
$
12,706
$
13,998
Depreciation
2,163
2,581
6,923
7,736
Non-cash stock-based compensation
91
-
113
-
Interest and dividend income
(1,830
)
(2,527
)
(6,151
)
(6,595
)
Non-cash interest expense and amortization of deferred financing costs
34
35
103
102
Loss on disposal of property and equipment
24
-
24
8
Unrealized (gain) loss on derivative instruments
(257
)
6,782
1,439
3,523
Gain on marketable securities
-
-
-
(575
)
Other income
-
-
(2,750
)
(1
)
Income tax (benefit) provision
(3
)
12
635
34
Adjusted EBITDA
$
(973
)
$
9,659
$
13,042
$
18,230
The following table reconciles cash flows from operations, the most directly comparable GAAP liquidity financial measure, with adjusted EBITDA.
Nine Months Ended September 30,
2024
2023
Net cash provided by operating activities
$
41,415
$
8,458
Deferred income taxes, net
(618
)
-
Interest and dividend income
(6,151
)
(6,595
)
Income tax provision
635
34
Change in operating assets and liabilities, net
(19,489
)
16,334
Other income
(2,750
)
(1
)
Adjusted EBITDA
$
13,042
$
18,230
17
Results of Operations
Consolidated
Three Months Ended September 30,
Nine Months Ended September 30,
Change
Change
2024
2023
Amount
%
2024
2023
Amount
%
Revenues
$
51,140
$
116,752
$
(65,612
)
(56.2
)%
$
181,830
$
276,241
$
(94,411
)
(34.2
)%
Volume/product mix effect
(39,558
)
(33.9
)%
$
(46,469
)
(16.8
)%
Price effect
(26,054
)
(22.3
)%
$
(47,942
)
(17.4
)%
Gross profit
383
3,870
(3,487
)
(90.1
)%
$
14,047
$
16,901
$
(2,854
)
(16.9
)%
Operating expenses
(3,271
)
(3,573
)
302
8.5
%
(9,286
)
(9,936
)
650
6.5
%
Other income, net
1,690
2,491
(801
)
(32.2
)%
8,580
7,067
1,513
21.4
%
Income tax (benefit) provision
(3
)
12
(15
)
na
635
34
601
1767.6
%
Net (loss) income
$
(1,195
)
$
2,776
$
(3,971
)
na
$
12,706
$
13,998
$
(1,292
)
(9.2
)%
Consolidated revenue in the three months ended September 30, 2024, decreased $65,612 compared to the three months ended September 30, 2023. This decline was driven mostly by lower sales volumes in the biofuel segment of $41,015. Production issues, primarily stemming from delays by equipment suppliers that created an extended service utility downtime, which prevented us from building the biodiesel inventories we would typically have available to sell in the three months ended September 30, 2024. Also reducing sales revenue in the three-month period, were lower prices in the biofuel segment of $24,678 due to a decline in renewable fuel and RIN prices with market supply in excess of the EPA RIN mandate. In our chemical segment, sales revenue increased $81 for the three months ended September 30, 2024, compared to the prior-year period, due primarily to stronger sales volumes in the coatings market of $1,457, but was mostly offset by reduced chemical sales prices, $1,376, from chemicals sold into the agricultural and energy markets.
Consolidated revenue in the nine months ended September 30, 2024, decreased $94,411 compared to the nine months ended September 30, 2023. As noted above, this decline was driven mostly by lower sales volumes in the biofuel segment of $48,590 as production issues in the first three months of the year related to harsh winter weather and the production issues noted above in the three months ended September 30, 2024, prevented us from building the biodiesel inventories we would typically have available to sell during the current period. Also reducing sales revenue in the nine-month period, were lower prices in the biofuel segment of $42,560 due to a decline in renewable fuel and RIN prices with market supply in excess of the EPA RIN mandate. In our chemical segment, sales revenue declined a net $3,261 ($5,382 on reduced prices on chemicals sold into the agricultural and energy markets partially offset by increased volumes in the energy market, $2,121), compared to the prior-year period.
