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EXCEL - IDEA: XBRL DOCUMENT - Renewable Energy Group, Inc.Financial_Report.xls
EX-32 - EXHIBIT 32.1 - Renewable Energy Group, Inc.regi-2015q1xex321.htm
EX-32 - EXHIBIT 32.2 - Renewable Energy Group, Inc.regi-2015q1xex322.htm
EX-31 - EXHIBIT 31.1 - Renewable Energy Group, Inc.regi-2015q1xex311.htm
EX-31 - EXHIBIT 31.2 - Renewable Energy Group, Inc.regi-2015q1xex312.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 March 31, 2015
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 April 30, 2015, the registrant had 43,935,566 shares of Common Stock 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)
   
March 31,
2015
 
December 31,
2014
ASSETS
   

 
   

CURRENT ASSETS:
   

 
   

Cash and cash equivalents
$
213,545

 
$
63,516

Marketable securities
3,080

 
16,770

Accounts receivable, net (includes amounts owed by related parties of $0 and $36, respectively)
51,025

 
294,669

Inventories
120,485

 
97,508

Prepaid expenses and other assets
39,524

 
43,135

Restricted cash

 
12,845

Total current assets
427,659

 
528,443

Property, plant and equipment, net
496,355

 
493,196

Goodwill
191,477

 
188,275

Intangible assets, net
28,669

 
28,837

Investments
10,059

 
9,736

Other assets
18,906

 
19,586

Restricted cash
104,815

 
104,815

TOTAL ASSETS
$
1,277,940

 
$
1,372,888

LIABILITIES AND EQUITY
   

 
   

CURRENT LIABILITIES:
   

 
   

Revolving lines of credit
$
1,302

 
$
16,679

Current maturities of long-term debt
5,681

 
5,746

Accounts payable (includes amounts owed to related parties of $914 and $1,101, respectively)
180,497

 
202,821

Accrued expenses and other liabilities
20,971

 
28,486

Deferred income taxes
14,280

 
14,899

Deferred revenue
15,134

 
16,680

Total current liabilities
237,865

 
285,311

Unfavorable lease obligation
18,713

 
19,170

Deferred income taxes
9,788

 
6,905

Contingent consideration for acquisitions
32,236

 
30,091

Long-term debt
247,030

 
247,183

Other liabilities
4,154

 
5,566

Total liabilities
549,786

 
594,226

COMMITMENTS AND CONTINGENCIES


 


EQUITY:
   

 
   

Common stock ($.0001 par value; 300,000,000 shares authorized; 43,935,566 and 44,422,881 shares outstanding, respectively)
4

 
4

Common stock—additional paid-in-capital
454,601

 
453,109

Retained earnings
282,976

 
321,083

Accumulated other comprehensive loss
(4,643
)
 
(11
)
Treasury stock (1,110,431 and 585,150 shares outstanding, respectively)
(9,412
)
 
(4,412
)
Total equity attributable to the Company's shareholders
723,526

 
769,773

              Non-controlling interest
4,628

 
8,889

                       Total equity
728,154

 
778,662

TOTAL LIABILITIES AND EQUITY
$
1,277,940

 
$
1,372,888

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
   
 
March 31, 2015
 
March 31, 2014
REVENUES:
 
   
 
   
Biomass-based diesel sales
 
$
221,026

 
$
209,122

Biomass-based diesel government incentives
 
9,788

 
9,890

   
 
230,814

 
219,012

Services
 
104

 
28

   
 
230,918

 
219,040

COSTS OF GOODS SOLD:
 
   
 
   
Biomass-based diesel
 
242,510

 
200,305

Biomass-based diesel—related parties
 
4,542

 
7,146

Services
 
61

 
25

   
 
247,113

 
207,476

GROSS PROFIT (LOSS)
 
(16,195
)
 
11,564

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
 
16,675

 
11,654

RESEARCH AND DEVELOPMENT EXPENSE
 
3,860

 
1,873

LOSS FROM OPERATIONS
 
(36,730
)
 
(1,963
)
OTHER INCOME (EXPENSE), NET:
 
   
 
   
Change in fair value of contingent consideration
 
(293
)
 

Other income, net
 
565

 
48

Interest expense
 
(2,743
)
 
(551
)
   
 
(2,471
)
 
(503
)
LOSS BEFORE INCOME TAXES
 
(39,201
)
 
(2,466
)
INCOME TAX BENEFIT
 
897

 
107

NET LOSS
 
(38,304
)
 
(2,359
)
LESS—NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
 
(197
)
 

NET LOSS ATTRIBUTABLE TO THE COMPANY
 
(38,107
)
 
(2,359
)
PLUS—GAIN ON REDEMPTION OF PREFERRED STOCK
 

 
378

LESS—EFFECT OF CHANGES TO PREFERRED STOCK
 

 
(40
)
NET LOSS ATTRIBUTABLE TO THE COMPANY’S COMMON STOCKHOLDERS
 
$
(38,107
)
 
$
(2,021
)
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
 
   
 
   
BASIC
 
$
(0.86
)
 
$
(0.05
)
DILUTED
 
$
(0.86
)
 
$
(0.06
)
WEIGHTED AVERAGE SHARES USED TO COMPUTE NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
 
   
 
   
BASIC
 
44,362,637

 
38,290,404

DILUTED
 
44,362,637

 
38,557,441

See notes to condensed consolidated financial statements.

2



RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
(in thousands)
 
Three months ended
 
March 31, 2015
 
March 31, 2014
Net loss
$
(38,304
)
 
$
(2,359
)
Unrealized gains (losses) on marketable securities, net of taxes of $0 and $0, respectively
9

 
(52
)
Foreign currency translation adjustments
(4,641
)
 

Other comprehensive loss
(4,632
)
 
(52
)
Comprehensive loss
$
(42,936
)
 
$
(2,411
)
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
 
Noncontrolling Interest
 
Total
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

 

 
2,230,559

 

 
26,254

 

 

 

 

 
26,254

Stock compensation expense

 

 

 

 
1,235

 

 

 

 

 
1,235

Series B Preferred Stock dividends paid

 

 

 

 

 
(40
)
 

 

 

 
(40
)
Net change in unrealized losses on marketable securities

 

 

 

 

 

 
(52
)
 

 

 
(52
)
Net loss

 

 

 

 

 
(2,359
)
 

 

 

 
(2,359
)
BALANCE, March 31, 2014

 
$

 
38,788,076

 
$
4

 
$
387,912

 
$
236,113

 
$
(52
)
 
$
(3,886
)
 
$

 
$
620,091

BALANCE, January 1, 2015

 
$

 
44,422,881

 
$
4

 
$
453,109

 
$
321,083

 
$
(11
)
 
$
(4,412
)
 
$
8,889

 
$
778,662

Issuance of common stock

 

 
37,966

 

 
412

 

 

 

 

 
412

Treasury stock purchases

 

 
(525,281
)
 

 

 

 

 
(5,000
)
 

 
(5,000
)
Purchase of additional interest

 

 

 

 

 

 

 

 
(4,064
)
 
(4,064
)
Stock compensation expense

 

 

 

 
1,080

 

 

 

 

 
1,080

Net change in unrealized gains (losses) on marketable securities

 

 

 

 

 

 
9

 

 

 
9

Foreign currency translation adjustment

 

 

 

 

 

 
(4,641
)
 

 

 
(4,641
)
Net loss

 

 

 

 

 
(38,107
)
 

 

 
(197
)
 
(38,304
)
BALANCE, March 31, 2015

 
$

 
43,935,566

 
$
4

 
$
454,601

 
$
282,976

 
$
(4,643
)
 
$
(9,412
)
 
$
4,628

 
$
728,154

See notes to condensed consolidated financial statements.

4



RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
Three months ended
   
March 31, 2015
 
March 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
   
 
   
Net loss
$
(38,304
)
 
$
(2,359
)
Adjustments to reconcile net loss to net cash flows from operating activities:
   
 
   
Depreciation expense
5,613

 
3,004

Amortization expense of assets and liabilities, net
113

 
(121
)
Accretion of convertible note discount
1,158

 

Change in fair value of contingent consideration
293

 

Provision for doubtful accounts
(816
)
 
(150
)
Stock compensation expense
1,080

 
1,235

Deferred tax expense (benefit)
(938
)
 
(387
)
Other operating activities
199

 

Changes in asset and liabilities, net of effects from acquisitions:
   
 
   
Accounts receivable, net
242,572

 
52,213

Inventories
(24,123
)
 
(8,261
)
Prepaid expenses and other assets
4,508

 
(3,734
)
Accounts payable
(20,482
)
 
(7,383
)
Accrued expenses and other liabilities
(5,305
)
 
(5,578
)
Deferred revenue
(1,546
)
 
(3,659
)
Net cash flows provided by operating activities
164,022

 
24,820

CASH FLOWS FROM INVESTING ACTIVITIES:
   
 
   
Cash paid for marketable securities

 
(59,975
)
Maturities of marketable securities
13,733

 

Change in restricted cash
12,845

 

Cash paid for purchase of property, plant and equipment
(12,178
)
 
(12,773
)
Cash paid for acquisitions and additional interests, net of cash acquired
(4,064
)
 
(15,275
)
Other investing activities

 
112

Net cash flows provided by (used in) investing activities
10,336

 
(87,911
)
CASH FLOWS FROM FINANCING ACTIVITIES:
   
 
   
Net repayments on line of credit
(15,325
)
 
