FutureFuel Corp.
FutureFuel Corp. (Form: 10-K, Received: 03/15/2012 13:59:19)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
(Mark One)
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
 
Commission file number: 0-52577
 
FUTUREFUEL CORP.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
20-3340900
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
8235 Forsyth Blvd., Suite 400
Clayton, Missouri  63105
(Address of Principal Executive Offices, including Zip Code)
 
(805) 565-9800
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
Common stock, par value $0.0001
 
New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act:
 
None
(Title of class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes    No  √
 
 
 

 
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes   No  √
 
Note —Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes  √ No  
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  √   No  
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
 
Large accelerated filer                                           
 
Accelerated filer                                                      √
Non-accelerated filer                                           
Smaller reporting company                                                      

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes    No √
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.  $171,337,015
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 41,319,057
 
RDGPreambleEnd
 
 

 
 
Table of Contents
 
  Page
   
Part I
1
Item 1. Business.
1
Item 1A. Risk Factors.
17
Item 1B. Unresolved Staff Comments.
26
Item 2. Properties.
26
Item 3. Legal Proceedings.
26
Item 4. Mine Safety Disclosures.
26
Part II
27
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
27
Item 6. Selected Financial Data.
30
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
30
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
42
Item 8. Financial Statements and Supplementary Data.
44
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
70
Item 9A. Controls and Procedures.
70
Item 9B. Other Information.
72
Part III
73
Item 10. Directors, Executive Officers, and Corporate Governance.
73
Item 11. Executive Compensation.
78
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
87
Item 13. Certain Relationships and Related Transactions, and Director Independence.
90
Item 14. Principal Accountant Fees and Services.
90
Part IV
92
Item 15. Exhibits and Financial Statement Schedules.
92
 
 
 

 
 
PART I
 
Item 1. Business.
 
General Development of the Business
 
The Company
 
FutureFuel Corp. (sometimes referred to as the “Company” or “we” or “us” or “our” and includes our wholly-owned subsidiaries) is a Delaware corporation incorporated on August 12, 2005 under the name “Viceroy Acquisition Corporation”.  We were formed to serve as a vehicle for the acquisition of one or more operating businesses in the oil and gas industry.  On July 12, 2006, we completed our initial public offering.  On July 21, 2006, we entered into an acquisition agreement with Eastman Chemical Company to acquire its wholly-owned subsidiary, Eastman SE, Inc., a chemical manufacturer which had just launched a biobased products platform.  Our shareholders approved the acquisition of Eastman SE, Inc. on October 27, 2006 and, on October 31, 2006, the acquisition of Eastman SE, Inc. was consummated and Eastman SE, Inc. became our wholly-owned subsidiary.  In connection with such closing, we changed our name to FutureFuel Corp. and Eastman SE, Inc. changed its name to FutureFuel Chemical Company.
 
Prior to 2011, our shares of common stock were quoted on the Over-the-Counter Bulletin Board (or OTC Bulletin Board).  The OTC Bulletin Board is an electronic trading service offered by the National Association of Security Dealers that shows real-time quotes, last sale prices, and volume information for over-the-counter equity securities.  On March 8, 2011, the New York Stock Exchange (or NYSE) approved the listing of our common stock for trading on the exchange.  Trading of our common stock on the NYSE commenced on March 23, 2011 under the symbol “FF”, and our common stock ceased to be quoted on the OTC Bulletin Board at that time.
 
On February 10, 2011, we filed with the United States Securities and Exchange Commission (or SEC) a Form S-3 Registration Statement commonly referred to as a “shelf registration” whereby we registered shares of our common stock, preferred stock, warrants, rights, and units which we might issue in the future in an aggregate amount not to exceed $50 million.  This registration statement became effective on March 10, 2011.  Pursuant to this registration statement, on May 11, 2011, we commenced an “At-the-Market” offering under which we may from time to time over the succeeding three years sell up to 3 million shares of our common stock.  During 2011, we issued 1,313,985 shares of our common stock pursuant to this At-the-Market offering.
 
On February 7, 2011, we declared a special cash dividend of $0.10 per share on our common stock.  On April 5, 2011, we declared normal quarterly cash dividends of $0.10 per share for the remainder of 2011.  On November 18, 2011, we declared normal quarterly cash dividends of $0.10 per share on our common stock for the calendar year 2012.
 
FutureFuel Chemical Company
 
FutureFuel Chemical Company is a Delaware corporation incorporated on September 1, 2005 under the name Eastman SE, Inc.  It owns approximately 2,200 acres of land six miles southeast of Batesville in north central Arkansas fronting the White River.  Approximately 500 acres of the site are occupied with batch and continuous manufacturing facilities, laboratories, and associated infrastructure, including on-site liquid waste treatment.  It has approximately 500 full-time employees.  FutureFuel Chemical Company manufactures diversified chemical products, biobased products comprised of biofuels, and biobased specialty chemical products.
 
In 2011, demand for our existing product lines in our chemical segment generally faced negative economic pressures.  So far, 2012 has seen a continuance of these economic pressures.  Notwithstanding that, we continue to focus on building and maintaining our reputation as a technology-driven competitive chemical producer.  Further, we retain a strong emphasis on cost control and efficiency improvements that, we believe, will enable us to take advantage of growth opportunities that exist as a result of conditions in the worldwide chemical industry.
 
With respect to our biofuels segment, in 2010, we redesigned our continuous line to produce biodiesel from feedstock with high fatty acids.  By the end of 2011, daily production volumes from the redesigned line demonstrated a production capacity of approximately 35 million gallons of biodiesel per year.  Additional debottlenecking has increased annualized production to in excess of 45 million gallons per year.  However, there continues to be uncertainty as to whether we will produce biodiesel in the future.  This uncertainty results from: (i) changes in feedstock prices relative to biodiesel prices; and (ii) whether or not government mandates remain in effect.  See the discussion below, including “Risk Factors” beginning at page 17 below.
 
 
1

 
 
Financial Information about Segments
 
Unless otherwise noted, the financial data presented herein represents our consolidated operations for the twelve-month periods ended December 31, 2011, December 31, 2010, and December 31, 2009.  The following table sets forth: (i) our consolidated revenues from external customers for the years ended December 31, 2011, 2010, and 2009; (ii) our consolidated net income for the years ended December 31, 2011, 2010, and 2009; and (iii) our total assets at December 31, 2011, 2010, and 2009.
 
(Dollars in thousands)
 
Period
 
Revenues from External Customers
   
Net Income
   
Total Assets
 
Year ended December 31, 2011
  $ 309,885     $ 34,509     $ 385,244  
Year ended December 31, 2010
  $ 219,183     $ 23,094     $ 343,156  
Year ended December 31, 2009
  $ 196,711     $ 16,992     $ 246,007  

We have two business reporting “segments” as defined by accounting principles generally accepted in the United States (or GAAP): chemicals and biofuels.  We are not able to allocate net income and total assets between these two business segments.  However, revenues from external customers and gross margins can be allocated between the two business segments as set forth in the following table.
 
(Dollars in thousands)
 
Period
 
Revenues from Chemical Segment
   
Revenues from Biofuels Segment
   
Total Revenues from External Customers
   
Gross Margin from Chemical Segment
   
Gross Margin from Biofuels Segment
   
Gross Margin
 
Year ended December 31, 2011
  $ 168,237     $ 141,648     $ 309,885     $ 42,685     $ 19,070     $ 61,755  
Year ended December 31, 2010
  $ 178,280     $ 40,903     $ 219,183     $ 41,433     $ (149 )   $ 41,284  
Year ended December 31, 2009
  $ 143,759     $ 52,952     $ 196,711     $ 33,007     $ 1,430     $ 34,437  

See note 21 to our consolidated financial statements contained in “Item 8. Financial Statements and Supplementary Data” for adjustments to segment gross margins to arrive at net income.
 
Narrative Description of Our Business
 
Principal Executive Offices
 
Our principal executive offices are located at 8235 Forsyth Blvd., 4 th Floor, Clayton, Missouri 63105.  Our telephone number is (805) 565-9800.  FutureFuel Chemical Company’s principal executive offices are located at 2800 Gap Road, Highway 394 South, Batesville, Arkansas 72501-9680.  Its telephone number at such office is (870) 698-3000.
 
The Company
 
We completed our initial public offering on July 12, 2006 and acquired FutureFuel Chemical Company on October 31, 2006.  On July 11, 2008, our common stock began to be quoted on the OTC Bulletin Board under the symbol “FTFL”.  On March 8, 2011, the NYSE approved the listing of our common stock for trading on the exchange.  Trading of our common stock on the NYSE commenced on March 23, 2011 under the symbol “FF”, and our common stock ceased to be quoted on the OTC Bulletin Board at that time.
 
 
2

 
 
We own approximately 2,200 acres of land six miles southeast of Batesville in north central Arkansas fronting the White River.  Approximately 500 acres of the site are occupied with batch and continuous manufacturing facilities, laboratories, and associated infrastructure, including on-site liquid waste treatment.  Land and support infrastructure are available to support expansion and business growth.  In November 2011, we acquired a warehouse in Batesville, Arkansas approximately 8 miles from our plant.
 
For the year ended December 31, 2011, approximately 50% of our revenue was derived from manufacturing specialty chemicals for specific customers (“custom manufacturing”) with 4% of revenues being derived from multi-customer specialty chemicals (“performance chemicals”) and 46% from biofuels.  Custom manufacturing involves producing unique products for individual customers, generally under long-term contracts.  Our custom manufacturing product portfolio includes a bleach activator for a major detergent manufacturer, a proprietary herbicide and intermediates for a major life sciences company, chlorinated polyolefin adhesion promoters and antioxidant precursors for a major chemical company, and a biocide intermediate for another major diversified chemical company.  In 2012, we will be selling commercial quantities of an intermediate anode powder as a component of high-performance graphite anode materials for lithium-ion batteries to a major petrochemical company as a custom manufacturing product.  Our performance chemicals product portfolio includes polymer (nylon and polyester) modifiers and several small-volume specialty chemicals and solvents for diverse applications.
 
We are committed to growing our chemical and biofuels businesses.  We also intend to pursue commercialization of other products, including building block chemicals.  In pursuing this strategy, we will continue to establish a name identity in the biofuels business, leverage our technical capabilities and quality certifications, secure local and regional markets, and expand marketing efforts to fleets and regional/national customers.  These items are discussed in greater detail below.
 
Biofuels Business Segment
 
Overview of the Segment
 
Our biofuels segment was established in early 2005 as an initiative of the then site management team to leverage their plant’s technical and operational expertise as well as available manufacturing capacity to pursue business growth opportunities outside of their legacy specialty chemicals business.
 
Biofuel Products
 
Our biofuels business segment primarily produces and sells biodiesel.  In addition, we sell petrodiesel in blends with our biodiesel and, from time to time, with no biodiesel added.  Our biofuels segment also includes the operation of a granary in central Arkansas that we acquired in March 2009.  Finally, we are a shipper of refined petroleum products on a common carrier pipeline and, from time-to-time, we buy and sell petroleum products to maintain our active shipper status on this pipeline.
 
Biodiesel is a renewable energy consisting of mono-alkyl esters of fatty acids.  The mono-alkyl esters are typically produced from vegetable oil, fat, or grease feedstocks.  Biodiesel is used primarily as a blend with petrodiesel (usually 5% (commonly referred to as B5) to 20% (commonly referred to as B20) by volume).  A major advantage of biodiesel is that it can be used in most existing diesel engines and fuel injection equipment in blends up to B20 with no material impact to engine performance.  As an additional benefit, biodiesel is the only alternative fuel to meet all testing requirements of the Clean Air Act and, in 1998, Congress approved the use of biodiesel as an Energy Policy Act compliance strategy (which allows federal, state, and public fleets covered by this Act to meet their alternative fuel vehicle purchase requirements simply by buying biodiesel and burning it in new or existing diesel vehicles in at least a B20 blend).  Finally, biodiesel also benefits from favorable properties compared to petrodiesel (e.g., negligible sulfur content and lower particulate matter and greenhouse gas emissions).  See Status and Issues for Biodiesel in the United States , National Renewable Energy Laboratory, Robert L. McCormick, Teresa Alleman, Aaron Williams, Yoshio Coy, Andrew Hudgins, and Wendy Dafoe, October 2009 and Pew Center on Global Climate Change, http://www.pewclimate.org/technology/factsheet/biodiesel (sometimes we refer to this as the “Pew Center”).
 
 
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Biodiesel commercialization was achieved at our Batesville plant in October 2005.  Technical and operational competency developed as a supplier of specialty chemicals enabled the development of a flexible manufacturing process which can utilize the broadest possible range of feedstock oils, including soy oil, cottonseed oil, pork lard, poultry fat, crude corn oil, yellow grease, inedible tallow, choice white grease, and beef tallow.  Our Batesville plant produces biodiesel, which is sometimes referred to as B100.  A blend is currently used in the facility’s diesel fleet and is available for retail sale at the site.  In 2009, we began offering B100, biodiesel blended with petrodiesel (B2, B5, B10, and B20 blends), and petrodiesel at our leased storage facility in Little Rock, Arkansas.  In addition, we deliver blended product to a small group of customers within our region.
 
Biodiesel Production/Capacity
 
Biodiesel can be made from renewable sources such as: (i) crude and refined virgin vegetable oils; (ii) crude and refined animal fats; and (iii) used cooking oils and trap grease.  In general, the choice of feedstock to be used in producing biodiesel is determined primarily by the price and availability of each feedstock variety, the yield loss of lower quality feedstock, and the capabilities of the producer’s biodiesel production facility.  In addition, the chemical properties of the biodiesel (e.g., cloud point, pour point, and cetane number) depend on the type of feedstock used.  See Pew Center.
 
In the United States, the majority of biodiesel historically has been made from domestically produced crude soybean oil due to its relatively low price.  See Pew Center.  However, since January 2006, the cost of crude soybean oil has increased due in part to its use in biodiesel production and competing food demands.  As a result, the biodiesel feedstock market in the United States is in a transition from this increasingly expensive first-generation soy feedstock to alternative second-generation lower-cost, non-food feedstocks such as used vegetable oil, tallow, and algae.  See http://www.emerging-markets.com/biodiesel/default.asp .  Accordingly, we redesigned our continuous line to produce biodiesel from these second-generation lower-cost feedstocks with high fatty acids.  By the end of 2011, daily production volumes from the redesigned line demonstrated a production capacity in excess of 35 million gallons of biodiesel per year.  Debottlenecking has increased the annual rate to in excess of 45 million gallons per year.  Projects are currently in progress to further debottleneck the plant to run at higher rates.
 
Legislative Incentives
 
The acceptance of biodiesel in the United States in the latter part of the 20 th Century and continuing into this Century has been driven to a great degree by legislative initiatives at both the federal and state levels.  Those legislative initiatives are discussed in greater detail below.
 
Federal Mandate
 
The largest incentive at this time is the federal mandate enacted by Congress as part of the Energy Policy Act of 2005 (or the 2005 Act).  The 2005 Act included a number of provisions intended to spur the production and use of biodiesel.  In particular, the 2005 Act’s provisions included biodiesel as part of the minimum volume (i.e., a mandate) of renewable fuels (the renewable fuels standard or RFS) to be included in the nationwide gasoline and diesel pool.  More specifically, the RFS required a specific amount of renewable fuel to be used each year in the nationwide gasoline and diesel pool.  The volume increased each year, from 4 billion gallons per year in 2006 to 7.5 billion gallons per year in 2012.  The 2005 Act required the Environmental Protection Agency (or USEPA), beginning in 2006, to publish “renewable fuel obligations” that will be applicable to refiners, blenders, and importers in the contiguous 48 states.  The renewable fuel obligations were required to be expressed in terms of a volume percentage of gasoline sold or introduced into commerce and consisted of a single applicable percentage that applied to all categories of refiners, blenders, and importers.  The renewable fuel obligations were to be based on estimates that the Energy Information Association provided to the USEPA on the volumes of gasoline it expected would be sold or introduced into commerce.  The USEPA released the final rules to implement the RFS on April 10, 2007.  Under those rules, the RFS compliance period did not begin until September 1, 2007.  The applicable volume of renewable fuel under this program was 4.7 billion gallons for 2007, 5.4 billion gallons for 2008, 11.1 billion gallons for 2009, and 12.95 billion gallon for 2010.  However, no differentiation was made among the various types of renewable fuels (such as biodiesel or ethanol).
 
 
4

 
 
On December 19, 2007, the Energy Independence and Security Act of 2007 (or the 2007 Act) was enacted which, among other things, expanded the RFS (the RFS2).  Prior to the enactment of the 2007 Act, the RFS requirement of the 2005 Act had mostly been filled by ethanol.  In contrast to the 2005 Act, this bill provided a renewable fuel standard carve-out applicable specifically to biodiesel.  Beginning January 1, 2009, the 2007 Act mandated that 500 million gallons of biomass-based diesel (biodiesel) be used per year.  On November 21, 2008, the USEPA announced that the 2009 RFS2 for refiners, importers, and blenders was 10.21%, which represented 11.1 billion gallons of total renewable fuel and included 500 million gallons of biodiesel.  The biodiesel mandate under the 2007 Act increased each year and reached 1 billion gallons per year in 2012.  Beyond 2012, the mandate is to be determined by the USEPA in coordination with the secretaries of energy and agriculture, but with a minimum of that mandated in 2012, thus a 1 billion gallons per year floor.  The USEPA finalized the 2010 and 2011 RFS2 biodiesel volumes at 650 million and 800 million gallons, respectively.
 
The following table shows the RFS/RFS2 requirements for the period 2006 through 2022, inclusive, for biomass-based diesel (biodiesel), cellulosic biofuel, total advanced biofuel, and total renewable fuel (including ethanol).
 
(Gallons in billions)
 
 
Advanced Biofuel
 
Year
Biomass-Based Diesel (biodiesel)
Cellulosic Biofuel
Total Advanced Biofuel
Total Renewable Fuel
2006
n/a
n/a
n/a
4.00
2007
n/a
n/a
n/a
4.70
2008
n/a
n/a
n/a
9.00
2009
0.50
n/a
0.60
11.10
2010
0.65
0.10
0.95
12.95
2011
0.80
0.25
1.35
13.95
2012
1.00
0.50
2.00
15.20
2013
1.00
1.00
2.75
16.55
2014
1.00
1.75
3.75
18.15
2015
1.00
3.00
5.50
20.50
2016
1.00
4.25
7.25
22.25
2017
1.00
5.50
9.00
24.00
2018
1.00
7.00
11.00
26.00
2019
1.00
8.50
13.00
28.00
2020
1.00
10.50
15.00
30.00
2021
1.00
13.50
18.00
33.00
2022
1.00
16.00
21.00
36.00

Source: www.epa.gov/OMS/renewablefuels/rfs2-4standards.pdf
 
 
5

 
 
The actual biodiesel production in the United States for the years 2005 through 2011, compared to the federal mandate, are shown in the following chart.
 
