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EX-32.1 - EXHIBIT32.1 - Renewable Energy Group, Inc.regi-2014q3xex321.htm
EX-32.2 - EXHIBIT32.2 - Renewable Energy Group, Inc.regi-2014q3xex322.htm
EX-31.2 - EXHIBIT31.2 - Renewable Energy Group, Inc.regi-2014q3xex312.htm
EX-31.1 - EXHIBIT31.1 - Renewable Energy Group, Inc.regi-2014q3xex311.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
     
Form 10-Q
      
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-35397
RENEWABLE ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)
   
Delaware
   
26-4785427
(State of other jurisdiction of
incorporation or organization)
   
(I.R.S. Employer
Identification No.)
   
   
416 South Bell Avenue Ames, Iowa
   
50010
(Address of principal executive offices)
   
(Zip code)
(515) 239-8000
(Registrant’s telephone number, including area code)
      

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    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  x    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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  x
   
   
Non-accelerated filer  ¨
   
Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO   x
As of October 31, 2014, the registrant had 42,306,595 shares of Common Stock issued and outstanding.




PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL INFORMATION
RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share and per share amounts)
   
September 30,
2014
 
December 31,
 2013
ASSETS
   

 
   

CURRENT ASSETS:
   

 
   

Cash and cash equivalents
$
67,270

 
$
153,227

Marketable securities
61,378

 

Accounts receivable, net (includes amounts owed by related parties of $141 and $426, respectively)
35,422

 
82,911

Inventories
49,382

 
85,814

Prepaid expenses and other assets
39,786

 
25,568

Total current assets
253,238

 
347,520

Property, plant and equipment, net
462,053

 
286,044

Property, plant and equipment, net—variable interest entity

 
5,180

Goodwill
175,472

 
84,864

Intangible assets, net
29,280

 
4,867

Deferred income taxes
1,470

 

Other assets (includes amounts owed by related parties of $0 and $35, respectively)
29,356

 
12,380

Restricted cash
104,815

 

TOTAL ASSETS
$
1,055,684

 
$
740,855

LIABILITIES AND EQUITY
   

 
   

CURRENT LIABILITIES:
   

 
   

Revolving line of credit
$

 
$
10,986

Current maturities of long-term debt
6,105

 
6,729

Current maturities of long-term debt—variable interest entity

 
300

Accounts payable (includes amounts owed to related parties of $570 and $552, respectively)
53,942

 
48,727

Accrued expenses and other liabilities
15,361

 
12,305

Deferred income taxes
8,968

 
3,687

Deferred revenue
99

 
15,503

Total current liabilities
84,475

 
98,237

Unfavorable lease obligation
7,058

 
7,905

Deferred income taxes

 
2,691

Contingent consideration for acquisitions
39,411

 

Long-term debt
241,495

 
23,422

Long-term debt—variable interest entity

 
3,729

Other liabilities
4,153

 
6,838

Total liabilities
376,592

 
142,822

COMMITMENTS AND CONTINGENCIES (Note 15)


 


Series B preferred stock ($.0001 par value; 3,000,000 shares authorized; 0 and 143,313 shares outstanding; redemption amount $0 and $3,583, respectively)

 
3,963

EQUITY:
   

 
   

Common stock ($.0001 par value; 300,000,000 shares authorized; 42,306,595 and 36,506,221 shares outstanding, respectively)
4

 
4

Common stock—additional paid-in-capital
431,300

 
359,818

Retained earnings
251,692

 
238,134

Accumulated other comprehensive loss
(18
)
 

Treasury stock (530,898 and 530,898 shares outstanding, respectively)
(3,886
)
 
(3,886
)
Total stockholders’ equity
679,092

 
594,070

TOTAL LIABILITIES AND EQUITY
$
1,055,684

 
$
740,855

See notes to condensed consolidated financial statements.

1



RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share amounts)
 
Three months ended
 
Nine months ended
   
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
REVENUES:
   
 
   
 
   
 
   
Biodiesel sales
$
382,296

 
$
399,226

 
$
919,255

 
$
859,058

Biodiesel government incentives
1,830

 
59,203

 
16,742

 
248,385

   
384,126

 
458,429

 
935,997

 
1,107,443

Services
132

 
15

 
219

 
104

   
384,258

 
458,444

 
936,216

 
1,107,547

COSTS OF GOODS SOLD:
   
 
   
 
   
 
   
Biodiesel
351,033

 
388,518

 
854,800

 
875,475

Biodiesel—related parties
10,490

 
12,057

 
31,919

 
37,198

Services
20

 
20

 
67

 
149

   
361,543

 
400,595

 
886,786

 
912,822

GROSS PROFIT
22,715

 
57,849

 
49,430

 
194,725

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
16,707

 
12,686

 
45,861

 
33,556

INCOME FROM OPERATIONS
6,008

 
45,163

 
3,569

 
161,169

OTHER INCOME (EXPENSE), NET:
   
 
   
 
   
 
   
Change in fair value of contingent consideration
1,059

 

 
1,443

 

Other income, net
124

 
66

 
556

 
276

Interest expense
(2,867
)
 
(577
)
 
(4,622
)
 
(1,757
)
   
(1,684
)
 
(511
)
 
(2,623
)
 
(1,481
)
INCOME BEFORE INCOME TAXES
4,324

 
44,652

 
946

 
159,688

INCOME TAX BENEFIT (EXPENSE)
248

 
42,051

 
12,274

 
(3,452
)
NET INCOME
4,572

 
86,703

 
13,220

 
156,236

PLUS—GAIN ON REDEMPTION OF PREFERRED STOCK

 

 
378

 

PLUS—CHANGE IN UNDISTRIBUTED DIVIDENDS ALLOCATED TO PREFERRED STOCKHOLDERS

 
(147
)
 

 
(147
)
LESS—DISTRIBUTED DIVIDENDS TO PREFERRED STOCKHOLDERS

 
(258
)
 
(40
)
 
(1,848
)
LESS—EFFECT OF PARTICIPATING PREFERRED STOCK

 
(6,455
)
 

 
(18,010
)
LESS—EFFECT OF PARTICIPATING SHARE-BASED AWARDS
(68
)
 
(1,381
)
 
(196
)
 
(2,273
)
NET INCOME ATTRIBUTABLE TO THE COMPANY’S COMMON STOCKHOLDERS
$
4,504

 
$
78,462

 
$
13,362

 
$
133,958

NET INCOME PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
   
 
   
 
   
 
   
BASIC
$
0.11

 
$
2.32

 
$
0.33

 
$
4.20

DILUTED
$
0.11

 
$
2.31

 
$
0.32

 
$
4.20

WEIGHTED AVERAGE SHARES USED TO COMPUTE NET INCOME PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
   
 
   
 
   
 
   
BASIC
42,374,768

 
33,790,034

 
40,216,467

 
31,918,951

DILUTED
42,432,005

 
34,016,476

 
40,228,929

 
31,924,197

See notes to condensed consolidated financial statements.

2



RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands)
 
Three months ended
 
Nine months ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
Net income
$
4,572

 
$
86,703

 
$
13,220

 
$
156,236

Unrealized gains (losses) on marketable securities, net of taxes of $0 and $0, respectively
4

 

 
(18
)
 

Other comprehensive income (loss)
4

 

 
(18
)
 

Comprehensive income
$
4,576

 
$
86,703

 
$
13,202

 
$
156,236

See notes to condensed consolidated financial statements.


3



RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND EQUITY
(unaudited)
(in thousands except share amounts)
   
   
 
   
 
Company Stockholders’ Equity
 
   
   
Redeemable
Preferred
Stock
Shares
 
Redeemable
Preferred
Stock
 
Common
Stock
Shares
 
Common
Stock
 
Common Stock -
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Loss
 
Treasury
Stock
 
Total
BALANCE, January 1, 2013
2,995,106

 
$
83,043

 
30,559,935

 
$
3

 
$
274,136

 
$
53,823

 
$

 
$
(3,198
)
 
$
324,764

Issuance of common stock

 

 
58,501

 

 
423

 

 

 

 
423

Conversion of Series B Preferred Stock to common stock
(2,469,489
)
 
(68,479
)
 
4,988,995

 
1

 
69,116

 

 

 

 
69,117

Conversion of restricted stock units to common stock (net of 21,675 shares of treasury stock purchased)

 

 
70,515

 

 

 

 

 
(158
)
 
(158
)
Stock compensation expense

 

 

 

 
3,869

 

 

 

 
3,869

Series B Preferred Stock dividends paid

 

 

 

 

 
(1,848
)
 

 

 
(1,848
)
Net income

 

 

 

 

 
156,236

 

 

 
156,236

BALANCE, September 30, 2013
525,617

 
$
14,564

 
35,677,946

 
$
4

 
$
347,544

 
$
208,211

 
$

 
$
(3,356
)
 
$
552,403

BALANCE, January 1, 2014
143,313

 
$
3,963

 
36,506,221

 
$
4

 
$
359,818

 
$
238,134

 
$

 
$
(3,886
)
 
$
594,070

Issuance of common stock

 

 
49,662

 

 
582

 

 

 

 
582

Conversion of Series B Preferred Stock to common stock
(816
)
 
(23
)
 
1,634

 

 
23

 

 

 

 
23

Preferred stock redemption
(142,497
)
 
(3,940
)
 

 

 

 
378

 

 

 
378

Issuance of common stock in acquisition (net of issuance costs of $884)

 

 
5,724,172

 

 
60,196

 

 

 

 
60,196

Conversion of restricted stock units to common stock

 

 
24,906

 

 

 

 

 

 

Convertible notes conversion feature (net of taxes of $5,082 and net of issuance cost of $886)

 

 


 

 
19,068

 

 

 

 
19,068

Purchase of capped call transactions

 

 

 

 
(11,904
)
 

 

 

 
(11,904
)
Purchase of remaining interest in VIE (net of taxes of $300)

 

 

 

 
(524
)
 

 

 

 
(524
)
Stock compensation expense

 

 

 

 
4,041

 

 

 

 
4,041

Net change in unrealized losses on marketable securities

 

 

 

 

 

 
(18
)
 

 
(18
)
Series B Preferred Stock dividends paid

 

 

 

 

 
(40
)
 

 

 
(40
)
Net income

 

 

 

 

 
13,220

 

 

 
13,220

BALANCE, September 30, 2014

 
$

 
42,306,595

 
$
4

 
$
431,300

 
$
251,692

 
$
(18
)
 
$
(3,886
)
 
$
679,092

See notes to condensed consolidated financial statements.