(8,549
)
Cash paid on debt
(1,317
)
 
(1,006
)
Cash paid for debt issuance costs
(317
)
 
(118
)
Cash paid for equity issuance costs

 
(108
)
Cash paid for treasury stock
(5,000
)
 
(529
)
Cash paid for preferred stock dividends

 
(40
)
Cash paid for redemption of preferred stock

 
(3,562
)
Cash paid for contingent consideration settlement
(1,052
)
 

Net cash flows used in financing activities
(23,011
)
 
(13,912
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
151,347

 
(77,003
)
CASH AND CASH EQUIVALENTS, Beginning of period
63,516

 
153,227

Effect of exchange rate changes on cash
(1,318
)
 

CASH AND CASH EQUIVALENTS, End of period
$
213,545

 
$
76,224

(continued)

5




RENEWABLE ENERGY GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
Three months ended
 
March 31, 2015
 
March 31, 2014
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
   
 
   
Cash paid/(received) for income taxes
$

 
$
40

Cash paid for interest
$
715

 
$
539

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
   
 
   
Amounts included in period-end accounts payable for:
   
 
   
Purchases of property, plant and equipment
$
3,511

 
$
4,579

Debt issuance cost
$
28

 
$
63

Incentive stock liability for raw material supply agreement
$
70

 
$
101

Equity issuance costs


 
$
321

Issuance of common stock for acquisitions


 
$
26,254

Contingent consideration for acquisitions


 
$
17,050

Gain on redemption of preferred stock


 
$
378

(concluded)
   
See notes to condensed consolidated financial statements.



6



RENEWABLE ENERGY GROUP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For The three Months Ended March 31, 2015 and 2014
(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 March 31, 2015, the Company operates a network of nine operating biomass-based diesel production facilities with aggregate nameplate production capacity of 332 million gallons per year, or mmgy. A number of these plants are “multi-feedstock capable” which allows them to use a broad range of lower cost feedstocks, such as inedible corn oil, used cooking oil and inedible animal fats in addition to vegetable oils, such as soybean oil and canola oil.
The Company expanded its business to Europe by acquiring a majority interest in Petrotec AG (Petrotec) in December 2014. Petrotec is a fully-integrated company that produces biodiesel at its two biorefineries in Emden and Oeding, Germany to sell to the European market.
The biomass-based diesel industry and the Company’s business have benefited from the continuation of certain federal and state incentives. The federal biodiesel tax credit expired on December 31, 2014 and it is uncertain whether it will be reinstated. This revocation along with other amendments of any one or more of those laws, could adversely affect the financial results of the Company.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company has disclosed a summary of the Company's significant accounting policies in its Annual Report on Form 10-K for the year ended December 31, 2014. There have been no material changes from the policies previously disclosed other than those noted below.
Restricted Cash
At March 31, 2015, current restricted cash was $0. At December 31, 2014, current restricted cash was $12,845, which was held in certificates of deposit as pledges for a letter of credit to support a subsidiary's trade activities and the Company's tender offer to acquire the remaining interest at Petrotec. Non-current restricted cash consists of $101,315 as of March 31, 2015 and December 31, 2014, respectively, 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, at March 31, 2015 and December 31, 2014, non-current restricted cash included an amount of $3,500, which is held in a certificate of deposit and pledged to Bank of America, who issued a letter of credit to support a subsidiary's trade activities. The Company classifies restricted cash between current and non-current assets based on the length of time of the restricted use.
Accounts Receivable
Accounts receivable are carried at invoiced amount less allowance for doubtful accounts. Management estimates the allowance for doubtful accounts based on existing economic conditions, the financial conditions of customers, and the amount and age of past due accounts. Receivables are considered past due if full payment is not received by the contractual due date. Past due accounts are generally written off against the allowance for doubtful accounts only after reasonable collection attempts have been exhausted. At March 31, 2015, the outstanding receivable amount related to the 2014 biodiesel mixture excise tax credit reinstatement was approximately $14,722.
Goodwill

7



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 biomass-based diesel reporting unit exceeded its carrying value by approximately 7% and the services reporting unit exceeded its carrying value by approximately 66%. The Company also reviewed goodwill recorded from the acquisitions of LS9, Inc., Syntroleum Corporation and Dynamic Fuels, LLC during the annual impairment testing. There have been no impairment indicators in the first three months of 2015 that would indicate that an additional assessment needs to be performed.
Share Repurchase Programs
In February 2015, the Company's board of directors approved a share repurchase program of up to $30,000 of the Company's shares of Common Stock. Shares may be repurchased from time to time in open market transactions, privately negotiated transactions or by other means. The Company accounts for share repurchases using the cost method. Under this method, the cost of the share repurchase is recorded entirely in treasury stock, a contra equity account. During the three months ended March 31, 2015, the Company repurchased shares of Common Stock in the amount of $5,000 under this share repurchase program.
Foreign Currency Transactions and Translation
The Company’s reporting and functional currency is U.S. dollars. Monetary assets and liabilities denominated in currencies other than U.S. dollars are remeasured into their respective functional currencies at exchange rates in effect at the balance sheet date. The resulting exchange gain or loss is included in the Company’s Condensed Consolidated Statements of Operations as foreign exchange gain (loss) unless the remeasurement gain or loss relates to an intercompany transaction that is of a long-term investment nature and for which settlement is not planned or anticipated in the foreseeable future. Gains or losses arising from translation of such transactions are reported as a component of accumulated other comprehensive income (loss) in the Company’s Condensed Consolidated Balance Sheets.
The Company translates the assets and liabilities of its foreign subsidiaries from their respective functional currencies to U.S. dollars at the appropriate spot rates as of the balance sheet date. Generally, our foreign subsidiaries use the local currency as their functional currency. Changes in the carrying value of these assets and liabilities attributable to fluctuations in spot rates are recognized in foreign currency translation adjustment, a component of accumulated other comprehensive income (loss) in the Company’s Condensed Consolidated Balance Sheets.
Income Taxes
The Company uses the asset and liability method to account for income taxes. Accordingly, deferred income taxes are recognized for differences between the financial statement and tax bases of assets and liabilities at enacted statutory tax rates in effect for the years in which differences are expected to reverse. Changes in tax rates are recognized directly to the income statement as they arise. Consideration is given to positive and negative evidence related to the realization of the deferred tax assets and valuation allowances are established to reduce deferred tax assets to the amounts expected to be realized. Significant judgment is required in making this assessment.
For uncertain tax positions, the Company recognizes tax benefits that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized.
With regard to non-US subsidiaries, the Company does not have any undistributed earnings and the Company has not yet decided to indefinitely invest any future earnings outside of the U.S. 
New Accounting Standards
In February 2015, the FASB issued ASU 2015-02, which amends the consolidation requirements in ASC 810 and significantly changes the consolidation analysis required under U.S. GAAP. The guidance in the ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015 with early adoption permitted. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03 simplifying the presentation of debt issuance costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct

8



deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance in the ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements.
NOTE 3 — ACQUISITIONS AND EQUITY TRANSACTIONS
Syntroleum Corporation/Dynamic Fuels, LLC
On June 3, 2014, REG Synthetic Fuels, a wholly-owned subsidiary of the Company included in the Biomass-based diesel 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 in exchange for the issuance of $34,831, or 3,493,613 shares, of the Company's Common Stock. Dynamic Fuels owned a 75 million gallon per year nameplate capacity renewable hydrocarbon diesel biorefinery located in Geismar, Louisiana.
On June 6, 2014, REG Synthetic Fuels acquired the remaining 50% ownership interest in Dynamic Fuels from Tyson Foods in exchange for $16,447 in cash and $28,900 in contingent consideration. The Company renamed Dynamic Fuels to REG Geismar, LLC, which is included in the Biomass-based diesel segment. The Company has completed its initial accounting for this business combinations during the first quarter of 2015 as the valuation of the intangible assets, goodwill, the real and personal property, and contingent consideration has been finalized.
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 Stock 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.
The finalization of the purchase price allocation resulted in an increase in goodwill of $3,202 relating to higher than initially estimated net operating losses prior to the acquisition of Syntroleum and Dynamic Fuels.
The following table summarizes the amount of assets acquired and liabilities assumed at the acquisition date and at March 31, 2015 for the combined acquisition of Syntroleum and Dynamic Fuels:
   
June 6, 2014
 
March 31, 2015

Assets (liabilities) acquired of Syntroleum and Dynamic Fuels:
   

 
 
Cash
$
253

 
$
253

Other current assets
4,666

 
4,666

Property, plant and equipment
121,567

 
121,567

Goodwill
68,196

 
71,398

Intangible assets
8,900

 
8,900

Other noncurrent assets
10,281

 
10,281

Other current liabilities
(1,024
)
 
(1,024
)
Deferred tax liabilities
(5,108
)
 
(8,310
)
Debt
(113,553
)
 
(113,553
)
Other noncurrent liabilities
(14,000
)
 
(14,000
)
Total
$
80,178

 
$
80,178

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 price per gallon of product sold. The probability weighted contingent payments were discounted using a risk adjusted discount rate of 5.8%. Any contingent payments will be payable in cash. As of March 31, 2015, the Company has recorded a contingent liability of $29,967, of which $6,324 has been classified in accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets.