Gross profit in the three months ended September 30, 2024, decreased $3,487 as compared to the same period of 2023, due primarily to: (i) lower sales prices in the chemical agricultural and energy markets and (ii) reduced throughput of biofuel segment volumes primarily due to the issues noted above.
Gross profit in the nine months ended September 30, 2024 decreased $2,854 as compared to the same period of 2023, primarily due to: (i) a reduction of RIN sales in the current nine-month period and (ii) the change in the adjustment in the carrying value of our inventory as determined utilizing the Last In First Out (“LIFO”) method of inventory accounting. This adjustment increased gross profit $2,885 in the nine months ended September 30, 2024, as compared to an increase of $6,023 in the same period of 2023. Gross profit was negatively impacted by the change in the activity of derivative instruments with a realized loss of $354 and unrealized loss of $1,696 in the nine months ended September 30, 2024, as compared to a realized gain of $9,437 and unrealized gain of $3,259 in the same period of 2023. Gross profit was also negatively impacted in the nine-month period ended September 30, 2024, by higher costs resulting from the impact of extreme winter weather and the production issues noted above.
Operating e xpenses
Operating expenses decreased $302 in the three months ended September 30, 2024, as compared to the three months ended September 30, 2023. The decrease was from lower administrative and research and development expenses. Operating expenses decreased $650 in the nine months ended September 30, 2024, as compared to the same period of 2023. This decrease also resulted from lower research and development and administrative expenses.
Other income, net
Other income decreased a net $801 in the three months ended September 30, 2024, as compared to the same period of 2023 from lower interest income of $1,830 compared to $2,527 in the prior period. Other income increased a net $1,513 in the nine months ended September 30, 2024, from the receipt of a legal settlement of $2,750 . Partially offsetting this increase was lower interest income of $6,151 compared to dividend and interest income of $6,595 and a gain of $575 on marketable securities in the same period of 2023 .
18
Income tax (benefit) provision
The Company’s income tax benefit was insignificant in the three months ended September 30, 2024. In the nine months ended September 30, 2024, the provision was comprised primarily of an increase in the valuation allowance against net deferred assets, plus immaterial state taxes and miscellaneous items. No deferred tax benefits on ongoing tax losses or other deferred tax assets have been recognized, reflecting management’s determination that none of the net deferred tax assets are more likely than not to be realized. The three-month period in 2023 similarly reflected immaterial state taxes and miscellaneous items.
The Company evaluates its deferred tax assets quarterly and records a valuation allowance to reduce these assets to the amount that is more likely than not to be realized.
Chemical Segment
Three Months Ended September 30,
Nine Months Ended September 30,
Change
Change
2024
2023
Amount
%
2024
2023
Amount
%
Revenues
$
17,928
$
17,847
$
81
0.5
%
$
55,223
$
58,484
$
(3,261
)
(5.6
)%
Volume/product mix effect
1,457
8.2
%
$
2,121
3.6
%
Price effect
(1,376
)
(7.7
)%
$
(5,382
)
(9.2
)%
Gross profit
$
3,407
$
6,878
$
(3,471
)
(50.5
)%
$
12,105
$
21,917
$
(9,812
)
(44.8
)%
Chemical revenue in the three months ended September 30, 2024, increased 0.5% or $81 compared to the three months ended September 30, 2023. Revenue from custom chemicals for the three months ended September 30, 2024 totaled $15,323, a net increase of $869 from the same period in 2023, resulting from higher sales volumes of $1,791 from products sold in the agricultural and energy markets, which were partially offset by lower prices of $1,204. Performance chemicals revenue was $2,605, a decrease of $788 from the three months ended September 30, 2023 . This decrease was mostly from lower sales volumes of glycerin due to reduced production resulting from the extended service utility downtime caused by equipment suppliers.
Chemical revenue in the nine months ended September 30, 2024, decreased 5.6% or $3,261 compared to the nine months ended September 30, 2023. Revenue from custom chemicals for the nine months ended September 30, 2024, totaled $46,333, a decrease of $317 from the same period in 2023. The sales revenue decline was from reduced sales prices of chemicals sold in the agricultural and energy markets. Partially offsetting these reductions were sales from increased volumes of chemicals sold into the automotive coatings market as well as sales of one new product into the coatings market. Performa nce chemicals revenue was $8,890, a decrease of $2,944 from the nine months ended September 30, 2023. The decrease was mostly from lower sales volumes and price of glycerin from reduced production.