4



RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
Nine months ended
   
September 30, 2014
 
September 30, 2013
CASH FLOWS FROM OPERATING ACTIVITIES:
   
 
   
Net income
$
13,220

 
$
156,236

Adjustments to reconcile net income to net cash flows from operating activities:
   
 
   
Depreciation expense
9,526

 
6,974

Amortization expense of assets and liabilities, net
412

 
(365
)
Accretion of convertible note discount
1,488

 

Change in fair value of contingent consideration
(1,443
)
 

Gain on disposal of property, plant and equipment

 
(67
)
Provision for doubtful accounts
356

 
99

Stock compensation expense
4,041

 
3,869

Deferred tax expense (benefit)
(12,840
)
 
8,872

Other operating activities
437

 

Changes in asset and liabilities, net of effects from acquisitions:
   
 
   
Accounts receivable, net
47,678

 
(47,959
)
Inventories
38,379

 
(14,681
)
Prepaid expenses and other assets
(12,358
)
 
(24,441
)
Accounts payable
967

 
23,843

Accrued expenses and other liabilities
(3,105
)
 
3,432

Deferred revenue
(15,404
)
 
987

Net cash flows provided by operating activities
71,354

 
116,799

CASH FLOWS FROM INVESTING ACTIVITIES:
   
 
   
Cash paid for marketable securities
(80,973
)
 

Cash receipts from marketable securities
19,174

 

Cash proceeds from involuntary disposal of fixed assets

 
330

Change in restricted cash
(104,815
)
 

Cash paid for purchase of property, plant and equipment
(45,579
)
 
(28,785
)
Cash paid for acquisitions, net of cash acquired
(32,892
)
 
(10,933
)
Cash paid for investments
(2,779
)
 

Other investing activities
72

 
(58
)
Net cash flows used in investing activities
(247,792
)
 
(39,446
)
CASH FLOWS FROM FINANCING ACTIVITIES:
   
 
   
Borrowings on line of credit
1,056,596

 
1,103,568

Repayments on line of credit
(1,067,582
)
 
(1,103,568
)
Cash received from issuance of debt
143,750

 
3,000

Cash paid for capped call transactions
(11,904
)
 

Cash paid on debt
(20,340
)
 
(9,690
)
Cash paid for debt issuance costs
(4,381
)
 
(47
)
Cash paid for equity issuance costs
(1,527
)
 
(25
)
Cash paid for treasury stock
(529
)
 
(282
)
Cash paid for preferred stock dividends
(40
)
 
(1,205
)
Cash paid for redemption of preferred stock
(3,562
)
 

Cash paid for fractional common stock shares

 
(6
)
Net cash flows provided by (used in) financing activities
90,481

 
(8,255
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
(85,957
)
 
69,098

CASH AND CASH EQUIVALENTS, Beginning of period
153,227

 
66,785

CASH AND CASH EQUIVALENTS, End of period
$
67,270

 
$
135,883

(continued)

5



RENEWABLE ENERGY GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
Nine months ended
 
September 30, 2014
 
September 30, 2013
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
   
 
   
Cash paid/(received) for income taxes
$
21

 
$
(6,538
)
Cash paid for interest
$
2,286

 
$
1,496

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
   
 
   
Amounts included in period-end accounts payable for:
   
 
   
Purchases of property, plant and equipment
$
5,905

 
$
3,608

Debt issuance cost
$
60

 
 
Incentive stock liability for raw material supply agreement
$
317

 
$
439

Equity issuance costs
$
25

 
 
Issuance of common stock for acquisitions
$
61,085

 
 
Issuance of note payable for acquisition
 
 
$
5,135

Contingent consideration for acquisitions
$
45,950

 
 
Debt assumed in acquisition
$
113,553

 
 
Gain on redemption of preferred stock
$
378

 
 
Issuance of common stock for dividends
 
 
$
643

(concluded)
   
See notes to condensed consolidated financial statements.



6



RENEWABLE ENERGY GROUP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For The Three and Nine Months Ended September 30, 2014 and 2013
(unaudited)
(in thousands, except share and per share amounts)
NOTE 1 — BASIS OF PRESENTATION AND NATURE OF THE BUSINESS
The condensed consolidated financial statements have been prepared by Renewable Energy Group, Inc. and its subsidiaries (the Company), pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted as permitted by such rules and regulations. All adjustments, consisting of normal recurring adjustments, have been included. Management believes that the disclosures are adequate to present fairly the financial position, results of operations and cash flows at the dates and for the periods presented. It is suggested that these interim financial statements be read in conjunction with the consolidated financial statements and the notes thereto appearing in the Company’s latest annual report on Form 10-K. Results for interim periods are not necessarily indicative of those to be expected for the fiscal year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates.
As of September 30, 2014, the Company owned biomass-based diesel production facilities with an aggregate nameplate production capacity of 332 million gallons per year (mmgy).
The biomass-based diesel industry and the Company’s business have benefited from certain federal and state incentives. The federal biomass-based diesel mixture excise tax credit (BTC) expired on December 31, 2013 and it is uncertain whether it will be reinstated. This expiration, along with other amendments of any one or more of those laws or incentives, could adversely affect the financial results of the Company.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We have disclosed a summary of the Company's significant accounting policies in the December 31, 2013 Annual Report on Form 10-K. There have been no material changes from the policies previously disclosed other than those noted below.
Restricted Cash
Restricted cash consists of $101,315 of cash, which is held in a certificate of deposit and pledged to Bank of America, who issued a letter of credit on the Company's behalf to support the payments on the Company's GOZone Bonds. In addition, $3,500 is held in a certificate of deposit and pledged to Bank of America, who issued a letter of credit to support REG Energy Services' trade activities as of September 30, 2014. There was no restricted cash balance at December 31, 2013. For additional information, see "Note 9 - Debt". The Company classifies restricted cash between current and non-current assets based on the length of time of the restricted use.
Marketable Securities
The Company’s marketable securities are classified as available-for-sale and are reported at fair value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income (loss). Realized gains or losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are reported in other income, net. The Company evaluates the investments periodically for possible other-than-temporary impairment. A decline of fair value below amortized costs of debt securities is considered an other-than-temporary impairment if the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security before recovery of the entire amortized cost basis. In those instances, an impairment charge equal to the difference between the fair value and the amortized cost basis is recognized in earnings. Regardless of the Company’s intent or requirement to sell a debt security, an impairment is considered other-than-temporary if the Company does not expect to recover the entire amortized cost basis; in those instances, a credit loss equal to the difference between the present value of the cash flows expected to be collected based on credit risk and the amortized cost basis of the debt security is recognized in earnings. The Company has no current requirement or intent to sell a material portion of marketable securities as of September 30, 2014. The Company expects to recover up to (or beyond) the initial cost of investment for securities held. In computing realized gains and losses on available-for-sale securities, the Company determines cost based on amounts paid, including direct costs such as commissions to acquire the security, using the specific identification method. There were no gross realized gains and losses on available-for-sale securities during the three and nine months ended September 30, 2014 and 2013.
Inventories

7



Inventories are valued at the lower of cost or market. Lower of cost or market adjustments amounting to $1,051 and $0 were made to the inventory values reported as of September 30, 2014 and December 31, 2013, respectively. Cost is determined based on the first-in, first-out method.
Goodwill
Goodwill is tested for impairment annually on July 31 or when impairment indicators exist. Goodwill is allocated and tested for impairment by reporting units. The analysis is based on a comparison of the carrying value of the reporting unit to its fair value, determined utilizing both a discounted cash flow methodology and a market comparable methodology. The determination of whether or not the asset has become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the value of the Company’s reporting units. Changes in estimates of future cash flows caused by items such as unforeseen events or sustained unfavorable changes in market conditions could negatively affect the fair value of the reporting unit’s goodwill asset and result in an impairment charge. The annual impairment test determined that the fair value of the biodiesel reporting unit exceeded its carrying value by approximately 7% and the services reporting unit exceeded its carrying value by approximately 66%. There have been no impairment indicators in the first nine months of 2014 that would indicate that an additional assessment needs be taken.
Contingent Consideration for Acquisitions
Contingent considerations in a purchase business combination are established at the time of the acquisition (See "Note 3 - Acquisitions and Equity Transactions"). The contingent consideration is adjusted to fair value at each reporting period. The change in fair value is included in change in fair value of contingent consideration on the Condensed Consolidated Statements of Operations.
Research and Development Costs
Research and development (R&D) costs are charged to expense as incurred and included in Selling, General and Administrative expenses on the Condensed Consolidated Statements of Operations. R&D expense was $2,810 and $7,900 for the three and nine months ended September 30, 2014, respectively, and $79 and $153 for the three and nine months ended September 30, 2013, respectively. In process research and development (IPR&D) assets acquired in connection with acquisitions are recorded on the Condensed Consolidated Balance Sheets as intangible assets. Acquired IPR&D is initially assigned an indefinite life and is subject to impairment testing until the completion or abandonment of the associated R&D efforts. If abandoned, the carrying value of the IPR&D asset is expensed. Once the associated R&D efforts are completed, the carrying value of the IPR&D is reclassified as a finite-lived asset and is amortized over its useful life.
Convertible Debt
In June 2014, the Company issued $143,750 in convertible senior notes. Applicable authoritative accounting guidance requires that the conversion feature be assigned a fair value and that that feature reduce the initial recorded value of the liability component of the convertible senior notes. This conversion feature is recorded in equity on a net of tax basis. The discount on the liability component is being amortized through interest expense until the maturity date of June 15, 2019. See "Note 9 - Debt" for further descriptions of the transaction.
Capped Call Transaction
In connection with the issuance of the convertible senior notes, the Company entered into capped call transactions. The purchased capped call transactions were recorded as a reduction to common stock-additional paid-in-capital. Because this was considered to be an equity transaction and qualifies for the derivative scope exception, no future changes in the fair value of the capped call will be recorded by the Company.
Income Taxes
The tax benefit for the nine months ended September 30, 2014 was mainly attributable to the acquisition of Syntroleum and Dynamic Fuels. Specifically, in connection with the acquisition of Syntroleum and Dynamic Fuels, the Company acquired a net deferred tax liability of $7,278 that will produce future taxable income. The increase in the gross deferred tax liability resulted in a reduction to the Company's valuation allowance which was recognized as a tax benefit discretely in the quarter ended June 30, 2014.
Under the rules prescribed by Internal Revenue Code (IRC) Section 382 and applicable regulations, if certain transactions occur with respect to an entity's capital stock that result in a cumulative ownership shift of more than 50% by 5% stockholders over a testing period, annual limitations are imposed with respect to the entity's ability to utilize its net operating loss carryforwards. During the nine months ended September 30, 2014, the Company recorded an increase to the deferred tax assets for net operating loss carryforwards from Syntroleum of approximately $22,600 on a pre-tax basis (after IRC Section 382

8



limitation). IRC Section 382 limits the Company's ability to realize these net operating losses, which begin to expire in 2018 and, accordingly, the Company has recorded a full valuation allowance on the net operating loss carryforwards. As described in Note 3, the Company has not completed its accounting for the business combinations related to the Syntroleum and Dynamic Fuels acquisitions, and we continue to assess the recognition, measurement, and realizability of these deferred tax assets, and any changes thereto will be recorded in the accounting for the business combination.
New Accounting Standards
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers: Summary and Amendments that Create Revenue from Contracts with Customers and Other Assets and Deferred Costs—Contracts with Customers. The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2016. The Company is currently still assessing the impact that this guidance will have on its consolidated financial statements.
NOTE 3 — ACQUISITIONS AND EQUITY TRANSACTIONS
LS9, Inc.
On January 22, 2014, REG Life Sciences, a wholly-owned subsidiary of the Company, acquired substantially all of the assets and certain liabilities of LS9. The Company has completed its initial accounting for this business combination in the second quarter when the valuation of the contingent consideration, in-process research & development intangible assets and goodwill acquired was finalized. The following table summarizes the consideration paid for LS9 and the amounts of assets acquired and liabilities assumed at the acquisition date:
 
January 22, 2014
Consideration at fair value:
 
Cash
$
15,275

Common stock
26,254

Contingent consideration
17,050

Total
$
58,579

   
January 22, 2014
Assets (liabilities) acquired:
   

Property, plant and equipment
$
8,215

In-process research & development intangible assets
15,956

Goodwill
34,846

Other noncurrent liabilities
(438
)
Total
$
58,579

The fair value of the 2,230,559 shares of Common Stock issued as part of the consideration paid for LS9 was determined on the basis of the closing market price of the Company's common shares at the date of acquisition.
Subject to achievement of certain milestones related to the development and commercialization of products from LS9’s technology, LS9 may receive contingent consideration of up to $21,500 (Earnout Payments) over a five-year period after the acquisition. The Earnout Payments will be payable in cash, the Company's stock or a combination of cash and stock at the Company's election. As of September 30, 2014, the Company has recorded a contingent liability of $15,474, all of which has been classified as non-current on the Condensed Consolidated Balance Sheets.
The goodwill acquired is included in the Biodiesel segment, a portion of which is expected to be deductible for tax purposes.
REG Life Sciences had no revenues for the three and nine months ended September 30, 2014. The net loss generated by REG Life Sciences for the three and nine months ended September 30, 2014, included in the Condensed Consolidated Statements of Operations was $3,863 and $8,527, respectively.