9



The goodwill acquired is included in the Biomass-based diesel segment, a portion of which is expected to be deductible for tax purposes.
Petrotec AG
On December 24, 2014, the Company acquired 69.08% of the outstanding common shares and voting interest of Petrotec. The results of Petrotec’s operations have been included in the consolidated financial statements since that date. The Company has not completed its initial accounting for this business combination as the valuation of the assets acquired and liabilities assumed has not been finalized.
The following table summarizes the consideration paid for Petrotec:
 
December 24, 2014
Consideration at fair value for Petrotec:
 
Common stock
$
20,022

The fair value of the 2,070,538 shares of the Company's Common Stock issued for the acquisition was determined on the basis of the closing market price of the Company's Common Stock at the date of acquisition.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date.
   
December 24, 2014
Assets (liabilities) acquired of Petrotec:
   
Cash
$
13,523

Accounts receivable
4,989

Inventory
9,470

Other current assets
3,583

Property, plant and equipment
25,026

Total identifiable assets acquired
56,591

 
 
Accounts payable
(8,171
)
Accrued expenses and other liabilities
(2,151
)
Debt
(16,192
)
Non-current liabilities
(1,462
)
Total liabilities assumed
(27,976
)
Net identifiable assets acquired
28,615

Goodwill
369

Non-controlling interest
(8,962
)
Net assets acquired
$
20,022

The $369 of goodwill was assigned to the Biomass-based diesel segment, all of which is expected to be deductible for income tax purposes.
At December 31, 2014, the fair value of the 30.92% noncontrolling interest in Petrotec was estimated to be $8,962. The fair value of the noncontrolling interest was estimated using a combination of the income approach and a market approach.
The Company recognized $1,289 of acquisition related costs that were expensed in the last quarter of 2014. In addition, during the three months ended March 31, 2015, the Company acquired additional common shares of Petrotec as part of the cash tender offer. At March 31, 2015, the Company owned 84.42% of the outstanding common shares and voting interest of Petrotec.
In April 2015, Petrotec's application to de-list its shares of common stock from the Frankfurt Stock Exchange was approved. As a result, Petrotec's shares of common stock will no longer be traded on any regulated market of any stock exchange at the end of the October 8, 2015 trading day.

10



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 March 31, 2015
 
Maturity
 
Gross Amortized Cost
 
Total Unrealized Gains
 
Total Unrealized Losses
 
Fair Value
Certificates of deposit
Within one year
 
$
3,080

 
$

 
$

 
$
3,080

 
As of December 31, 2014
 
Maturity
 
Gross Amortized Cost
 
Total Unrealized Gains
 
Total Unrealized Losses
 
Fair Value
Corporate bonds
Within one year
 
$
6,781

 
$

 
$
(6
)
 
$
6,775

Certificates of deposit
Within one year
 
10,000

 

 
(5
)
 
9,995

Total
 
 
$
16,781

 
$

 
$
(11
)
 
$
16,770

NOTE 5 — INVENTORIES
Inventories consist of the following:
   
March 31, 2015

December 31, 2014
Raw materials
$
33,138


$
23,117

Work in process
2,875


2,879

Finished goods
84,472


71,512

Total
$
120,485


$
97,508

NOTE 6 — PREPAID EXPENSES AND OTHER ASSETS
Prepaid expense and other assets consist of the following:
   
March 31, 2015
 
December 31, 2014
Commodity derivatives and related collateral, net
$
15,169

 
$
12,938

Prepaid expenses
5,783

 
7,901

Deposits
3,958

 
4,481

RIN inventory
7,955

 
10,795

Taxes receivable
1,712

 
2,843

Other
4,947

 
4,177

Total
$
39,524

 
$
43,135

RIN inventory values were adjusted in the amount of $3 and $1,042 at March 31, 2015 and December 31, 2014, respectively, to reflect the lower of cost or market.
Other noncurrent assets consist of the following:
 
March 31, 2015
 
December 31, 2014
Debt issuance costs (net of accumulated amortization of $1,345 and $1,474, respectively)
$
4,825

 
$
5,152

Spare parts inventory
3,440

 
3,440

Deposits
4,370

 
4,370

Other
6,271

 
6,624

Total
$
18,906

 
$
19,586


11



NOTE 7 — GOODWILL
The following table shows the carrying amount of goodwill by reportable segment as of December 31, 2014 and the changes in goodwill for the three months ended March 31, 2015:
 
Biomass-based diesel
 
Services
 
Total
Balance, December 31, 2014
$
172,195

 
$
16,080

 
$
188,275

Finalization of purchase accounting
3,202

 

 
3,202

Balance, March 31, 2015
$
175,397

 
$
16,080

 
$
191,477

NOTE 8 — INTANGIBLE ASSETS
Intangible assets consist of the following:
 
March 31, 2015
 
Cost
 
Accumulated Amortization
 
Net
 
Weighted Average Remaining Life
Raw material supply agreement
$
5,983

 
$
(1,208
)
 
$
4,775

 
10.8 years
Renewable hydrocarbon diesel technology
8,300

 
(461
)
 
7,839

 
14.3 years
Ground lease
200

 
(101
)
 
99

 
6.6 years
Total amortizing intangibles
14,483

 
(1,770
)
 
12,713

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

 

 
15,956

 
 
Total intangible assets
$
30,439

 
$
(1,770
)
 
$
28,669

 
 
 
December 31, 2014
 
Cost
 
Accumulated Amortization
 
Net
 
Weighted Average Remaining Life
Raw material supply agreement
$
5,914

 
$
(1,113
)
 
$
4,801

 
11.0 years
Renewable hydrocarbon diesel technology
8,300

 
(323
)
 
7,977

 
14.5 years
Ground lease
200

 
(97
)
 
103

 
6.9 years
Total amortizing intangibles
14,414

 
(1,533
)
 
12,881

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

 

 
15,956

 
 
Total intangible assets
$
30,370

 
$
(1,533
)
 
$
28,837

 
 
The Company recorded intangible amortization expense of $237 and $84 for the three months ended March 31, 2015 and March 31, 2014, respectively.
The estimated intangible asset amortization expense for fiscal year 2015 through fiscal year 2020 and thereafter is as follows:
April 1, 2015 through December 31, 2015
$
769

2016
1,040

2017
1,054

2018
1,068

2019
1,083

2020
1,099

2021 and thereafter
6,600

Total
$
12,713

NOTE 9 — DEBT
The Company’s debt is as follows:

12



   
March 31, 2015

December 31, 2014
2.75% Convertible Senior Notes, $143,750 face amount, due in June 2019
$
122,512

 
$
121,354

REG Geismar GOZone bonds, secured, variable interest rate of daily LIBOR, due in October 2033
100,000

 
100,000

REG Danville term loan, secured, variable interest rate of LIBOR plus 5%, due in November 2015
1,213

 
1,513

REG Newton term loan, secured, variable interest rate of LIBOR plus 4%, due in December 2018
19,206

 
19,868

REG Mason City term loan, fixed interest rate of 5%, due in July 2019
4,346

 
4,566

REG Ames term loans, secured, fixed interest rates of 3.5% and 4.25%, due in January 2018 and December 2019, respectively
4,145

 
4,226

Other
1,289

 
1,402

Total debt
$
252,711

 
$
252,929


Revolving Lines of Credit
 
March 31, 2015
 
December 31, 2014
Amount borrowed under revolving lines of credit
$
1,302

 
$
16,679

Maximum available to be borrowed under revolving line of credit
$
39,970

 
$
20,719

NOTE 10 — RELATED PARTY TRANSACTIONS
Summary of Related Party Balances - Condensed Consolidated Statements of Operations
   
Three Months 
 Ended 
 March 31, 
 2015
 
Three Months 
 Ended 
 March 31, 
 2014
Cost of goods sold – Biomass-based diesel
$
4,542

 
$
7,146

Summary of Related Party Balances - Condensed Consolidated Balance Sheets
   
As of
March 31, 2015
 
As of
December 31, 2014
Accounts receivable
$

 
$
36

Accounts payable
$
914

 
$
1,101

NOTE 11 — DERIVATIVE INSTRUMENTS
The Company enters into heating oil and soybean oil futures, swaps and options (commodity contract derivatives) to reduce the risk of price volatility related to anticipated purchases of feedstock raw materials and to protect gross profit margins from potentially adverse effects of price volatility on biomass-based diesel 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 biomass-based diesel costs of goods sold reflected in current results of operations. As of March 31, 2015, the Company had 2,626 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

13



derivatives and amounts that offset within the Condensed Consolidated Balance Sheets:
   
March 31, 2015
 
December 31, 2014
   
Assets
 
Liabilities
 
Assets
 
Liabilities
Gross amounts of derivatives recognized at fair value
$
6,282

 
$
1,296

 
$
14,901

 
$
205

Cash collateral
10,183

 

 
2,870

 
4,628

Total gross amount recognized
16,465

 
1,296

 
17,771

 
4,833

Gross amounts offset
(1,296
)
 
(1,296
)
 
(4,833
)
 
(4,833
)
Net amount reported in the condensed consolidated balance sheet
$
15,169

 
$

 
$
12,938

 
$

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 
 March 31, 
 2015
 
Three Months 
 Ended 
 March 31, 
 2014
Commodity derivatives
Cost of goods sold – Biomass-based diesel

$
(623
)
 
$
(694
)
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 March 31, 2015
   
Total
 
Level 1
 
Level 2
 
Level 3
Certificates of deposit
$
3,080

 
$

 
$
3,080

 
$

Commodity contract derivatives
$
4,986

 
1,933

 
3,053

 

Contingent consideration for LS9 acquisition
$
(8,593
)
 

