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EX-32.2 - EXHIBIT 32.2 - Renewable Energy Group, Inc.regi-2016q3xex322.htm
EX-32.1 - EXHIBIT 32.1 - Renewable Energy Group, Inc.regi-2016q3xex321.htm
EX-31.2 - EXHIBIT 31.2 - Renewable Energy Group, Inc.regi-2016q3xex312.htm
EX-31.1 - EXHIBIT 31.1 - Renewable Energy Group, Inc.regi-2016q3xex311.htm
EX-10.1 - EXHIBIT 10.1 - Renewable Energy Group, Inc.regi-2016q3xex101formofprs.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
     
Form 10-Q
      
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-35397
RENEWABLE ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)
   
Delaware
   
26-4785427
(State of other jurisdiction of
incorporation or organization)
   
(I.R.S. Employer
Identification No.)
   
   
416 South Bell Avenue Ames, Iowa
   
50010
(Address of principal executive offices)
   
(Zip code)
(515) 239-8000
(Registrant’s telephone number, including area code)
      

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
   
Large accelerated filer  ¨
   
Accelerated filer  x
   
   
Non-accelerated filer  ¨
   
Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO   x
As of October 31, 2016, the registrant had 38,553,413 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)
   
September 30,
2016
 
December 31,
2015
ASSETS
   

 
   

CURRENT ASSETS:
   

 
   

Cash and cash equivalents
$
86,531

 
$
47,081

Accounts receivable, net
105,005

 
310,731

Inventories
98,222

 
85,890

Prepaid expenses and other assets
45,752

 
31,882

Total current assets
335,510

 
475,584

Property, plant and equipment, net
610,560

 
574,584

Goodwill
16,080

 
16,080

Intangible assets, net
29,973

 
30,941

Investments
12,158

 
8,797

Other assets
11,833

 
11,819

Restricted cash
4,000

 
105,815

TOTAL ASSETS
$
1,020,114

 
$
1,223,620

LIABILITIES AND EQUITY
   

 
   

CURRENT LIABILITIES:
   

 
   

Lines of credit
$
6,354

 
$
23,149

Current maturities of long-term debt
10,349

 
5,206

Accounts payable
86,142

 
236,817

Accrued expenses and other liabilities
28,672

 
28,466

Deferred revenue
1,492

 
333

Total current liabilities
133,009

 
293,971

Unfavorable lease obligation
15,972

 
17,343

Deferred income taxes
17,766

 
19,186

Long-term contingent consideration for acquisitions
32,258

 
26,949

Convertible debt conversion liability
23,700

 

Long-term debt (net of debt issuance costs of $6,488 and $4,105, respectively)
201,884

 
247,251

Other liabilities
4,637

 
4,910

Total liabilities
429,226

 
609,610

COMMITMENTS AND CONTINGENCIES


 


EQUITY:
   

 
   

Common stock ($.0001 par value; 300,000,000 shares authorized; 38,553,413 and 43,837,714 shares outstanding, respectively)
5

 
4

Common stock—additional paid-in-capital
479,102

 
474,367

Retained earnings
193,810

 
169,680

Accumulated other comprehensive loss
(2,832
)
 
(4,009
)
Treasury stock (9,246,002 and 3,178,372 shares outstanding, respectively)
(81,824
)
 
(28,762
)
Total equity attributable to the Company's shareholders
588,261

 
611,280

              Non-controlling interest
2,627

 
2,730

                       Total equity
590,888

 
614,010

TOTAL LIABILITIES AND EQUITY
$
1,020,114

 
$
1,223,620

See notes to condensed consolidated financial statements.