Gross profit for the chemical segment for the three and nine months ended September 30, 2024, decreased $3,471 and $9,812 when compared to the same periods of 2023. This decrease was primarily from: (i) reduced chemical sales prices in the agricultural and energy markets, (ii) reduced throughput as described above, and (iii) the change in the adjustment in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. This adjustment decreased gross profit $418 in the current three-month period as compared to an increase in gross profit of $234 in the same period of the prior year. For the nine months, this adjustment increased gross profit $623 in the current period as compared to $1,105 in the same period of the prior year.
19
Biofuel Segment
Three Months Ended September 30,
Nine Months Ended September 30,
Change
Change
2024
2023
Amount
%
2024
2023
Amount
%
Revenues
$
33,212
$
98,905
$
(65,693
)
(66.4
)%
$
126,607
$
217,757
$
(91,150
)
(41.9
)%
Volume/product mix effect
(41,015
)
(41.5
)%
$
(48,590
)
(22.3
)%
Price effect
(24,678
)
(25.0
)%
$
(42,560
)
(19.5
)%
Gross (loss) profit
$
(3,024
)
$
(3,008
)
$
(16
)
(0.5
)%
$
1,942
$
(5,016
)
$
6,958
na
Biofuels revenue in the three months ended September 30, 2024, decreased $65,693 as compared to the same period of 2023. This decrease resulted fro m a 42% or $41,015 reduction in sales volume and a 25% or $24,678 reduction in the average price of fuel sold. The lower prices were driven in part by the reduction in D4 RIN prices as a result of the excess of D4 RINs of the EPA's mandated volumes. The volume reduction resulted from production issues, primarily stemming from delays by equipment suppliers that created an extended service utility downtime, which prevented us from building the biodiesel inventories we would typically have available to sell in the three months ended September 30, 2024.
Biofuels revenue in the nine months ended September 30, 2024, decreased $91,150 as compared to the same period of 2023 . The decrease was primarily from a 22% or $48,590 reduction in sales volume and a 20% or $42,560 reduction in the average price of fuel sold. Additionally, production and sales volumes for the nine months ended September 30, 2024, were impacted by the extreme winter weather experienced in the first quarter of 2024.
A significant portion of our biodiesel sold was t o two and three majo r refiners/blenders in the three and nine months ended September 30, 2024, respectively, as compared to four and two in the three and nine months ended September 30, 2023, respectively. No assurances can be given that we will continue to sell to such major refiners, or, if we do sell, the volume we will sell or the profit margin we will realize. We do not believe that the loss of these customers would have a material adverse effect on our biofuels segment or on us as a whole because: (i) we believe that we could readily sell our biodiesel to other customers on equivalent terms as potential demand from other customers for biodiesel exceeds our production capacity; (ii) our sales to these customers are not under fixed terms and the customers have no fixed obligation to purchase any minimum quantities except as stipulated by short-term purchase orders; and (iii) the prices we receive from these customers are based upon then-market rates, as would be the case with sales of this commodity to other customers.
Biofuel gross loss was $3,024 in the three months ended September 30, 2024, a decrease in gross profit of $16 from the comparative period in 2023. This decrease primarily resulted from reduced sales volumes, primarily stemming from delays by equipment suppliers that created an extended service utility downtime, which prevented us from building the biodiesel inventories we would typically have available to sell in the three months ended September 30, 2024. Also reducing gross profit was the change in the adjustment in the carrying value of our inventory as determined utilizing the LIFO method of inventory accounting. This adjustment decreased gross profit $1,038 in the current three-month period as compared to an increase in gross profit of $2,294 in the same period of the prior year. Partially increasing gross profit was: (i) the change in the activity of derivative instruments with a realized gain of $1,691 and an unrealized gain of $256 in the current three-month period as compared to a realized loss of $7,286 and an unrealized loss of $6,782 in the same period of the prior year, and (ii) the change in the number of separated RINs held in inventory at September 30, 2024 with a fair market value of $2,556 as compared to $6,971 at September 30, 2023.