 
Biodiesel Production Source: 2005 thru 2010 is reported by the National Biodiesel Board; 2011 is reported by the USEPA at www.epa.gov/otaq/fuels/rfsdata/2011emts.htm
 
Biodiesel production in 2009 and 2011 exceeded the federal mandate for those years, whereas 2010 production was less than 50% of the 2010 mandate.  We do not have an estimate of biodiesel production in 2012, although the RFS2 mandate will be at least 1 billion gallons for that year.
 
Other Federal Incentives
 
Agencies of the United States government, including the Department of Energy, the USEPA, the Internal Revenue Service, the Department of Agriculture, and the Department of Transportation, offer biodiesel incentives in addition to the mandate discussed above.  Some of these federal governmental incentives do not directly reduce the net cost of producing or blending biodiesel but do drive the demand for biodiesel.  For example, tax credits are available under the Internal Revenue Code for investment in qualifying refueling property, the USEPA will pay 50-100% of the cost for schools to upgrade and/or replace their buses, and programs administered by the Department of Energy indirectly require government fleet operators to purchase substantial amounts of biodiesel.
 
The Energy Policy Act of 1992 requires government fleet operators to use a certain percentage of alternatively fueled vehicles.  The Act established a goal of replacing 10% of motor fuels with non-petroleum alternatives by 2000, increasing to 30% by the year 2010.  Currently, 75% of all new light-duty federal vehicles purchased are required to have alternative fuel capability to set an example for the private automotive and fuel industries.
 
Under the Energy Conservation Reauthorization Act of 1998, vehicle fleets that are required to purchase alternatively fueled vehicles can generate credit toward this requirement by purchasing and using biodiesel in a conventional vehicle.  Since there are few cost-effective options for purchasing heavy-duty alternatively fueled vehicles, federal and state fleet providers can meet up to 50% of their heavy-duty alternatively fueled vehicle purchase requirements with biodiesel.  The biodiesel fuel credit allows fleets to purchase and use 450 gallons of biodiesel in vehicles in excess of 8,500 pounds gross vehicle weight instead of alternatively fueled vehicles.  Fleets must purchase and use the equivalent of 450 gallons of pure biodiesel in a minimum of a 20% blend to earn one credit.  Covered fleets earn one vehicle credit for every light-duty alternatively fueled vehicle they acquire annually beyond their base vehicle acquisition requirements.  Credits can be banked or sold.
 
The 2005 Act also created a new tax credit for small agri-biodiesel producers with production capacity not in excess of 60 million gallons, of 10¢ per gallon for the first 15 million gallons of agri-biodiesel sold.  Our 2011 biodiesel production capacity did not exceed 60 million gallons and we qualified for this credit.  This credit expired at December 31, 2011 and will not be available in 2012.
 
 
6

 
 
On February 17, 2009, the American Recovery and Reinvestment Act of 2009 was enacted which, among other things, appropriated monies to support various investments and offered incentives (such as tax credits, grant programs, and other funding) for projects related to alternative fuels, energy independence, and renewable energy technologies.  For example, the Department of Energy was provided with $800 million for projects related to biomass, and $2 billion was made available for grants for manufacturing advanced battery systems and electric vehicle components to support domestic manufacturing of advanced lithium ion batteries and hybrid electric systems.  We were the recipient of a portion of these grants.  See the discussion under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. - Department of Energy Grant” beginning at page 33 below.
 
The federal government also offers other programs that benefit our biofuels segment, such as the alternative fuel infrastructure credit, the clean school bus program, and the national clean diesel program.
 
State Incentives
 
Many states follow the federal government’s lead and are offering similar programs and incentives to spur biodiesel production and use.  For example, Arkansas offers a tax refund of $0.50 for each gallon of biodiesel used by a supplier to produce a biodiesel/petrodiesel mixture of not more than 2% biodiesel.  In April 2007, Arkansas passed legislation that provided for a $0.20 per gallon biodiesel producer credit and up to $50,000 in grants per site for biodiesel producers and distributors to install distribution infrastructure.  The $0.20 per gallon Arkansas producer credit was capped at 10 million gallons of production, or $2 million, per defined time intervals.  We applied for, and received, the credit for time intervals through June 30, 2009.  No funding was available for this program in 2010 or 2011.  However, we intend to apply for the credit in future years when and as such credit is available.
 
Our review of state statutes reveals that virtually all states provide either user or producer incentives for biodiesel, several states provide both types of incentives, and more than 35 states provide incentives to biodiesel producers to build facilities in their states, typically offering tax credits, grants, and other financial incentives.  As we expand our business outside of Arkansas, we will evaluate these additional state incentives to determine if we qualify for them.
 
Summary
 
We will continue to identify and pursue other legislative incentives to support our business.  However, no assurances can be given that we will qualify for any such incentives or, if we do qualify, what the amount of such incentives will be or whether such incentives will continue to be available.
 
Quality
 
For quality specification purposes, and to qualify for the mandate, biodiesel must meet the requirements of ASTM D6751.  This specification ensures that blends up to B20 are compatible with diesel engines and associated fuel system hardware.  See Status and Issues for Biodiesel in the United States , National Renewable Energy Laboratory, Robert L. McCormick, Teresa Alleman, Aaron Williams, Yoshio Coy, Andrew Hudgins, and Wendy Dafoe, October 2009.  All biodiesel manufactured at our Batesville plant is tested in on-site quality control laboratories and confirmed to meet and usually exceed the ASTM D6751 standard.  The ability of our biodiesel to meet stricter specifications than the industry standards enables us to sell to a broader customer base than our competitors who do not meet those stricter requirements.
 
Commercially available biodiesels can contain small amounts of unreacted or partially reacted oils and fats as well as other minor components and impurities.  The unreacted or partially reacted oils and fats are called glycerides.  In rare instances the glycerides and other minor components and impurities can clog engine filters.  To address this issue, ASTM D6751 was amended in February 2012 to create two new grades of biodiesel.  Grade No. 2 is essentially the specifications in effect before the amendment.  Grade No. 1 provides for a maximum total monoglyceride content and a maximum cold soak filterability time and in theory would be used where the No. 2 biodiesel does not operate down to its cloud point.  Both grades of biodiesel qualify as “biodiesel” for purposes of the RFS2 mandate.  All biodiesel made in our continuous process meets the specifications for No. 1 biodiesel.  However, the effect on the market for biodiesel resulting from the existence of two grades in unknown at this time.
 
 
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In response to early product quality inconsistencies, the U.S. biodiesel industry created the BQ-9000 program.  This program is run by the National Biodiesel Accreditation Committee, which is a cooperative and voluntary program for the accreditation of biodiesel producers and marketers.  The program is a quality systems program that includes storage, sampling, testing, blending, shipping, distribution, and fuel management practices.  Since the creation and adoption of the BQ-9000 program, the quality of biodiesel in the U.S. market has improved greatly.  Our plant is operated as a BQ-9000 accredited production facility.
 
The ISO 9000 family of standards represents an international consensus on good quality management practices.  It consists of standards and guidelines relating to quality management systems and related supporting standards.  ISO 9001 is the standard that provides a set of standardized requirements for a quality management system, regardless of what the user organization does, its size, or whether it is in the private or public sector.  It is the only international standard against which organizations can be certified, although certification is not a compulsory requirement of the standard.  Our plant is an ISO 9001 accredited production facility.
 
Renewable Identification Numbers
 
As noted above, the RFS2 mandates levels of various types of renewable fuels that are to be blended with U.S. gasoline and diesel fuel by U.S. refiners, blenders, and importers.  Renewable Identification Numbers (or RINs) are the mechanism for insuring that the prescribed levels of blending are reached.  As ethanol and biodiesel is produced or imported, the producer or importer has the responsibility to assign a series of numbers (i.e., a RIN) to their product.  Assignment is made according to guidelines established by the USEPA.  Currently, 1½ RINs are assigned for each gallon of biodiesel produced.  When biofuels change ownership to the refiners, importers, and blenders of the fuel, the RINs are also transferred.  The RINs ultimately are separated from the renewable fuel generally at the time the renewable fuel is blended.  The refiners, importers, and blenders generally use the RINs to establish that they have blended their applicable percentage of renewable fuels during the applicable reporting period.  However, once the RINs are separated from the underlying biofuels (e.g., by blending the underlying biodiesel with petrodiesel), they can also be sold separate and apart from the underlying biofuel.
 
We create RINs with our biodiesel.  Those RINs may be separated from the biodiesel at the time, if any, that we blend the biodiesel with petrodiesel.  If we sell the unblended biodiesel, the RIN goes with the biodiesel.  If we blend the biodiesel, we then sell the RINs with our blended biodiesel or we sell them separate from the biodiesel, dependent upon whether there is a market for the separated RINs and the prices at which they can be sold.  In July 2010 when the RFS2 became effective, biodiesel RINs began trading through market makers.  However, please note that no assurances can be given that a separate market for RINs will be sustained or, if sustained, the price for which biodiesel RINs can be sold.
 
Loss of the Blenders Credit
 
Congress passed a biodiesel tax incentive, structured as a federal excise tax credit (also known as the blenders credit), as part of the American Jobs Creation Act of 2004.  The blenders credit amounted to one cent for each percentage point of vegetable oil or animal fat biodiesel that was blended with petrodiesel (and one-half cent for each percentage point of recycled oils and other non-agricultural biodiesel).  For example, blenders that blended B20 made from soy, canola, and other vegetable oils and animal fats received a 20¢ per gallon excise tax credit, while biodiesel made from recycled restaurant oils (yellow grease) received half of this credit.  The tax incentive generally was taken by petroleum distributors and was substantially passed on to the consumer.  The blenders credit was designed to lower the cost of biodiesel to consumers in both taxable and tax-exempt markets.  The blenders credit was scheduled to expire at the end of 2006, but was extended by the 2005 Act to the end of 2008.  The Emergency Economic Stabilization Act of 2008 extended the blenders credit through December 31, 2009 and qualified all biodiesel for a $1.00 per gallon tax credit, including biodiesel made from non-virgin feedstocks such as yellow grease.  The blenders credit again expired on December 31, 2009.  However, in December 2010, the blenders credit was reinstated by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, retroactive to January 1, 2010 and effective through December 31, 2011.  The blenders credit finally expired on December 31, 2011 and was not extended, nor do we anticipate that Congress will again reinstate the credit.
 
 
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Glycerin
 
A byproduct of the biodiesel process is crude glycerin, which is produced at the rate of approximately 10% by mass of the quantity of biodiesel produced.  See http://www.benchmarkenergy.net/market.html .  The RFS2 2012 mandate will result in excess of 100 million gallons of glycerin being produced by the biodiesel industry in 2012.  As a result of this influx of glycerin from biodiesel production, U.S. glycerin markets have been and will be significantly affected.  The crude glycerin generated from biodiesel production is impure and of little economic value.  See http://www.extension.org/pages/29264/new-uses-for-crude-glycerin-from-biodiesel-production .  Biodiesel producers generally sell their crude glycerin to large refineries for upgrading.  However, because of the influx of crude glycerin into the market from biodiesel producers, such producers are receiving only a few cents per pound for this byproduct.  Crude glycerin can be refined into a pure form and then used in the specialty chemical, food, pharmaceutical, and/or cosmetic industries.  However, because the food, pharmaceutical, and cosmetic industries require USP grade glycerin, most biodiesel producers must seek alternative methods for its disposal.  Production of a technical grade of glycerin suitable for specialty chemical applications is less expensive than production of the USP grade required for food, pharmaceutical, and cosmetic applications.  Production of a technical grade of glycerin is a potential alternative to the costly disposal of crude glycerin or the relatively expensive purification to a USP grade glycerin.
 
Until the middle of 2011, we primarily utilized the crude glycerin generated in our biodiesel production as a waste fuel to provide a portion of the thermal energy required to operate our plant.  Process wastewater streams containing low concentrations of glycerin were and continue to be disposed of in our wastewater treatment facilities.  In mid-2011, we added the capability to partially clean the glycerin (i.e., remove methanol) to make the glycerin suitable for use in animal feed rations and began selling methanol free crude glycerin for use in various industrial markets  mid-2011.  Glycerin which is not cleaned up continues to be burned as waste fuel or is disposed of in our wastewater treatment facility.
 
In 2012, we expect that the rate of methanol recovery from our glycerin will increase, thereby reducing the quantities of crude glycerin burned as waste fuel or treated in our wastewater treatment facilities.  We also plan to produce a technical grade glycerin that will have specialty chemical applications, although no assurances can be given that we will be successful in that endeavor.
 
Biodiesel Production Capacity
 
According to Biodiesel Magazine, as of December 21, 2011, there were 190 biodiesel plants in existence in the United States.  These plants had a combined annual nameplate production capacity of 2.881 billion gallons.  An additional 14 plants were under construction with a combined nameplate production capacity of 402.5 million gallons, for a total built-out capacity of 3.284 billion gallons.  See www.biodieselmagazine.com/articles/8241/2012-data-shows-us-capacity-at-2-881-billion .  This is more than three times the total biodiesel production in 2011 and more than three times the federal mandate for 2012.
 
The majority of this nameplate production capacity was built to use higher cost crude vegetable oil, usually soybean oil, as its only feedstock.  We believe many of these biodiesel plants were constructed in haste and were either poorly built, built with deficient technology, built in an area with poor logistics, or a combination of the foregoing.  These factors, plus the contraction of the biodiesel industry in 2009 and 2010, caused many of these biodiesel plants to fail.  Many of the biodiesel plants that shut down production prior to 2011 may experience difficulty in restarting production due to insufficient working capital, poor logistics that make them less competitive, and a limited ability to run lower cost feedstocks without significant capital improvements.  As such, we do not believe that stated nameplate capacity of all of the biodiesel plants as set forth above is the practical production capacity in the United States, but rather we believe the practical production capacity is substantially less than the stated nameplate capacity.  However, we do not know the amount of the actual practical biodiesel production capacity in the United States.
 
Customers and Markets
 
Biodiesel and biodiesel blends are currently used in nearly all of the end markets where petrodiesel is used.  Most biodiesel in the United States is consumed in the on-road diesel fuel market, although some is used for off-road purposes  such as the farming, residential/commercial heating oil, and power generation markets.
 
 
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We currently market our biodiesel products by truck and rail directly to customers in the United States.  Through the utilization of liquid bulk storage facilities and barge loading capabilities, we are positioned to market biodiesel throughout the United States for transportation and home heating fuel usage.  Although the regional market is still being developed, we estimate that the regional direct market available to us at maturity will be at least 30 million gallons per year.
 
For the twelve months ended December 31, 2011, one of our customers represented approximately 46% of our biofuels revenues (21% of total revenues) with the remaining biofuels revenues (25% of total revenues) spread across a large number of customers.  We do not have a contract with this customer, but rather sell on the basis of monthly purchase orders placed with us by this customer at prices based upon then-prevailing market rates.  We do not believe that the loss of this customer would have a material adverse effect on our biofuels segment in that: (i) unlike our custom manufacturing products, biodiesel is a commodity with a large potential customer base; (ii) we believe that we could readily sell our biodiesel to other customers in that current customer demand for our biodiesel exceeds our production capacity; and (iii) the prices we receive from this customer are based upon then-market rates.
 
Competition
 
We compete with other producers of biodiesel, both locally, regionally, and nationally.  The largest producers of biodiesel in the United States in 2011 were Renewable Energy Group, Inc., Archer Daniels Midland Company, Louis Dreyfus Commodities, and AG Processing, Inc.  There were numerous other smaller producers.  There are four biodiesel plants in the state of Arkansas, but only our plant is currently operating.  There are several operating facilities in surrounding states and announced biodiesel production facilities in surrounding states.
 
In addition to biodiesel producers, we compete with new technologies that are being developed as alternatives to biodiesel.  For example, biotech company LS9 Inc. announced that it is producing renewable diesel fuel from E. coli excrement.  See http://www.prweb.com/releases/2010/07/prweb4324034.htm .  UOP, a major supplier to the petrochemical refining industry, has also reported the development of technology for the conversion of natural oils and wastes to green diesel, and for producing renewable jet fuel from alcohols found in natural feedstocks.  See http://www.kctv5.com/story/16163806/honeywells-uop-receives-contract-to-demonstrate-technology-for-conversion-of-alcohol-to-aviation-biofuel .  We cannot give any assurances that renewable diesel fuel, green diesel, or some other product produced by these competing technologies will not supplant biodiesel as an alternative to conventional petrodiesel.
 
Supply and Distribution
 
As a result of our feedstock-flexible process, we are able to source feedstock from a broad supplier base which includes crude corn oil producers and pork, chicken, and beef rendering facilities from both national and regional suppliers.  Crude corn oil has been sourced from several national and regional producers.  Cottonseed oil has been sourced from a regional cooperative.  All feedstocks are currently supplied by either rail or truck.  We believe that an adequate supply of feedstocks can be sourced to support our anticipated production.
 
We sell biodiesel from our plant site as well as ship it to liquid bulk storage facilities for further distribution.  Sales from our plant site are made by railcar and tank truck.  Biodiesel is being delivered by Company-owned tank trucks and common carriers to liquid bulk storage facilities leased by us for distribution there and for further transportation by barge or tank truck.
 
Cyclicality and Seasonality
 
Biodiesel producers have historically experienced seasonal fluctuations in demand for biodiesel.  Biodiesel demand has tended to be lower during the winter in northern and midwestern states due to concerns about biodiesel’s ability to operate optimally in cold weather as compared to petrodiesel.  This seasonal fluctuation was strongest for biodiesel made from inedible animal fats and used cooking oils.  Biodiesel made from those feedstocks has a higher cloud point (which is the point at which a fuel begins to gel) than biodiesel produced from soybean, canola, or crude corn oil.  This higher cloud point may cause cold weather performance issues.  This historical seasonality appears to be decreasing as biodiesel blends are used in cold midwestern states like Illinois throughout the year.
 