1



RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share amounts)
 
Three months ended
 
Nine months ended
   
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
REVENUES:
   
 
   
 
   
 
   
Biomass-based diesel sales
$
523,739

 
$
393,758

 
$
1,223,294

 
$
981,239

Biomass-based diesel government incentives
100,336

 
1,066

 
255,890

 
18,132

   
624,075

 
394,824

 
1,479,184

 
999,371

Other revenue
565

 
32

 
1,627

 
165

   
624,640

 
394,856

 
1,480,811

 
999,536

COSTS OF GOODS SOLD:
   
 
   
 
   
 
   
Biomass-based diesel
575,956

 
390,424

 
1,389,881

 
989,999

Biomass-based diesel—related parties

 

 

 
4,542

 
575,956

 
390,424

 
1,389,881

 
994,541

Other costs of goods sold
1,336

 
27

 
1,334

 
111

   
577,292

 
390,451

 
1,391,215

 
994,652

GROSS PROFIT
47,348

 
4,405

 
89,596

 
4,884

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
20,799

 
18,468

 
61,426

 
51,268

RESEARCH AND DEVELOPMENT EXPENSE
4,805

 
3,527

 
13,158

 
11,778

GAIN ON INVOLUNTARY CONVERSION
(3,470
)
 

 
(8,010
)
 

INCOME (LOSS) FROM OPERATIONS
25,214

 
(17,590
)
 
23,022

 
(58,162
)
OTHER INCOME (EXPENSE), NET:
   
 
   
 
   
 
   
Change in fair value of contingent consideration
(1,124
)
 
(1,106
)
 
(4,680
)
 
722

Change in fair value of convertible debt conversion liability
3,013

 

 
16,445

 

Gain on debt extinguishment
179

 

 
2,331

 

Other income (loss), net
(493
)
 
4,896

 
(430
)
 
7,240

Interest expense
(4,487
)
 
(2,921
)
 
(11,536
)
 
(8,592
)
   
(2,912
)
 
869

 
2,130

 
(630
)
INCOME (LOSS) BEFORE INCOME TAXES
22,302

 
(16,721
)
 
25,152

 
(58,792
)
INCOME TAX (EXPENSE) BENEFIT
1,203

 
1,050

 
(821
)
 
2,654

NET INCOME (LOSS)
23,505

 
(15,671
)
 
24,331

 
(56,138
)
LESS—NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST
63

 
4

 
201

 
(355
)
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY
23,442

 
(15,675
)
 
24,130

 
(55,783
)
LESS—EFFECT OF PARTICIPATING SHARE-BASED AWARDS
(513
)
 

 
(462
)
 

NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY’S COMMON STOCKHOLDERS
$
22,929

 
$
(15,675
)
 
$
23,668

 
$
(55,783
)
NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
   
 
   
 
   
 
   
BASIC
$
0.59

 
$
(0.36
)
 
$
0.57

 
$
(1.27
)
DILUTED
$
0.59

 
$
(0.36
)
 
$
0.57

 
$
(1.27
)
WEIGHTED AVERAGE SHARES USED TO COMPUTE NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
   
 
   
 
   
 
   
BASIC
38,744,878

 
43,844,005

 
41,673,223

 
43,979,266

DILUTED
38,751,706

 
43,844,005

 
41,678,988

 
43,979,266

See notes to condensed consolidated financial statements.

2



RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands)
 
Three months ended
 
Nine months ended
 
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
Net income (loss)
$
23,505

 
$
(15,671
)
 
$
24,331

 
$
(56,138
)
Unrealized gains (losses) on marketable securities, net of taxes of $0 and $0, respectively

 
14

 

 
(1
)
Foreign currency translation adjustments
766

 
(470
)
 
1,052

 
(4,346
)
Other comprehensive income (loss)
766

 
(456
)
 
1,052

 
(4,347
)
Comprehensive income (loss)
24,271

 
(16,127
)
 
25,383

 
(60,485
)
Less—Comprehensive income (loss) attributable to noncontrolling interest
(26
)
 
(53
)
 
(125
)
 
(623
)
Comprehensive income (loss) attributable to the Company
$
24,297

 
$
(16,074
)
 
$
25,508

 
$
(59,862
)
See notes to condensed consolidated financial statements.