9



Syntroleum Corporation/Dynamic Fuels, LLC
On June 3, 2014, REG Synthetic Fuels, a wholly-owned subsidiary of the Company included in the Biodiesel segment, acquired substantially all the assets of Syntroleum, which consisted of a 50% limited liability company membership interest in Dynamic Fuels, as well as intellectual property and other assets. Dynamic Fuels owns a 75 million gallon per year nameplate capacity renewable hydrocarbon diesel biorefinery located in Geismar, Louisiana. The Company has not completed its initial accounting for this business combination as the valuation of the intangible assets and goodwill acquired has not been finalized. The following table summarizes the consideration paid for Syntroleum.
 
June 3, 2014
Consideration at fair value for Syntroleum:
 
Common stock
$
34,831

The fair value of the 3,493,613 shares of Common Stock issued to Syntroleum was determined on the basis of the closing market price of the Company's common shares at the date of acquisition.
The fair value of the Syntroleum renewable hydrocarbon diesel technology was determined using the relief from royalty method, or RFR, which reflects the savings realized by owning the intangible assets. The value under RFR method is dependent upon the following factors for an asset: royalty rate, discount rate, expected life and projected revenue.
On June 6, 2014, REG Synthetic Fuels acquired the remaining 50% ownership interest in Dynamic Fuels, from Tyson Foods. The Company renamed Dynamic Fuels to REG Geismar, LLC, which is included in the Biodiesel segment. The Company has not completed its initial accounting for this business combination as the valuation of the real and personal property, contingent consideration, intangible assets and goodwill acquired has not been finalized.
The following table summarizes the consideration paid to Tyson Foods for Dynamic Fuels:
 
June 6, 2014
Consideration at fair value for Dynamic Fuels:
 
Cash
$
16,447

Contingent consideration
28,900

Total
$
45,347

The following table summarizes the amount of assets acquired and liabilities assumed at the acquisition date for the combined acquisition of Syntroleum and Dynamic Fuels:
   
June 6, 2014
Assets (liabilities) acquired of Syntroleum and Dynamic Fuels:
   

Cash
$
253

Other current assets
4,666

Property, plant and equipment
122,827

Goodwill
55,762

Intangible assets
8,900

Other noncurrent assets
10,281

Other current liabilities
(1,180
)
Deferred tax liabilities
(7,278
)
Debt
(113,553
)
Other noncurrent liabilities
(500
)
Total
$
80,178

Subsequent to the closing of the Tyson Foods transaction, REG Geismar paid off the debt owed to Tyson Foods in the amount of $13,553.
Subject to achievements related to the sale of renewable hydrocarbon diesel at the REG Geismar production facility, Tyson Foods may receive contingent consideration of up to $35,000. The Company will pay contingent consideration, if and when, the Company achieves certain sales volumes. The agreement calls for periodic payments based on pre-determined

10



payments per gallon of product sold. The probability weighted contingent payments were discounted using a risk adjusted discount rate of 5.8%. The contingent payments will be payable in cash. As of September 30, 2014, the Company has recorded a contingent liability of $29,033, of which $5,096 has been classified in accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets.
The goodwill acquired is included in the Biodiesel segment, a portion of which is expected to be deductible for tax purposes.
REG Synthetic Fuels, including its wholly-owned subsidiary REG Geismar, had $262 and $312 in revenues for the three and nine months ended September 30, 2014, respectively. The net loss generated by REG Synthetic Fuels for the three and nine months ended September 30, 2014 included in the Condensed Consolidated Statement of Operations was $4,766 and $9,617, respectively, which includes $3,004 of income tax expense for the nine months ended September 30, 2014, resulting from the recording of a valuation allowance offsetting their deferred tax assets.
The following pro forma condensed combined results of operations assume that LS9, Syntroleum and Dynamic Fuels acquisitions were completed as of January 1, 2013:
 
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
Revenues
$
384,258

 
$
458,463

 
$
936,759

 
$
1,135,692

Net income (loss)
4,504

 
67,746

 
(497
)
 
131,688

Basic net income (loss) per share
$
0.11

 
$
1.77

 
$
(0.01
)
 
$
3.54

416 S. Bell, LLC
Prior to July 25, 2014, the Company had a 50% ownership in 416 S Bell, LLC (Bell, LLC), a variable interest entity (VIE) joint venture that owned and leased to the Company its corporate office building in Ames, Iowa. Commencing January 1, 2011, the Company had the right to execute a call option with the joint venture member, Dayton Park, LLC (Dayton Park), to purchase Bell, LLC and commencing on January 1, 2013, Dayton Park had the right to execute a put option with the Company to sell Bell, LLC. The Company determined it was the primary beneficiary of Bell, LLC and had consolidated Bell, LLC into the Company’s financial statements since January 1, 2011.
On July 25, 2014, the Company completed the acquisition of the remaining 50% interest in Bell, LLC in exchange for $1,423 cash. The Company determined that this transaction did not result in a change of control and as such has accounted for it as an equity transaction. Neither goodwill nor a gain/loss was recognized in conjunction with the acquisition.
NOTE 4 — MARKETABLE SECURITIES
The Company's investments in marketable securities are stated at fair value and are available-for-sale. The following table summarizes the Company's marketable securities:
 
As of September 30, 2014
 
Maturity
 
Gross Amortized Cost
 
Total Unrealized Gains
 
Total Unrealized Losses
 
Fair Value
Commercial paper
Within one year
 
$
19,473

 
$
7

 
$
(4
)
 
$
19,476

Corporate bonds
Within one year
 
30,243

 

 
(9
)
 
30,234

Certificates of deposit
Within one year
 
11,680

 

 
(12
)
 
11,668

Total

 
$
61,396

 
$
7

 
$
(25
)
 
$
61,378

NOTE 5 — INVENTORIES
Inventories consist of the following:

11



   
September 30, 2014

December 31, 2013
Raw materials
$
22,923


$
13,393

Work in process
1,722


1,456

Finished goods
24,737


70,965

Total
$
49,382


$
85,814

NOTE 6 — PREPAID EXPENSES AND OTHER ASSETS
Prepaid expense and other assets consist of the following:
   
September 30, 2014
 
December 31, 2013
Commodity derivatives and related collateral, net
$
14,069

 
$
13,675

Prepaid expenses
5,172

 
2,414

Deposits
4,314

 
293

RIN inventory
11,753

 
6,455

Income taxes receivable
2,028

 
2,197

Other
2,450

 
534

Total
$
39,786

 
$
25,568

RIN inventory values were adjusted in the amount of $260 and $1,277 at September 30, 2014 and December 31, 2013, respectively, to reflect the lower of cost or market.
Other noncurrent assets consist of the following:
 
September 30, 2014
 
December 31, 2013
Investments
$
10,003

 
$
7,351

Debt issuance costs (net of accumulated amortization of $1,207 and $715, respectively)
4,837

 
832

Spare parts inventory
3,671

 
3,671

Deposits
3,870

 

Other
6,975

 
526

Total
$
29,356

 
$
12,380

NOTE 7 — GOODWILL
The following table shows the carrying amount of goodwill by reportable segment as of December 31, 2013 and the changes in goodwill for the nine months ended September 30, 2014:
 
Biodiesel
 
Services
 
Total
Balance, December 31, 2013
$
68,784

 
$
16,080

 
$
84,864

Acquisitions
90,608

 

 
90,608

Balance, September 30, 2014
$
159,392

 
$
16,080

 
$
175,472

NOTE 8 — INTANGIBLE ASSETS
Intangible assets consist of the following:

12



 
September 30, 2014
 
Cost
 
Accumulated Amortization
 
Net
 
Weighted Average Remaining Life
Raw material supply agreement
$
5,818

 
$
(1,017
)
 
$
4,801

 
11.3 years
Renewable hydrocarbon diesel technology
8,300

 
(184
)
 
8,116

 
14.8 years
Trademarks
600

 
(300
)
 
300

 
0.3 years
Ground lease
200

 
(93
)
 
107

 
7.1 years
Total amortizing intangibles
14,918

 
(1,594
)
 
13,324

 
 
In-process research and development, indefinite lives
15,956

 

 
15,956

 
 
Total intangible assets
$
30,874

 
$
(1,594
)
 
$
29,280

 
 
 
December 31, 2013
 
Cost
 
Accumulated Amortization
 
Net
 
Weighted Average Remaining Life
Raw material supply agreement
$
5,502

 
$
(753
)
 
$
4,749

 
12.0 years
Ground lease
200

 
(82
)
 
118

 
7.9 years
Total amortizing intangibles
5,702

 
(835
)
 
4,867

 
 
In-process research and development, indefinite lives

 

 

 
 
Total intangible assets
$
5,702

 
$
(835
)
 
$
4,867

 
 
The Company recorded intangible amortization expense of $583 and $760 for the three and nine months ended September 30, 2014, respectively, and $89 and $236 for the three and nine months ended September 30, 2013, respectively.
The estimated intangible asset amortization expense for fiscal year 2014 through fiscal year 2019 and thereafter is as follows:
October 1, 2014 through December 31, 2014
$
542

2015
1,038

2016
1,052

2017
1,067

2018
1,082

2019 and thereafter
8,543

Total
$
13,324

NOTE 9 — DEBT
The Company’s debt is as follows:
   
September 30, 2014

December 31, 2013
Convertible debt
$
120,207

 
$

REG Geismar GOZone bonds
100,000

 

REG Danville term loan
2,113

 
5,626

REG Newton term loan
15,524

 
18,143

REG Mason City term loan
4,710

 
5,135

Other
5,046

 
1,247

Total debt
$
247,600

 
$
30,151

Bell, LLC promissory note—variable interest entity
$

 
$
4,029

Convertible Debt
In June 2014, the Company issued $143,750 in convertible senior notes (Convertible Notes) with a maturity date of June 15, 2019, unless earlier converted or repurchased. The Convertible Notes bear interest at a rate of 2.75% per annum, payable semi-annually in arrears on June 15 and December 15 of each year, beginning December 15, 2014.