 
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Our sales of biodiesel previously were limited in winter months in that non-seasonal business (primarily on-road transportation) had not been sufficient regionally to generate biodiesel sales at blends greater than B5 in winter months at the end of farming activity.  At this time, however, due primarily to the quality of our biodiesel, we are experiencing continued demand for our biodiesel during winter months.
 
Outlook for the Biodiesel Industry/Our Future Strategy
 
Prior to 2009, the biodiesel industry had enjoyed significant growth.  However, producers who manufacture biodiesel solely from soybean oil have seen their feedstock costs rise dramatically since 2006 as discussed above.  As the relative cost of biodiesel increased due to rising prices of feedstocks (among other things), and the blenders credit terminated at the end of 2009 (with uncertainty about its reinstatement), the production of biodiesel in the United States decreased in 2009 and 2010, also as discussed above.  Biodiesel production increased again in 2011 with the reinstatement of the blenders credit.  However, the blenders credit expired at the end of 2011, and there is uncertainty as to the impact of the credit’s expiration on the U.S. biodiesel industry.  To date, our biodiesel business has not been materially adversely affected by the termination of the blenders credit at the end of 2011.
 
Given the loss of the blenders credit and the high cost of soybean oil, researchers generally agree that producers who manufacture biodiesel solely from soybean oil have been adversely affected and that the U.S. biodiesel market will transition to larger plants, alternative feedstocks, and second generation technologies, resulting in a consolidation among smaller, first-generation producers accompanied by a series of mergers and acquisitions in the field.  We believe that producers who are proactive in responding to these changes can benefit in this emerging market.  These responses include: new and improved technologies; alternative feedstocks with higher yields; production scalability and flexibility options; supply chain, distribution, and co-location strategies; the sale of RINs separate from the underlying biodiesel; and innovative risk management strategies.  See http://www.emerging-markets.com/biodiesel/default.asp .
 
Our future strategy for our biofuels segment is geared towards these responses.  For example, in 2009, we commercialized two biobased solvents: FUTURESOL FAME and FUTURESOL Glysol, which we are marketing.  In addition, we redesigned our continuous line to produce biodiesel from lower cost feedstock with high fatty acids.  By the end of 2011, daily production volumes from the redesigned line demonstrated a production capacity in excess of 35 million gallons of biodiesel per year.  Debottlenecking has increased the annual rate to in excess of 45 million gallons per year.  Projects are currently in progress to further debottleneck the plant to run at higher rates.  We intend to expand our biodiesel capacity utilizing available facilities as market conditions dictate.  We expect that all future capacity will be operated primarily in continuous processing mode to realize operating economies and optimum throughput.  Furthermore, we expect existing and future processes will accommodate a wide range of feedstock oils, allowing optimization relative to supply and pricing.
 
Notwithstanding our future strategy, our continued production of biodiesel may be severely limited, or eliminated entirely, in the event Congress eliminates the federal mandate of the RFS2.  See “Risk Factors” beginning at page 17  below.
 
Chemicals Business Segment
 
Overview of the Segment
 
Our chemicals segment manufactures diversified chemical products that are sold externally to third party customers.  This segment comprises two components: “custom manufacturing” (manufacturing chemicals for specific customers); and “performance chemicals” (multi-customer specialty chemicals).
 
Chemical Products
 
Custom manufacturing involves producing unique products for individual customers, generally under long-term contracts.  Many of these products are produced under confidentiality agreements in order to protect intellectual property.  This is a service-based business where customers value technical capabilities, responsiveness, and process improvement to continually improve costs and reliability.  Our plant’s custom manufacturing product portfolio includes two large products or product families which are generally produced throughout the year: (i) a bleach activator for a major detergent and consumer products manufacturer; and (ii) a proprietary herbicide (and intermediates) for a major life sciences company.  The portfolio also contains a number of smaller products most of which are produced intermittently in a “batch campaign” mode, for diverse customers and end markets.  These smaller products include chlorinated polyolefin adhesion promoters and antioxidant precursors for a major chemical company and a biocide intermediate for another major diversified chemical company.  In 2012, we will also be selling commercial quantities of an intermediate anode powder as a component of high-performance graphite anode materials for lithium-ion batteries to a major petrochemical company.
 
 
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Performance chemicals comprise multi-customer products which are sold based upon specification and/or performance in the end-use application.  This portfolio includes a family of polymer (nylon and polyester) modifiers and several small-volume specialty chemicals and solvents for diverse applications.  In addition, we have recently been successful in growing our performance chemical business through new product development.  New products include a family of acetal based solvents, including diethoxymethane, dimethoxymethane, dibutoxymethane, and glycerol formal, and phenol sulfonic acid, which build on our sulfonations technology.
 
Future Strategy
 
To build on and maintain our reputation as a technology-driven competitive chemical producer, we believe that we must continuously focus on cost control, operational efficiency, and capacity utilization to maximize earnings.  The ability to utilize large scale batch and continuous production processes and a continuous focus on process improvements allow us to compete effectively in the custom manufacturing market and to remain cost competitive with, and for some products cost-advantaged over, our competitors.  We intend to improve margins in this area of our business by careful management of product mix with regard to size of opportunity, timing to market, capital efficiency, and matching of opportunities to assets and capabilities.
 
We expect to derive significant growth in performance chemicals as a result of the application of new technologies to the conversion of biomass and waste carbon sources in order to produce a range of specialty chemical products.  If we are successful in developing these products, they would represent a first generation of renewable chemicals that we believe would displace materials currently produced from fossil fuels.  However, no assurances can be made that we will successfully develop such products or, if developed, that they will be accepted commercially.
 
Customers and Markets
 
Our chemical products are used in a variety of markets and end uses, including detergent, agrochemical, automotive, photographic imaging, coatings, nutrition, and polymer additives.  These products are generally non-cyclical; however, the customers are often the “brand owners” and therefore control factors related to demand, such as market development strategy.  In many cases, we may be unable to increase or maintain our level of sales revenue for these products.
 
All sales of the bleach activator are made to The Procter & Gamble Company pursuant to a multi-year supply agreement that was effective April 1, 2008.  Sales of the bleach activator totaled $70,179,000, $79,537,000, and $73,466,000 for the years ended December 31, 2011, 2010, and 2009, respectively.  In the second quarter of 2011, we received notification from the customer of the bleach activator stating their intention to reduce the quantities of the bleach activator they purchase beginning as soon as possible from the date of such notice.  The amount of such decrease was not stated.  We continue to work collaboratively with our customer to assess their future demand, which demand may continue to decline.  The financial impact of any such decline is not known at this time.
 
All sales of a proprietary herbicide and certain other intermediates used in the production of this herbicide are made to Arysta LifeScience North America Corporation pursuant to contracts which continue year-to-year unless terminated by notice given no later than 270 days prior to the end of the current term for the herbicide and not later than 18 months prior to the current term for the intermediates.  No assurances can be given that these contracts will not be terminated.  Sales of this herbicide and its intermediates totaled $38,925,000, $36,509,000, and $31,587,000 for the years ended December 31, 2011, 2010, and 2009, respectively. Ostensibly due to increased generic competition, the customer recently initiated discussions to, among other things, reduce volumes and/or prices of the herbicide and intermediates. For the first three months of 2012, the customer reduced its purchase volumes by approximately 50% of 2011 levels. We do not know the volumes of these products which ultimately will be sold to this customer in 2012. However, no definitive agreement has been reached at this time and the financial impact of changes, are not known.
 
None of our other chemical customers represented 10% or more of our revenues from our chemical segment.
 
 
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Competition
 
Historically, there have been significant barriers to entry for competitors with respect to chemicals primarily due to the fact that the relevant technology and manufacturing capability has been held by a small number of companies.  As technology and investment have increasingly moved outside of North America, competition from multi-national chemical manufacturers has intensified, primarily from India and China.  We compete with these and other producers primarily based on price, customer service, technology, quality, and reliability.  Our major competitors in this segment include large multi-national companies with specialty chemical business units, and smaller independent producers.  The multi-national competitors are often disadvantaged by poor responsiveness and customer service, while the small producers often have limited technology and financial resources.  We believe that we are well positioned for growth due to the combination of our scale of operations, technical capabilities, and financial resources.
 
Supply and Distribution
 
Specialty chemicals are generally high unit value products sold in packaged, or low-volume bulk form, for which distribution is a relatively minor component of cost.  Most products are sold FOB the Batesville site for distribution globally.  Similarly, raw materials for these products are comparatively higher-value components that are sourced globally.  An exception will be the biofuels co-products, which will be recovered from local processing.
 
Cyclicality and Seasonality
 
Our chemical products typically are not cyclical but they are sensitive to global economic conditions.  Supply and demand dynamics determine profitability at different stages of cycles and global economic conditions affect the length of each cycle.  Despite some sensitivity to global economic conditions, many of the products in the chemical segment provide a stable foundation of earnings.
 
Backlog
 
The majority of our revenues are derived under custom manufacturing agreements with specific customers.  These customers generally provide us with forecasts of demand on a monthly or quarterly basis.  These forecasts are intended to enable us to optimize the efficiency of our production processes and generally are not firm sales orders.  As such, we do not monitor or report backlog.
 
Intellectual Property
 
We consider our intellectual property portfolio to be a valuable corporate asset which we intend to expand and protect globally through a combination of trade secrets, confidentiality and non-disclosure agreements, patents, and copyrights.  As a producer of a broad and diverse portfolio of chemicals, our intellectual property relates to a wide variety of products and processes acquired through the development and manufacture of over 300 specialty chemicals during the history of the site.  Our primary strategy regarding our intellectual property portfolio will be to appropriately protect all innovations and know-how in order to provide our business segments with a technology-based competitive advantage wherever possible.  In the chemicals business segment, custom manufacturing projects are primarily conducted within the framework of confidentiality agreements with each customer to ensure that intellectual property rights are defined and protected.  In the biofuels business segment, innovations and process know-how will be vigorously protected as appropriate.  As may be necessary, we will seek to license technologies from third parties that complement our strategic business objectives.  Neither our business as a whole nor any particular segment is materially dependent upon any one particular patent, copyright, or trade secret.  As the laws of many foreign countries do not protect intellectual property to the same extent as the laws of the United States, we can make no assurance that we will be able to adequately protect all of our intellectual property assets.
 
 
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Research and Development
 
We devote significant resources to our research and development programs which are primarily targeted towards two objectives:
 
 
·
innovating, developing, and improving biofuels processes, in particular biodiesel and other biofuels, including value-up technology and applications for co-products; and
 
·
developing and improving processes for custom manufacturing products and performance chemicals.
 
Our research and development capabilities comprise analytical chemistry competencies to assay and characterize raw materials and products, organic chemistry expertise applied across a breadth of reaction chemistries and materials, process engineering capabilities for batch and continuous processing of both solid and liquid materials, and proficiency in process safety to design and scale-up safe chemical manufacturing processes.  We believe that these core competencies, established in support of the legacy chemical business, are applicable to building a technology-based position in biofuels and associated biobased specialty products.
 
Research and development expense incurred by us for the years ended December 31, 2011, 2010, and 2009 were $3,512,000, $3,494,000, and $4,165,000, respectively.  Substantially all of such research and development expense related to the development of new products, services, and processes or the improvement of existing products, services, and processes.
 
Environmental Matters
 
Various aspects of our operations are subject to regulation by state and federal agencies.  Biofuel and chemical operations are subject to numerous, stringent, and complex laws and regulations at the federal, state, and local levels governing the discharge of materials into the environment or otherwise relating to environmental protection.  These laws and regulations may:
 
 
·
require acquisition of permits regarding discharges into the air and discharge of waste waters;
 
·
place restrictions on the handling and disposal of hazardous and other wastes; and
 
·
require capital expenditures to implement pollution control equipment.
 
Compliance with such laws and regulations can be costly and noncompliance can result in substantial civil and even criminal penalties.  Some environmental laws impose strict liability for environmental contamination, rendering a person liable for environmental damages and cleanup costs without regard to negligence or fault.  Moreover, public interest in the protection of the environment has increased substantially in recent years.  Our operations could be adversely affected to the extent laws are enacted or other governmental action is taken that imposes environmental protection requirements that result in increased costs to the biofuels and/or chemical manufacturing industry in general.  The following provides a general discussion of some of the significant environmental laws and regulations that impact our activities.
 
The federal Comprehensive Environmental Response, Compensation and Liability Act (or CERCLA), and analogous state laws, impose joint and several liability, without regard to fault or the legality of the original act, on certain classes of persons that contributed to the release of a hazardous substance into the environment.  These persons include the owner and operator of the site where the release occurred, past owners and operators of the site, and companies that disposed or arranged for the disposal of hazardous substances found at the site.  Responsible parties under CERCLA may be liable for the costs of cleaning up hazardous substances that have been released into the environment and for damages to natural resources.  Additionally, it is not uncommon for third parties to assert claims for personal injury and property damage allegedly caused by the release of hazardous substances or other pollutants into the environment.
 
The federal Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act (or RCRA), is the principal federal statute governing the management of wastes, including the treatment, storage, and disposal of hazardous wastes.  RCRA imposes stringent operating requirements, and liability for failure to meet such requirements, on a person who is either a generator or transporter of hazardous waste or an owner or operator of a hazardous waste treatment, storage, or disposal facility.  Many of the wastes generated in our manufacturing facility are governed by RCRA.
 
 
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The federal Oil Pollution Act of 1990 (or OPA) and regulations thereunder impose liability on responsible parties for damages resulting from oil spills into or upon navigable waters, adjoining shorelines, or in the exclusive economic zone of the United States.  A responsible party includes the owner or operator of an onshore facility.  OPA limits liability for onshore facilities to $350 million.  These liability limits may not apply if a spill is caused by a party’s gross negligence or willful misconduct, the spill resulted from violation of a federal safety, construction, or operating regulation, or if a party fails to report a spill or to cooperate fully in a clean-up.  Failure to comply with OPA’s requirements may subject a responsible party to civil, criminal, or administrative enforcement actions.
 
The federal Water Pollution Control Act (also referred to as the Clean Water Act) imposes restrictions and controls on the discharge of pollutants into navigable waters.  These controls have become more stringent over the years, and it is possible that additional restrictions may be imposed in the future.  Permits must be obtained to discharge pollutants into state and federal waters.  The Clean Water Act provides for civil, criminal, and administrative penalties for discharges of oil and other pollutants, and imposes liability on parties responsible for those discharges for the costs of cleaning up any environmental damage caused by the release and for natural resource damages resulting from the release.  Comparable state statutes impose liability and authorize penalties in the case of an unauthorized discharge of petroleum or its derivatives, or other pollutants, into state waters.
 
The federal Clean Air Act and associated state laws and regulations restrict the emission of air pollutants from many sources, including facilities involved in manufacturing chemicals and biofuels.  New facilities are generally required to obtain permits before operations can commence, and new or existing facilities may be required to incur certain capital expenditures to install air pollution control equipment in connection with obtaining and maintaining operating permits and approvals.  Federal and state regulatory agencies can impose administrative, civil, and criminal penalties for non-compliance with permits or other requirements of the Clean Air Act and associated state laws and regulations.
 
The federal Endangered Species Act, the federal Marine Mammal Protection Act, and similar federal and state wildlife protection laws prohibit or restrict activities that could adversely impact protected plant and animal species or habitats.  Manufacturing activities could be prohibited or delayed in areas where such protected species or habitats may be located, or expensive mitigation may be required to accommodate such activities.
 
Our policy is to operate our plant and facilities in a manner that protects the environment and the health and safety of our employees and the public.  We intend to continue to make expenditures for environmental protection and improvements in a timely manner consistent with our policies and with the technology available.  In some cases, applicable environmental regulations such as those adopted under the Clean Air Act and RCRA, and related actions of regulatory agencies, determine the timing and amount of environmental costs incurred by us.
 
We establish reserves for closure/post-closure costs associated with the environmental and other assets we maintain.  Environmental assets include waste management units such as chemical waste destructors, landfills, storage tanks, and boilers.  When these types of assets are constructed or installed, a reserve is established for the future costs anticipated to be associated with the closure of the site based on the expected life of the environmental assets, the applicable regulatory closure requirements, and our environmental policies and practices.  These expenses are charged into earnings over the estimated useful life of the assets.  Currently, we estimate the useful life of each individual asset up to 35 years.
 
In addition to our general environmental policies and policies for asset retirement obligations and environmental reserves, we accrue environmental costs when it is probable that we have incurred a liability and the amount can be reasonably estimated.  In some instances, the amount cannot be reasonably estimated due to insufficient data, particularly in the nature and timing of the future performance.  In these cases, the liability is monitored until such time that sufficient data exists.  With respect to a contaminated site, the amount accrued reflects our assumptions about remedial requirements at the site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties.  Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, chemical control regulations, and testing requirements could result in higher or lower costs.
 
 
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Our cash expenditures related to environmental protection and improvement were approximately $10,287,000, $9,376,000, and $9,923,000 for the years ended December 31, 2011, 2010, and 2009, respectively.  These amounts pertain primarily to operating costs associated with environmental protection equipment and facilities, but also include expenditures for construction and development.  We do not expect future environmental capital expenditures arising from requirements of environmental laws and regulations to materially increase our planned level of annual capital expenditures for environmental control facilities.
 
We believe that we have obtained in all material respects the necessary environmental permits and licenses to carry on our operations as presently conducted.  We have reviewed environmental investigations of the properties owned by us and believe, on the basis of the results of the investigations carried out to date, that there are no material environmental issues which adversely impact us.  In addition, under our acquisition agreement with Eastman Chemical Company, Eastman Chemical Company acquired environmental insurance with respect to environmental conditions at the Batesville plant existing as of the closing date and Eastman Chemical Company agreed, subject to certain limitations, to indemnify FutureFuel Chemical Company with respect to such environmental conditions through October 31, 2011.  No such indemnification exists after that date.  In connection with the acquisition of our warehouse in Batesville, the seller agreed to remediate certain environmental conditions existing at the facility on the date that we acquired it and to indemnify us with respect to those environmental conditions.
 
Management Team and Workforce
 
Our executive management team at our Batesville plant consists of individuals with a combined 80 plus years of experience in the chemicals industry, comprising technical, operational, and business responsibilities.  The members of the executive team also have international experience, including assignments in Europe and Asia.  The operational and commercial management group at the Batesville site includes additional degreed professionals with an average experience of over 20 years in the chemical industry.
 