3



RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
(in thousands, except share amounts)
   
Company Stockholders’ Equity
 
 
 
   
   
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, 2015
44,422,881

 
$
4

 
$
453,109

 
$
321,083

 
$
(11
)
 
$
(4,412
)
 
$
8,889

 
$
778,662

Issuance of common stock
1,712,966

 

 
15,722

 

 

 

 

 
15,722

Conversion of restricted stock units to common stock (net of 64,978 shares of treasury stock purchased)
178,156

 

 

 

 

 
(616
)
 

 
(616
)
Treasury stock purchases
(2,030,722
)
 

 

 

 

 
(19,313
)
 

 
$
(19,313
)
Acquisition of noncontrolling interest

 

 

 

 

 

 
(4,416
)
 
(4,416
)
Stock compensation expense

 

 
3,427

 

 

 

 

 
3,427

Other comprehensive loss

 

 

 

 
(3,724
)
 

 
(623
)
 
(4,347
)
Net loss

 

 

 
(55,783
)
 

 

 
(355
)
 
(56,138
)
Other

 

 
350

 

 

 

 

 
350

BALANCE, September 30, 2015
44,283,281

 
$
4

 
$
472,608

 
$
265,300

 
$
(3,735
)
 
$
(24,341
)
 
$
3,495

 
$
713,331

BALANCE, January 1, 2016
43,837,714

 
$
4

 
$
474,367

 
$
169,680

 
$
(4,009
)
 
$
(28,762
)
 
$
2,730

 
$
614,010

Issuance of common stock
33,973

 

 
316

 

 

 

 

 
316

Issuance of common stock in acquisition
500,000

 
1

 
4,049

 

 

 

 

 
4,050

Conversion of restricted stock units to common stock (net of 69,307 shares of treasury stock purchased)
180,049

 

 

 

 

 
(752
)
 

 
(752
)
Partial termination of capped call options (inclusive of tax impact of $116)

 

 
1,863

 

 

 

 

 
1,863

Convertible debt extinguishment impact (net of tax impact of $2,144)

 

 
(5,560
)
 

 

 

 

 
(5,560
)
Treasury stock purchases
(5,998,323
)
 

 

 

 

 
(52,310
)
 

 
(52,310
)
Acquisition of noncontrolling interest

 

 

 

 

 

 
(179
)
 
(179
)
Stock compensation expense

 

 
4,067

 

 

 

 

 
4,067

Other comprehensive income (loss)

 

 

 

 
1,177

 

 
(125
)
 
1,052

Net income

 

 

 
24,130

 

 

 
201

 
24,331

BALANCE, September 30, 2016
38,553,413

 
$
5

 
$
479,102

 
$
193,810

 
$
(2,832
)
 
$
(81,824
)
 
$
2,627

 
$
590,888

See notes to condensed consolidated financial statements.

4



RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
Nine months ended
   
September 30, 2016
 
September 30, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
   
 
   
Net income (loss)
$
24,331

 
$
(56,138
)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
   
 
   
Depreciation expense
23,447

 
18,008

Amortization expense of assets and liabilities, net
676

 
369

Gain on involuntary conversion
(8,010
)
 

Accretion of convertible note discount
3,820

 
3,507

Amortization of marketable securities

 
183

Change in fair value of contingent consideration
4,680

 
(722
)
Change in fair value of convertible debt conversion liability
(16,445
)
 

Gain on debt extinguishment
(2,331
)
 

Bargain purchase gain from acquisition

 
(5,358
)
Provision for doubtful accounts
42

 
(843
)
Stock compensation expense
4,067

 
3,427

Deferred tax expense (benefit)
505

 
(2,991
)
Other operating activities
(43
)
 
(248
)
Changes in asset and liabilities, net of effects from acquisitions:
   
 
   
Accounts receivable, net
205,733

 
262,499

Inventories
(10,482
)
 
36,810

Prepaid expenses and other assets
(13,857
)
 
(8,974
)
Accounts payable
(147,268
)
 
(124,827
)
Accrued expenses and other liabilities
1,114

 
(8,965
)
Deferred revenue
1,159

 
(16,680
)
Net cash flows provided by operating activities
71,138

 
99,057

CASH FLOWS FROM INVESTING ACTIVITIES:
   
 
   
Cash paid for marketable securities

 
(52,153
)
Cash received from maturities of marketable securities

 
61,642

Cash receipts for involuntary conversion
8,010

 
6,500

Cash receipts of restricted cash
1,985

 
13,345

Cash paid for purchase of property, plant and equipment
(42,809
)
 