Biofuel gross profit was $1,942 in the nine months ended September 30, 2024, an increase of $6,958 from the comparative period of 2023. This increase resulted from the change in the number of separated RINs held in inventory at September 30, for each year as noted above and the change in the activity of derivative instruments with an unrealized loss of $1,439 in the current nine-month period as compared to an unrealized loss of $3,523 in the same period of the prior year. Partially reducing gross profit was the change in the adjustment in the carrying value of our inventory as determined utilizing the LIFO method of accounting. This adjustment increased gross profit $2,262 in the current nine-month period as compared to an increase in gross profit of $4,918 in the same period of the prior year, and the change in the activity of derivative instruments with a realized gain of $1,337 in the current nine-month period as compared to a realized gain of $2,150 in the same nine months of the prior year. In addition, gross profit was negatively impacted by lower RIN prices and in the nine-month period ended September 30, 2024, from higher costs resulting from extreme winter weather in the first quarter of 2024.
For our derivative activity, we recognize all derivative instruments as either assets or liabilities at fair value in our consolidated balance sheets. The realized and unrealized derivative gains and losses are recorded as cost of goods sold. Our derivative instruments do not qualify for hedge accounting under the specific guidelines of ASC Topic 815, Derivatives and Hedging. None of the derivative instruments are designated and accounted for as hedges.
The volumes and carrying values of our derivative instruments included in other current assets were as follows:
Asset (Liability)
September 30, 2024
December 31, 2023
Contract Quantity
Fair Value
Contract Quantity
Fair Value
Regulated fixed price future commitments (in thousand barrels)
105
$
297
354
$
1,736
*All derivative instruments are entered into with the standard contract terms and conditions in accordance with major trading authorities of the New York Mercantile Exchange.
20
Critical Accounting Estimates
Revenue Recognition
The Company recognizes revenue under ASC Topic 606, Revenue from Contracts with Customers. Certain long-term contracts had upfront non-cancellable payments considered material rights. The Company applied the renewal option approach in allocating the transaction price to the material rights. For each of these contracts, the Company estimated the expected contractual volumes to be sold at the most likely expected sales price as a basis for allocating the transaction price to the material right. Estimated amortization is updated quarterly on a prospective basis. These custom chemical contracts have payment terms of 30 days. See Note 3 to our consolidated financial statements for additional information.
For most product sales, revenue is recognized when product is shipped from our facilities and risk of loss and title have passed to the customer, which is in accordance with our customer contracts and the stated shipping terms. Nearly all custom manufactured products are manufactured under written master service agreements. Performance chemicals and biodiesel are generally sold pursuant to the terms of written purchase orders. In general, customers do not have any rights of return, except for quality disputes. All of our products are tested for quality before shipment, and historically returns have been inconsequential and we typically do not offer rebates.
Biodiesel selling prices can at times fluctuate based on the timing of unsold, internally generated RINs. From time to time, sales of biodiesel are on a “RINs-free” basis. Such method of selling results in applicable RINs being held. The value of the RINs is not reflected in revenue until such time as the RIN sale has been completed.
Revenue from bill-and-hold transactions in which a performance obligation exists is recognized when the total performance obligation has been met and control of the product has transferred. Bill-and-hold transactions for the three and nine months ended September 30, 2024 and 2023 were related to custom chemicals customers whereby revenue was recognized in accordance with contractual agreements based upon product being produced and ready for use by the customer. These sales were subject to written monthly purchase orders. The product was custom manufactured and stored at the customer’s request and could not be sold to another buyer. Credit and payment terms for bill-and-hold customers are similar to other custom chemicals customers. Revenues under bill-and-hold arrangement s were $10,211 and $32,875 for t he three and nine months ended September 30, 2024, respectively. As of September 30, 2024 and December 31, 2023, $4,482 and $4,317 of bill-and-hold revenue had not shipped, respectively.
21
Liquidity and Capital Resources
Our net cash from operating activities, investing activities, and financing activities for the nine months ended September 30, 2024 and 2023 is set forth in the following table.