13



The initial conversion rate is 75.3963 shares of Common Stock per $1 principal amount of Convertible Notes, which represents an initial conversion price of approximately $13.26 per share. The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the stated maturity date, the Company will increase the conversion rate for a holder who elects to convert in connection with such a corporate event in certain circumstances.
Prior to December 15, 2018, holders may convert all or any portion of their Convertible Notes only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2014 (and only during such calendar quarter), if the last reported sale price of the Common Stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price of the Convertible Notes on each applicable trading day; (2) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of Convertible Notes for each trading day of such five consecutive trading day period was less than 98% of the product of the last reported sale price of the Common Stock and the conversion rate of the Convertible Notes on each such trading day; or (3) upon the occurrence of specified corporate events. On or after December 15, 2018 until the close of business on the second scheduled trading day immediately preceding the maturity date of the Convertible Notes, holders may convert their Convertible Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of Common Stock or a combination of cash and shares of Common Stock, at the Company’s election. If the Company satisfies its conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of Common Stock, the amount of cash and shares of Common Stock, if any, due upon conversion will be based on a daily conversion value calculated for each trading day in an 80 trading day observation period. The Company's intent is to settle the principal amount of the Senior Notes in cash upon conversion. If the conversion value exceeds the principal amount, the Company would deliver shares of its common stock in respect to the remainder of its conversion obligation in excess of the aggregate principal amount (conversion spread).
Upon a fundamental change, subject to certain conditions, holders may require the Company to repurchase for cash all or a portion of their Convertible Notes at a purchase price in cash that will generally be equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The Convertible Notes are not redeemable at the Company’s option prior to maturity.
In accounting for the issuance of the Convertible Notes, the Company separated the Convertible Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the estimated fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the face value of the Convertible Notes as a whole. The excess of the face amount of the liability component over its carrying amount is amortized to interest expense over the term of the Convertible Notes using the effective interest method with an effective interest rate of 3.80% per annum. The gross proceeds of $143,750 were accordingly allocated between long-term debt for $118,719 and stockholders' equity $25,031. Issuance costs of $4,563 which were allocated between deferred financing costs and equity.
In connection with the issuance of the Convertible Notes, the Company entered into capped call transactions (Capped Call) for the purpose of reducing potential dilution of earnings per share if the Convertible Notes were to be converted to shares of Common Stock. Under the Capped Call, the Company purchased capped call options that in aggregate relate to 92.5% of the total number of shares of the Company's Common Stock underlying the Convertible Notes, with a strike price equal to the conversion price of the Convertible Notes and with a cap price equal to $16.02 per share. The capped calls were purchased for $11,904 and recorded as a reduction to common stock-additional paid-in-capital.
The Capped Call is expected generally to reduce the potential dilution to the Common Stock and/or offset potential cash payments the Company is required to make in excess of the principal amount to the extent of such percentage upon conversion of the Convertible Notes in the event that the market price per share of the Common Stock, as measured under the terms of the Capped Call, is greater than the strike price of the Capped Call, which initially corresponds to the conversion price of the Convertible Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Convertible Notes, with such reduction and/or offset subject to a cap in the event that the market price per share of the Common Stock, as measured under the terms of the Capped Call, is greater than the cap price of the Capped Call.
The Company will not be required to make any cash payments to the Option Counterparties or their respective affiliates upon the exercise of the options that are a part of the Capped Call, but the Company will be entitled to receive from them a number of shares of Common Stock and/or an amount of cash generally based on the amount by which the market price per share of the Common Stock, as measured under the terms of the Capped Call, is greater than the strike price of the Capped Call during the relevant valuation period under the Capped Call, with such number of shares of Common Stock and amounts of cash, if any, subject to the cap.

14



The Capped Call is a separate transaction entered into by the Company with the Option Counterparties, are not part of the terms of the Convertible Notes and will not change the holders' rights under the Convertible Notes.
REG Geismar, LLC's GOZone Bonds
In October 2008, Dynamic Fuels received $100,000 in proceeds from the issuance of GOZone Bonds by the Louisiana Public Facilities Authority (the Authority) pursuant to a loan agreement between Dynamic Fuels and the Authority (Loan Agreement). The proceeds were used to construct the Dynamic Fuels production facility. In June 2014, as a result of the acquisitions of Syntroleum and Dynamic Fuels, the Loan Agreement related to the GOZone Bonds became part of the Company's consolidated long-term debt. The GOZone Bonds mature on October 1, 2033. Interest on the GOZone Bonds accrues at a daily rate, weekly rate, commercial paper rate or long term rate, as determined by REG Geismar. When the GOZone Bonds are in daily or weekly mode, at any time holders have the right to tender bonds for repurchase and bonds are subject to optional redemption by a remarketing agent pursuant to a remarketing agreement. The GOZone Bonds were in the weekly interest rate mode as of September 30, 2014 and the applicable interest rate at September 30, 2014 was 0.04% per annum.
At the time that the GOZone Bonds were originally issued, Tyson Foods, one of the former equityholders of Dynamic Fuels, obtained an irrevocable direct-pay letter of credit (Old Letter of Credit) from a financial institution which was provided to the trustee for the GOZone Bonds and drawn upon to pay the principal of and interest on the GOZone Bonds and the portion of the purchase price attributable to principal of and interest on the GOZone Bonds in connection with any GOZone Bond repurchase obligations of Dynamic Fuels. In connection with the acquisition from Tyson Foods, the Company agreed to reimburse Tyson Foods for any amounts payable by Tyson in the event of a draw on the Old Letter of Credit, to replace the Old Letter of Credit or redeem or discharge the GOZone Bonds and to secure these obligations by the deposit of $101,315 into an escrow account for the benefit of Tyson, which represented the full amount of Tyson’s obligation under the Old Letter of Credit.
On July 8, 2014, REG Geismar and Bank of America entered into a Reimbursement Agreement, dated as of the same date (Reimbursement Agreement), and Bank of America issued a letter of credit (Substitute Letter of Credit) to the trustee for the GOZone Bonds, in substitution for the irrevocable direct-pay letter of credit (Old Letter of Credit) held by Tyson Foods. The Substitute Letter of Credit is in the stated amount of $101,315, which represents the sum of the outstanding $100,000 principal amount of the GOZone Bonds plus $1,315 of interest. REG Geismar’s repayment obligations under the Reimbursement Agreement are secured by a $101,315 certificate of deposit established by REG Capital, LLC, or REG Capital, which was pledged by REG Capital to Bank of America.This certificate of deposit is recorded as restricted cash in non-current assets of the Condensed Consolidated Balance Sheets. The Substitute Letter of Credit expires on July 8, 2015. In the event that the expiration date of the Substitute Letter of Credit is not extended or a new letter of credit is not issued in substitution for the Substitute Letter of Credit, holders of the Bonds are required to tender their Bonds for repurchase and the trustee for the Bonds is required pursuant to the terms of the indenture governing the Bonds to draw down the Substitute Letter of Credit to fund the repurchase of the Bonds. The Substitute Letter of Credit requires that the Bonds remain in the daily or weekly interest rate mode.
Revolving Line of Credit
 
September 30, 2014
 
December 31, 2013
Amount borrowed under revolving line of credit
$

 
$
10,986

Maximum available to be borrowed under revolving line of credit
$
35,975

 
$
29,014

NOTE 10 — RELATED PARTY TRANSACTIONS
West Central Cooperative
West Central beneficially owns more than 5% of our outstanding securities. The Company has several contractual relationships and transactions with West Central, including contracts for services, supply of soybean oil feedstock, a ground lease for the Ralston facility and an extended payment terms arrangement.
Under the ground lease with West Central, West Central leases the real property on which the Ralston facility is located for an annual rental fee of one dollar. The ground lease has a 20-year term ending July 31, 2026 and the Company may elect to extend the term for six additional five-year terms. The Company also has an Asset Use Agreement with West Central which provides for the use of certain assets, such as buildings, equipment and utilities, which will be charged to the Company based on fixed and variable components.
The Company purchases once-refined soybean oil from West Central to supply the Ralston facility. On October 1, 2012, the Company entered into a new feedstock supply agreement with West Central. The supply agreement expired on January 31, 2014 with the option for a one year extension, which the Company extended. West Central agrees to supply and the Company

15



agrees to purchase soybean oil for the Ralston facility at a price indexed to prevailing Chicago Board of Trade, or CBOT, soybean oil market prices with an agreed upon negotiated market basis.
In June 2009, the Company entered into an extended payment terms agreement with West Central. The agreement set forth the terms of payment that apply for soybean oil that West Central sold to the Company for use at the Ralston facility, as well as any other feedstock that West Central agreed to sell. Pursuant to the agreement, payment for feedstocks delivered by West Central is required to be made within 45 days after delivery by West Central of an invoice for the feedstocks. Interest accrues on amounts due for feedstocks supplied by West Central beginning on the fifth day after West Central delivered an invoice for the feedstock until paid. At no time during the term of the agreement is the amount payable to West Central permitted to exceed $3,000. The agreement expires in January 2015 and automatically renews for one additional year unless either party provides sufficient notice of cancellation prior to the renewal.
Summary of Related Party Balances - Condensed Consolidated Statements of Operations
   
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
Cost of goods sold – Biodiesel
$
10,490


$
12,057


$
31,919

 
$
37,198

Selling, general and administrative expenses
$
4


$


$
43

 
$
2

Interest expense
$
1


$
2


$
2

 
$
30

Summary of Related Party Balances - Condensed Consolidated Balance Sheets
   
As of
September 30, 2014
 
As of
December 31, 2013
Accounts receivable
$
141

 
$
426

Other assets
$

 
$
35

Accounts payable
$
570

 
$
552

NOTE 11 — DERIVATIVE INSTRUMENTS
The Company enters into heating oil and soybean oil futures, swaps and options (commodity contract derivatives) to hedge its exposure to price risk related to anticipated purchases of feedstock raw materials and to protect gross profit margins from potentially adverse effects of price volatility on biodiesel sales where prices are set at a future date. All of the Company’s commodity contract derivatives are designated as non-hedge derivatives and recorded at fair value on the Condensed Consolidated Balance Sheets. Unrealized gains and losses are recognized as a component of biodiesel costs of goods sold reflected in current results of operations. As of September 30, 2014, the Company had 2,255 open commodity contracts.
The Company offsets the fair value amounts recognized for its commodity contract derivatives with cash collateral with the same counterparty under a master netting agreement. The net position is presented within prepaid and other assets in the Condensed Consolidated Balance Sheets. The following table sets forth the fair value of the Company's commodity contract derivatives and amounts that offset within the Condensed Consolidated Balance Sheets:
   
September 30, 2014
 
December 31, 2013
   
Assets
 
Liabilities
 
Assets
 
Liabilities
Gross amounts of derivatives recognized at fair value
$
11,019

 
$
210

 
$
325

 
$
546

Cash collateral
3,763

 
503

 
13,896

 

Total gross amount recognized
14,782

 
713

 
14,221

 
546

Gross amounts offset
(713
)
 
(713
)
 
(546
)
 
(546
)
Net amount reported in the condensed consolidated balance sheet
$
14,069

 
$

 
$
13,675

 
$


16



The following table sets forth the pre-tax gains (losses) included in the Condensed Consolidated Statements of Operations:
   
Location of Gain (Loss)
Recognized in income

Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
Commodity derivatives
Cost of goods sold – Biodiesel

$
19,249


$
(11,209
)
 
$
15,811

 
$
(3,170
)
NOTE 12 — FAIR VALUE MEASUREMENT
The fair value hierarchy prioritizes the inputs used in measuring fair value as follows:
Level 1 — Quoted prices for identical instruments in active markets.
Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.
Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
A summary of assets (liabilities) measured at fair value is as follows:
   
As of September 30, 2014
   
Total
 
Level 1
 
Level 2
 
Level 3
Money market funds
$
561

 
$
561

 
$

 
$

Certificates of deposit
11,668

 

 
11,668

 

Commercial paper
19,476

 

 
19,476

 

Commercial notes/bonds
30,234

 

 
30,234

 

Commodity contract derivatives
10,809

 
3,264

 
7,545

 