 

 
(8,593
)
Contingent consideration for Dynamic Fuels acquisition
$
(29,967
)
 

 

 
(29,967
)
 
$
(30,494
)
 
$
1,933

 
$
6,133

 
$
(38,560
)
   
As of December 31, 2014
   
Total
 
Level 1
 
Level 2
 
Level 3
Money market funds
$
302

 
$
302

 
$

 
$

Certificates of deposit
$
9,995

 

 
9,995

 

Commercial notes/bond
$
6,775

 

 
6,775

 

Commodity contract derivatives
$
14,696

 
6,885

 
7,811

 

Contingent consideration for LS9 acquisition
$
(8,624
)
 

 

 
(8,624
)
Contingent consideration of Dynamic Fuels acquisition
$
(30,695
)


 

 
(30,695
)
   
$
(7,551
)

$
7,187


$
24,581


$
(39,319
)
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):

14



 
Contingent Consideration for LS9 Acquisition
 
Contingent Consideration for Dynamic Fuels Acquisition
Balance at beginning of period, January 1, 2015
$
8,624

 
$
30,695

Change in estimates included in earnings
(31
)
 
324

Settlements

 
(1,052
)
Balance at end of period, March 31, 2015
$
8,593

 
$
29,967

 
Contingent Consideration for LS9 Acquisition
 
Contingent Consideration for Dynamic Fuels Acquisition
Balance at beginning of period, January 1, 2014
$

 
$

Additions for acquisitions
17,050

 

Balance at end of period, March 31, 2014
$
17,050

 
$

The estimated fair values of the Company’s financial instruments, which are not recorded at fair value, are as follows:
   
As of March 31, 2015
 
As of December 31, 2014
   
Asset (Liability)
Carrying
Amount
 
Fair Value
 
Asset (Liability)
Carrying
Amount
 
Fair Value
Financial liabilities:
   
 
   
 
   
 
   
Debt and lines of credit
$
(254,013
)
 
$
(254,781
)
 
$
(269,608
)
 
$
(270,331
)
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, which include certificates of deposit and commercial notes/bonds 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 of contracts based on quoted prices of identical assets in an active exchange-traded market is reflected in Level 1. Contract fair value that is determined based on quoted prices of similar contracts in over-the-counter markets is 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 LOSS PER SHARE

15



Basic net loss per 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 loss per share attributable to common stockholders during the periods presented as the effect was anti-dilutive:
   
Three Months 
 Ended 
 March 31, 
 2015
 
Three Months 
 Ended 
 March 31, 
 2014
Options to purchase common stock
87,026

 
87,026

Restricted stock units

 
567,716

Stock appreciation rights
2,123,770

 
1,583,670

Warrants to purchase common stock

 
17,916

Convertible notes
10,838,218

 

Total
13,049,014

 
2,256,328

The following table presents the calculation of diluted net loss per share:
   
Three Months 
 Ended 
 March 31, 
 2015
 
Three Months 
 Ended 
 March 31, 
 2014
Net loss attributable to the Company’s common stockholders - Basic
$
(38,107
)
 
$
(2,021
)
Plus: distributed dividends to Preferred Stockholders

 
40

Plus (Less): effect of participating securities

 
(378
)
Net loss attributable to common stockholders - Dilutive
$
(38,107
)
 
$
(2,359
)
Shares:

 

Weighted-average shares used to compute basic net loss per share
44,362,637

 
38,290,404

Adjustment to reflect conversion of preferred stock

 
267,037

Weighted-average shares used to compute diluted net loss per share
44,362,637

 
38,557,441

Net loss per share attributable to common stockholders:

 

Diluted
$
(0.86
)
 
$
(0.06
)
NOTE 14 — REPORTABLE SEGMENTS
The Company reports its reportable segments based on products and services provided to customers, which include Biomass-based diesel, 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 Biomass-based diesel segment processes waste vegetable oils, animal fats, virgin vegetable oils and other feedstocks and methanol into biomass-based diesel. The Biomass-based diesel 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 Biomass-based diesel segment. Revenues are recorded by the Services

16



segment at cost. Corporate expenses consist of corporate office expenses including compensation, benefits, occupancy and other administrative costs, including management service expenses.
The following table represents the significant items by reportable segment:
   
Three Months 
 Ended 
 March 31, 
 2015
 
Three Months 
 Ended 
 March 31, 
 2014
Net revenues:
   
 
   
Biomass-based diesel
$
230,814

 
$
219,012

Services
18,811

 
20,524

Intersegment revenues
(18,707
)
 
(20,496
)
   
$
230,918

 
$
219,040

Income (loss) before income taxes:
   
 
   
Biomass-based diesel
$
(20,098
)
 
$
11,561

Services
43

 
3

Corporate and other (a)
(19,146
)
 
(14,030
)
   
$
(39,201
)
 
$
(2,466
)
Depreciation and amortization expense, net:
   
 
   
Biomass-based diesel
$
5,208

 
$
2,589

Services
62

 
41

Corporate and other (a)
456

 
253

   
$
5,726

 
$
2,883

Cash paid for purchases of property, plant and equipment:
   
 
   
Biomass-based diesel
$
10,490

 
$
12,554

Services
722

 

Corporate and other (a)
966

 
219

   
$
12,178

 
$
12,773

   
As of
March 31, 2015
 
As of
December 31, 2014
Assets:
   
 
   
Biomass-based diesel
$
916,371

 
$
899,211

Services
22,781

 
20,750

Corporate and other (b)
338,788

 
452,927

   
$
1,277,940

 
$
1,372,888

(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.

Geographic Information:
The following geographic data include net sales attributed to the countries based on the location of the subsidiary making the sale and long-lived assets based on physical location. Long-lived assets represent the net book value of property, plant and equipment.

17



   
Three Months 
 Ended 
 March 31, 
 2015
 
Three Months 
 Ended 
 March 31, 
 2014
Net revenues:
   
 
   
United States
$
200,925

 
$
219,040

Foreign
29,993

 

 
$
230,918

 
$
219,040

   
As of March 31, 2015
 
As of December 31, 2014
Long-lived assets:
   
 
   
United States
$
474,397

 
$
468,170

Foreign
21,958

 
25,026

 
$
496,355

 
$
493,196

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.
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 months ended March 31, 2015. 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

18



We are a leading advanced biofuels producer and are expanding into the development of renewable chemicals. We have been a leader in the biomass-based diesel industry since 1996. We utilize a nationwide production, distribution and logistics system as part of an integrated value chain model to focus on converting natural fats, oils and greases into advanced biofuels and converting diverse feedstocks into renewable chemicals. We own and operate nine biomass-based diesel production facilities with aggregate nameplate production capacity of 332 million gallons per year, or mmgy, as well as one fermentation facility.
We are expanding into the production of renewable chemicals, additional advanced biofuels and other products through our January 2014 acquisition and creation of REG Life Sciences, LLC. This industrial biotechnology business is a development stage company focusing on harnessing the power of microbial fermentation to develop and produce renewable chemicals, fuels and other products.
We began selling petroleum-based heating oil and diesel fuel, which enables us to offer additional biofuel blends, while expanding our customer base. We sell heating oil and ultra-low sulfur diesel, or ULSD, at terminals throughout the northeastern U.S. as well as BioHeat® blended heating fuel at one of our existing Northeast terminal locations in February 2014. We are expanding our sales of additional biofuel blends to Midwest terminal locations and potentially in other areas across North America.
We acquired a 75 mmgy nameplate capacity renewable hydrocarbon diesel biorefinery located in Geismar, Louisiana in June 2014. Our Geismar facility had been idled by its previous owner and began operating again by us in October 2014 after our completion of certain upgrades.
We also expanded our business internationally by acquiring a majority interest in Petrotec AG, or Petrotec, in December 2014. During first quarter 2015, we acquired additional shares in Petrotec through the previously filed and closed cash tender offer. Petrotec is a fully-integrated company utilizing more than 15,000 collection points to gather used cooking oil and other waste feedstocks to produce biomass-based diesel at its two biorefineries in Emden and Oeding, Germany.  Petrotec’s nameplate production capacity is approximately 56 mmgy (185,000 metric tons or MT) per year.
For the three months ended March 31, 2015, we sold 60 million total gallons, including four million gallons that we purchased from third parties and resold, nine million international gallons and four million petroleum gallons. During 2014, we sold a total of 287 million total gallons, including 42 million gallons we purchased from third parties and resold and four million petroleum gallons.
We derive revenues from two reportable business segments: Biomass-based diesel and Services.
Biomass-based diesel Segment
Our Biomass-based diesel segment, as reported herein, includes:
the operations of the following biomass-based diesel production facilities:
a 12 mmgy nameplate biomass-based diesel production facility located in Ralston, Iowa;
a 35 mmgy nameplate biomass-based diesel production facility located near Houston, Texas;
a 45 mmgy nameplate biomass-based diesel production facility located in Danville, Illinois;
a 30 mmgy nameplate biomass-based diesel production facility located in Newton, Iowa;
a 60 mmgy nameplate biomass-based diesel production facility located in Seneca, Illinois;
a 30 mmgy nameplate biomass-based diesel production facility located near Albert Lea, Minnesota;
a 15 mmgy nameplate biomass-based diesel production facility located in New Boston, Texas;
a 30 mmgy nameplate biomass-based diesel production facility located in Mason City, Iowa;
a 75 mmgy nameplate renewable hydrocarbon diesel production facility located in Geismar, Louisiana, since its acquisition in June 2014;
a 30 mmgy nameplate biomass-based diesel production facility located in Emden, Germany since its majority ownership was acquired in December 2014;
a 26 mmgy nameplate biomass-based diesel production facility located in Oeding, Germany since its majority ownership was acquired in December 2014; and
a demonstration scale facility located in Okeechobee, Florida since its acquisition in January 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; and
incentives received from federal and state programs for renewable fuels.

