2 )	Significant accounting policies and basis of presentation

Finan

cial 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

2019

presentation.

Cas

cas

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.

Accounts receivable also includes amounts from the retroactive reinstatement of the biodiesel blenders’ tax credit (“BTC”) passed in law in

December 2019.

See Note

for details.

Custome

concentrations

For the

twelve

months ended

December 31, 2019,

2018,

and

2017,

significant portions of the Company’s sales were made to a relatively small number of customers. Sales to

one

biodiesel customer totaled

$22,351

(

11%

of total revenue) in

2019

and sales to

two

customers in

2018

totaled

$57,198

(

20%

of total revenue). Receivables for these customers combined were

and

of the total accounts receivable at

December 31, 2019

and

2018,

respectively. Sales to another customer totaled

$38,917

(

14%

of total revenue) in

2017.

One chemical customer and its affiliates, represented approximately

22%,

27%,

and

30%

of chemicals revenue (

11%

of total revenues each year) in

2019,

2018

and

2017,

respectively. We sell multiple products to various affiliates of this customer under both long-term and short-term contracts. Receivable balances for this customer was

and

25%

of the total accounts receivable at

December 31, 2019

and

2018,

respectively. One product contract was

not

renewed at

December 31, 2019

representing

15%

of chemical revenue in

2019

(

of total revenue); , and

14%

of chemical revenue in

2018

and

2017

(

,and

5%,

of total revenue respectively)

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.

Derivativ

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

25,

Derivative

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

derivative instruments that qualified under these rules as designated accounting hedges in

2019

2018.

The Company has elected the normal purchase and normal sales exception for certain feedstock purchase contracts and supply agreements.

arketable

ecurities

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

and

for further information on marketable securities and fair value measurements.

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

inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level

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

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

plan

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

ntangible

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.

Impairmen

assets

Long-live

tangibl

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.

Indefinite-live

intangibl

asset

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,

further testing is required. Otherwise, the Company will apply the quantitative impairment test method. In performing the Company's qualitative analysis, the Company determined that it was more likely than

not

that the indefinite-lived intangible asset's fair value was greater than the carrying value.

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

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.

Revenue recognition

In the year ended

December 31, 2017

included in the consolidated statement of operations, amounts recognized for revenue and other revenue related balances were in accordance with the ASC

605,

Revenue Recognition

. For most product sales, revenue was recognized when product was shipped from the Company facilities and risk of loss and title had passed to the customer, which was in accordance with customer contracts and the stated shipping terms. All custom manufactured products were manufactured under written contracts. Performance chemicals and biofuels were usually sold pursuant to the terms of written purchase orders. In general, customers did

not

have any rights of return, except for quality disputes. However, all products were tested for quality before shipment, and historically returns were inconsequential. The Company did

not

offer rebates or other warranties.

Bill and hold transactions related to a few specialty chemical customers whereby revenue was recognized in accordance with contractual agreements based on product produced and readied for use. Sales were subject to written monthly purchase orders with the agreement that production was reasonable. The inventory 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 were similar to other specialty chemical customers.

Taxes collected from customers and 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.

As of

January 1, 2018,

the Company adopted ASU

2014

09,

Revenue from Contracts with Customers

, and related subsequently issued ASUs (“Topic

606”

) using the modified retrospective approach, which resulted in a

$6,900

adjustment recognized through equity upon adoption. Prior to such time, including during the period within the financial statements for the year ended

December 31, 2017

included in the consolidated statement of income, the Company was recognizing revenue in accordance with ASC

605,

Revenue Recognition

. In accordance with Topic

606,

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

days for chemical segment customers and

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

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.

cost is incurred in the generation of a RIN.

The accounting policies for taxes collected from customers and shipping and handling fees did

not

change with the adoption of Topic

606.

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. This tax credit was

not

in law during

2017.

February 2018,

the tax credit was retroactively reinstated for

2017.

December 2019,

the tax credit was retroactively reinstated for all of

2018

and

2019.

See Note

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.

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

Realized gains and losses are determined using the specific identification method and are recognized in OCI.

Incom

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

The Company adopted ASU

2016

01,

Financial Instruments - Overall

(Subtopic

825

Recognition and Measurement of Financial Assets and Financial Liabilities on

January 1, 2019

which requires that equity investments be measured at fair value and changes in fair value recognized in net income. The Company used the modified retrospective method, and therefore,

adjustments were made to amounts in the prior period financials. The Company recorded the cumulative effect of adopting the standard as an adjustment to increase the

January 1, 2019

opening balance of retained earnings by

$13,139

on a pre-tax basis (

$8,273

after-tax) related to the net impact of unrealized gains and losses primarily on equity securities and preferred stock.

The FASB issued ASU

2016

02,

Leases

, (“Topic

842”

), which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize an ROU asset and a lease liability on the balance sheet for all leases with a term longer than

months. An ROU asset represents the Company’s right to use an underlying asset for the lease term, and a lease liability represents the Company’s obligation to make lease payments under the leases.

The Company adopted the new lease standard

January 1, 2019

under the modified retrospective transition approach using the effective date as the date of initial application with the practical expedient election for short-term lease exemption along with the election to

not

separate lease and non-lease components for all leases. The Company determines lease existence and classification at inception when an agreement conveys the right to control identified property for a period of time in exchange for consideration. Upon adoption, an ROU asset and a lease liability were reported as other noncurrent assets of

$1,641

and other current liabilities and other noncurrent liabilities of

$370

and

$1,271,

respectively. See Note

for additional information on leases.

Recently issued accounting standards

not

yet adopted

ASU

2019

12,

Income Taxes

(Topic

740

Simplifying the Accounting for Income Taxes

. In

December 2019,

the FASB issued these amendments to remove specific exceptions to the general principles in Topic

740.

It eliminates the need for an organization to analyze whether the following apply in a given period:

-Exception to the incremental approach for intraperiod tax allocation;

-Exceptions to accounting for basis differences when there are ownership changes in foreign investments; and

-Exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses.

The ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for:

-Franchise taxes that are partially based on income;

-Transactions with a government that result in a step up in the tax basis of goodwill;

-Separate financial statements of legal entities that are

not

subject to tax; and

-Enacted changes in tax laws in interim periods.

The effective date is for annual periods beginning after

December 15, 2020

and interim periods within those fiscal years. Early adoption is permitted, including any interim period. The Company is evaluating the impact on current reporting under Topic

740

to determine the timing and impact of adoption.

ASU

2016

13,

Financial Instruments - Credit Losses, Measurement of Credit Losses on Financial Instruments.

June 2016,

the FASB issued this update with subsequent amendments by ASUs

2019

11,

2019

10,

2019

05,

and

2019

04.

This update requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. Although delayed for some entities, these amendments are effective for annual periods beginning after

December 15, 2019.

Earlier adoption is permitted. The Company plans to adopt the new guidance effective

January 1, 2020,

with minimal impact.