Contingent consideration for LS9 acquisition
(15,474
)
 

 

 
(15,474
)
Contingent consideration for Dynamic Fuels acquisition
(29,033
)
 

 

 
(29,033
)
   
As of December 31, 2013
   
Total
 
Level 1
 
Level 2
 
Level 3
Commodity contract derivatives
$
(221
)
 
$

 
$
(221
)
 
$

The following is a reconciliation of the beginning and ending balances for liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
 
Contingent Consideration for LS9 Acquisition
 
Contingent Consideration for Dynamic Fuels Acquisition
Beginning balance - January 1, 2014
$

 
$

Fair value of contingent liability recorded at measurement date
17,050

 

Ending balance - March 31, 2014
17,050

 

Fair value of contingent liability recorded at measurement date

 
28,900

Change in estimates included in earnings
(384
)
 

Settlements

 

Ending balance - June 30, 2014
16,666

 
28,900

Change in estimates included in earnings
(1,192
)
 
133

Settlements

 

Ending balance - September 30, 2014
$
15,474

 
$
29,033

The estimated fair values of the Company’s financial instruments, which are not recorded at fair value, are as follows:

17



   
As of September 30, 2014
 
As of December 31, 2013
   
Asset (Liability)
Carrying
Amount
 
Fair Value
 
Asset (Liability)
Carrying
Amount
 
Fair Value
Financial liabilities:
   
 
   
 
   
 
   
Debt and lines of credit
$
(247,600
)
 
$
(247,915
)
 
$
(45,166
)
 
$
(45,094
)
The carrying amounts reported in the Condensed Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair values. Money market funds are included in cash and cash equivalents on the Condensed Consolidated Balance Sheets.
The Company used the following methods and assumptions to estimate fair value of its financial instruments:
Marketable securities: The fair value of marketable securities are obtained using quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets in markets that are not active; and inputs other than quoted prices, e.g., interest rates and yield curves. The Company utilizes a pricing service to assist in obtaining fair value pricing for the majority of this investment portfolio.
Commodity derivatives: The instruments held by the Company consist primarily of futures contracts, swap agreements, purchased put options and written call options. The fair value is determined based on quoted prices of similar contracts in over-the-counter markets and are reflected in Level 2.
Contingent consideration for acquisitions: The fair value of the LS9 contingent consideration is determined using an expected present value technique. Expected cash flows are determined using the probability weighted-average of possible outcomes that would occur should achievement of certain milestones related to the development and commercialization of products from LS9’s technology occur. There is no observable market data available to use in valuing the contingent consideration; therefore, the Company developed its own assumptions related to the expected future delivery of product enhancements to estimate the fair value of these liabilities. An 8.0% discount rate is used to estimate the fair value of the expected payments.
The fair value of the Dynamic Fuels contingent consideration is determined using an expected present value technique. Expected cash flows are determined using the probability weighted-average of possible outcomes that would occur should the achievement of certain milestones related to the sale of renewable hydrocarbon diesel at the REG Geismar's production facility. A 5.8% discount rate is used to estimate the fair value of the expected payments.
Debt and lines of credit: The fair value of long-term debt and lines of credit was established using discounted cash flow calculations and current market rates reflecting Level 2 inputs.
NOTE 13 — NET INCOME PER SHARE
Basic net income per common share is presented in conformity with the two-class method required for participating securities. Participating securities include, or have included, Series B Preferred Stock and restricted stock units (RSUs).
Under the two-class method, net income is reduced for distributed and undistributed dividends earned in the current period. The remaining earnings are then allocated to Common Stock and the participating securities. The Company calculates the effects of participating securities on diluted earnings per share (EPS) using both the “if-converted or treasury stock” and "two-class" methods and discloses the method which results in a more dilutive effect. The effects of Common Stock options, warrants, stock appreciation rights and convertible notes on diluted EPS are calculated using the treasury stock method unless the effects are anti-dilutive to EPS.
The following potentially dilutive weighted average securities were excluded from the calculation of diluted net income per share attributable to common stockholders during the periods presented as the effect was anti-dilutive:

18



   
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
Options to purchase common stock
87,026

 
87,026

 
87,026

 
87,026

Restricted stock units

 

 

 

Stock appreciation rights
1,137,743

 
314,036

 
1,401,144

 
1,194,477

Warrants to purchase common stock

 

 
17,916

 

Convertible notes
10,838,218

 

 
4,764,052

 

Total
12,062,987

 
401,062

 
6,270,138

 
1,281,503

The following table presents the calculation of diluted net income per share:
   
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
Net income attributable to the Company’s common stockholders - Basic
$
4,504

 
$
78,462

 
$
13,362

 
$
133,958

Plus: change in undistributed dividends allocated to preferred stockholders

 
147

 

 
147

Plus: distributed dividends to Preferred Stockholders

 
258

 
40

 
1,848

Plus (Less): effect of participating securities

 
(355
)
 
(406
)
 
(1,992
)
Net income available to common stockholders - Dilutive
$
4,504

 
$
78,512

 
$
12,996

 
$
133,961

Shares:

 
 
 

 

Weighted-average shares used to compute basic net income per share
42,374,768

 
33,790,034

 
40,216,467

 
31,918,951

Adjustment to reflect warrants to purchase common stock
17,916

 
4,533

 

 
269

Adjustment to reflect stock appreciation right conversions
39,321

 
221,909

 
12,462

 
4,977

Weighted-average shares used to compute diluted net income per share
42,432,005

 
34,016,476

 
40,228,929

 
31,924,197

Net income per share attributable to common stockholders:

 
 
 

 

Diluted
$
0.11

 
$
2.31

 
$
0.32

 
$
4.20

NOTE 14 — REPORTABLE SEGMENTS
The Company reports its reportable segments based on products and services provided to customers, which include Biodiesel, Services and Corporate and other. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company has chosen to differentiate the reportable segments based on the products and services each segment offers.
The Biodiesel segment processes waste vegetable oils, animal fats, virgin vegetable oils and other feedstocks and methanol into biomass-based diesel. The Biodiesel segment also includes the Company’s purchases and resale of biomass-based diesel produced by third parties. Revenues are derived from the purchases and sales of biomass-based diesel and raw material feedstocks acquired from third parties, sales of biomass-based diesel produced under toll manufacturing arrangements with third party facilities, sales of processed biomass-based diesel from Company facilities, sales of RINs, related by-products and renewable energy government incentive payments. The Services segment offers services for managing the construction of biomass-based diesel production facilities and managing ongoing operations of internal and third party plants and collects fees related to the services provided. The Company does not allocate items that are of a non-operating nature or corporate expenses to the business segments. Intersegment revenues are reported by the Services segment, which manages the construction and operations of facilities included in the Biodiesel segment. Revenues are recorded by the Services segment at cost. Corporate expenses consist of corporate office expenses including compensation, benefits, occupancy and other administrative costs, including management service expenses.

19



The following table represents the significant items by reportable segment:
   
Three Months 
 Ended 
 September 30, 
 2014
 
Three Months 
 Ended 
 September 30, 
 2013
 
Nine Months 
 Ended 
 September 30, 
 2014
 
Nine Months 
 Ended 
 September 30, 
 2013
Net revenues:
   
 
   
 
   
 
   
Biodiesel
$
384,126

 
$
458,429

 
$
935,997

 
$
1,107,443

Services
25,422

 
17,854

 
72,012

 
46,809

Intersegment revenues
(25,290
)
 
(17,839
)
 
(71,793
)
 
(46,705
)
   
$
384,258

 
$
458,444

 
$
936,216

 
$
1,107,547

Income (loss) before income taxes:
   
 
   
 
   
 
   
Biodiesel
$
22,603

 
$
57,854

 
$
49,278

 
$
194,770

Services
112

 
(5
)
 
152

 
(45
)
Corporate and other (a)
(18,391
)
 
(13,197
)
 
(48,484
)
 
(35,037
)
   
$
4,324

 
$
44,652

 
$
946

 
$
159,688

Depreciation and amortization expense, net:
   
 
   
 
   
 
   
Biodiesel
$
3,509

 
$
2,214

 
$
8,934

 
$
5,854

Services
55

 
35

 
148

 
86

Corporate and other (a)
335

 
237

 
856

 
669

   
$
3,899

 
$
2,486

 
$
9,938

 
$
6,609

Cash paid for purchases of property, plant and equipment:
   
 
   
 
   
 
   
Biodiesel
$
9,749

 
$
8,363

 
$
40,655

 
$
26,573

Services
12

 
30

 
643

 
504

Corporate and other (a)
3,508

 
335

 
4,281

 
1,708

   
$
13,269

 
$
8,728

 
$
45,579

 
$
28,785

   
As of
September 30, 2014
 
As of
December 31, 2013
Assets:
   
 
   
Biodiesel
$
801,106

 
$
444,945

Services
21,036

 
20,542

Corporate and other (b)
233,542

 
275,368

   
$
1,055,684

 
$
740,855

(a)
Corporate and other includes income/(expense) not associated with the reportable segments, such as corporate general and administrative expenses, shared service expenses, interest expense and interest income.
(b)
Corporate and other includes cash and other assets not associated with the reportable segments, including investments.
NOTE 15 — COMMITMENTS AND CONTINGENCIES
The Company is involved in legal proceedings in the normal course of business. The Company currently believes that any ultimate liability arising out of such proceedings will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
The Company has entered into contracts for supplies of hydrogen, nitrogen and utilities for the REG Geismar production facility and natural gas for REG Albert Lea. The following table outlines the minimum take or pay requirement related to the purchase of hydrogen, nitrogen, utilities and natural gas.

20



October 1, 2014 through December 31, 2014
$
958

2015
3,857

2016
3,857

2017
3,857

2018
3,784

2019 and thereafter
19,591

Total
$
35,904

As of September 30, 2014, REG Geismar relies on one supplier to provide hydrogen necessary to execute the production process. Any disruptions to the hydrogen supply from this supplier will result in the shutdown of the REG Geismar plant operations. The Company is currently seeking additional hydrogen suppliers for the REG Geismar facility.