Nine Months Ended September 30,
2024
2023
Net cash provided by operating activities
$
41,415
$
8,458
Net cash (used in) provided by investing activities
(10,176
)
29,716
Net cash used in financing activities
(117,285
)
(7,891
)
We believe that existing cash balances and cash flow to be generated from operating activities and borrowing capacity under the amended and restated credit agreement will be sufficient to fund operations, product development, cash dividends, and capital requirements for the foreseeable future.
Operating Activities
Cash provided by operating activities was $41,415 in the nine months ended September 30, 2024, as compared to $8,458 in the same period of 2023. This increase in cash was primarily attributable to the change in accounts receivable, including accounts receivable - related parties, demonstrating a cash inflow of $15,729. Also contributing to the current period increase in cash was the change in inventory of $8,249, the change in accrued expenses and other current liabilities of $6,466, and the change in accounts payable, including accounts payable - related parties, of $4,749. Partially offsetting these cash inflows was the change in the fair value of derivative instruments of $2,084, and the change in net income of $1,292.
Investing Activities
Cash used in investing activities was $10,176 in the nine months ended September 30, 2024, as compared to cash provided by investing activities of $29,716 in the nine months ended September 30, 2023. This $39,892 decrease in cash was primarily due to the change in proceeds from the sale of marketable securities of $37,701 and included an increase in capital expenditure of $5,611. Partially offsetting these reductions in cash was the change in the collateralization of derivative instruments of $3,414.
Financing Activities
Cash used in financing activities was $117,285 and $7,891 in the nine months ended September 30, 2024 and 2023, respectively, primarily for payments of dividends on our common stock inclusive of a special dividend of $109,408 paid in the current nine-month period.
22
Credit Facility
We have a credit agreement, as amended on March 30, 2020, with a syndicated group of commercial banks for $100,000. The loan is a revolving facility, the proceeds of which may be used for our working capital, capital expenditures, and general corporate purposes. The facility terminates on March 30, 2025. See Note 8 to our consolidated financial statements for additional information regarding our credit agreement.
We intend to fund future capital requirements for our businesses from cash flow as well as from existing cash, cash investments, and, if the need should arise, borrowings under our credit facility. We do not believe there will be a need to issue any securities to fund such capital requirements.
Dividends
On April 9, 2024, we paid a special dividend of $2.50 per share on our common stock which amounted to $109,408. The declaration of this special dividend was made in the first quarter of 2024. Regular cash dividends of $0.06 per share were paid on our common stock in each quarter of 2024 and 2023. The regular cash dividend amounted to $2,626 in each of the quarters of 2024 and 2023. The declaration of these regular quarterly cash dividends was made in the three months ended December 31, 2023, and December 31, 2022, respectively.
Capital Management
As a result of our initial equity offering, our subsequent positive operating results, the exercise of warrants, and the issuance of shares in our at-the-market offering, we accumulated excess working capital. Some of this excess working capital has been paid out as special and regular cash dividends. Third parties have not placed significant restrictions on our working capital management decisions.
A significant portion of these funds were held in cash or cash equivalents at multiple financial institutions such as depositary accounts, money market accounts, and other similar accounts at selected financial institutions.
Off- Balance Sheet Arrangements
We engage in two types of transactions to mitigate the impacts of changes in prices for both commodity sales and purchases. First, for our biofuel sales, we enter into the purchase and sale of futures contracts and options on futures contracts of energy commodities. This activity was captured in our consolidated balance sheets at September 30, 2024, and December 31, 2023 as derivative instruments recorded in accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”). Second, for our biofuel feedstocks, we execute purchase contracts and supply agreements with certain vendors that may meet the normal purchase and normal sales exception of ASC 815. These transactions are recognized in earnings and were not recorded in our consolidated balance sheets at September 30, 2024, or December 31, 2023 to the extent that we are able to apply the normal purchase and normal sales exception of ASC 815. The purchase of biofuels feedstock generally involves two risk components: basis and price. Basis covers any refining or processing required as well as transportation. Price covers the purchases of the actual agricultural commodity. Both basis and price fluctuate over time. A supply agreement with a vendor constitutes a hedge when we have committed to a certain volume of feedstock in a future period and have fixed the basis for that volume.
23
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