Our Batesville workforce comprises approximately 500 full-time employees, and includes degreed professionals (including chemists and PhDs) and engineers (including licensed professional engineers and chemical engineers).  Operations personnel are highly skilled as all site manufacturing and infrastructure is fully automated and computer-controlled.  The workforce is substantially self-sufficient in the range of required operational skills and experience due to the lack of locally-available process industry infrastructure.  Voluntary attrition at the site has averaged 2% annually since 2007.  We believe that we have good relations with our employees.
 
Financial Information about Geographic Areas
 
Most of our sales are FOB the Batesville plant, although some FOB points are in other states or at foreign ports.  While many of our chemicals are utilized to manufacture products that are shipped, further processed, and/or consumed throughout the world, the chemical products, with limited exceptions, generally leave the United States only after ownership has transferred from us to the customer.  Rarely are we the exporter of record, never are we the importer of record into foreign countries, and we are not always aware of the exact quantities of our products that are moved into foreign markets by our customers.  We do track the addresses of our customers for invoicing purposes and use this address to determine whether a particular sale is within or outside the United States.  Our revenues for the last three fiscal years attributable to the United States and foreign countries (based upon the billing addresses of our customers) were as set forth in the following table.
 
(Dollars in thousands)
 
Period
 
United States
   
All Foreign
Countries
   
Total
 
Year ended December 31, 2011
  $ 295,780     $ 14,105     $ 309,885  
Year ended December 31, 2010
  $ 201,496     $ 17,687     $ 219,183  
Year ended December 31, 2009
  $ 179,505     $ 17,206     $ 196,711  

For the years ended December 31, 2011, 2010, and 2009, revenues from Mexico accounted for 4%, 7%, and 8%, respectively, of total revenues.  Other than Mexico, revenues from a single foreign country during 2011, 2010, and 2009 did not exceed 1% of our total revenues.
 
 
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All of our long-lived assets are located in the United States.
 
Available Information
 
We file annual, quarterly, and other reports, proxy statements, and other information with the SEC.  You may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549.  You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers such as us that file electronically with the SEC.  You may access that site at http://www.sec.gov .
 
Such documents may also be viewed at our website at http://ir.futurefuelcorporation.com/sec.cfm .
 
We make available free of charge, through the “Investor Relations - SEC Filings” section of our Internet website ( http://ir.futurefuelcorporation.com/sec.cfm ), our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (or the Exchange Act), as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the SEC.
 
We also make available free of charge, through the “Investor Relations - Corporate Governance” section of our website ( http://ir.futurefuelcorporation.com/governance.cfm ), the corporate governance guidelines of our board of directors, the charters of each of the committees of our board of directors, and the code of business conduct and ethics for our directors, officers, and employees.  Such materials will be made available in print upon the written request of any shareholder to FutureFuel Corp., 8235 Forsyth Blvd., 4 th Floor, Clayton, Missouri 63105, Attention: Investor Relations.
 
Item 1A. Risk Factors.
 
An investment in us involves a high degree of risk and may result in the loss of all or part of your investment.  You should consider carefully all of the information set out in this document and the risks attaching to an investment in us, including, in particular, the risks described below.  The information below does not purport to be an exhaustive list and should be considered in conjunction with the contents of the rest of this document.
 
Risks Associated With Our Business Activities
 
The industries in which we compete are highly competitive.
 
The biodiesel industry, as well as the chemical business, are highly competitive.  There is competition within these industries and also with other industries in supplying the energy, fuel, and chemical needs of industry and individual consumers.  We compete with other firms in the sale or purchase of various goods or services in many national and international markets.  We compete with large national and multi-national companies that have longer operating histories, greater financial, technical, and other resources, and greater name recognition than we do.  In addition, we compete with several smaller companies capable of competing effectively on a regional or local basis, and the number of these smaller companies is increasing.  Our competitors may be able to respond more quickly to new or emerging technologies and services and changes in customer requirements.  As a result of competition, we may lose market share or be unable to maintain or increase prices for our products and/or services or to acquire additional business opportunities, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.  Although we will employ all methods of competition which are lawful and appropriate for such purposes, no assurances can be made that they will be successful.  A key component of our competitive position, particularly given the expected commodity-based nature of many of our products, will be our ability to manage expenses successfully, which requires continuous management focus on reducing unit costs and improving efficiency.  No assurances can be given that we will be able to successfully manage such expenses.
 
Our competitive position in the markets in which we participate is, in part, subject to external factors in addition to those that we can impact.  Natural disasters, changes in laws or regulations, war or other outbreak of hostilities, or other political factors in any of the countries or regions in which we operate or do business, or in countries or regions that are key suppliers of strategic raw materials, could negatively impact our competitive position and our ability to maintain market share.
 
 
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As to our biofuels segment, biodiesel produced in Canada, South America, Europe, Eastern Asia, the Pacific Rim, or other regions may be imported into the United States to compete with U.S. produced biodiesel.  These regions may benefit from biodiesel production incentives or other financial incentives in their home countries that offset some of their biodiesel production costs and enable them to profitably sell biodiesel in the U.S. at lower prices than U.S.-based biodiesel producers.  Under the RFS2, imported biodiesel may be eligible to satisfy an obligated party’s requirements and therefore may compete to meet the volumetric requirements of RFS2.  This could make it more challenging for us to market or sell biodiesel in the United States, which would have a material adverse effect on our revenues.
 
The European Commission has imposed anti-dumping and countervailing duties on biodiesel blends imported into Europe, which have effectively eliminated our ability to sell those biodiesel blends in Europe.
 
In March 2009, as a response to the federal blenders tax credit, the European Commission imposed anti-dumping and anti-subsidy tariffs on biodiesel produced in the United States.  These tariffs have effectively eliminated European demand for B20 or higher blends imported from the United States.  The European Commission extended these tariffs through 2014.  In May 2011, the European Commission imposed similar anti-dumping and countervailing duties on biodiesel blends below B20.  These duties significantly increase the price at which we and other United States biodiesel producers will be able to sell such biodiesel blends in European markets, making it difficult or impossible to compete in the European biodiesel market.  These anti-dumping and countervailing duties therefore decrease the demand for biodiesel produced in the United States and increase the supply of biodiesel available in the United States market.  Such market dynamics may negatively impact our revenues and profitability.
 
Fluctuations in commodity prices may cause a reduction in the demand or profitability of the products or services we produce.
 
Prices for alternative fuels tend to fluctuate widely based on a variety of political and economic factors.  These price fluctuations heavily influence the oil and gas industry.  Lower energy prices for existing products tend to limit the demand for alternative forms of energy services and related products and infrastructure.  Historically, the markets for alternative fuels have been volatile, and they are likely to continue to be volatile.  Wide fluctuations in alternative fuel prices may result from relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty, and other factors that are beyond our control, including:
 
 
·
worldwide and domestic supplies of oil and gas;
 
·
the price and/or availability of biodiesel feedstocks;
 
·
weather conditions;
 
·
the level of consumer demand;
 
·
the price and availability of alternative fuels;
 
·
the availability of pipeline and refining capacity;
 
·
the price and level of foreign imports;
 
·
domestic and foreign governmental regulations and taxes;
 
·
the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls;
 
·
political instability or armed conflict in oil-producing regions; and
 
·
the overall economic environment.
 
These factors and the volatility of the commodity markets make it extremely difficult to predict future alternative fuel price movements with any certainty.  There may be a decrease in the demand for our products or services and our profitability could be adversely affected.
 
We are reliant on certain strategic raw materials for our operations.
 
We are reliant on certain strategic raw materials (such as acetic anhydride, pelargonic acid, biodiesel feedstocks, and methanol) for our operations.  We have implemented certain risk management tools, such as multiple suppliers and hedging, as appropriate, to mitigate short-term market fluctuations in raw material supply and costs.  There can be no assurance, however, that such measures will result in cost savings or supply stability or that all market fluctuation exposure will be eliminated.  In addition, natural disasters, changes in laws or regulations, war or other outbreak of hostilities, or other political factors in any of the countries or regions in which we operate or do business, or in countries or regions that are key suppliers of strategic raw materials, could affect availability and costs of raw materials.
 
 
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While temporary shortages of raw materials may occasionally occur, these items have historically been sufficiently available to cover current requirements.  However, their continuous availability and price are impacted by natural disasters, plant interruptions occurring during periods of high demand, domestic and world market and political conditions, changes in government regulation, and war or other outbreak of hostilities.  In addition, as we increase our biodiesel capacity, we will require larger supplies of raw materials which have not yet been secured and may not be available for the foregoing reasons, or may be available only at prices higher than current levels.  Our operations or products may, at times, be adversely affected by these factors.
 
We are reliant upon two customers for a substantial amount of our chemical segment sales.
 
All sales of the bleach activator are made to The Procter & Gamble Company and all sales of a proprietary herbicide and certain other intermediates used in the production of this herbicide are made to Arysta LifeScience North America Corporation.  These two customers represented approximately 35% of our revenues for the year ended December 31, 2011.  The loss of these two companies as customers would have a material adverse effect on us.
 
Changes in technology may render our products or services obsolete.
 
The alternative fuel and chemical industries may be substantially affected by rapid and significant changes in technology.  Examples include competitive product technologies, such as green gasoline and renewable diesel produced from catalytic hydroforming of renewable feedstock oils and competitive process technologies such as advanced biodiesel continuous reactor and washing designs that increase throughput.  These changes may render obsolete certain existing products, energy sources, services, and technologies currently used by us.  We cannot assure you that the technologies used by or relied upon by us will not be subject to such obsolescence.  While we may attempt to adapt and apply the services provided by us to newer technologies, we cannot assure you that we will have sufficient resources to fund these changes or that these changes will ultimately prove successful.
 
Failure to comply with governmental regulations could result in the imposition of penalties, fines, or restrictions on operations and remedial liabilities.
 
The biofuel and chemical industries are subject to extensive federal, state, local, and foreign laws and regulations related to the general population’s health and safety and those associated with compliance and permitting obligations (including those related to the use, storage, handling, discharge, emission, and disposal of municipal solid waste and other waste, pollutants or hazardous substances or waste, or discharges and air and other emissions) as well as land use and development.  Existing laws also impose obligations to clean up contaminated properties or to pay for the cost of such remediation, often upon parties that did not actually cause the contamination.  Compliance with these laws, regulations, and obligations could require substantial capital expenditures.  Failure to comply could result in the imposition of penalties, fines, or restrictions on operations and remedial liabilities.  These costs and liabilities could adversely affect our operations.
 
Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent or costly waste handling, storage, transport, disposal, or cleanup requirements could require us to make significant expenditures to attain and maintain compliance and may otherwise have a material adverse effect on our business segments in general and on our results of operations, competitive position, or financial condition.  We are unable to predict the effect of additional environmental laws and regulations which may be adopted in the future, including whether any such laws or regulations would materially adversely increase our cost of doing business or affect our operations in any area.
 
Under certain environmental laws and regulations, we could be held strictly liable for the removal or remediation of previously released materials or property contamination regardless of whether we were responsible for the release or contamination, or if current or prior operations were conducted consistent with accepted standards of practice.  Such liabilities can be significant and, if imposed, could have a material adverse effect on our financial condition or results of operations.
 
 
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Our biofuels operations may be harmed if the government were to change current laws and regulations.
 
Alternative fuels businesses benefit from government subsidies and mandates.  If any of the state or federal laws and regulations relating to the government subsidies and mandates change, the ability to recover capital expenditures from our alternative fuels business could be harmed.  Our biofuels platform is subject to federal, state, and local laws and regulations governing the application and use of alternative energy products, including those related specifically to biodiesel.  For instance, biodiesel products benefit from being the only alternative fuel certified by the USEPA that fulfills the requirements of Section 211(B) of the Clean Air Act.  If agency determinations, laws, and regulations relating to the application and use of alternative energy are changed, the marketability and sales of biodiesel production could be materially adversely affected.
 
Market conditions or transportation impediments may hinder access to raw goods and distribution markets.
 
Market conditions, the unavailability of satisfactory transportation, or the location of our manufacturing complex from more lucrative markets may hinder our access to raw goods and/or distribution markets.  The availability of a ready market for biodiesel depends on a number of factors, including the demand for and supply of biodiesel and the proximity of the plant to trucking and terminal facilities.  The sale of large quantities of biodiesel necessitates that we transport our biodiesel to other markets since the Batesville, Arkansas regional market is not expected to absorb all of our contemplated production.  Currently, common carrier pipelines are not transporting biodiesel or biodiesel/ petrodiesel blends.  This leaves trucks, barges, and rail cars as the means of distribution of our product from the plant to these storage terminals for further distribution.  However, the current availability of rail cars is limited and at times unavailable because of repairs or improvements, or as a result of priority transportation agreements with other shippers.  Additionally, the current availability of barges is limited, particularly heated barges to transport biodiesel during winter months.  If transportation is restricted or is unavailable, we may not be able to sell into more lucrative markets and consequently our cash flow from sales of biodiesel could be restricted.
 
The biodiesel industry also faces several challenges to wide biodiesel acceptance, including cold temperature limitations, storage stability, fuel quality standards, and exhaust emissions.  If the industry does not satisfy consumers that these issues have been resolved or are being resolved, biodiesel may not gain widespread acceptance which may have an adverse impact on our cash flow from sales of biodiesel.
 
Our insurance may not protect us against our business and operating risks.
 
We maintain insurance for some, but not all, of the potential risks and liabilities associated with our business.  For some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented.  As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance policies may become unavailable or available only for reduced amounts of coverage.  As a result, we may not be able to renew our existing insurance policies or procure other desirable insurance on commercially reasonable terms, if at all.  Although we will maintain insurance at levels we believe are appropriate for our business and consistent with industry practice, we will not be fully insured against all risks which cannot be sourced on economic terms.  In addition, pollution and environmental risks generally are not fully insurable.  Losses and liabilities from uninsured and underinsured events and delay in the payment of insurance proceeds could have a material adverse effect on our financial condition and results of operations.
 
If a significant accident or other event resulting in damage to our operations (including severe weather, terrorist acts, war, civil disturbances, pollution, or environmental damage) occurs and is not fully covered by insurance or a recoverable indemnity from a customer, it could adversely affect our financial condition and results of operations.
 
We depend on key personnel, the loss of any of whom could materially adversely affect our future operations.
 
Our success depends to a significant extent upon the efforts and abilities of our executive officers.  The loss of the services of one or more of these key employees could have a material adverse effect on us.  Our business is also dependent upon our ability to attract and retain qualified personnel.  Acquiring or retaining these personnel could prove more difficult to hire or cost substantially more than estimated.  This could cause us to incur greater costs.
 
 
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If we are unable to effectively manage the commodity price risk of our raw materials or finished goods, we may have unexpected losses.
 
We hedge our raw materials and/or finished products for our biofuels segment to some degree to manage the commodity price risk of such items.  This requires the purchase or sale of commodity futures contracts and/or options on those contracts or similar financial instruments.  We may be forced to make cash deposits available to counterparties as they mark-to-market these financial hedges.  This funding requirement may limit the level of commodity price risk management that we are prudently able to complete.  If we do not manage or are not capable of managing the commodity price risk of our raw materials and/or finished products for our biofuels segment, we may incur losses as a result of price fluctuations with respect to these raw materials and/or finished products.
 
In most cases we are not capable of hedging raw material and/or finished products for our chemicals segment.  Certain of our products are produced under manufacturing agreements with our customers which provide us the contractual ability to pass along raw material price increases.  However, we do not have this protection for all product lines within the chemicals segment.  If we do not manage or are not capable of managing escalating raw material prices and/or passing these increases along to our customers via prices for our finished products, we may incur losses.
 
If we are unable to acquire or renew permits and approvals required for our operations, we may be forced to suspend or cease operations altogether.
 
The operation of our manufacturing plant requires numerous permits and approvals from governmental agencies.  We may not be able to obtain all necessary permits (or modifications thereto) and approvals and, as a result, our operations may be adversely affected.  In addition, obtaining all necessary renewal permits (or modifications to existing permits) and approvals for future expansions may necessitate substantial expenditures and may create a significant risk of expensive delays or loss of value if a project is unable to function as planned due to changing requirements.
 
The lack of business diversification may adversely affect our results of operations.
 
It is possible that we will not consummate more than one business combination and FutureFuel Chemical Company may be the only target business that we acquire.  Accordingly, the prospects for our success may be entirely dependent upon FutureFuel Chemical Company.  Unlike other entities which may have the resources to complete several business combinations of entities operating in multiple industries or multiple areas of a single industry, it is possible that we will not have the resources to diversify effectively our operations or benefit from the possible spreading of risks or offsetting of losses.
 
Our indebtedness may limit our ability to borrow additional funds or capitalize on acquisition or other business opportunities.
 
We have entered into a $50 million revolving credit facility with a commercial bank.  The restrictions governing this indebtedness (such as total debt to EBITDA limitations) may reduce our ability to incur additional indebtedness, engage in certain transactions, or capitalize on acquisition or other business opportunities.  If we are unable to meet our future debt service obligations and other financial obligations, we could be forced to restructure or refinance such indebtedness and other financial transactions, seek additional equity, or sell assets.
 
We expect to have capital expenditure requirements, and we may be unable to obtain needed financing on satisfactory terms.
 
We expect to make capital expenditures for the expansion of our biofuels and chemicals production capacity and complementary infrastructure.  We intend to finance these capital expenditures primarily through cash flow from our operations, borrowings under our credit facility, and existing cash.  However, if our capital requirements vary materially from those provided for in our current projections, we may require additional financing sooner than anticipated.  A decrease in expected revenues or adverse change in market conditions could make obtaining this financing economically unattractive or impossible.  As a result, we may lack the capital necessary to complete the projected expansions or capitalize on other business opportunities.
 
 
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We may be unable to successfully integrate future acquisitions with our operations or realize all of the anticipated benefits of such acquisitions.
 
Failure to successfully integrate future acquisitions, if any, in a timely manner may have a material adverse effect on our business, financial condition, results of operations, and cash flows.  The difficulties of combining acquired operations include, among other things:
 
 
·
operating a significantly larger combined organization;
 
·
consolidating corporate technological and administrative functions;
 
·
integrating internal controls and other corporate governance matters; and
 
·
diverting management’s attention from other business concerns.
 
In addition, we may not realize all of the anticipated benefits from future acquisitions, such as increased earnings, cost savings, and revenue enhancements, for various reasons, including difficulties integrating operations and personnel, higher and unexpected acquisition and operating costs, unknown liabilities, and fluctuations in markets.  If benefits from future acquisitions do not meet the expectations of financial or industry analysts, the market price of our shares of common stock may decline.
 