19




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 2014 and for the three months ended March 31, 2015, our revenues from the sale of co-products were less than five percent of our total Biomass-based diesel segment revenues.
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 through the production and sales of 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 RINs is reflected in “Prepaid expenses and other assets” on our Condensed 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.
During recent years, we have utilized our construction management expertise internally to upgrade our facilities, such as Albert Lea, New Boston, Mason City and Newton. 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. Currently, biodiesel and renewable hydrocarbon diesel production meets two categories of an Obligated Party’s annual renewable fuel required volume obligation, or RVO—biomass-based diesel and undifferentiated advanced biofuel. 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 or the 2015 RVO. In November 2013, the EPA proposed that the 2014 and 2015 biomass-based diesel RVO be 1.28 billion gallons for each of those years and a reduced Advanced Biofuel RVO of 2.20 billion gallons rather than the original EISA volume of 3.75 for 2014, a proposal whereby the EPA has issued a "notification of delay in issuing standards." In April 2015, the EPA announced a consent decree to release the 2014 and 2015 RFS2 target RVO and finalize the 2014 and 2015 targets by November 30, 2015. In addition, within this announcement the EPA indicated they would release the biomass-based diesel RVO for 2016 and 2017 during June 2015.
Volumes of biomass-based diesel produced increased from 2010 to 2013. From 2013 through 2014 volumes of biomass-based diesel were flat. Notwithstanding the lack of a finalized 2014 RVO, according to EMTS data, 1.75 billion gallons of

20



biomass-based diesel was produced and imported into the U.S. in 2014. In the first three months of 2015, according to EMTS data, 0.31 billion gallons of biomass-based diesel was produced and imported into the U.S., compared to 0.33 billions in the first three months of 2014.
The Biodiesel Mixture Excise Tax Credit, or 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 became effective January 1, 2005 and then lapsed January 1, 2010 before being reinstated retroactively on December 17, 2010. The BTC again expired as of December 31, 2011 and on January 2, 2013, it was again reinstated, retroactively for 2012 and through December 31, 2013. The BTC expired again on December 31, 2013 and was retroactively reinstated for 2014 on December 19, 2014. Unlike prior years, Congress did not grant a two year reinstatement, but rather only reinstated the BTC for 2014. Accordingly, the BTC expired again on December 31, 2014. We recognized a net benefit from the BTC of $78.8 million in 2014 and expect to recognize a net benefit of $16.5 million in 2015 relating to 2014 activity. It is uncertain whether the BTC will be reinstated and if reinstated, whether or not it would be reinstated retroactively. 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, like RINs and the BTC and the price of feedstocks used to produce biomass-based diesel.
Biomass-based diesel is a low carbon, renewable alternative to petroleum-based diesel fuel and is primarily sold to the end user after it has been blended 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 crude oil supply and demand balance, worldwide economic conditions, wars and other political events, OPEC production quotas, changes in refining capacity and natural disasters.
Regulatory and legislative factors also influence the price of biomass-based diesel. Biomass-based diesel RIN pricing has had a significant impact on our biomass-based diesel pricing. During 2014, the value of RINs, as reported by OPIS, have contributed to the average B100 spot price of a gallon of biomass-based diesel, as reported by The Jacobsen, from a low of $0.64 per gallon, or 19%, in January to a high of $1.15, or 34%, per gallon in December. There was a significant decline in RIN prices during the second and third quarters of 2014, but the prices went back up in the fourth quarter and finished the year at their peak. During the first three months of 2015, the value of RINs, as reported by OPIS, have contributed to the average B100 spot price of a gallon of biomass-based diesel, as reported by the Jacobsen, from a low of $0.94 or 30% in January to a high of $1.31 or 45% also in January.
The changes in the value of RINs during the first three months of 2015 resulted in a $2.8 million write-down to lower of cost or market on RIN inventory acquired from third party transactions that occurred throughout the period. See “Note 6 – Prepaid Expenses and Other Assets” to our Condensed Consolidated Financial Statements. We enter into forward contracts to sell RINs and we use risk management position limits to manage RIN exposure. Because of EPA rules limiting the amount of assigned RINs we can hold at any one time, the value of these assigned RINs held in inventory does not have a material effect on margins from period to period.
During 2014, feedstock expense accounted for 80% 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:


21



Feedstock
      
Factors Influencing Supply and Price
Inedible Corn Oil
      
Demand for inedible corn oil from renewable fuel and other markets
 
 
Ethanol production
   
      
Export demand
   
      
Extraction system yield
 
 
Implementation of inedible corn oil separation systems into existing and new ethanol facilities
Used Cooking Oil
      
Biomass-based diesel demand
 
 
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
 
 
Biomass-based diesel demand
During 2014, 85% of our feedstocks were comprised of inedible corn oil, used cooking oil and inedible animal fats with the remainder coming from refined vegetable oil.
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 March 31, 2015. 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.

22



(1)
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).   
(2)
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).
(3)
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).
(4)
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 March 31, 2015.
   
(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.
Energy prices continued to decline in first quarter 2015 mainly driven by a decrease in crude oil prices. Feedstock prices traded in a sideways-pattern in first quarter 2015. A record corn and soybean harvest coupled with lower energy prices helped push feedstock prices lower in the last-half of 2014. US cattle slaughter numbers continued at a historically low rate as a result of the two year drought in the southern plains. During first quarter 2015, hog slaughter numbers continued to increase year over year.

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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 2014 and the first three months of 2015. 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 supply risks related to biomass-based diesel production in a number of ways, including, where available, through long-term supply contracts. 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 feedstock 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 but the purchase or sale of feedstocks or biomass-based diesel has not yet occurred resulting in the offsetting gain or loss will be recognized in a later accounting period.
We recorded risk management losses of $0.6 million and $0.7 million from our derivative financial instrument activity for the three months ended March 31, 2015 and March 31, 2014, respectively. Changes in the value of these futures, swaps or options instruments are recognized in current income or loss. Over the first three months of 2015, we had risk management losses of approximately $0.01 per gallon sold. Over the last three years, risk management gains have represented income of approximately $0.07 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

24



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. A RIN is dated for the calendar year in which it is generated. 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.
Industry capacity and production
Our operating results are influenced by our industry’s capacity and production, including in relation to RFS2 consumption requirements. Consumption of biomass-based diesel in 2011, 2012 and 2013 was in excess of a continued expanding RFS2 volume requirements. As reported by EMTS, biomass-based diesel RIN generation was 1.78 billion gallons in 2013 when the RVO for biomass-based diesel was 1.28 billion. In November 2013 the EPA proposed the 2014 and 2015 biomass-based diesel RVO at 1.28 billion gallons for each year. The EPA later issued a "notification of delay in issuing standards", effectively withdrawing the proposal. In April 2015, the EPA announced a consent decree to release the 2014 and 2015 RFS2 target RVO and finalize the 2014 and 2015 targets by November 30, 2015. In addition, within this announcement, the EPA indicated they would release the biomass-based diesel RVO for 2016 and 2017 during June 2015. As of the date of this filing, the RVO for 2014 and 2015 had not been proposed nor finalized. Notwithstanding this, we expect RFS2 to continue to create demand for biomass-based diesel. Biomass-based diesel consumption, as reported by EMTS, was flat when comparing 2013 gallons produced and imported to the 1.75 billion gallons produced and imported during 2014. In the first three months of 2015, according to EMTS data, 0.31 billion gallons of biomass-based diesel was produced and imported into the U.S., compared to 0.33 billions in the first three months of 2014.
During 2013 and 2014, the amount of imported gallons qualifying under RFS2 has increased. Imported gallons will likely make up a growing percentage of the RVO, as the EPA has approved a plan to allow Argentinian biodiesel made from soybean oil to qualify for RINs generation. Under RFS2, Obligated Parties are entitled to satisfy up to 20% of their annual requirement for with prior year RINs. We saw a decline in RIN prices in the first three quarters of 2014 as production rates exceeded the then proposed, yet delayed issuance and not yet finalized, RVO target. During 2015, according to OPIS, RINs prices began the year at $0.92 per RIN and closed March lower at $0.81 per RIN.
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 Annual Report on Form 10-K for the year ended December 31, 2014 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.
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 Biomass-based diesel 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

25



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 Biomass-based diesel reporting unit exceeded its value by approximately 7% and the Services reporting unit exceeded its value by approximately 66%. We also reviewed goodwill recorded from the acquisitions of LS9, Inc., Syntroleum Corporation and Dynamic Fuels, LLC at July 31, 2014 and determined no impairment was needed. No impairment of goodwill was recorded at March 31, 2015 or during 2014. 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 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 months ended March 31, 2015 and 2014
Set forth below is a summary of certain financial information (dollars in thousands and gallons in millions except for per gallon data) for the periods indicated:
 
Three Months Ended
March 31,
 
2015
 
2014
 
 
 
 
Gallons sold
59.9

 
47.3

Average B100 price per gallon
$
3.08

 
$
3.54

 
 
 
 