******
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements regarding Renewable Energy Group, Inc., or “we,” “our” or “the Company” that involve risks and uncertainties such as anticipated financial performance, business prospects, technological developments, products, possible strategic initiatives and similar matters. In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “predict,” “potential,” “plan,” or the negative of these terms, and similar expressions intended to identify forward-looking statements.  
These forward-looking statements include, but are not limited to, statements about facilities currently under development progressing to the construction and operational stages, including planned capital expenditures and our ability to obtain financing for such construction; existing or proposed legislation affecting the biomass-based diesel industry, including governmental incentives and tax credits; our utilization of forward contracting and hedging strategies to minimize feedstock and other input price risk; anticipated future revenue sources from our operational management and facility construction services; the expected effect of current and future environmental laws and regulations on our business and financial condition; our ability to renew existing and expired contracts at similar or more favorable terms; expected technological advances in biomass-based diesel production methods; our competitive advantage relating to input costs relative to our competitors; the market for biomass-based diesel and potential biomass-based diesel consumers; our ability to further develop our financial, managerial and other internal controls and reporting systems to accommodate future growth; expectations regarding the realization of deferred tax assets and the establishment and maintenance of tax reserves and anticipated trends; expectations regarding our expenses and sales; anticipated cash needs and estimates regarding capital requirements and needs for additional financing; and challenges in our business and the biomass-based diesel market.
These forward-looking statements are based on management’s current expectations, estimates, assumptions and projections, which are subject to risks and uncertainties. These risks and uncertainties could cause actual results to differ materially from those expected. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Risks and uncertainties include, but are not limited to, those risks discussed in Item 1A Part II in this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2014. We encourage you to read this Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the accompanying condensed consolidated financial statements and related notes. Forward-looking statements contained in this report present management’s views only as of the date of this report. Except as required under applicable law, we do not intend to issue updates concerning any future revisions of management’s views to reflect events or circumstances occurring after the date of this report.
Overview
We intend to become a leading producer of advanced biofuels and renewable chemicals. We are currently the largest producer of biomass-based diesel, an advanced biofuel, in the United States based on gallons produced. We participate in each aspect of biomass-based diesel production, from acquiring feedstock, managing construction and operating biomass-based diesel production facilities to marketing, selling and distributing biomass-based diesel and its co-products.
We operate a network of nine operational biomass-based diesel plants, with an aggregate nameplate production capacity of 332 million gallons per year, or mmgy, and one fermentation facility. We have acquired eight of our ten facilities since February 2010. We believe our fully integrated approach, which includes acquiring feedstock, managing biorefinery facility construction and upgrades, operating biorefineries, marketing renewable products and distributing through a network of terminals, positions us to capitalize on growing demand for biomass-based diesel, renewable chemicals and other advanced biofuels. Our experience has enabled us to develop extensive expertise in biorefinery operations, from facility construction management and feedstock procurement to biomass-based diesel production, marketing, logistics and risk management.
We are a low-cost biomass-based diesel producer. We primarily produce our biomass-based diesel from a wide variety of lower cost feedstocks, including inedible corn oil, used cooking oil and inedible animal fat. We also produce biomass-based diesel from virgin vegetable oils, which are more widely available and tend to be higher in price. We believe our ability to process a wide variety of feedstocks provides us with a cost advantage over many biomass-based diesel producers, particularly those that rely on higher cost virgin vegetable oils, such as soybean oil or canola oil.
We are expanding into the production of renewable chemicals, additional advanced biofuels and other products through our acquisition of LS9, Inc., or LS9, in January 2014. LS9 was a development stage company focused on harnessing the power of microbial fermentation to develop and produce renewable chemicals, fuels and other products. The LS9 assets acquired consist mainly of in-process research and development, fixed assets and goodwill.
On February 12, 2014, we announced the launch of a new company, REG Energy Services, LLC, or REG Energy Services, which sells petroleum-based heating oil and diesel fuel, and enables us to offer more biofuel blends. We sell heating oil and ultra-low sulfur diesel, or ULSD, at terminals throughout the northeastern U.S. as well as BioHeat® blended heating

21



fuel at one of our existing Northeast terminal locations. REG Energy Services is expanding its selling of additional biofuel blends to Minnesota and Iowa terminal locations and potentially in other areas across North America.
On June 3, 2014, our subsidiary, REG Synthetic Fuels, LLC, or REG Synthetic Fuels, acquired substantially all the assets of Syntroleum Corporation, or Syntroleum, which consisted of a 50% limited liability company membership interest in Dynamic Fuels, LLC, or Dynamic Fuels, as well as intellectual property and other assets. Dynamic Fuels owned a 75 mmgy nameplate capacity renewable hydrocarbon diesel biorefinery located in Geismar, Louisiana. In connection with this transaction, we issued 3,493,613 shares of our Common Stock to Syntroleum.
On June 6, 2014, we acquired the remaining 50% ownership interest in Dynamic Fuels from Tyson Foods, Inc., or Tyson Foods. At closing, we renamed Dynamic Fuels, REG Geismar, LLC or REG Geismar and REG Synthetic paid approximately $16.5 million in cash to Tyson Foods and funded the repayment by Dynamic Fuels of a promissory note issued to Tyson Foods in the amount of approximately $13.5 million. REG Synthetic is also obligated to make up to $35 million in future payments to Tyson Foods based on product volumes at the REG Geismar biorefinery over a period of up to eleven and a half years. The obligations of REG Synthetic with respect to these future payments are guaranteed by the us.
For the three and nine months ended September 30, 2014, we sold 89 million and 213 million gallons of biomass-based diesel, including 18 million and 35 million gallons that we purchased from third parties and resold. During 2013, we sold a total of 259 million gallons of biomass-based diesel, including 48 million gallons we purchased from third parties and resold.
We own three partially completed biodiesel production facilities and one non-operational plant. In 2007, we began construction of two 60 mmgy nameplate production capacity facilities, one near New Orleans, Louisiana and the other in Emporia, Kansas. In February 2008, we halted construction of these facilities as a result of conditions in the biomass-based diesel industry and our inability to obtain financing necessary to complete construction of the facilities. Construction of the New Orleans facility is approximately 45% complete and construction of the Emporia facility is approximately 20% complete. Further, during the third quarter of 2010, we acquired a 15 mmgy nameplate biodiesel production capacity facility in Clovis, New Mexico which is approximately 50% complete. Currently, the Clovis facility is being operated as a terminal. In November 2012, we acquired a 15 mmgy nameplate biodiesel production facility near Atlanta, Georgia that was idled prior to our acquisition and will remain non-operational until certain repairs or upgrades are made. We plan to complete construction and upgrade of these facilities as financing becomes available, and subject to market conditions. Accordingly, at this point in time, we do not believe that any of these facilities should be impaired.
We derive revenues from two reportable business segments: Biodiesel and Services
Biodiesel Segment
Our Biodiesel segment, as reported herein, includes:
the operations of the following production facilities:
a 12 mmgy nameplate biodiesel production facility located in Ralston, Iowa;
a 35 mmgy nameplate biodiesel production facility located near Houston, Texas;
a 45 mmgy nameplate biodiesel production facility located in Danville, Illinois;
a 30 mmgy nameplate biodiesel production facility located in Newton, Iowa;
a 60 mmgy nameplate biodiesel production facility located in Seneca, Illinois;
a 30 mmgy nameplate biodiesel production facility located near Albert Lea, Minnesota;
a 15 mmgy nameplate biodiesel production facility located in New Boston, Texas;
a 30 mmgy nameplate biodiesel production facility located in Mason City, Iowa; and
a 75 mmgy nameplate renewable hydrocarbon diesel production facility located in Geismar, Louisiana, since its acquisition in June 2014.
purchases and resale of biomass-based diesel, Renewable Identification Numbers, or RINs, and raw material feedstocks acquired from third parties;
our sales of biomass-based diesel produced under toll manufacturing arrangements with third party facilities using our feedstocks;
our production of biomass-based diesel under toll manufacturing arrangements with third parties using their feedstocks at our facilities; and
incentives received from federal and state programs for renewable fuels.    
We derive a small portion of our revenues from the sale of glycerin, free fatty acids and other co-products of the biomass-based diesel production process. In 2013 and the nine months ended September 30, 2014, our revenues from the sale of co-products were less than five percent of our total Biodiesel segment revenues.

22



In accordance with EPA regulations, we generate 1.5 to 1.7 Renewable Identification Numbers, or RINS, for each gallon of biomass-based diesel we produce and sell, as specified in the RFS2 regulations. RINs are used to track compliance with RFS2 using the EPA moderated transaction system, or EMTS. RFS2 allows us to attach between zero and 2.5 RINs to any gallon of biomass-based diesel we sell. We generally attach 1.5 to 1.7 RINs when we sell a gallon of biomass-based diesel. As a result, a portion of our selling price for a gallon of biomass-based diesel is generally attributable to RFS2 compliance; however no cost is allocated to the RINs generated by our biomass-based diesel production as RINs are a form of government incentive and not a result of the physical attributes of the biomass-based diesel production. In addition, RINs, once obtained with gallons of biomass-based diesel, may be separated by the acquirer and sold separately. From time to time, we may obtain these RINs from third parties for resale, and the value of these is reflected in “Prepaid expenses and other assets” on our Consolidated Balance Sheets. At each balance sheet date, this RIN inventory is valued at the lower of cost or market and resulting adjustments are reflected in our cost of goods sold for the period. The cost of RINs obtained from third parties is determined using the average cost method. Because we do not allocate costs to RINs generated by our biomass-based diesel production, fluctuations in the value of our RIN inventory represent fluctuations in the value of RINs we have obtained from third parties.
Services Segment
Our Services segment includes:
biomass-based diesel facility management and operational services, whereby we provide day-to-day management and operational services to biomass-based diesel production facilities; and
construction management services, whereby we act as the construction management and general contractor for the construction of biomass-based diesel production facilities.
Historically, we provided facility operations management services to owners of biomass-based diesel production facilities under management and operational services agreements, or MOSAs. During 2010, we ceased providing services to three of these facilities, acquired one and continued to provide limited services to the other facility. The termination of our MOSAs has not had a significant impact on our financial statements. Our Services segment continues to provide management services to our wholly-owned biorefineries and has been focused internally on managing and upgrading our facilities.
We have utilized our construction management expertise internally to upgrade our facilities. We recently completed a $20 million upgrade to our Mason City facility, enabling the plant to run on lower cost feedstocks in addition to refined vegetable oils the plant was originally designed to process. Currently, we are working on a $13 million upgrade to our Newton facility. In 2013, we completed a $22 million upgrade to our Albert Lea facility and spent $4 million and $1 million in repairs of our recently acquired New Boston and Mason City facilities, respectively. We anticipate external revenues derived from construction management services will be minimal in future periods. Demand for our construction management and facility management and operational services depend on capital spending by potential customers and existing customers, which is directly affected by trends in the biomass-based diesel industry. We have not received any orders or provided services to outside parties for new facility construction services since 2009.
Factors Influencing Our Results of Operations
The principal factors affecting our operations are the market prices for biomass-based diesel and the feedstocks used to produce biomass-based diesel, as well as governmental programs designed to create incentives or requirements for the production and use of biomass-based diesel.
Governmental programs favoring biomass-based diesel production and use
Biomass-based diesel has historically been more expensive than petroleum-based diesel, excluding biomass-based diesel incentives and credits. The biomass-based diesel industry’s growth has largely been the result of federal and state programs that require or incentivize biomass-based diesel, which allows biomass-based diesel to compete with petroleum-based diesel on price.
On July 1, 2010, RFS2 was implemented, stipulating volume requirements for the amount of biomass-based diesel and other advanced biofuels that must be utilized in the United States each year. Under RFS2, Obligated Parties, including petroleum refiners and fuel importers, must show compliance with these standards. Biomass-based diesel can be used to meet several categories of an Obligated Party’s annual renewable fuel required volume obligation, or RVO—the biomass-based diesel requirement, the undifferentiated advanced biofuel requirement and the general renewable fuel requirement. The RFS2 program required the domestic use of one billion gallons of biomass-based diesel in 2012 and 1.28 billion gallons in 2013. As of this filing, the EPA has not finalized the 2014 RVO. The EPA has proposed that the 2014 and 2015 biomass-based diesel RVO be 1.28 billion gallons for each of those years and a reduced 2014 Advanced Biofuel RVO of 2.20 billion gallons rather than the original EISA volume of 3.75 billion. According to EMTS data, RINS equivalent to 1.25 billion gallons of biomass-based diesel were generated for the first nine months of 2014. Since 2010, our sales volumes and revenues have benefited from our increased production capacity, as well as an increase in demand relating to the implementation of RFS2.