If we are unable to respond to changes in ASTM or customer standards, our ability to sell biodiesel may be harmed.
 
We currently produce biodiesel to conform to or exceed standards established by ASTM.  ASTM standards for biodiesel and biodiesel blends may be modified in response to new observations from the industries involved with diesel fuel.  New tests or more stringent standards may require us to make additional capital investments in, or modify, plant operations to meet these standards.  In addition, some biodiesel customers have developed their own biodiesel standards which are stricter than the ASTM standards.  If we are unable to meet new ASTM standards or our biodiesel customers’ standards cost effectively or at all, our production technology may become obsolete, and our ability to sell biodiesel may be harmed, negatively impacting our revenues and profitability.
 
If we fail to maintain effective internal control over financial reporting, we might not be able to report our financial results accurately or prevent fraud; in that case, our stockholders could lose confidence in our financial reporting, which would harm our business and could negatively impact the value of our stock.
 
Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud.  The process of maintaining our internal controls may be expensive and time consuming and may require significant attention from management.  Although we have concluded as of December 31, 2011 that our internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements.  Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our results of operations or cause us to fail to meet our reporting obligations.  If we or our independent registered public accounting firm discover a material weakness, the disclosure of that fact could harm the value of our stock and our business.
 
Confidentiality agreements with customers, employees, and others may not adequately prevent disclosures of confidential information, trade secrets, and other proprietary information.
 
We rely in part on trade secret protection to protect our confidential and proprietary information and processes.  However, trade secrets are difficult to protect.  We have taken measures to protect our trade secrets and proprietary information, but these measures may not be effective.  For example, we require new custom manufacturing chemical customers to execute confidentiality agreements before we begin manufacturing custom chemicals for them.  We also require employees and consultants to execute confidentiality agreements upon the commencement of their employment or consulting arrangement with us.  These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties.  These agreements also generally provide that know-how and inventions conceived by the individual in the course of rendering services to us are our exclusive property.  Nevertheless, these agreements may be breached, or may not be enforceable, and our proprietary information may be disclosed.  Further, despite the existence of these agreements, third parties may independently develop substantially equivalent proprietary information and techniques.  Accordingly, it may be difficult for us to protect our trade secrets.  Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
 
 
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Moreover, we cannot assure you that our technology does not infringe upon any valid claims of patents that other parties own.  In the future, if we were found to be infringing on a patent owned by a third party, we might have to seek a license from such third party to use the patented technology.  We cannot assure you that, if required, we would be able to obtain such a license on terms acceptable to us, if at all.  If a third party brought a legal action against us or our licensors, we could incur substantial costs in defending ourselves, and we cannot assure you that such an action would be resolved in our favor.  If such a dispute were to be resolved against us, we could be subject to significant damages.
 
We depend on our ability to maintain relationships with industry participants, including our strategic partners.
 
Our ability to maintain commercial arrangements with chemical and biodiesel customers, raw material and feedstock suppliers, and transportation and logistics services providers may depend on maintaining close working relationships with industry participants.  There can be no assurance that we will be able to maintain or establish additional necessary strategic relationships, in which case the opportunity to grow our business may be negatively affected.
 
If automobile manufacturers and other industry groups express reservations regarding the use of biodiesel, our ability to sell biodiesel will be negatively impacted.
 
Because it is a relatively new product, research on biodiesel use in automobiles is ongoing.  Some industry groups have recommended that blends of no more than 5% biodiesel be used for automobile fuel due to concerns about fuel quality, engine performance problems, and possible detrimental effects of biodiesel on rubber components and other engine parts.  Although some manufacturers have encouraged use of biodiesel fuel in their vehicles, cautionary pronouncements by other manufacturers or industry groups may impact our ability to market our biodiesel.
 
There is currently excess production capacity and low utilization in the biodiesel industry and if non-operational and underutilized facilities commence or increase operations, our results of operations may be negatively affected.
 
Many biodiesel plants in the United States do not currently operate, and of those that do, many do not operate at full capacity.  Further, plants under construction and expansion in the United States as of December 2011, if completed, would add additional biodiesel production capacity.  The annual production capacity of existing plants and plants under construction far exceeds both historic consumption of biodiesel in the United States and required consumption under RFS2.  If this excess production capacity was utilized for biodiesel production, it would increase competition for our feedstocks, increase the volume of biodiesel on the market, and may reduce biodiesel gross margins, harming our revenues and profitability.
 
Perception about “food vs. fuel” could impact public policy which could impair our ability to operate at a profit and substantially harm our revenues and operating margins.
 
Some people believe that biodiesel may increase the cost of food, as some feedstocks such as soybean oil used to make biodiesel can also be used for food products.  This debate is often referred to as “food vs. fuel.”  This is a concern to the biodiesel industry because biodiesel demand is heavily influenced by government policy and, if public opinion were to erode, it is possible that these policies would lose political support.  These views could also negatively impact public perception of biodiesel.  Such claims have led some, including members of Congress, to urge the modification of current government policies which affect the production and sale of biofuels in the United States.
 
 
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Concerns regarding the environmental impact of biodiesel production could affect public policy which could impair our ability to operate at a profit and substantially harm our revenues and operating margins.
 
Because biodiesel is a new product, the environmental impacts associated with biodiesel production and use have not yet been fully analyzed.  Under the 2007 Energy Independence and Security Act, the USEPA is required to produce a study every three years of the environmental impacts associated with current and future biofuel production and use, including effects on air and water quality, soil quality and conservation, water availability, energy recovery from secondary materials, ecosystem health and biodiversity, invasive species, and international impacts.  A draft of the first such triennial report was released in January 2011, with the final report expected to be released in 2012.  Should the 2012 study, future USEPA triennial studies, or other analyses find that biodiesel production and use has resulted in, or could in the future result in, adverse environmental impacts, such findings could also negatively impact public perception of biodiesel and acceptance of biodiesel as an alternative fuel, which also could result in the loss of political support.
 
To the extent that state or federal laws are modified or public perception turns against biodiesel, use requirements such as RFS2 may not continue, which could materially harm our ability to operate profitably.
 
Growth in the sale and distribution of biodiesel is dependent on the expansion of related infrastructure which may not occur on a timely basis, if at all, and our operations could be adversely affected by infrastructure limitations or disruptions.
 
Growth in the biodiesel industry depends on substantial development of infrastructure for the distribution of biodiesel.  Substantial investment required for these infrastructure changes and expansions may not be made on a timely basis or at all.  The scope and timing of any infrastructure expansion are generally beyond our control.  Also, we compete with other biofuel companies for access to some of the key infrastructure components such as pipeline and terminal capacity.  As a result, increased production of biodiesel or other biofuels will increase the demand and competition for necessary infrastructure.  Any delay or failure in expanding distribution infrastructure could hurt the demand for or prices of biodiesel, impede delivery of our biodiesel, and impose additional costs, each of which would have a material adverse effect on our results of operations and financial condition.  Our business will be dependent on the continuing availability of infrastructure for the distribution of increasing volumes of biodiesel and any infrastructure disruptions could materially harm our business.
 
Nitrogen oxide emissions from biodiesel may harm its appeal as a renewable fuel and increase costs.
 
In some instances biodiesel may increase emissions of nitrogen oxide as compared to petrodiesel, which could harm air quality.  Nitrogen oxide is a contributor to ozone and smog.  These emissions may decrease the appeal of biodiesel to environmental groups and agencies who have been historic supporters of the biodiesel industry, potentially harming our ability to market our biodiesel.
 
In addition, several states have acted to regulate potential nitrogen oxide emissions from biodiesel.  Texas currently requires that biodiesel blends contain an additive to eliminate this perceived nitrogen oxide increase.  California is in the process of formulating biodiesel regulations that may also require such an additive.  In states where such an additive is required to sell biodiesel, the additional cost of the additive may make biodiesel less profitable or make biodiesel less cost competitive against petrodiesel or renewable diesel, which would negatively impact our ability to sell our products in such states and therefore have an adverse effect on our revenues and profitability.
 
Several biofuels companies throughout the United States have filed for bankruptcy over the last several years due to industry and economic conditions.
 
Unfavorable worldwide economic conditions, lack of financing, and volatile biofuel prices and feedstock costs have likely contributed to the necessity of bankruptcy filings by biofuel producers.  Our business may be negatively impacted by the industry conditions that influenced the bankruptcy proceedings of other biofuel producers, or we may encounter new competition from buyers of distressed biodiesel properties who enter the industry at a lower cost than original plant investors.
 
 
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Risks Associated With Owning Our Shares
 
If our founding shareholders and Mr. Novelly or his designees exercise their registration rights, such exercise may have an adverse effect on the market price of our shares of common stock.
 
Those shareholders holding shares of our common stock prior to our July 2006 offering (our founding shareholders; see “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters -- Founding Shares Owned by the Founding Shareholders” below) and Mr. Paul A. Novelly, our executive chairman of the board, or his designees, are entitled to demand that we register under the Securities Act of 1933, as amended (or the Securities Act), the resale of their shares of our common stock issued prior to our July 2006 offering (the founding shares) and their shares included in the units purchased in our initial public offering.  The demand may be made at any time after the date on which we became a reporting company under the Exchange Act, and their founding shares have been released from escrow.  This occurred on July 12, 2009.  If our founding shareholders exercise their registration rights with respect to all of their shares of our common stock, there will be an additional 16,250,000 shares (which includes the 5,000,000 shares issued on exercise of their warrants) eligible for trading in the public market.  The presence of this additional number of shares eligible for trading in the public market may have an adverse effect on the market price of our shares.
 
We may be suspended or delisted from the New York Stock Exchange if we do not satisfy their continued listing requirements.
 
Our common stock commenced trading on the NYSE on March 23, 2011 under the symbol “FF”.  Securities admitted to the NYSE may be suspended from dealing or delisted at any time the listed company fails to satisfy certain continued listing criteria.  These criteria could be triggered if, among other things, the number of our publicly-held shares falls below 600,000, the average closing price of our common stock is less than $1.00 per share over a consecutive 30 trading-day period, or we fail to file certain reports with the SEC.  As a matter of practice, the NYSE generally gives a listed company notice if any of these criteria are triggered, and generally provides the listed company with certain cure periods.  If we suffer such an event but do not cure it, or if such event cannot be cured, trading of our common stock on the NYSE may be suspended from dealing or our stock may be delisted.  Any such suspension or delisting may have an adverse effect on the market price of our common stock.
 
We may issue substantial amounts of additional shares without stockholder approval.
 
Our certificate of incorporation authorizes the issuance of 75,000,000 shares of common stock and 5,000,000 shares of preferred stock.  We filed with the SEC a Form S-3 Registration Statement commonly known as a “shelf registration”.  Pursuant to this registration statement, we may issue common stock or preferred stock, or warrants or rights, or units comprised of any of the foregoing, in an amount not to exceed $50 million, without any action or approval by our stockholders.  As of the date of this report, 41,319,057 shares of our common stock currently are outstanding.  The issuance of any additional shares of our common stock or preferred stock would dilute the percentage ownership of our company held by existing stockholders.
 
The market price of our common stock is highly volatile and may increase or decrease dramatically at any time.
 
The market price of our common stock is highly volatile and our shares are thinly traded.  Our stock price may change dramatically as the result of: (i) announcements of new products or innovations by us or our competitors; (ii) uncertainty regarding the viability of any of our product initiatives; (iii) significant customer contracts; (iv) significant litigation; (v) the loss of the RFS2 mandate; or (vi) other factors or events that would be expected to affect our business, financial condition, results of operations, and future prospects.
 
The market price for our common stock may also be affected by various factors not directly related to our business or future prospects, including the following:
 
 
25

 
 
 
·
intentional manipulation of our stock price by existing or future shareholders;
 
·
a reaction by investors to trends in our stock rather than the fundamentals of our business;
 
·
a single acquisition or disposition, or several related acquisitions or dispositions, of a large number of our shares, including by short sellers covering their position;
 
·
the interest of the market in our business sector, without regard to our financial condition, results of operations, or business prospects;
 
·
positive or negative statements or projections about us or our industry by analysts and other persons;
 
·
the adoption of governmental regulations or government grant programs and similar developments in the United States or abroad that may enhance or detract from our ability to offer our products and services or affect our cost structure; and
 
·
economic and other external market factors, such as a general decline in market price due to poor economic conditions, investor distrust, or a financial crisis.
 
If securities or industry analysts issue an adverse or misleading opinion regarding our stock or do not publish research or reports about our business, our stock price and trading volume could decline.
 
The trading market for shares of our common stock will rely in part on the research and reports that equity research analysts publish about us and our business.  It may be difficult for companies such as ours to attract independent equity research analysts to cover our common stock.  We do not control these analysts or the content and opinions included in their reports.  The price of our common stock could decline if one or more equity research analysts downgrade our common stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.  If one or more equity research analysts cease coverage of us, we could lose visibility in the market, which in turn could cause our stock price to decline.
 
Item 1B. Unresolved Staff Comments.
 
None.
 
Item 2. Properties.
 
Our principal asset is a manufacturing plant situated on approximately 2,200 acres of land six miles southeast of Batesville in north central Arkansas fronting the White River.  Approximately 500 acres of the site are occupied with batch and continuous manufacturing facilities, laboratories, and infrastructure, including on-site liquid waste treatment.  Our subsidiary FutureFuel Chemical Company is the fee owner of this plant and the land upon which it is situated (which plant and land are not subject to any major encumbrances), and manufactures both biofuels and chemicals at the plant.  Utilization of these facilities may vary with product mix and economic, seasonal, and other business conditions, but the plant is substantially utilized with the exception of facilities designated for capacity expansion of biodiesel.  The plant, including approved expansions, has sufficient capacity for existing needs and expected near-term growth.  We believe that the plant is generally well maintained, in good operating condition, and suitable and adequate for its uses.
 
In February 2009, we formed FFC Grain, L.L.C. to acquire a granary in Marianna, Arkansas for use in our biofuels business.  FFC Grain, L.L.C. acquired the granary in March 2009 and owns it in fee simple, and the land and improvements thereon are not subject to any material encumbrances.
 
On December 13, 2011, we acquired a warehouse in Batesville, Arkansas.  We intend to store inventories (both raw goods and finished products) from our chemicals business in this facility.  The warehouse is owned in fee simple by our subsidiary FutureFuel Warehouse Company, LLC, and the land and improvements thereon are not subject to any material encumbrances.
 
Item 3. Legal Proceedings.
 
We are not a party to, nor is any of our property subject to, any material pending legal proceedings, other than ordinary routine litigation incidental to our business.  However, from time to time, we may be parties to, or targets 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 we expect to be handled and defended in the ordinary course of business.  While we are unable to predict the outcome of any matters currently pending, we do not believe that the ultimate resolution of any such pending matters will have a material adverse effect on our overall financial condition, results of operations, or cash flows.  However, adverse developments could negatively impact earnings or cash flows in future periods.
 
Item 4. Mine Safety Disclosures.
 
Not applicable.
 
 
26

 
 
PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Market Information
 
Commencing July 11, 2008, shares of our common stock were quoted on the OTC Bulletin Board under the symbol “FTFL”.  On March 23, 2011, our common stock commenced trading on the NYSE under the symbol “FF” and our stock ceased being quoted on the OTC Bulletin Board at that time.  The high and low bid quotations on the OTC Bulletin Board for our shares of common stock for 2010 and for the period January 1, 2011 through March 22, 2011 are set forth in the following table.
 
   
Shares
 
Period
 
High
   
Low
 
January 1, 2010 – March 31, 2010
  $ 6.36     $ 4.85  
April 1, 2010 – June 30, 2010
  $ 6.32     $ 5.66  
July 1, 2010 – September 30, 2010
  $ 7.45     $ 6.22  
October 1, 2010 – December 31, 2010
  $ 10.00     $ 7.00  
January 1, 2011 – March 22, 2011
  $ 10.10     $ 9.40  

The high and low sales price on the NYSE for our shares of common stock for the period March 23, 2011 through December 31, 2011 are set forth in the following table.
 
   
Shares
 
Period
 
High
   
Low
 
March 23, 2011 – March 31, 2011
  $ 10.70     $ 10.12  
April 1, 2011 – June 30, 2011
  $ 13.66     $ 10.95  
July 1, 2011 – September 30, 2011
  $ 12.72     $ 9.95  
October 1, 2011 – December 31, 2011
  $ 12.73     $ 9.70  

There currently are outstanding 41,319,057 shares of our common stock.  None of our warrants are currently outstanding.  See the discussion below.  Under U.S. securities laws at the time of our offering, shares of our common stock that were sold or acquired on July 12, 2006 could not be re-sold until they had been held for two years, unless registered with the SEC or unless an exemption from registration was available.  The relevant U.S. securities laws were revised to reduce the holding period for non-affiliates to six months, effective February 15, 2008.  As a result, such shares may be sold by non-affiliates of the Company, either within or outside the U.S., without restrictions imposed by U.S. securities laws.  Affiliates of the Company, defined generally as any person that directly or indirectly controls, is controlled by, or is under common control with the Company (typically directors, executive officers, and primary shareholders) remain limited in the amount and manner in which they may sell our shares.  Thus, non-affiliates who acquired our shares which were issued in our initial offering on July 12, 2006 may generally freely trade those shares in the United States.
 
Please note, however, that the exercise of the warrants for shares of our common stock were subject to certain conditions designed to ensure compliance with U.S. securities laws.  The shares of our common stock issued upon the exercise of a warrant were considered restricted securities subject to a six-month holding period.  In general, a security holder who had not been an affiliate of the Company for three months could resell these securities without any restriction after satisfying the six-month holding period, provided that we were current in our SEC filings.  Because of these restrictions, the certificates for shares of our common stock issued upon the exercise of our warrants had to contain an appropriate legend, which meant they had to be certificated, generally for the twelve months after the warrant was exercised.  Our warrants were last exercised on July 13, 2010.  As such, any shares of our common stock issued with respect to any warrant exercise and held by persons who are not our affiliates are now freely tradable.
 
 
27

 
 
Holders
 
The shares of our common stock were held by approximately 351 holders of record on March 1, 2012 as recorded on our transfer agents’ registers.  However, we believe that the number of beneficial owners of our common stock is substantially greater than the number of holders.
 
Dividends
 
The payment of cash dividends by us is dependent upon our existing cash and cash equivalents, future earnings, capital requirements, and overall financial condition.  Based on such criteria, we paid special cash dividends in 2010 and the first quarter of 2011 as follows.
 