Revenues
230,918

 
219,040

Cost of goods sold
247,113

 
207,476

Gross profit
(16,195
)
 
11,564

Selling, general and administrative expenses
16,675

 
11,654

Research and development expense
3,860

 
1,873

Loss from operations
(36,730
)
 
(1,963
)
Other income (expenses), net
(2,471
)
 
(503
)
Income tax benefit
897

 
107

Net loss
(38,304
)
 
(2,359
)
Less: Net loss attributable to noncontrolling interests
(197
)
 

Net loss attributable to the Company
(38,107
)
 
(2,359
)
Gain on redemption of preferred stock

 
378

Distributed and undistributed dividends to preferred stockholders

 
(40
)
Net loss attributable to the Company's common stockholders
$
(38,107
)
 
$
(2,021
)

Revenues. Our total revenues increased $11.9 million, or 5%, to $230.9 million for the three months ended March 31, 2015 from $219.0 million for the three months ended March 31, 2014. This increase was primarily due to the increase in the gallons sold during the quarter resulting from our expansion into renewable hydrocarbon diesel and international sales. The increase was offset by decreasing biodiesel prices as a result of the drop in crude oil prices, declining market demand from the uncertainty around the RVO coupled with low seasonal demand, and the reductions in biomass-based diesel government incentives resulting from the expiration of the biodiesel mixture excise credit, or BTC at December 31, 2014. As of this filing, the EPA has not finalized the 2014 or the 2015 RVO.
Biomass-based diesel revenues including government incentives increased $11.8 million, or 5%, to $230.8 million for the three months ended March 31, 2015 from $219.0 million for the three months ended March 31, 2014. Gallons sold increased by 12.6 million, or 27%, to 59.9 million gallons for the three months ended March 31, 2015 compared to 47.3 million gallons for the three months ended March 31, 2014. Our average B100 sales price per gallon decreased $0.46, or 13%, to $3.08 for the three months ended March 31, 2015, compared to $3.54 for the three months ended March 31, 2014. The decrease in average sales price contributed to a $21.6 million decrease in revenues for the three months ended March 31, 2015, when

26



applied to the number of gallons sold during the same period of 2014. The increase in gallons sold for the three months ended March 31, 2015 accounted for revenues increase of $44.6 million for the three months ended March 31, 2015 using pricing for the same period of 2014. Sales of separated RIN inventory were $32.5 million for the three months ended March 31, 2015 and $30.0 million for the three months ended March 31, 2014.
Costs of goods sold. Our costs of goods sold increased $39.6 million, or 19%, to $247.1 million for the three months ended March 31, 2015 from $207.5 million for the three months ended March 31, 2014. Costs of goods sold as a percentage of revenues were 107% for the three months ended March 31, 2015 and 95% for the three months ended March 31, 2014. The increase in cost of goods sold as a percentage of revenues during the three months ended March 31, 2015 was primarily due to the expiration of the BTC at December 31, 2014 and lower biodiesel prices as compared to 2014, as the sharp decline in energy prices continued in first quarter 2015 driven mostly by crude oil price declines.
Biomass-based diesel costs of goods sold increased in the three months ended March 31, 2015 due to a 27% increase in gallons sold that offset a slight decrease in average feedstock prices. Average lower cost feedstocks prices were $0.29 per pound for the three months ended March 31, 2015, and $0.32 per pound for the three months ended March 31, 2014. Soybean oil costs were $0.33 per pound for the three months ended March 31, 2015 and $0.40 per pound for the three months ended March 31, 2014. We recorded risk management losses of $0.6 million from our derivative financial instrument activity for the three months ended March 31, 2015, compared to risk management losses of $0.7 million for the three months ended March 31, 2014. Costs of goods sold for separated RIN inventory sales were $40.2 million for the three months ended March 31, 2015 and $19.7 million for the three months ended March 31, 2014.
Selling, general and administrative expenses. Our selling, general and administrative, or SG&A, expenses were $16.7 million, or 7% of total revenue, for the three months ended March 31, 2015 and $11.7 million, or 5.3% of total revenue, for the three months ended March 31, 2014. The increase of $5.0 million, or 43%, for the three months ended March 31, 2015 was primarily due to an increase of $2.4 million from international expansion, $1.3 million in employee related expenses as headcount increased from prior year acquisitions supporting growth, $1.2 million increase in legal and professional expenses largely associated with international expansion.
Research and development expense. Our research and development expenses were $3.9 million for the three months ended March 31, 2015, compared to $1.9 million for the three months ended March 31, 2014. The increase in research and development expenses was mainly attributable to increased research and development activities to bring products to market and drive growth, and having the full quarter of activity in 2015 for REG Life Sciences compared to a partial quarter in 2014 due to timing of the acquisition. REG Life Sciences primarily focuses on microbial fermentation to develop and produce renewable chemicals, fuels and other products.
Other income (expense), net. Other expense was $2.5 million for the three months end March 31, 2015, and $0.5 million for the three months ended March 31, 2014. Other income (expense) is primarily comprised of change in value of contingent consideration, interest expense, interest income and the other non-operating items.
Income tax benefit (expense). We recognized an income tax benefit of $0.9 million and $0.1 million for the three months ended March 31, 2015 and March 31, 2014, respectively. Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising in that quarter.  Our effective tax rate differs from the statutory tax rate primarily due to the fact that the company has a valuation allowance on its deferred tax assets.
Adjusted EBITDA
We use earnings before interest, taxes, depreciation and amortization, adjusted for certain additional items, identified in the table below, or Adjusted EBITDA, as a supplemental performance measure. We present Adjusted EBITDA because we believe it assists investors in analyzing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA to evaluate, assess and benchmark our financial performance on a consistent and a comparable basis and as a factor in determining incentive compensation for our executives.

27



The following table provides our Adjusted EBITDA for the periods presented, as well as a reconciliation to net income:
(In thousands)
Three Months 
 Ended 
 March 31, 
 2015
 
Three Months 
 Ended 
 March 31, 
 2014
Net loss
$
(38,304
)
 
$
(2,359
)
Adjustments:
 
 
 
Income tax (benefit) expense
(897
)
 
(107
)
Interest expense
2,743

 
551

Other (income) expense, net
(565
)
 
(48
)
Change in fair value of contingent liability
293

 

Straight-line lease expense
(158
)
 
(163
)
Depreciation
5,613

 
3,004

Amortization
(219
)
 
(185
)
Other
197

 

Biodiesel tax credit (1)

 
12,778

Non-cash stock compensation
1,080

 
1,235

Adjusted EBITDA
$
(30,217
)
 
$
14,706

   


(1)
On December 19, 2014, the Tax Increase Prevention Act of 2014 was signed into law, which reinstated a set of tax extender items including the retroactive reinstatement of the federal biodiesel mixture excise tax credit for 2014 and expired on December 31, 2014. The retroactive credit for 2014 resulted in a net benefit to us that was recognized in the fourth quarter of 2014, however because this credit relates to the full year operating performance and results, we allocated the credit based upon gallons sold among each of the quarters of 2014.
Adjusted EBITDA is a supplemental performance measure that is not required by, or presented in accordance with, generally accepted accounting principles, or GAAP. Adjusted EBITDA should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP, or as alternatives to cash flows from operating activities or a measure of our liquidity or profitability. Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for any of our results as reported under GAAP. Some of these limitations are:

Adjusted EBITDA does not reflect our cash expenditures for capital assets or the impact of certain cash clauses that we consider not to be an indication of our ongoing operations;
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital requirements;
Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect cash requirements for such replacements;
stock-based compensation expense is an important element of our long term incentive compensation program, although we have excluded it as an expense when evaluating our operating performance; and
other companies, including other companies in the industry, may calculate these measures differently than we do, limiting their usefulness as a comparative measure.
Liquidity and Capital Resources
Sources of liquidity. At March 31, 2015, the total of our cash and cash equivalents and our marketable securities was $216.6 million compared to $80.3 million at December 31, 2014. At March 31, 2015, we had total assets of $1,277.9 million compared to $1,372.9 million at December 31, 2014. At March 31, 2015, we had term debt of $252.7 million, compared to term debt of $252.9 million at December 31, 2014. Over $101.3 million of our term debt is fully cash collateralized with a certificate of deposit with Bank of America. There were $1.3 million outstanding borrowings on our revolving lines of credit at March 31, 2015 compared to $16.7 million at December 31, 2014. Availability under the Wells Fargo revolver was $40.0 million as of March 31, 2015. We were in compliance with all restrictive financial covenants associated with the borrowings as of March 31, 2015.