23



The 2013 RFS2 requirement for biomass-based diesel was 1.28 billion. According to EMTS data, 1.78 billion gallons of biomass-based diesel was produced in 2013. We believe more gallons were produced in 2013 than were required by RFS2 as a result of the fact that the federal biomass-based diesel mixture excise tax credit, or BTC, was set to expire on December 31, 2013. Since Obligated Parties are allowed to satisfy up to 20% of their 2014 RVO with 2013 RINs, we believe many producers, importers and purchasers of biomass-based diesel were taking advantage of the BTC while it was available. We believe this 2013 overproduction and importation of more biomass-based diesel in 2013 than was required to meet the 2013 RVO, when combined with the unseasonably cold winter, led to decreased demand for biomass-based diesel in the first six months of 2014.
The BTC provided a $1.00 refundable tax credit per gallon of 100% pure biomass-based diesel, or B100, to the first blender of biomass-based diesel with petroleum-based diesel fuel. The BTC expired on December 31, 2013 and it is uncertain whether it will be reinstated again. The expiration of the BTC along with any amendments that may be made if the BTC is reinstated or a similar credit is enacted, could adversely affect our financial results in the future.
Biomass-based diesel and feedstock price fluctuations
Our operating results generally reflect the relationship between the price of biomass-based diesel, including credits and incentives, including RINs, and the price of feedstocks used to produce biomass-based diesel.
Biomass-based diesel fuels are low carbon, renewable alternatives to petroleum-based diesel fuel and are primarily sold to the end user after blending with petroleum-based diesel fuel. Biomass-based diesel prices have historically been heavily influenced by petroleum-based diesel fuel prices. Accordingly, biomass-based diesel prices have generally been impacted by the same factors that affect petroleum prices, such as worldwide economic conditions, supply and demand factors, wars and other political events, OPEC production quotas, changes in petroleum refining capacity and natural disasters.
Regulatory and legislative factors also influence the price of biomass-based diesel. Biomass-based diesel RIN pricing, a value component that was introduced via RFS2 in July 2010, has had a significant impact on our biodiesel pricing. During 2013, the value of RINs, as reported by OPIS, contributed to the average B100 spot price of a gallon of biodiesel, as reported by The Jacobsen, with the level of contribution ranging from a low of $0.35 per gallon, or 9%, in October 2013 to a high of $2.20, or 43%, per gallon in January 2013. There was a sharp decline in RIN prices during the third and fourth quarters of 2013. RIN pricing declined from $1.07 per RIN at June 30, 2013 to the low price of $0.24 per RIN in November 2013, finishing the year at $0.35 per RIN on December 31, 2013, as reported by OPIS, which contributed to the decline in the average price of biodiesel during 2013. During the first nine months of 2014, the value of RINs, as reported by OPIS, contributed approximately $0.83, or 23.5%, of the average B100 Upper Midwest spot price of a gallon of biodiesel, as reported by The Jacobsen.
During 2013, feedstock expense accounted for 84% of our production cost, while methanol and chemical catalysts expense accounted for 5% and 3% of our costs of goods sold, respectively.
Feedstocks for biomass-based diesel production, such as inedible corn oil, used cooking oil, inedible animal fat and soybean oil are commodities and market prices for them will be affected by a wide range of factors unrelated to the price of biomass-based diesel and petroleum-based diesel fuels. The following table outlines some of the factors influencing supply and price for each feedstock:

24



Feedstock
      
Factors Influencing Supply and Price
Inedible Corn Oil
      
Ethanol production
   
      
Implementation of inedible corn oil separation systems into existing and new ethanol facilities
   
      
Demand for inedible corn oil from renewable fuel and other markets
   
      
Export demand
   
      
Extraction system yield
Used Cooking Oil
      
Export demand
   
      
Population
   
      
Number of restaurants in the vicinity of collection facilities and terminals which is dependent on population density
   
      
Cooking methods and eating habits, which can be impacted by the economy
Inedible Animal Fat
      
Export demand
   
      
Number of slaughter kills in the United States
   
      
Demand for inedible animal fat from other markets
Soybean Oil
      
Export demand
   
      
Weather conditions
   
      
Soybean meal demand
   
      
Farmer planting decisions
   
      
Government policies and subsidies
   
      
Crop disease
During 2013, 83% of our feedstocks were comprised of inedible corn oil, used cooking oil and inedible animal fats with the remainder coming from refined vegetable oil.
Historically, most biodiesel in the United States has been made from soybean oil. Soybean oil prices have fluctuated greatly over the past years. Over the period from January 2010 through September 2014, soybean oil prices (based on closing sales prices on the CBOT nearby futures, for crude soybean oil) have ranged from a high of $0.5977 per pound, or $4.6023 per gallon of biodiesel in April 2011 to a low of $0.3144 per pound, or $2.4209 per gallon in September 2014, assuming 7.7 pounds of soybean oil yields one gallon of biodiesel. The average closing price for soybean oil during 2013 was $0.4585 per pound, or $3.44 per gallon of biodiesel, compared to $0.4718 per pound, or $3.63 per gallon of biodiesel, for the nine months ended September 30, 2014.
Over the period from January 2010 to September 2014, the price of choice white grease, an inedible animal fat (based on daily closing nearby futures prices reported by The Jacobsen for Missouri River delivery of choice white grease), have ranged from $0.2250 per pound, or $1.80 per gallon of biodiesel, in January 2014 to $0.5450 per pound, or $4.36 per gallon of biodiesel, in May 2012, assuming 8.0 pounds of choice white grease yields one gallon of biodiesel. The average closing price for choice white grease during 2013 was $0.3767 per pound, or $3.01 per gallon of biodiesel, compared to $0.3782 per pound, or $3.0256 per gallon of biodiesel, for the nine months ended September 30, 2014.
The graph below illustrates the spread between the cost of producing one gallon of biodiesel made from soybean oil to the cost of producing one gallon of biodiesel made from a lower cost feedstock from December 2011 to September 2014. The results were derived using assumed conversion factors for the yield of each feedstock and subtracting the cost of producing one gallon of biodiesel made from each respective lower cost feedstock from the cost of producing one gallon of biodiesel made from soybean oil.

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Soybean oil (crude) prices are based on the monthly average of the daily closing sale price of the nearby soybean oil contract as reported by CBOT (based on 7.7 pounds per gallons).   
(1)
Used cooking oil prices are based on the monthly average of the daily low sales price of Missouri River yellow grease as reported by The Jacobsen (based on 8.5 pounds per gallon).
(2)
Inedible corn oil prices are reported as the monthly average of the daily distillers’ corn oil market values delivered to Illinois as reported by The Jacobsen (based on 8.2 pounds per gallon).
(3)
Choice white grease prices are based on the monthly average of the daily low prices of Missouri River choice white grease as reported by The Jacobsen (based on 8.0 pounds per gallon).
Our results of operations generally will benefit when the spread between biodiesel prices and feedstock prices widens and will be harmed when this spread narrows. The following graph shows feedstock cost data of choice white grease and soybean oil on a per gallon basis compared to the per gallon sale price data for biodiesel, and the spread between the two, from December 2011 to September 2014.

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(1)
Biodiesel prices are based on the monthly average of the midpoint of the high and low prices of B100 (Upper Midwest) as reported by The Jacobsen.
(2)
Soybean oil (crude) prices are based on the monthly average of the daily closing sale price of the nearby soybean oil contract as reported by CBOT (based on 7.7 pounds per gallon).
(3)
Choice white grease prices are based on the monthly average of the daily low price of Missouri River choice white grease as reported by The Jacobsen (based on 8.0 pounds per gallon).
(4)
Spread between biodiesel price and choice white grease price.
(5)
Spread between biodiesel price and soybean oil (crude) price.
Feedstock prices declined throughout the third quarter of 2014. Palm oil prices continued to decline from June 2014 levels, coupled with a USDA record harvest forecasted for corn and soybeans, putting downward pressure on soybean oil prices and other feedstock prices. We continued to see lower slaughter numbers in cattle, as a result of the two year drought in the southern plains, along with a slight seasonal increase in slaughter numbers for hogs, despite continued impacts on herds from the PED virus.
Risk Management
The profitability of the biomass-based diesel production business largely depends on the spread between prices for feedstocks and biomass-based diesel, including RINs, each of which is subject to fluctuations due to market factors and each of which is not significantly correlated. Adverse price movements for these commodities directly affect our operating results. We attempt to protect operating margins by entering into risk management contracts that mitigate price volatility of our feedstocks, such as inedible corn oil, used cooking oil, inedible animal fat, soybean oil and energy prices. We create offsetting positions by using a combination of forward fixed-price physical purchases and sales contracts on feedstock and biomass-based diesel, including risk management futures contracts, swaps and options primarily on heating oil and soybean oil; however, the extent to which we engage in risk management activities varies substantially from time to time, and from feedstock to feedstock, depending on market conditions and other factors. In making risk management decisions, we utilize research conducted by outside firms to provide additional market information.
Inedible corn oil, used cooking oil, inedible animal fat and soybean oil are the primary feedstocks we used to produce biodiesel in 2013 and the first nine months of 2014. We utilize several varieties of inedible animal fat, such as beef tallow, choice white grease and poultry fat derived from livestock. There is no established futures market for these lower cost feedstocks. The purchase prices for lower cost feedstocks are generally set on a negotiated flat price basis or spread to a prevailing market price reported by the USDA price sheet or The Jacobsen. Our limited ability to risk manage against changing inedible corn oil, used cooking oil and inedible animal fat prices have involved entering into futures contracts, swaps or options on other commodity products, such as soybean oil or heating oil. However, these products do not always experience the same price movements as lower cost feedstocks, making risk management for these feedstocks challenging. We manage feedstock