Per Share Amount
Record Date
Payment Date
Date of Declaration
$0.20
March 23, 2010
April 9, 2010
March 12, 2010
$0.20
May 18, 2010
June 8, 2010
June 30, 2010
$0.20
September 14, 2010
September 30, 2010
August 17, 2010
$0.20
December 1, 2010
December 15, 2010
November 12, 2010
$0.10
March 1, 2011
March 15, 2011
February 3, 2011

We declared regular cash dividends for the remainder of 2011 and for 2012 as follows.
 
Per Share Amount
Record Date
Payment Date
Date of Declaration
$0.10
June 1, 2011
June 15, 2011
April 5, 2011
$0.10
September 1, 2011
September 15, 2011
April 5, 2011
$0.10
December 1, 2011
December 15, 2011
April 5, 2011
$0.10
March 1, 2012
March 15, 2012
November 17, 2011
$0.10
June 1, 2012
June 15, 2012
November 17, 2011
$0.10
September 4, 2012
September 18, 2012
November 17, 2011
$0.10
December 3, 2012
December 17, 2012
November 17, 2011

No assurances can be given that we will declare dividends for years after 2012.
 
Securities Authorized for Issuance Under Equity Compensation Plan
 
Our board of directors adopted an omnibus incentive plan which was approved by our shareholders at our 2007 annual shareholder meeting on June 26, 2007.  We do not have any other equity compensation plan or individual equity compensation arrangement.  Under this plan, we are authorized to issue 2,670,000 shares of our common stock.  The shares to be issued under the plan were registered with the SEC on a Form S-8 filed on April 29, 2008.  Through December 31, 2011, we issued options to purchase 810,500 shares of our common stock and awarded an additional 39,800 shares to participants under the plan.  The following additional information regarding this plan is as of December 31, 2011.
 
Plan Category
Number of securities to be issued upon exercise of outstanding options, warrants and rights
Weighted-average exercise price of outstanding options, warrants and rights
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
 
(a)
(b)
(c)
Equity compensation plans
 approved by security holders
521,888
$7.84
1,819,700

 
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Performance Graph
 
The following graph shows changes over the 60-month period beginning January 1, 2007 through December 31, 2011 in the value of a $100 investment in: (i) our common stock; (ii) Russell 2000; and (iii) an industry group of other companies that file reports with the SEC using SIC Code 2860.  The companies in this industry group are: Aemetis Inc., All Fuels & Energy Company, Altair Nano Technologies Inc., Alternative Energy Partners Inc., Alternative Energy Sources Inc., American Jianye Greentech Holdings Inc., Amyris Inc., Aspa Gold Corp., Aventine Renewable Energy Holdings, Balchem Corp., Biofuel Energy Corp., Biofuels Power Corp., Bluefire Renewables Inc., Carbonics Capital Corp., Cardinal Ethanol LLC, Celanese Corp., China Clean Energy Inc., China Jianye Fuel Inc., China Rutai International Holdings Company, Clean Tech Biofuels Inc., Easylink Solutions Corp., Evolution Fuels Inc., Glyeco Inc., Granite Falls Energy LLC, Green Energy Live Inc., Green Energy Resources Inc., Green Plains Renewable Energy Inc., Greenhouse Holdings Inc., Greenman Technologies Inc., Greenshift Corp., Hybrid Fuels Inc., Incoming Inc., Innophos Holdings Inc., International Flavors & Fragrances Inc., Keyuan Petrochemicals Inc., Kior Inc., KL Energy Corp., KMG Chemicals Inc., Koppers Holdings Inc., Kreido Biofuels Inc., Luna Technologies International Inc., New Generation Biofuels Holdings Inc., Newmarket Corp., Originoil Inc., Orion Ethanol Inc., Pacific Ethanol Inc., Panda Ethanol Inc., Petroalgae Inc., Pure Biofuels Corp., Regeneca Inc., Rex American Resources Corp., Sino Clean Energy Inc., Solutia Inc., Southridge Enterprises Inc., Space Propulsion Systems Inc., Spartan Gold Limited, Syntec Biofuel Inc., and Verenium Corp.
 
Recent Sales of Securities
 
We did not sell any of our securities within the three-year period ended December 31, 2011 in transactions that were not registered under the Securities Act.
 
On February 10, 2011, we filed with the SEC a Form S-3 Registration Statement commonly referred to as a “shelf registration” whereby we registered shares of our common stock, preferred stock, warrants, rights, and units which we might issue in the future in an aggregate amount not to exceed $50 million.  This registration statement became effective on March 10, 2011.  Pursuant to this registration statement, on May 11, 2011, we commenced an At-the-Market offering under which we may from time to time over the succeeding three years sell up to 3 million shares of our common stock.  The underwriter was Stifel, Nicolaus & Company, Incorporated.  During 2011, we issued the following shares of our common stock pursuant to this At-the-Market offering.
 
 
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Quarter Ended
Number of Shares Sold
Net Proceeds
Compensation to Underwriter
June 30, 2011
1,313,985
$15,763,000
$488,000
September 30, 2011
0 $0 $0
December 31, 2011
0
$0
$0

Purchase of Securities by Us
 
Neither we nor anyone acting on our behalf purchased during 2011 any shares of our common stock, which is the only class of our equity securities that is registered pursuant to section 12 of the Exchange Act.
 
Item 6. Selected Financial Data.
 
The following table sets forth summary historical financial and operating data regarding us for the periods indicated below.  This summary historic financial and operating data has been derived from our consolidated financial statements for the twelve months ended December 31, 2007, 2008, 2009, 2010, and 2011.  The information presented in the table below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and notes thereto.
 
(Dollars in thousands, except per share amounts)
 
Item
 
Twelve Months Ended December 31, 2011
   
Twelve Months Ended December 31, 2010
   
Twelve Months Ended December 31, 2009
   
Twelve Months Ended December 31, 2008
   
Twelve Months Ended December 31, 2007
 
Operating Revenues
  $ 309,885     $ 219,183     $ 196,711     $ 198,330     $ 169,788  
Net income
  $ 34,509     $ 23,094     $ 16,992     $ 22,675     $ 8,408  
Earnings per common share:
                                       
Basic
  $ 0.85     $ 0.63     $ 0.60     $ 0.84     $ 0.31  
Diluted
  $ 0.84     $ 0.62     $ 0.58     $ 0.82     $ 0.26  
Total Assets
  $ 385,244     $ 343,156     $ 246,007     $ 238,126     $ 216,113  
Long-term obligations
  $ 61,207     $ 46,674     $ 34,842     $ 34,377     $ 24,353  
Cash dividends per common share
  $ 0.40     $ 0.80     $ 0.30     $ 0.70     $ 0.00  
Net cash provided by operating activities
  $ 50,429     $ 17,839     $ 25,883     $ 36,275     $ 21,554  
Net cash provided by (used in) investing activities
  $ (51,367 )   $ (30,767 )   $ 21,430     $ (52,009 )   $ (29,978 )
Net cash provided by (used in) financing activities
  $ (374 )   $ 38,473     $ (9,256 )   $ (11,466 )   $ (50 )

Item 7. 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 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.
 
 
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Liquidity and Capital Resources
 
Our net cash provided by (used in) operating activities, investing activities, and financing activities for the years ended December 31, 2011, 2010, and 2009 are set forth in the following table.
 
(Dollars in thousands)
 
   
2011
   
2010
   
2009
 
Net cash provided by operating activities
  $ 50,429     $ 17,839     $ 25,883  
Net cash provided by (used in) investing activities
  $ (51,367 )   $ (30,767 )   $ 21,430  
Net cash provided by (used in) financing activities
  $ (374 )   $ 38,473     $ (9,256 )

Operating Activities
 
Cash provided by operating activities increased from $17,839,000 in 2010 to $50,429,000 in 2011, a net $32,590,000 increase.  This increase was primarily attributable to: (i) an increase in net income; (ii) the timing of collections of accounts receivable, including those receivables from related parties; (iii) the timing of payments of accounts payable, including those payables to related parties; and (iv) cash receipts related to deferred revenue.  As will be discussed in more detail in the discussion of our results of operations, our net income increased from $23,094,000 in the 2010 to $34,509,000 in 2011, an increase of $11,415,000.  In 2010, accounts receivable accounted for a $13,406,000 reduction in cash provided by operating activities.  In 2011, accounts receivable accounted for a $512,000 reduction in cash provided by operating activities despite increased consolidated revenues.  The primary reason for this result was the retroactive reinstatement of the $1.00 per gallon biodiesel blenders tax credit in December 2010.  At December 31, 2010, we had an outstanding receivable from the federal government related to this credit of $10,785,000.  This receivable was collected in February 2011, increasing the 2011 cash provided by operating activities.  In 2010, the change in accounts payable increased cash provided by operating activities by $272,000.  In 2011, the change in accounts payable increased cash provided by operating activities by $6,592,000.  This increase in cash provided by operating activities is largely due to timing differences related to the receipt and payment of inventory and the timing of payment for capital expenditures.  In 2010, deferred revenue contributed $7,958,000 to cash provided by operating activities.  In 2011 it contributed $12,124,000.  This change is a result of progress made on capital projects we have undertaken on behalf of certain of our customers.  Partially offsetting these increases in cash provided by operating activities was an increase in inventory.  In 2010, inventory reduced cash provided by operating activities by $10,929,000.  In 2011, inventory reduced cash provided by operating activities by $20,067,000.  The increase in inventory at the end of 2011 relative to year-end 2010 primarily relates to increased biodiesel feedstock.
 
Cash provided by operating activities decreased from $25,883,000 in 2009 to $17,839,000 in 2010.  This decrease was primarily the result of an $11,695,000 decrease in the cash provided by the change in accounts receivables and a $12,070,000 decrease in the cash provided by the change in inventory.  Partially offsetting these decreases was an $8,604,000 increase in the cash provided by deferred revenue, a $2,404,000 increase in the cash provided by the provision for deferred income taxes, and a $6,102,000 increase in net income.  The decrease in cash provided by the change in accounts receivable was a result of the December 2010 retroactive reinstatement of the $1.00 per gallon biodiesel blenders tax credit.  A key component of the impact of this reinstatement was the booking of a $10,785,000 receivable from the federal government.  This receivable remained uncollected until February 2011 when payment was received in full.  The decrease in the cash provided by the change in inventory stemmed from an inventory build of feedstocks and raw materials at December 31, 2010 along with end-of-the-year purchases of petrodiesel.  The increase in cash provided by deferred revenue was a result of progress made on capital projects we undertook on behalf of our customers.  The increase in cash provided by the provision for deferred income taxes was a result of the effects of tax laws such as bonus depreciation which allowed for an early recognition of income tax expenses.
 
 
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Investing Activities
 
Cash used in investing activities increased from $30,767,000 in 2010 to $51,367,000 in 2011, a net increase of $20,600,000.  This increase was primarily attributable to a net increase in the purchases of marketable securities and an increase in capital expenditures.  In 2011, we purchased a net $47,124,000 of marketable securities.  Such purchases totaled $3,139,000 in 2010.  Such purchases were made to increase the expected returns on our cash holdings.  The increase in capital expenditures is largely the result of us undertaking certain capital projects on behalf of certain customers, a large portion of which is reimbursed by certain of our customers and through grants.  These reimbursements are summarized in the table below.
 
(Dollars in thousands)
 
   
2011
   
2010
 
Cash paid for capital expenditures
  $ 23,208     $ 9,671  
Cash received as reimbursement of capital expenditures
    (13,324 )     (4,236 )
Cash paid, net of reimbursement, for capital expenditures
  $ 9,884     $ 5,435  

These increases in cash used in investing activities were partially offset by a reduction in our restricted cash balances of $21,086,000 in 2011.  This reduction resulted from our short sale position in U.S. Treasuries being closed in 2011.  When this happened, the cash which was previously held in a restricted margin account was returned to us.
 
Cash provided by (used in) investing activities decreased from $21,430,000 in 2009 to $(30,767,000) in 2010.  This decrease was primarily a result of increased investing activity, as cash held in a restricted account for purposes of securing a short position increased by $21,086,000 and purchases of marketable securities increased $26,187,000.  These decreases in cash were partially offset by a decrease of $13,491,000 in capital expenditures.
 
Financing Activities
 
Cash provided by (used in) financing activities decreased from $38,473,000 in 2010 to $(374,000) in 2011.  This decrease was primarily attributable to reduced proceeds from the issuance of our common stock in 2011 compared to 2010, which was partially offset by a reduction in dividend payments in 2011.  In 2010, $70,736,000 in net proceeds were received from the issuance of our common stock.  Such proceeds were primarily the result of the exercise of warrants to purchase our common shares.  All such warrants that were not exercised expired in 2010.  As a result, no warrants were exercised in 2011.  We did, however, generate $15,872,000 in 2011 in net proceeds from the issuance of common shares as part of our At-the-Market offering under which we issued 1,313,985 shares of our common stock and as a result of the exercise of stock options.  Cash dividends decreased from $31,053,000 in 2010 to $16,254,000 in 2011, partially offsetting the 2011 reduction in proceeds from the issuance of shares of our common stock.
 
Cash provided by (used in) financing activities increased from $(9,256,000) in 2009 to $38,473,000 in 2010.  This increase was primarily attributable to the exercise of warrants to purchase our common stock and the exercise of stock options.  Proceeds from such stock issuances totaled $70,736,000 in 2010.  Partially offsetting the positive impact from the stock issuances was the effect of increased dividends paid.  The payment of dividends increased from $8,457,000 in 2009 to $31,053,000 in 2010.
 
Capital Expenditure Commitments
 
We had no material capital projects as of December 31, 2011.
 
Historically, we finance capital requirements for our business with cash flows from operations and have not had the need to incur bank indebtedness to finance any of our operations during the periods discussed herein.
 
Credit Facility
 
We entered into a $50 million credit agreement with a commercial bank in March 2007.  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 June 30, 2013.  Advances are made pursuant to a borrowing base.  Advances are secured by a perfected first priority security interest in our accounts receivable and inventory.  The interest rate floats at certain margins over LIBOR or base rate based upon the leverage ratio from time to time.  There is an unused commitment fee.  The ratio of total funded debt to EBITDA may not be less than 3:1.  We had no borrowings under this credit facility at December 31, 2011, 2010, or 2009.
 
 
32

 
 
We intend to fund future capital requirements for our businesses from cash flow generated by us 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.
 
Department of Energy Grant
 
We entered into a contract with a customer to design, construct, and operate a commercial-scale plant to produce intermediate anode powder as a component of high-performance graphite anode materials for lithium-ion batteries.  In connection with this contract, we applied for a financial assistance award under the Electric Drive Vehicle Battery and Component Manufacturing Initiative administered by the Department of Energy National Energy Technology Laboratory on behalf of the Office of Energy Efficiency and Renewable Energy.  An award was granted to us in the amount of $12,600,000, which we accepted on July 27, 2010.  The funds were to be used to modify existing idle assets and to acquire and construct new assets to be used for the production of specialized materials for lithium-ion batteries for electric cars and other applications.  We receive grant monies on a cost share basis as we incur construction-related expenditures.  The amounts received under this arrangement are recorded as deferred revenue and are amortized into earnings over the anticipated life of the customer relationship.  Such amortization began once construction was completed and the plant was placed into service.  This occurred in the third quarter of 2011.  Through December 31, 2011, we collected 97% of this award.
 
Dividends
 
In 2011, we declared a special cash dividend aggregating $0.10 per share on our common stock, with a record date and payment date as previously discussed.  The special cash dividend amounted to $3,998,000.  We also declared regular cash dividends aggregating $0.30 per share on our common stock, with record dates and payment dates as set forth above.  The regular cash dividends amounted to $12,256,000, for total dividends paid by us in 2011 of $16,254,000.
 
In 2010, we declared special cash dividends aggregating $0.80 per share on our common stock, with record dates and payment dates as previously discussed.  The special cash dividends amounted to $31,053,000.
 
On November 30, 2009, we declared a special cash dividend of $0.30 per share on our common stock, with a record date of December 1, 2009 and a payment date of December 22, 2009.  The special cash dividend amounted to $8,457,000.
 
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 was paid out in 2009, 2010, and 2011 as a special cash dividend and in 2011 as regular cash dividends.  Regular cash dividends will also be paid in 2012 as previously discussed.  We intend to retain the remaining cash to fund infrastructure and capacity expansion at our Batesville plant.  Third parties have not placed significant restrictions on our working capital management decisions.
 
These funds were predominantly held in cash or cash equivalents at multiple financial institutions.  In 2011 and 2010, we also had investments in certain preferred stock, trust preferred securities, and other equity instruments.  We classify these investments as current assets in the accompanying consolidated balance sheets and designate them as being “available-for-sale”.  Accordingly, they are recorded at fair value, with the unrealized gains and losses, net of taxes, reported as a component of stockholders’ equity.  The fair value of these preferred stock, trust preferred securities, and other equity instruments, including accrued interest, totaled $56,294,000 and $28,200,000 at December 31, 2011 and 2010, respectively.
 
 
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We also maintained a position in auction rate securities during 2010.  We selectively made investments in certain auction rate securities that we believed offered sufficient yield along with sufficient liquidity.  Through the date of their repurchase, all the auction rate securities in which we invested maintained a mechanism for liquidity, meaning that the respective auctions did not fail, the issuers called the instruments, or a secondary market existed for liquidation of the securities.  We classified these instruments as current assets in the accompanying consolidated balance sheet and carried them at their estimated fair market value.  These securities were repurchased on October 15, 2010 for par value.
 
At December 31, 2010, we had a short position in certain marketable debt securities.  No such position existed at December 31, 2011.  The purpose of this position was to help mitigate the potential negative impact an increase in interest rates would have on other marketable securities we had purchased.  The securities comprising this position were carried at fair value, with unrealized gains and losses reported as a component of net income.  We realized gains of $240,000 and $528,000 on these securities in 2011 and 2010, respectively.  The fair value of these securities totaled $(19,295,000) at December 31, 2010.  The margin account maintained with a broker to collateralize these securities carried a balance of $21,086,000 at December 31, 2010, and was classified as restricted cash and cash equivalents in our consolidated balance sheet.  The margin account did not exist as December 31, 2011.
 
Lastly, we maintain depository accounts such as checking accounts, money market accounts, and other similar accounts at selected financial institutions.
 