28



Our term debt (in thousands) are as follows:
   
March 31, 2015
 
December 31, 2014
2.75% Convertible Senior Notes, $143,750 face amount, due in June 2019
$
122,512

 
$
121,354

REG Geismar GOZone bonds, secured, variable interest rate of daily LIBOR, due in October 2033
100,000

 
100,000

REG Danville term loan, secured, variable interest rate of LIBOR plus 5%, due in November 2015
1,213

 
1,513

REG Newton term loan, secured, variable interest rate of LIBOR plus 4%, due in December 2018
19,206

 
19,868

REG Mason City term loan, fixed interest rate of 5%, due in July 2019
4,346

 
4,566

REG Ames term loans, secured, fixed interest rates of 3.5% and 4.25%, due in January 2018 and December 2019, respectively
4,145

 
4,226

Other
1,289

 
1,402

Total debt
$
252,711

 
$
252,929

We have disclosed under the heading “Liquidity and Capital Resources” in our Annual Report on Form 10-K for the year ended December 31, 2014 the capital resources which materially affect our financial statements. There have been no material changes from the capital resources previous disclosed other than those noted below. You should carefully consider the liquidity and capital resources set forth in our Annual Report on Form 10-K along with the information described below.
Cash flows. The following table presents information regarding our cash flows and cash and cash equivalents for the three months ended March 31, 2015 and 2014 (in thousands):
   
Three Months Ended
March 31,
   
2015
 
2014
Net cash flows provided by operating activities
$
164,022

 
$
24,820

Net cash flows provided by (used in) investing activities
10,336

 
(87,911
)
Net cash flows used in financing activities
(23,011
)
 
(13,912
)
Net change in cash and cash equivalents
151,347

 
(77,003
)
Cash and cash equivalents, end of period
$
213,545

 
$
76,224

In the first quarter of 2015, we received approximately $220.3 million related to the 2014 reinstatement of the BTC while the majority of the related payable amounts remained outstanding at quarter end, which led to a significant increase in operating cash flows, offset by a decline in accounts payable and increase in inventories. Our net cash flows provided by investing activity was impacted by the release of restricted cash used to acquire additional interest in Petrotec, the maturities of certain investments in marketable securities along with expenditures made for continued biorefinery capital improvements. Financing activities were impacted by payments made on our term debt and revolver, in addition to our share repurchase program. Our 2014 financing activities included our convertible senior note issuance, our entering into the related capped call transactions as well as equity issuances to support our acquisition activities and for working capital, among others.
Capital expenditures. We have three partially constructed plants, one near New Orleans, Louisiana, one in Emporia, Kansas, one in Clovis, New Mexico and a non-operational plant near Atlanta, Georgia. We expect additional investments of approximately $165 to $180 million in the aggregate, excluding working capital requirements, would be required before these plants would be able to commence production. These facilities would add an expected 150 mmgy to our nameplate production capacity. Our Clovis plant is currently being operated as a terminal facility. We plan to make significant capital expenditures when debt or equity financing becomes available to complete construction of these four facilities.
During recent years, we completed upgrades to a number of our facilities such as Albert Lea, New Boston, Mason City and Newton. We plan to undertake various upgrades at our existing facilities to further expand processing capabilities, which may include an estimated $15 million at our Geismar facility. We may enter into additional tolling arrangements with third parties from time to time where third parties will produce biomass-based diesel on our behalf using our feedstocks. Such arrangements may require investments of additional working capital during the tolling periods.
We continue to be in discussions with lenders in an effort to enter into equity and debt financing arrangements to meet our projected financial needs for facilities under construction and capital improvement projects for our operating facilities. Since these discussions are ongoing, we are uncertain when or if financing will be available. The financing may consist of common or preferred stock, debt, project financing or a combination of these financing techniques. Additional debt would

29



increase our leverage and interest costs and would likely be secured by certain of our assets. Additional equity or equity-linked financings would likely have a dilutive effect on our existing and future stockholders. It is likely that the terms of any project financing would include customary financial and other covenants on our project subsidiaries, including restrictions on the ability to make distributions, to guarantee indebtedness and to incur liens on the plants of such subsidiaries.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Recent Accounting Pronouncements
For a discussion of new accounting pronouncements affecting the Company, refer to “Note 2 – Summary of Significant Accounting Policies” to our condensed consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objectives of our investment activity are to preserve principal, provide liquidity and maximize income without significantly increasing risk. Some of the securities we invest in are subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we maintain a portfolio of cash equivalents in short-term investments in money market funds.
Commodity Price Risk
Over the period from January 2010 through March 31, 2015, average diesel prices based on Platts reported pricing for Group 3 (Midwest) have ranged from a high of approximately $5.40 per gallon reported in June 2011 to a low of approximately $2.74 per gallon in March 2015, with prices averaging $4.15 per gallon during this period. Over the period January 2010 to March 31, 2015, soybean oil prices (based on daily closing nearby futures prices on the CBOT for crude soybean oil) have ranged from a high of $0.5977 per pound, or $4.60 per gallon of biodiesel in April 2011 to a low of $0.2954 per pound, or $2.27 per gallon in January 2015 assuming 7.7 pounds of soybean oil yields one gallon of biodiesel with closing sales prices averaging $0.4576 per pound or $3.52 per gallon. Over the period from January 2010 through March 31, 2015, animal fat prices (based on prices from The Jacobsen Missouri River, for choice white grease) have ranged from a high of $0.5450 per pound in June 2011 to a low of $0.22 per pound in January 2015, with sales prices averaging $0.3683 per pound during this period. Over the period from July 2010 through March 31, 2015, RIN prices (based on prices from OPIS) have ranged from a high of $1.99 in September 2011 to a low of $0.24 in November 2013, with sales prices averaging $0.88 during this period.
Lower biomass-based diesel prices and lower feedstock prices but at a disproportionate decreasing rate as compared to biomass-based diesel prices result in lower profit margins and, therefore, represent unfavorable market conditions. The availability and price of feedstocks are subject to wide fluctuations due to unpredictable factors such as weather conditions during the growing season, rendering volumes, carry-over from the previous crop year and current crop year yield, governmental policies with respect to agriculture and supply and demand.
We have prepared a sensitivity analysis to estimate our exposure to market risk with respect to our sales contracts, lower cost feedstock requirements, soybean oil requirements and the related exchange-traded contracts for 2014. Market risk is estimated as the potential loss in fair value, resulting from a hypothetical 10% adverse change in the fair value of our lower cost feedstock and soybean oil requirements and biomass-based diesel sales. The results of this analysis, which may differ from actual results, are as follows:
 
2014
Volume
(in millions)
 
Units
 
Hypothetical
Adverse
Change in
Price
 
Annual
Gross
Profit (in
millions)
 
Percentage
Change in
Gross
Profit
Biodiesel
287.3

 
gallons
 
10
%
 
$
98.3

 
(60.8
)%
Lower Cost Feedstocks
1,679.7

 
pounds
 
10
%
 
$
56.1

 
(34.7
)%
Soybean Oil
303.0

 
pounds
 
10
%
 
$
11.6

 
(7.2
)%
We attempt to protect operating margins by entering into risk management contracts that mitigate price volatility of our feedstocks, such as inedible animal fat and inedible corn oil and energy prices. We create offsetting positions by using a combination of forward 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. A 10% adverse change in the prices of heating oil would have had a negative effect on the

30



fair value of these instruments of $6.7 million. A 10% adverse change in the price of soybean oil would have had a negative effect on the fair value of these instruments of $0.5 million.
Interest Rate Risk
We are subject to interest rate risk in connection with our $0.7 million loan from the proceeds of Variable Rate Demand Industrial Development Revenue Bonds, or IFA Bonds, issued by the Iowa Finance Authority to finance our Ralston facility. The IFA Bonds bear interest at a variable rate determined by the remarketing agent from time to time as the rate necessary to produce a bid for the purchase of all of the Bonds at a price equal to the principal amount thereof plus any accrued interest at the time of determination, but not in excess of 10% per annum. The interest rate on the bonds was 0.08% at March 31, 2015.
REG Newton is subject to interest rate risk relating to its $19.2 million term debt financing from AgStar. Interest will accrue on the outstanding balance of the term loan at 30-day LIBOR plus 400 basis points (effective rate at March 31, 2015 of 4.17%).
We are subject to interest risk relating to the $100.0 million GOZone bonds, which bears interest at variable rates of daily LIBOR. The interest rate on the bonds was 0.02% at March 31, 2015.
We are subject to interest rate risk under our Wells Fargo Revolver entered into on December 23, 2011 under which we had no borrowings or outstanding amounts at March 31, 2015. Amounts borrowed under the Wells Fargo Revolver bear interest, in the case of LIBOR rate loans, at a per annum rate equal to the LIBOR rate plus the LIBOR Rate Margin (as defined in the Wells Fargo Revolver), which may range from 2.50 to 4.00 percent, based on the Quantity Average Excess Availability Amount (as defined in the Wells Fargo Revolver). All other amounts borrowed that are not LIBOR rate loans bear interest at a rate equal to the greatest of (i) (A) 1.75% per annum, (B) the Federal Funds Rate plus 0.5%, (C) the LIBOR Rate (which rate shall be calculated based upon an interest period of three months and will be determined on a daily basis), plus 1.5% points, and (D) the rate of interest announced, from time to time, within Wells Fargo Bank, National Association at its principal office in San Francisco as its “prime rate,” plus (ii) the Base Rate Margin (as defined in the Wells Fargo Revolver), which may range from 1.00 to 1.75 percent, based on the Quantity Average Excess Availability Amount. The Base Rate Margin is subject to reduction or increase depending on the amount available for borrowing under the Wells Fargo Revolver. The loan was a base rate loan as of March 31, 2015 (effective rate at March 31, 2015 of 4.00%).
Our weighted average interest rate on variable rate debt balances for the three months ended March 31, 2015 was 1.15% and a hypothetical increase in interest rate of 10% would not have a material effect on our annual interest expenses and consolidated financial statements.
Investment Exposure
We are exposed to investment risk as it relates to changes in the market value of our investments. Our cash and marketable securities investment policy and strategy attempts primarily to preserve capital and meet liquidity requirements. A large portion of our cash is managed by external managers within the guidelines of our investment policy. We protect and preserve invested funds by limiting default, market, and reinvestment risk. To achieve this objective, we maintain our portfolio of cash and cash equivalents and short-term and long-term investments in a variety of liquid fixed income securities, including both government and corporate obligations and money market funds. As of March 31, 2015 and December 31, 2014, net unrealized gains and losses on these investments were not material.
Inflation
To date, inflation has not significantly affected our operating results, though costs for petroleum-based diesel fuel, feedstocks, construction, labor, taxes, repairs, maintenance and insurance are all subject to inflationary pressures. Inflationary pressure in the future could affect our ability to sell the biomass-based diesel we produce, maintain our production facilities adequately, build new biomass-based diesel production facilities and expand our existing facilities as well as the demand for our facility construction management and operations management services.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a system of disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