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supply risks related to biomass-based diesel production in a number of ways, including, where available, through long-term supply contracts. For example, most of the feedstock requirements for our Ralston facility were supplied under an agreement with West Central which expires on January 31, 2015 and automatically renews for one additional year unless either party provides sufficient notice of cancellation prior to the renewal. The purchase price for soybean oil under these contracts may be indexed to prevailing CBOT, soybean oil market prices with a negotiated market basis. We utilize futures contracts, swaps and options to risk manage, or lock in, the cost of portions of our future soybean oil requirements generally for varying periods up to one year.
Our ability to mitigate our risk of falling biomass-based diesel prices is limited. We have entered into forward contracts to supply biomass-based diesel. However, pricing under these forward sales contracts generally has been indexed to prevailing market prices, as fixed price contracts for long periods on acceptable terms have generally not been available. There is no established market for biomass-based diesel futures in the United States. Our efforts to hedge against falling biomass-based diesel prices generally involve entering into futures contracts, swaps and options on other commodity products, such as diesel fuel and heating oil. However, price movements on these products are not highly correlated to price movements of biomass-based diesel.
We generate 1.5 to 1.7 biomass-based diesel RINs for each gallon of biomass-based diesel we produce and sell. We also obtain RINs from third party transactions which we hold for resale. There is no established futures market for RINs, which severely limits the ability to risk manage the price of RINs. We enter into forward contracts to sell RINs and we use risk management position limits to manage RIN exposure.
As a result of our strategy, we frequently have gains or losses on derivative financial instruments that are conversely offset by losses or gains on forward fixed-price physical contracts on feedstocks and biomass-based diesel or inventories. Gains and losses on derivative financial instruments are recognized each period in operating results while corresponding gains and losses on physical contracts are generally not recognized until quantities are delivered or title transfers. Our results of operations are impacted when there is a period mismatch of recognized gains or losses associated with the change in fair value of derivative instruments used for risk management purposes at the end of the reporting period when the purchase or sale of feedstocks or biomass-based diesel has not yet occurred and thus the offsetting gain or loss will be recognized in a later accounting period.
We recorded risk management gains of $19.2 million and $15.8 million from our derivative financial instrument activity for the three and nine months ended September 30, 2014, respectively, compared to risk management losses of $11.2 million and $3.2 million for the three and nine months ended September 30, 2013, respectively. Changes in the value of these futures, swaps or options instruments are recognized in current income or loss. Over the first nine months of 2014, we had risk management gains of approximately $0.07 per gallon sold. Over the last three years, risk management losses have represented an expense of approximately $0.02 per gallon sold.
Seasonality
Our operating results are influenced by seasonal fluctuations in the demand for biodiesel. Our sales tend to decrease during the winter season due to blending concentrations being reduced to adjust for performance during colder weather. Colder seasonal temperatures can cause the higher cloud point biodiesel we make from inedible animal fats to become cloudy and eventually gel at a higher temperature than petroleum-based diesel or lower cloud point biodiesel made from soybean oil, canola oil or inedible corn oil. Such gelling can lead to plugged fuel filters and other fuel handling and performance problems for customers and suppliers. Reduced demand in the winter for our higher cloud point biodiesel can result in excess supply of such higher cloud point biodiesel and lower prices for such biodiesel. In addition, most of our production facilities are located in colder Midwestern states in proximity to feedstock origination and our costs of shipping increases as more biodiesel is transported to warmer climate states during winter.
RIN prices may also be subject to seasonal fluctuations. As mentioned above, we generate 1.5 to 1.7 biomass-based diesel RINs for each gallon of biomass-based diesel we produce and sell. The RIN is dated for the calendar year in which it is generated. These RINs are used by Obligated Parties to satisfy their annual RVOs under the RFS2 program. Since only 20% of an Obligated Party's annual RVO can be satisfied by prior year RINs, most RINs must come from biofuel produced or imported during the RVO year. As a result, RIN prices can be expected to decrease as the calendar year progresses if the RIN market is oversupplied compared to that year's RVO and increase if it is undersupplied. In 2011, which had an RVO for biomass-based diesel of 800 million gallons, biomass-based diesel RIN prices, as reported by OPIS, began to decrease in October when biomass-based diesel RIN generation neared the equivalent of 800 million gallons of biomass-based diesel, as reported by EMTS. In 2012, which had an RVO for biomass-based diesel of one billion gallons, biomass-based diesel RIN prices, as reported by OPIS, began to decrease in September when biomass-based diesel RIN generation neared the equivalent of 900 million gallons, as reported by EMTS. For 2013, biomass-based diesel RIN generation was 1.78 billion gallons when the RVO for biomass-based diesel was 1.28 billion gallons. We saw a similar decline in RIN prices in the third and fourth quarters of

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2013 as production rates exceeded the RVO target. During third quarter 2014, we have seen biomass-based diesel RIN prices decline compared to RIN prices at end of second quarter 2014.
Industry capacity and production
Our operating results are influenced by our industry’s capacity and production, including in relation to RFS2 production requirements. According to EMTS data, approximately 1.1 billion gallons of biomass-based diesel was produced in the United States in 2011, primarily reflecting the recommencement of, or increase in, operations at underutilized facilities in response to RFS2 requirements. Such production was in excess of the 800 million gallon RFS2 requirement for 2011. During 2012, according to EMTS data, approximately 1.1 billion gallons of biomass-based diesel was produced, which also was above RFS2 required volumes of 1 billion gallons of biomass-based diesel for 2012. Production in 2011 and 2012 in excess of RFS2 volume requirements put downward pressure on our margins for biomass-based diesel, negatively affecting our profitability in 2012. As reported by EMTS, the biomass-based diesel RIN generation was 1.78 billion gallons in 2013 when the RVO for biomass-based diesel was 1.28 billion. As of this filing, the EPA has proposed the 2014 and 2015 biomass-based diesel RVO at 1.28 billion gallons for each year. Under RFS2, Obligated Parties are entitled to satisfy up to 20% of their annual requirement with prior year RINs, meaning that gallons produced in 2013 could potentially be used to satisfy 256 million gallons of the 1.28 billion gallon requirement for 2014.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, equities, revenues and expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for judgments we make about the carrying values of assets and liabilities that are not readily apparent from other sources. Because these estimates can vary depending on the situation, actual results may differ from the estimates.
We have disclosed under the heading “Critical Accounting Policies” in our December 31, 2013 Annual Report on Form 10-K the critical accounting policies which materially affect our financial statements. There have been no material changes from the critical accounting policies previously disclosed other than those noted below. You should carefully consider the critical accounting policies set forth in our Annual Report on Form 10-K along with information described below.
Valuation of certain assets and liabilities related to acquisition of LS9. The significant estimates related to our acquisition of LS9 include the valuation of in-process research and development intangible assets, or IPR&D, and contingent consideration. We engaged an independent external valuation specialist to provide assistance in measuring the fair values of these assets and liabilities related to the acquisition.
The fair value of the IPR&D was determined using an income approach called the excess earnings method. Cash flows for specific products for which the IPR&D relate were forecasted, and include estimates for costs to complete research and development activities, projected revenues based upon market data and discussions with market participants and projected operating expenses based on experience with smaller scale production. Appropriate returns for other identifiable assets were then calculated using generally accepted valuation methodologies and deducted from the forecast. These residual cash flows were then discounted to their present value using a risk adjusted discount rate of 25%. This rate reflects the developmental stage of the business and risks associated with development and commercialization of the products. Several scenarios were considered for each IPR&D project to reflect the possible outcomes dependent on future decisions related to production capacity, feedstock inputs and costs and decisions to discontinue development. Each scenario was assigned a probability based on its likelihood of occurring. The estimated fair value of IPR&D was arrived at by adding the probability weighted values of the scenarios considered.
We will pay contingent consideration of up to $21.5 million to the previous owners of LS9 if, and when, we achieve certain development and commercialization milestones of products from LS9’s technology. Payments for achieving individual product milestones range from $0.5 million to $2.5 million and are payable in either cash or shares of our common stock at our election. The fair value of contingent consideration was determined using an expected probability income approach. We estimated the likelihood of achieving each milestone for each product under development. These probabilities ranged from 0% to 88%. The anticipated time to reaching each milestone was also considered to determine if the payment would be made within the five-year milestone consideration time frame. Both the likelihood of achieving milestones and the related timing were estimated based on the current stage of development and the complexity of completing development and commercialization. If the anticipated time to the milestone fell within the time frame, then the probability-weighted earnout payment was discounted using a risk adjusted discount rate of 8%. The fair value of the contingent consideration will be estimated at the end of each reporting period with changes in fair value running through current period earnings.

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Valuation of certain assets and liabilities related to acquisition of Syntroleum/Dynamic Fuels. The significant estimates related to our acquisition of Syntroleum and Dynamic Fuels include the valuation of intangibles and contingent consideration. We engaged an independent external valuation specialist to provide assistance in measuring the fair value of these assets and liabilities related to the acquisition.
The fair value of the renewable hydrocarbon diesel technology was determined using the relief from royalty method, or RFR, which reflects the savings realized by owning the intangible assets. The premise associated with this valuation technique is that if the intangible assets were licensed to an unrelated party, the unrelated party would pay a percentage of revenue for the use of the assets. The cost savings, or relief from royalty, represents the value of the intangible assets. The value under RFR method is dependent upon the following factors for an asset: royalty rate, discount rate, expected life and projected revenue.
We will pay contingent consideration to Tyson Foods, if and when, we achieve certain production volumes. The agreement calls for periodic payments to Tyson Foods based on pre-determined payments per gallon of product sold, with a maximum of $35.0 million over a term of eleven and a half years. The obligation with respect to these future payments is guaranteed by the Company. The initial valuation of the contingent consideration was based on four distinct production forecasts developed to represent the range of possible production levels for Dynamic Fuels. The base case anticipates the plant will be running at full capacity by the end of 2015, and continue to run at full capacity thereafter. We considered there to be an 80% probability of realizing the forecasted base case. We believe that there are also foreseeable situations in which the Dynamic Fuels facility would not run at full capacity. As a result, we estimated a 10% probability the facility would run at two-thirds of capacity on average, and a 5% probability the facility would run at half capacity on average. The fourth scenario, given a 5% probability, is that some operational, regulatory, environmental, or unforeseen event prohibits Dynamic Fuels from producing renewable fuels at any significant level, leading to a shut-down with no significant contingent payments made to Tyson Foods. The probability weighted contingent payments were discounted using a risk adjusted discount rate of 5.8%. The fair value of the contingent consideration will be estimated at the end of each reporting period with changes in fair value running through current period earnings.
Convertible Notes. In June 2014, the Company issued $143.8 million in convertible senior notes. Applicable authoritative accounting guidance required that the liability component of the convertible senior notes be recorded at its fair value as of the issuance date and the debt discount being recorded in equity on a net of tax basis. The fair value of the convertible senior notes was calculated as if the convertible senior notes did not contain any conversion or capped call provisions. Therefore, a payment schedule was developed to calculate the anticipated interest payments to be made beginning on December 15, 2014 and continuing on each subsequent June 15 and December 15 until the final interest payment and repayment of principal on June 15, 2019. The payments were discounted at an implied yield on the note based upon a lattice model using a risk free rate adjusted for the volatility in our securities excluding the conversion provisions. The debt discount is being amortized through interest expense until the maturity date of June 15, 2019.
In connection with the issuance of the convertible senior notes, the Company entered into capped call transactions. The capped call transactions are expected to reduce potential dilution of earnings per share upon conversion of the convertible senior notes. The purchased capped call transactions were recorded as a reduction to common stock-additional paid-in-capital.
Goodwill asset valuation. While goodwill is not amortized, it is subject to periodic reviews for impairment. As required by ASC Topic 350, Intangibles-Goodwill and Other, we review the carrying value of goodwill for impairment annually on July 31 or when we believe impairment indicators exist. Goodwill is allocated and reviewed for impairment by reporting units. The analysis is based on a comparison of the carrying value of the reporting unit to its fair value, determined utilizing a discounted cash flow, or DCF, methodology and consideration of a market approach. Additionally, we review the carrying value of goodwill whenever events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. Changes in estimates of future cash flows caused by items such as unforeseen events or sustained unfavorable changes in market conditions could negatively affect the fair value of the reporting unit’s goodwill asset and result in an impairment charge.
We engaged an independent external valuation specialist to provide assistance in measuring the fair value of our biodiesel and services reporting units using an income approach. The income approach uses a discounted cash flow, or DCF, analysis based on cash flow estimates prepared by us in addition to comparing other selected public guideline company information. The selected DCF method is an invested capital method. In performing the services reporting unit goodwill impairment analysis, cash flows generated from services provided to third parties and to the biodiesel reporting unit were used to determine the reporting unit’s fair value.
The annual impairment tests as of July 31, 2014 determined that the fair value at the biodiesel reporting unit exceeded its value by approximately 7% and the services reporting unit exceeded its value by approximately 66%. No impairment of goodwill was recorded at September 30, 2014 or during the years 2013, 2012, and 2011. There can be no assurances that future circumstances and/or conditions will not change, which could result in an impairment of goodwill. Such circumstances and/or conditions could include, but are not limited to, further decline in the price of our common stock, deterioration in our financial

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condition or results of operations, and/or adverse changes in the fair value of our assets and liabilities. Management continues to monitor circumstances and conditions for events that could result in an impairment of our goodwill.
Results of Operations
Three and nine months ended September 30, 2014 and 2013
Set forth below is a summary of certain financial information (in thousands) for the periods indicated:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,