Results of Operations
 
In General
 
We break our chemicals business into two main product groups: custom manufacturing and performance chemicals.  Custom manufacturing consists of products made for specific customers based upon specifications provided by such customers.  Major products in the custom manufacturing group include: (i) nonanoyloxybenzene-sulfonate, a bleach activator manufactured exclusively for a customer for use in a household detergent; (ii) a proprietary herbicide (and intermediates) manufactured exclusively for a customer; (iii) chlorinated polyolefin adhesion promoters and antioxidant precursors for a customer; and (iv) a biocide intermediate for another customer.  The custom manufacturing group also includes agrochemicals as well as industrial and consumer products (cosmetics and personal care products, ink colorants, polymer additives, polymer and specialty dyes, specialty polymers, photographic and imaging chemicals, and food additives).  In 2012, products in the custom manufacturing group should also include an intermediate anode powder to be used as a component of high-performance graphite anode materials for lithium-ion batteries.
 
Revenues generated from the bleach activator are based on a supply agreement with the customer.  The supply agreement stipulates selling price per kilogram based on volume sold, with price moving up as volumes move down, and vice-versa.  The current contract expires in March 2013.  We pay for raw materials required to produce the bleach activator.  The contract with the customer provides that the price received by us for the bleach activator is indexed to changes in certain items, enabling us to pass along most inflationary increases in production costs to the customer.  In the second quarter of 2011, we received notification from the customer of the bleach activator stating their intention to reduce the quantities of the bleach activator they purchase beginning as soon as possible from the date of such notice.  The amount of such decrease was not stated.  We continue to work collaboratively with our customer to assess their future demand, which demand may continue to decline.  The financial impact of any such decline is not known at this time.
 
We have been the primary manufacturer for a customer of a proprietary herbicide and certain intermediates.  These products are facing generic competition, and no assurances can be given that we will remain the primary manufacturer for this product line.  The contracts automatically renew for successive one-year periods, subject to the right of either party to terminate the contract not later than 270 days prior to the end of the then current term for the herbicide and not later than 18 months prior to the then current term for the intermediates.  No assurances can be given that these contracts will not be terminated.  The customer supplies most of the key raw materials for production of the proprietary herbicide.  There is no pricing mechanism or specific protection against cost changes for raw materials or conversion costs that we are responsible for purchasing and/or providing.  The customer has initiated discussions to reduce volume and alter other terms of the contract.  However, no definitive agreement has been reached and the financial impact of changes, if any, are not known at this time.
 
 
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In 2008, we entered into a contract with a new customer for the toll manufacture of an industrial intermediate utilized in the antimicrobial industry.  We invested approximately $10 million in capital expenditures to modify and expand our plant to produce this industrial intermediate.  The customer reimbursed these expenditures, which reimbursements have been classified as deferred revenue on our balance sheet and will be earned into income over the expected life of the product.  The contract stipulates a price curve based on volumes sold and has an inflationary pricing provision whereby we pass along most inflationary changes in production costs to the customer.  The contract expires in December 2013.
 
Pricing for the other custom manufacturing products is negotiated directly with the customer.  Some, but not all, of these products have pricing mechanisms and/or protections against raw material or conversion cost changes.
 
Performance chemicals consist of specialty chemicals that are manufactured to general market-determined specifications and are sold to a broad customer base.  The major product line in the performance chemicals group is SSIPA/LiSIPA, a polymer modifier that aids the properties of nylon.  This group of products also includes sulfonated monomers and hydrotropes, specialty solvents, polymer additives, and chemical intermediates.
 
SSIPA/LiSIPA revenues are generated from a diverse customer base of nylon fiber manufacturers and other customers that produce condensation polymers.  Contract sales are indexed to key raw materials for inflation; otherwise, there is no pricing mechanism or specific protection against raw material or conversion cost changes.
 
Pricing for the other performance chemical products is established based upon competitive market conditions.  Some, but not all, of these products have pricing mechanisms and/or specific protections against raw material or conversion cost changes.
 
For our biofuels segment, we procure all of our own feedstock and only sell biodiesel for our own account.  In rare instances, we purchase biodiesel from other producers for resale.  We have the capability to process multiple types of vegetable oils and animal fats, we can receive feedstock by rail or truck, and we have completed the construction of substantial storage capacity to acquire feedstock at advantaged prices when market conditions permit.  In 2010, we redesigned our continuous line to produce biodiesel from feedstock with high fatty acids.  By the end of 2011, daily production volumes from the redesigned line demonstrated a production capacity in excess of 35 million gallons of biodiesel per year.  Debottlenecking has increased the annual rate to in excess of 45 million gallons per year.  Projects are currently in progress to further debottleneck the plant to run at higher rates.
 
There currently is uncertainty as to whether we will produce biodiesel in the future.  This uncertainty results from: (i) changes in feedstock prices relative to biodiesel prices; and (ii) the permanency of government mandates.  See “Risk Factors” above.
 
While biodiesel is the principal component of the biofuels segment, we also generate revenue from the sale of petrodiesel both in blends with our biodiesel and, from time to time, with no biodiesel added.  Petrodiesel and biodiesel blends are available to customers at our leased storage facility in North Little Rock, Arkansas and at our Batesville plant.  In addition, we deliver blended product to a small group of customers within our region.  We also sell refined petroleum products from time-to-time on common carrier pipelines in part to maintain our status as a shipper on the pipeline.
 
The majority of our expenses are cost of goods sold.  Cost of goods sold includes raw material costs as well as both fixed and variable conversion costs, conversion costs being those expenses that are directly or indirectly related to the operation of our plant.  Significant conversion costs include labor, benefits, energy, supplies, depreciation, and maintenance and repair.  In addition to raw material and conversion costs, cost of goods sold includes environmental reserves and costs related to idle capacity.  Finally, cost of goods sold includes hedging gains and losses recognized by us related to our biofuels segment.  Cost of goods sold is allocated to the chemicals and biofuels business segments based on equipment and resource usage for most conversion costs and based on revenues for most other costs.
 
Operating costs include selling, general and administrative, and research and development expenses.
 
The discussion of results of operations that follows is based on revenues and expenses in total and for individual product lines and do not differentiate related party transactions.
 
 
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Fiscal Year Ended December 31, 2011 Compared to Fiscal Year Ended December 31, 2010
 
Set forth below is a summary of certain financial information for the periods indicated.
 
(Dollars in thousands other than per share amounts)
 
   
Twelve Months Ended December 31, 2011
   
Twelve Months Ended December 31, 2010
   
Dollar Change
   
% Change
 
Revenues
  $ 309,885     $ 219,183     $ 90,702       41.4 %
Income from operations
  $ 51,615     $ 32,155     $ 19,460       60.5 %
Net income
  $ 34,509     $ 23,094     $ 11,415       49.4 %
Earnings per common share – basic
  $ 0.85     $ 0.63     $ 0.22       34.9 %
Earnings per common share – diluted
  $ 0.84     $ 0.62     $ 0.22       35.5 %
Capital expenditures (net of customer reimbursements and regulatory grants)
  $ 9,884     $ 5,435     $ 4,449       81.9 %
Adjusted EBITDA
  $ 61,701     $ 40,930     $ 20,771       50.7 %

We use adjusted EBITDA as a key operating metric.  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, 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 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 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, relative to a performance based on GAAP results, while isolating the effects of depreciation and amortization, which may vary among our operating segments without any correlation to their underlying operating performance, and of non-cash stock-based compensation expense, which is a non-cash expense that varies widely among similar companies, and gains and losses on derivative instruments, whose immediate recognition can cause net income to be volatile from period to period due to the timing of the valuation change in the derivative instruments relative to the sale of biofuel.
 
The following table reconciles adjusted EBITDA with net income, the most directly comparable GAAP financial measure.
 
 
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(Dollars in thousands)
 
   
Twelve Months Ended December 31, 2011
   
Twelve Month Ended December 31, 2010
 
Adjusted EBITDA
  $ 61,701     $ 40,930  
Depreciation and amortization
    (9,098 )     (7,564 )
Non-cash stock-based compensation
    (502 )     -  
Interest and dividend income
    3,495       1,135  
Interest expense
    (184 )     (74 )
Loss on disposal of property and equipment
    (262 )     (318 )
Losses on derivative instruments
    (20 )     (928 )
Other income (expense), net
    (1,889 )     997  
Impairment of fixed assets
    (466 )     -  
Income tax expense
    (18,266 )     (11,084 )
Net income
  $ 34,509     $ 23,094  

Revenues
 
Revenues for the year ended December 31, 2011 were $309,885,000 as compared to revenues for the year ended December 31, 2010 of $219,183,000, an increase of 41%.  Revenues from biofuels increased 246% and accounted for 46% of total revenues in 2011 as compared to 18% in 2010.  Revenues from chemicals decreased 6% and accounted for 54% of total revenues in 2011 as compared to 82% in 2010.  Within the chemicals segment, revenues for 2011 changed as follows as compared to 2010: (i) revenues from the bleach activator decreased 12%; (ii) revenues from the proprietary herbicide and intermediates increased 7%; (iii) revenues from CPOs decreased 24%; (iv) revenues from DIPB increased 8%; and (v) revenues from other products decreased 4%.
 
Revenues from the bleach activator and the proprietary herbicide and intermediates are together the most significant components of our chemicals segment revenue base, accounting for 35% of total revenues for the year ended December 31, 2011 as compared to 54% for the year ended December 31, 2010.  These products comprised a smaller percentage of our total revenues in 2011 as revenues from our biofuels segment assumed a larger percentage.  Additionally, revenues from the bleach activator decreased in 2011.  This decrease was attributable to reduced volumes sold in 2011.  The future volume of and revenues from the bleach activator depend on both consumer demand for the product containing the bleach activator and the manufacturing, sales, and marketing priorities of our customer.  We are unable to predict with any certainty the revenues we will receive from this product in the future.  With respect to the proprietary herbicide, the increase in revenues in 2011 as compared to 2010 was primarily the result of pricing increases caused by increased raw material costs.
 
Revenues from CPOs and DIPB together decreased 7% during 2011.  The end market for CPOs is the automotive industry and demand for this product has fluctuated significantly over the last couple of years.  In 2010, this product benefited from the improved economic conditions of the automotive industry.  In 2011, this product suffered from a reduction in demand.  Some of the decrease in CPO revenues was offset by an increase in revenues from DIPB in 2011 as compared to 2010.
 
Revenues from other custom chemical products decreased 17% in 2011 as compared to 2010.  This decrease was almost entirely due to production ceasing in early 2011 on one product which we campaigned for a customer in 2010.  A second campaign for this same customer was started in the fourth quarter of 2011.  Revenues from proprietary chemicals increased 18% in 2011 as compared to 2010 and account for approximately 4% of total revenues in 2011.  This increase was due to sales of new performance chemicals, including crude glycerin, and increased sales of SSIPA.
 
Revenues from biofuels increased from $40,903,000 in 2010 to $141,648,000 in 2011.  The reinstatement of the $1.00 per gallon federal blenders credit in December 2010 along with the government mandated renewable fuel standard for biodiesel combined to improve the economics of biodiesel, and demand and production increased in 2011 relative to 2010.  The blenders credit expired on December 31, 2011 and has not been reinstated.  We continue to develop our regional fuel distribution business.  A substantial portion of our biodiesel sold in 2011 was to a major refiner in the United States and no assurances can be given that we will continue to sell to such major refiner or, if we do sell, the volume that will be sold or the profit margin that will be realized.
 
 
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Cost of Goods Sold and Distribution
 
Total cost of goods sold and distribution for 2011 were $248,130,000 as compared to total cost of goods sold and distribution of $177,899,000 in 2010, an increase of 39%, which is comparable to the 41% increase in revenue for that period.
 
Cost of good sold and distribution for 2011 for our chemicals segment totaled $125,552,000 as compared to cost of goods sold and distribution for 2010 of $136,847,000.  On a percentage basis, the 8% reduction in costs of good sold and distribution in 2011 as compared to 2010 was comparable to the 6% reduction in 2011 chemical revenues, with the differences largely being attributable to differences in product mix from 2010 to 2011 and from the increase in biofuel related sales, which causes a higher percentage of our fixed costs to be allocated to our biofuels segment.  These items were partially offset by expenses we were unable to pass along to customers.
 
Cost of good sold and distribution for 2011 for our biofuel segment were $122,578,000 as compared to cost of good sold and distribution for 2010 of $41,052,000.  On a percentage basis, cost of goods sold and distribution increased 199% versus an increase in revenues of 246%.  This difference is due in part to our receipt of approximately $1,900,000 awarded to us under the USDA Section 9005 – Advanced Biofuel Producers program in the third quarter of 2011.  This award totaled $100,000 in 2010.  See Note 21 to our consolidated financial statements included elsewhere herein.  Based on the characteristics of the award, we recognize the income from it in the period funding is received.  Additionally, the $1.00 per gallon federal blenders credit existed throughout 2011 and it did not exist for the majority of 2010.  The existence of this credit was a significant factor in the profitability of biodiesel production.  Both the USDA Section 9005 – Advanced Biofuel Producer grant and the $1.00 per gallon federal blenders credit are recorded as a reduction to our cost of goods sold and distribution expenses in our consolidated statement of operations and comprehensive income.  Since December 31, 2011, we have continued to acquire biodiesel feedstock and produce biodiesel.  The $1.00 per gallon federal blenders credit expired effective December 31, 2011.
 
Operating Expenses
 
Operating expenses increased from $9,129,000 in 2010 to $10,140,000 in 2011.  The primary cause of this increase was an increase in compensation expense from $3,500,000 in 2010 to $4,050,000 in 2011.  This increase was primarily attributable to $502,000 being recognized in non-cash stock-based compensation expense in connection with the issuance of stock options to our board of directors and certain members of our management.  No such expense was recorded in 2010 as no stock-based compensation was granted.
 
Provision for Income Taxes
 
The effective tax rates for the years ended December 31, 2011 and 2010 reflect our expected tax rate on reported operating earnings before income taxes.  We have determined that we do not believe that we have a more likely than not probability of realizing a portion of our deferred tax assets.  As such, we have recorded a valuation allowance of $25,000 at December 31, 2011.
 
Income Taxes
 
We had no liability for uncertain tax positions at December 31, 2011.  See Note 15 to our consolidated financial statements included elsewhere herein.
 
Fiscal Year Ended December 31, 2010 Compared to Fiscal Year Ended December 31, 2009
 
Revenues
 
Revenues for the year ended December 31, 2010 were $219,183,000 as compared to revenues for the year ended December 31, 2009 of $196,711,000, an increase of 11%.  Revenues from biofuels decreased 23% and accounted for 18% of total revenues in 2010 as compared to 27% in 2009.  Revenues from chemicals increased 24% and accounted for 82% of total revenues in 2010 as compared to 73% in 2009.  Within the chemicals segment, revenues for 2010 changed as follows as compared to 2009: revenues from the bleach activator increased 8%; revenues from the proprietary herbicide and intermediates increased 16%; revenues from CPOs increased 195%; revenues from DIPB increased 10%; and revenues from other products increased 62%.
 
 
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Revenues from the bleach activator and the proprietary herbicide and intermediates are together the most significant components of our revenue base, accounting for 54% of revenues for the year ended December 31, 2010 as compared to 53% for the year ended December 31, 2009.  The increase in revenue from the bleach activator during 2010 as compared to 2009 was attributable to higher volumes sold in 2010.  The future volume of and revenues from the bleach activator depend on both consumer demand for the product containing the bleach activator and the manufacturing, sales, and marketing priorities of our customer.  We are unable to predict with certainty the revenues we will receive from this product in the future.  With respect to the proprietary herbicide, the increase in revenues in 2010 as compared to 2009 was primarily a result of higher volumes.
 
Revenues from CPOs and DIPB together increased 57% during 2010.  The end market for CPOs is the automotive industry and demand for this product has benefited from the improvement in economic conditions.  Revenues from DIPB in 2010 were higher in 2010 as compared to 2009; revenues in the second half of 2009 were sufficient to offset reduced revenues in the first half of the year related to a scheduled maintenance shutdown and reduced demand from our customer.
 
Decreased revenues in 2010 from the biofuels segment resulted from lower volume of biodiesel, a direct result of the expiration of the $1 blender’s credit, and reduced volume of agricultural commodities, primarily soybeans, rice, and corn from the granary we purchased in March 2009.  The volume of biodiesel sold in 2010 decreased 47% as compared to 2009.  The volume of petrodiesel and biodiesel blends (ranging from less than 5% biodiesel to as much as 99% biodiesel) increased 21% as compared to 2009; this increase was primarily a result of our success with our regional fuel distribution strategy and strategic purchases and sales of fuel.
 
Cost of Goods Sold and Distribution
 
Total cost of goods sold and distribution for 2010 were $177,899,000 as compared to total cost of goods sold and distribution for 2009 of $162,274,000, an increase of 10%.
 
Cost of goods sold and distribution for 2010 for our chemicals segment were $136,847,000 as compared to cost of goods sold and distribution for 2009 of $110,752,000.  On a percentage basis, the 24% increase in cost of goods sold and distribution were directly in line with the 24% increase in chemicals segment revenues.
 
Cost of goods sold and distribution for 2010 for our biofuels segment were $41,052,000 as compared to cost of goods sold and distribution for 2009 of $51,522,000.  On a percentage basis, cost of goods sold and distribution decreased 20% versus a decrease in revenues of 23%.  This decrease is primarily attributed to reduced sales volume in the absence of the $1 blender’s credit and losses incurred in our biodiesel hedging activities.   Additionally, the 2009 results reflect a $2,000,000 award from the Arkansas Alternative Fuels Development Program.  Under this program, biodiesel producers in the state of Arkansas were eligible to receive $0.20 per gallon for every gallon of biodiesel produced during defined time periods, up to a maximum of $2,000,000 per period, subject to funding by the State of Arkansas.  The grant was not funded in 2010.  Based on the characteristics of the Arkansas Alternative Fuels Development Program and the State funding behind this program, we recognized income in the period funding was received.
 
Operating Expenses
 
Operating expenses decreased 5% from $9,598,000 in 2009 to $9,129,000 in 2010.  Compensation expense decreased 3% as a result of reduced administrative staff.  Other expense increased 17%, primarily as a result of the addition of our granary and, to a lesser extent, from increased legal fees stemming from issues described under “Other Matters”.  Related party expense decreased 14%.  Related party expense is described in detail in Note 20 of our consolidated financial statements included elsewhere herein.
 
 
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Provision for Income Taxes
 
The effective tax rates for the years ended December 31, 2010 and 2009 reflect our expected tax rate on reported operating earnings before income taxes.  We have determined that we do not believe that we have a more likely than not probability of realizing a portion of our deferred tax assets.  As such, we have recorded a valuation allowance of $277,000 at December 31, 2010.
 