31



On December 24, 2014, we acquired 69.08% of the outstanding common shares and voting interest of Petrotec. During the three months ended March 31, 2015, we acquired an additional 15.34% ownership of the outstanding common shares and voting interest of Petrotec, bringing the total ownership to 84.42%. Our management excluded from its assessment of the effectiveness of the Company's internal control over financial reporting as of March 31, 2015, Petrotec's internal control over financial reporting. Petrotec represented less than 5% of our total assets at March 31, 2015 and approximately 13% of our revenues for the three months ended March 31, 2015. This exclusion is in accordance with the SEC's general guidance that an assessment of a recently acquired business may be omitted from our scope in the year of acquisition.
Management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of March 31, 2015. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2015.
Based on such evaluations, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) that occurred during the three months ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not a party to any material pending legal proceeding, nor is any of our property the subject of any material pending legal proceeding, except ordinary routine litigation arising in the ordinary course of our business and incidental to our business, none of which is expected to have a material adverse impact upon our business, financial position or results of operations.
ITEM 1A. RISK FACTORS
Our business, financial condition, results of operations and liquidity are subject to various risks and uncertainties, including those described below, and as a result, the trading price of our common stock could decline.
Risk Associated With Our Business
Loss or reductions of governmental requirements for the use of biofuels could have a material adverse effect on our revenues and operating margins.
The biomass-based diesel industry relies substantially on federal requirements and state policies for use of biofuels. Since biomass-based diesel has been more expensive to produce than petroleum-based diesel fuel over the past few years, the biomass-based diesel industry depends on governmental programs that support a market for biomass-based diesel that might not otherwise exist.
The most important of these government programs in the United States is RFS2, which requires that a certain volume of biomass-based diesel fuel, which includes biodiesel and renewable hydrocarbon diesel, be consumed. RFS2 became effective on July 1, 2010 and applies through 2022. We believe that much of the increase in demand for our biomass-based diesel since July 2010 is attributable to and accelerated by the implementation of RFS2. In addition, we believe that biomass-based diesel prices since July 2010 benefited significantly from RFS2.
The EPA is required to determine the volume of biomass-based diesel that will be required each year based on the EPA’s consideration of a variety of factors, with a minimum biomass-based diesel annual volume requirement be at least 1 billion gallons . The biomass-based diesel volume requirement for 2013 was 1.28 billion gallons.
There can be no assurance that the United States Congress will not repeal, curtail or otherwise change, or that the EPA will not curtail or otherwise change the RFS2 program in a manner adverse to us. The petroleum industry is generally opposed to RFS2 and can be expected to continue to press for changes that eliminate or reduce its impact. Any repeal or reduction in the RFS2 requirements or reinterpretation of RFS2 resulting in our biomass-based diesel failing to qualify as a required fuel would materially decrease the demand for and price of our biomass-based diesel, which would materially and adversely harm our revenues and cash flows.
If Congress decides to repeal or curtail RFS2, or if the EPA is not able or willing to enforce RFS2 requirements, the demand for our biomass-based diesel based on this program and any increases in demand that we expect due to RFS2 would be significantly reduced or eliminated and our revenues and operating margins would be materially harmed. In addition, although we believe that state requirements for the use of biofuels increase demand for our biomass-based diesel within such states, they generally may not increase overall demand in excess of RFS2 requirements. Rather, existing demand for our biofuel from petroleum refiners and petroleum fuel importers in the 48 contiguous states or Hawaii, which are defined as “Obligated Parties”

32



in the RFS2 regulations, in connection with federal requirements, may shift to states that have use requirements or tax incentive programs.
According to EMTS data, 0.31 billion gallons of biomass-based diesel was produced and imported into the U.S. during the first three months of 2015. As of the date of this filing, the EPA has not finalized the 2014 or 2015 Renewable Volume Obligations, or RVOs. The EPA originally proposed a 2014 and 2015 biomass-based diesel RVO of 1.28 billion gallons in each of those years and a reduced Advanced Biofuel RVO of 2.0 to 2.51 billion gallons rather than the original Energy Independence and Security Act of 2009, or EISA, volume of 3.75 billion gallons for 2014. The EPA received significant negative feedback to their proposal number and subsequently issued a "notification in delay in issuing standards." Before the RVO can be finalized, the OMB has to approve EPA’s proposal, based on the same factors outlined above. Due to the delay in publishing the proposal, which the EPA was required to determine and publish by November 30 two years prior, it is possible that the 2014 and 2015 RVOs will be challenged in court which may further delay any final determination of such RVOs, which could reduce the demand for and price of our biomass-based diesel and could harm our revenues and cash flows. In April 2015, the EPA announced in a proposed consent decree to release the 2015 RFS2 target RVO and finalize the 2014 and 2015 targets by November 30, 2015.
Our financial results may be harmed in the event biodiesel production exceeds the RVO.
Notwithstanding the lack of a finalized 2014 RVO, according to EMTS data, RINs representing 1.75 billion gallons of biomass-based diesel were generated for the twelve months ended December 31, 2014. According to EMTS data, 1.78 billion gallons of biomass-based diesel was produced and imported into the U.S. in 2013. Adding the 2012 carry-over to the 2013 RIN generation results in an estimated total biomass-based diesel RIN availability of approximately 2.04 billion gallons, which is approximately 760 million gallons more than required to satisfy the 1.28 billion gallon 2013 biomass-based diesel RVO. The originally proposed 2014 biomass-based diesel RVO of 1.28 billion gallons, would have limited the 2014 carryover to 256 million gallons, or 20%, of 1.28 billion, thus resulting in an excess supply of 504 million gallons of biomass-based diesel RINs. Excess biomass-based diesel RINs may be used to fulfill the advanced biofuel RVO or the renewable fuel RVO. If the volume of excess biomass-based diesel RINs exceeds the volume the Obligated Parties desire to use to fulfill their advanced biofuel and renewable fuel requirements, the demand for and price of our biomass-based and biomass-based diesel RINs may be reduced, which could harm revenues and cash flows.
Our gross margins are dependent on the spread between biomass-based diesel prices and feedstock costs.
Our gross margins depend on the spread between biomass-based diesel prices and feedstock costs. Historically, the spread between biomass-based diesel prices and feedstock costs has varied significantly. Although actual yields vary depending on the feedstock quality, the average monthly spread between the price per gallon of 100% pure biodiesel, or B100, as reported by The Jacobsen Publishing Company, or The Jacobsen, and the price per gallon for the amount of choice white grease, a common inedible animal fat used by us to make biomass-based diesel, was $1.26 in 2012, $1.61 in 2013 and $0.92 in 2014 assuming 8.0 pounds of choice white grease yields one gallon of biomass-based. The average monthly spread for the amount of crude soybean oil required to produce one gallon of biomass-based, based on the nearby futures contract as reported on the Chicago Board of Trade, or CBOT, was $0.65 in 2012, $1.19 in 2013 and $0.58 in 2014 assuming 7.7 pounds of soybean oil yields one gallon of biomass-based. For 2012, 2013 and 2014, approximately 84%, 83% and 85%, respectively, of our total feedstock usage was inedible corn oil, used cooking oil or inedible animal fat and 16%, 17% and 15%, respectively, was virgin vegetable oils.
Biomass-based diesel has traditionally been marketed primarily as an additive or alternative to petroleum-based diesel fuel and as a result biomass-based diesel prices have been influenced by the price of petroleum-based diesel fuel, adjusted for government incentives supporting renewable fuels, rather than biomass-based diesel production costs. Energy prices, particular the market price for crude oil, significantly decreased throughout fourth quarter 2014. A lack of close correlation between production costs and biomass-based diesel prices means that we may be unable to pass increased production costs on to our customers in the form of higher prices. Any decrease in the spread between biomass-based diesel prices and feedstock costs, whether as a result of an increase in feedstock prices or a reduction in biomass-based diesel prices, including, but not limited to, a reduction in the value of RINs would adversely affect our gross margins, cash flow and results of operations.
The costs of raw materials that we use as feedstocks are volatile and our results of operations could fluctuate substantially as a result.
The cost of feedstocks is a significant uncertainty for our business. The success of our operations is dependent on the price of feedstocks and certain other raw materials that we use to produce biomass-based diesel. A decrease in the availability or an increase in the price of feedstocks may have a material adverse effect on our financial condition and operating results. At elevated price levels, these feedstocks may be uneconomical to use, as we may be unable to pass feedstock cost increases on to our customers.

33



The price and availability of feedstocks and other raw materials may be influenced by general economic, market and regulatory factors. These factors include weather conditions, farming decisions, government policies and subsidies with respect to agriculture and international trade and global supply and demand. The significance and relative impact of these factors on the price of feedstocks is difficult to predict, especially without knowing what types of feedstock materials will be optimal for use in the future, particularly at new facilities that we may construct or acquire.