Income Taxes
 
We had no liability for uncertain tax positions at December 31, 2010.  See Note 15 to our consolidated financial statements included elsewhere herein.
 
Critical Accounting Estimates
 
Allowance for Doubtful Accounts
 
We reduce our accounts receivable by 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 our customers and historical bad debt experience.  This estimate is subject to change based upon the changing financial condition of our customers.  At both December 31, 2011 and 2010, we recorded an allowance for doubtful accounts of $10,000, which pertained to one customer.  We historically have not experienced significant problems in collecting our receivables and we do not expect this to change going forward.
 
Depreciation
 
Depreciation is provided for using the straight-line method over the associated assets’ estimated useful lives.  We primarily base our estimate of an asset’s useful life on our experience with other similar assets.  The actual useful life of an asset may differ significantly from our estimate for such reasons as the asset’s build quality, the manner in which the asset is used, or changes in the business climate.  When the actual useful life differs from the estimated useful life, impairment charges may result.  We monitor the estimated useful lives of our assets and do not currently anticipate impairment charges.
 
Asset Retirement Obligations
 
We establish reserves for closure/post-closure costs associated with the environmental and other assets we maintain.  Environmental assets include waste management units such as incinerators, landfills, storage tanks, and boilers.  When these types of assets are constructed or installed, a reserve is established 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 our environmental policies and practices.  These expenses are charged into earnings over the estimated useful life of the assets.  The future costs anticipated to be associated with the closure of the site are based upon estimated current costs for such activities adjusted for anticipated future inflation rates.  Unanticipated changes in either of these two variables or changes in the anticipated timing of closure/post-closure activities may significantly affect the established reserves.  As of December 31, 2011 and December 31, 2010, we recorded a reserve for closure/post-closure liabilities of $723,000 and $702,000, respectively.  We monitor this reserve and the assumptions used in its calculation.  As deemed necessary, we have made changes to this reserve balance and anticipate that future changes will occur.
 
Revenue Recognition
 
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 contracts.  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.  However, all of our products are tested for quality before shipment, and historically returns have been inconsequential.  We do not offer rebates or warranties.
 
 
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Revenue from bill and hold transactions in which a performance obligation exists is recognized when the total performance obligation has been met.  Bill and hold transactions for five specialty chemical customers in both 2011 and 2010 related to revenue that was recognized in accordance with contractual agreements based on product produced and ready for use.  These sales were subject to written monthly purchase orders with 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 customers are similar to other specialty chemical customers.  Sales revenue under bill and hold arrangements were $59,597,000, $57,074,000, and $42,773,000 for the years ended December 31, 2011, 2010, and 2009, respectively.
 
We sell petroleum products from time to time on common carrier pipelines in part to maintain our status as a shipper on the pipeline.  When such transactions result in us purchasing and selling product to the same counterparty, such transactions are recorded net as an element of revenue.
 
Income Taxes
 
We account for income taxes using the asset and liability method.  Under this method, income tax assets and liabilities are recognized for temporary differences between financial statement carrying amounts of assets and liabilities and their respective income tax basis.  A future income tax asset or liability is estimated for each temporary difference using enacted and substantively enacted income tax rates and laws expected to be in effect when the asset is realized or the liability settled.  Changes in the expected tax rates and laws to be in effect when the asset is realized or the liability settled could significantly affect the income tax assets and liabilities booked by us.  We monitor changes in applicable tax laws and adjust our income tax assets and liabilities as necessary.
 
Off-Balance Sheet Arrangements
 
We engage in two types of hedging transactions.  First, we hedge our biofuels sales through the purchase and sale of futures contracts and options on futures contracts of energy commodities.  This activity was captured on our balance sheet at December 31, 2011 and December 31, 2010.  Second, we hedge our biofuels feedstock through the execution of purchase contracts and supply agreements with certain vendors.  These hedging transactions are recognized in earnings and were not recorded on our balance sheet at December 31, 2011 or December 31, 2010 as they do not meet the definition of a derivative instrument as defined under accounting principles generally accepted in the U.S.  The purchase of biofuels feedstock generally involves two 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.
 
At December 31, 2010, we had a short position in certain marketable debt securities.  No such position existed at December 31, 2011.  The purpose of this position was to help mitigate the potential negative impact an increase in interest rates would have on other marketable securities we had purchased.  We were required to maintain a margin account at a broker to collateralize this obligation.  This margin account did not exist at December 31, 2011.
 
Contractual Obligations
 
The following table sets forth as of December 31, 2011 the payments due by period for the following contractual obligations.
 
(Dollars in thousands)
 
Contractual Obligations
 
Total
   
Less than
1 Year
   
1-3
Years
   
4-5
Years
   
More than
5 Years
 
Long-term debt obligations (a)
  $ -     $ -     $ -     $ -     $ -  
Capital lease obligations
    -       -       -       -       -  
Operating lease obligations
    2,071       771       880       420       -  
Purchase obligations (b)
    16,015       16,015       -       -       -  
Other long-term liabilities reflected on our balance sheet under GAAP (c)
    -       -       -       -       -  
Total
  $ 18,086     $ 16,786     $ 880     $ 420     $ -  
__________
 
 
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(a)
As of December 31, 2011, we had no borrowings under the $50 million credit agreement described above.
 
(b)
Purchase obligations within less than one year include: (i) the purchase of biodiesel feedstock to be taken during 2012; and (ii) various other infrastructure and capital repairs.
 
(c)
A component of other noncurrent liabilities is a reserve for asset retirement obligations and environmental contingencies of $723 at December 31, 2011.  We are liable for these asset retirement obligations and environmental contingencies only in certain events, primarily the closure of our Batesville, Arkansas facility.  As such, we do not expect a payment related to these liabilities in the foreseeable future and therefore we have excluded this amount from the table above.
 
Other Matters
 
We entered into an agreement with a customer to construct at a fixed price a processing plant and produce a certain chemical for the customer.  We engaged a third party to act as general contractor on the construction of this plant for a guaranteed price.  That general contractor defaulted on its obligations under its contract with us and abandoned the project.  As a result, we undertook the general contractor role ourselves.  We also filed suit against our former contractor to recoup any damages that we incurred as a result of his default.  The former contractor counterclaimed against us for amounts he asserts are due him under our contract with him.  At this time, we do not believe that the general contractor’s default had, or his counterclaim against us will have, a material adverse effect on us or on our financial condition.
 
We entered into an agreement with a biodiesel trade association to pay certain fees and dues to the association in order to obtain access and registration to the association’s compiled biodiesel health effects data (or HED) required by the USEPA for biodiesel manufacturers.  Manufacturers of biodiesel who pay their fair share of costs for the HED can have access to and obtain registration with the USEPA.  We brought suit against the trade association for reformation of the agreement and anti-trust violations for various reasons including, among other things, that we already paid our fair share of the costs for the data to the trade association, and that the fees and dues structure of the trade association were overly excessive, against public policy, and restrained competition.  The trade association counterclaimed against us for collection of fees and dues allegedly owed by us to it.  At this time, we are unable to determine what effect the trade association’s counterclaim against us will have on us or on our financial condition.
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
 
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 ASC 815-20-25, Derivatives and Hedging, Hedging-General, Recognition .  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 2011 or 2010.  Changes in the fair value of our derivative instruments are recognized at the end of each accounting period and recorded in the statement of operations as a component of cost of goods sold.
 
 
42

 
 
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, 2011 and 2010, the fair values of our derivative instruments were a net liability in the amount of $2,453,000 and $1,649,000, 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 2011.  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.
 
(Volumes and dollars in thousands)
 
Item
 
Volume (a) Requirements
 
Units
 
Hypothetical Adverse Change in Price
   
Decrease in Gross Profit
   
Percentage Decrease in Gross Profit
 
Crude corn oil and yellow grease
    140,175  
LB
    10%     $ 6,635       10.7%  
Petrodiesel
    4,884  
GAL
    10%     $ 1,448       2.3%  
__________
 
(a)
Volume requirements and average price information are based upon volumes used and prices obtained for the twelve months ended December 31, 2011.  Volume requirements may differ materially from these quantities in future years as our business evolves.
 
We had no borrowings as of December 31, 2011 or 2010 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.
 
At December 31, 2010, we had a short position in certain marketable debt securities.  The purpose of this position was to help mitigate the potential negative impact an increase in interest rates would have on our other marketable securities.  The fair value of the securities totaled $(19,295,000) at December 31, 2010.  We maintained a margin account to collateralize these marketable debt securities.  This margin account maintained a balance of $21,086,000 at December 31, 2010, and was classified as restricted cash and cash equivalents in our consolidated balance sheet included herein.  We were obligated to purchase these securities at a future date.  To the extent that these marketable debt securities appreciated in value, we were exposed to off-balance sheet risks.  No such position existed at December 31, 2011.
 
 
43

 
 
Item 8. Financial Statements and Supplementary Data.
 
Financial Statements.
 
The following sets forth our consolidated balance sheets as at December 31, 2011 and 2010 and our consolidated statements of operations, statements of cash flows, and statements of stockholders’ equity for each of the three years in the period ended December 31, 2011, together with RubinBrown LLP’s report thereon.
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders
 
FutureFuel Corp.:
 
We have audited the accompanying consolidated balance sheets of FutureFuel Corp. and subsidiaries (the Company) as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for   each of the three years in the period ended December 31, 2011.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), FutureFuel Corp. and subsidiaries’ internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 15, 2012 expressed an unqualified opinion on the Company’s internal control over financial reporting.
 
/s/ RubinBrown LLP

St. Louis, Missouri
March 15, 2012
 
 
44

 
RDGXBRLParseBegin

FutureFuel Corp.
Consolidated Balance Sheets
As of December 31, 2011 and 2010
 
(Dollars in thousands)
 
   
2011
   
2010
 
Assets
           
Cash and cash equivalents
  $ 89,745     $ 91,057  
Accounts receivable, net of allowances of $10
    35,554       35,165  
Accounts receivable – related parties
    123       -  
Inventory
    57,439       37,372  
Income taxes receivable
    -       519  
Prepaid expenses
    1,460       1,240  
Marketable securities
    56,294       28,200  
Restricted cash and cash equivalents
    -       21,086  
Other current assets
    1,910       1,015  
Total current assets
    242,525       215,654  
Property, plant and equipment, net
    140,517       125,007  
Intangible assets
    -       94  
Other assets
    2,202       2,401  
Total noncurrent assets
    142,719       127,502  
Total Assets
  $ 385,244     $ 343,156  
                 
Liabilities and Stockholders’ Equity
               
Accounts payable
  $ 18,665     $ 14,628  
Accounts payable - related parties
    3,023       468  
Income taxes payable
    1,123       -  
Current deferred income tax liability
    6,162       4,661  
Deferred revenue – short-term
    3,558       1,758  
Short position – marketable debt securities
    -       19,295  
Accrued expenses and other current liabilities
    3,225       3,341  
Accrued expenses and other current liabilities - related parties
    43       8  
Total current liabilities
    35,799       44,159  
Deferred revenue – long-term
    29,256       17,118  
Contingent liability – long-term
    2,521       2,289  
Other noncurrent liabilities
    924       903  
Noncurrent deferred income tax liability
    28,506       26,364  
Total noncurrent liabilities
    61,207       46,674  
Total Liabilities
    97,006       90,833  
Commitments and contingencies
               
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, none issued and outstanding
    -       -  
Common stock, $0.0001 par value, 75,000,000 shares authorized, 41,308,446 and 39,978,849 issued and outstanding as of December 31, 2011 and 2010, respectively
    4       4  
Accumulated other comprehensive income
    1,803       525  
Additional paid in capital
    253,505       237,123  
Retained earnings
    32,926       14,671  
Total stockholders’ equity
    288,238       252,323  
Total Liabilities and Stockholders’ Equity
  $ 385,244     $ 343,156  

The accompanying notes are an integral part of these financial statements.
 
 
45

 
 
FutureFuel Corp.
Consolidated Statements of Operations
for the Years Ended December 31, 2011, 2010, and 2009
(Dollars in thousands, except per share amounts)
 
   
2011
   
2010
   
2009
 
Revenues
  $ 304,614     $ 219,090     $ 194,217  
Revenues – related parties
    5,271       93       2,494  
Cost of goods sold
    237,867       169,776       151,359  
Cost of goods sold – related parties
    6,996       4,044       5,933  
Distribution
    2,824       3,553       4,894  
Distribution - related parties
    443       526       88  
Gross profit
    61,755       41,284       34,437  
Selling, general, and administrative expenses
                       
Compensation expense
    4,050       3,500       3,605  
Other expense
    2,044       1,794       1,530  
Related party expense
    534       341       298  
Research and development expenses
    3,512       3,494       4,165  
      10,140       9,129       9,598  
Income from operations
    51,615       32,155       24,839  
Interest and dividend income
    3,495       1,135       403  
Interest expense
    (184 )     (74 )     (27 )
Loss on foreign currency
    -       -       (3 )
(Loss) gain on marketable securities
    (1,889 )     997       (15 )
Other income (expense)
    (262 )     (35 )     249  
      1,160       2,023       607  
Income before income taxes
    52,775       34,178       25,446  
Provision for income taxes
    18,266       11,084       8,454  
Net income
  $ 34,509     $ 23,094     $ 16,992  
                         
Earnings per common share
                       
Basic
  $ 0.85     $ 0.63     $ 0.60  
Diluted
  $ 0.84     $ 0.62     $ 0.58  
Weighted average shares outstanding
                       
Basic
    40,708,552       36,526,105       28,190,300  
Diluted
    40,886,693       37,188,328       29,254,272  
                         
      2011         2010         2009  
Comprehensive income                        
Net income
  $ 34,509     $ 23,094     $ 16,992  
Other comprehensive income, net of tax of $797 in 2011, $306 in 2010, and $14 in 2009
    1,278       487       23  
Comprehensive income
  $ 35,787     $ 23,581     $ 17,015  
 
The accompanying notes are an integral part of these financial statements.
 
 
46

 
 
FutureFuel Corp.
Consolidated Statements of Cash Flows
for the Years Ended December 31, 2011, 2010, and 2009
(Dollars in thousands)
 
   
2011
   
2010
   
2009
 
Cash flows provided by operating activities
                 
Net income
  $ 34,509     $ 23,094     $ 16,992  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation and amortization
    9,098       7,564       7,517  
Provision for deferred income taxes
    2,846       3,429       1,025  
Change in fair value of derivative instruments and marketable securities
    617       (93 )     (1,236 )
Other than temporary impairment of marketable securities
    2,710       -       -  
Impairment of fixed assets
    466       -       -  
Loss (gain) on investments
    (590 )     (1,184 )     15  
Losses on disposals of fixed assets
    262       318       240  
Stock based compensation
    502       -       873  
Noncash interest expense
    21       22       22  
Changes in operating assets and liabilities:
                       
Accounts receivable
    (389 )     (13,406 )     (1,711 )
Accounts receivable – related parties
    (123 )     -       -  
Inventory
    (20,067 )     (10,929 )     1,141  
Income taxes receivable
    519       393       (120 )
Prepaid expenses
    (220 )     56       (3 )
Prepaid expenses - related parties
    -       23       (23 )
Accrued interest on marketable securities
    (123 )     32       5  
Other assets
    633       338       (19 )
Accounts payable
    4,037       360       937  
Accounts payable - related parties
    2,555       (88 )     134  
Income taxes payable
    1,123       -       -  
Accrued expenses and other current liabilities
    (116 )     509       581  
Accrued expenses and other current liabilities - related parties
    35       (60 )     47  
Deferred revenue
    12,124       7,958       (646 )
Other noncurrent liabilities
    -       (497 )     112  
Net cash provided by operating activities
    50,429       17,839       25,883  
Cash flows from investing activities
                       
Restricted cash
    21,086       (21,086 )     -  
Collateralization of derivative instruments
    (2,133 )     326       5,270  
Purchase of marketable securities
    (87,320 )     (50,151 )     (23,964 )
Proceeds from the sale of marketable securities
    40,196       47,012       35,972  
Net sales of auction rate securities
    -       2,800       12,185  
Proceeds from the sale of commercial paper
    -       -       15,424  
Proceeds from the sale of fixed assets
    12       3       17  
Contingent purchase price payment
    -       -       (312 )
Capital expenditures
    (23,208 )     (9,671 )     (23,162 )
Net cash provided by (used in) investing activities
    (51,367 )     (30,767 )     21,430  
Cash flows from financing activities
                       
Proceeds from the issuance of stock
    15,872       70,736       -  
Excess tax benefits associated with stock options
    8       -       -  
Purchase of warrants
    -       (1,210 )     (799 )
Payment of dividend
    (16,254 )     (31,053 )     (8,457 )
Net cash provided by (used in) financing activities
    (374 )     38,473       (9,256 )
Net change in cash and cash equivalents
    (1,312 )     25,545       38,057  
Cash and cash equivalents at beginning of period
    91,057       65,512       27,455  
Cash and cash equivalents at end of period
  $ 89,745     $ 91,057     $ 65,512  
                         
Cash paid for interest
  $ 5     $ 2     $ 8  
                         
Cash paid for income taxes
  $ 13,773     $ 8,081     $ 7,677  
                         
Non-cash capital expenditures
  $ 2,059     $ 3,859     $ -  

The accompanying notes are an integral part of these financial statements.
 
47

 
 
FutureFuel Corp.
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2011, 2010, and 2009
 
(Dollars in thousands)
 
   
Common Stock
   
Other
Comprehensive
   
Additional
Paid-In
   
Retained
   
Total
Stockholders’
 
   
Shares
   
Amount
   
Income
   
Capital
   
Earnings
   
Equity
 
Balance - December 31, 2008
    28,190,300     $ 3     $ 15     $ 167,524     $ 14,095     $ 181,637  
Special cash dividend
    -       -       -       -       (8,457 )     (8,457 )
Stock based compensation
    -       -       -       873       -       873  
Purchase of warrants
    -       -       -       (799 )     -       (799 )
Other comprehensive income
    -       -       23       -       -       23  
Net income
    -       -       -       -       16,992       16,992  
Balance - December 31, 2009
    28,190,300       3       38       167,598       22,630       190,269  
Special cash dividend
    -       -       -       -       (31,053 )     (31,053 )
Proceeds from the issuance of stock
    11,788,549       1       -       70,735       -       70,736  
Purchase of warrants
    -       -       -       (1,210 )     -