(61,014
)
Cash paid for acquisitions and additional interests, net of cash acquired
(12,720
)
 
(40,996
)
Cash paid for investments
(3,249
)
 
(639
)
Other investing activities

 

Net cash flows used in investing activities
(48,783
)
 
(73,315
)
CASH FLOWS FROM FINANCING ACTIVITIES:
   
 
   
Net borrowings (repayments) on revolving line of credit
(20,855
)
 
5,744

Borrowings on other lines of credit
8,807

 

Repayments on other lines of credit
(263
)
 

Cash received from notes payable
163,646

 
410

Cash paid on notes payable
(72,548
)
 
(5,084
)
Cash paid for debt issuance costs
(5,876
)
 
(383
)
Cash paid for treasury stock
(51,474
)
 
(19,929
)
Cash paid for contingent consideration settlement
(4,871
)
 
(2,106
)
Cash received on partial termination of capped call options
159

 

Net cash flows provided by (used in) financing activities
16,725

 
(21,348
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
39,080

 
4,394

CASH AND CASH EQUIVALENTS, Beginning of period
47,081

 
63,516

Effect of exchange rate changes on cash
370

 
(1,093
)
CASH AND CASH EQUIVALENTS, End of period
$
86,531

 
$
66,817

(continued)

5




RENEWABLE ENERGY GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
Nine months ended
 
September 30, 2016
 
September 30, 2015
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
   
 
   
Cash paid (received) for income taxes
$
203

 
$
50

Cash paid for interest
$
5,496

 
$
4,418

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
   
 
   
Amounts included in period-end accounts payable for:
   
 
   
Purchases of property, plant and equipment
$
4,220

 
$
4,043

Debt issuance cost
$
135

 
$
84

Incentive stock liability for raw material supply agreement
$

 
$
239

Issuance of common stock for acquisitions
$
4,050

 
$
15,310

Contingent consideration for acquisitions
$
4,500

 
$
5,000

Debt assumed in acquisition
$

 
$
5,225

Release of restricted cash to pay off the GOZone Bonds
$
101,315

 
$

Repayment of GOZone Bonds
$
100,000

 
$

Non-cash transfer of line of credit to long-term debt
$
4,498

 
$

Accruals of insurance proceeds related to impairment of property, plant and equipment
$
1,414

 
$
11,027

 
 
 
 
 
 
 
 
See "Note 3 - Acquisitions" for noncash items related to the acquisition transactions.
 
 
 
(concluded)
   
See notes to condensed consolidated financial statements.



6



RENEWABLE ENERGY GROUP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For The Three and Nine Months Ended September 30, 2016 and 2015
(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" or "REG"), 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 filed on March 14, 2016. Results for interim periods are not necessarily indicative of those to be expected for the fiscal year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates.
As of September 30, 2016, the Company operates a network of twelve biorefineries in North America, which includes eleven operating biomass-based diesel production facilities with aggregate nameplate production capacity of 452 million gallons per year, or mmgy, along with a fermentation facility. The Company's network includes the addition of a 20-million gallon nameplate capacity biomass-based diesel refinery located in DeForest, Wisconsin resulting from its acquisition of the biorefinery and related assets of Sanimax Energy, LLC ("Sanimax Energy") in March 2016. 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.
In December 2014, the Company expanded its business to Europe by acquiring a majority interest in Petrotec AG ("Petrotec"). 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 mixture excise tax credit (the "BTC") is in effect throughout 2016 and, if not reinstated before the end of the year, the BTC will expire on December 31, 2016. It is uncertain whether the BTC will be reinstated thereafter. The expiration, along with other amendments of any one or more of the laws applicable to these incentives, could adversely affect the financial results of the Company.
During the third quarter 2016 close process, the Company identified errors in its previously reported interim financial statements for the quarter ended March 31, 2016 pertaining to certain biomass-based diesel sales completed in that quarter that contained BTC sharing terms resulting in an overstatement of biomass-based diesel sales of $7,724 and a corresponding understatement of accounts payable, deferred income taxes and income tax expense of $7,724, $850 and $850, respectively for the three months ended March 31, 2016 and the six months ended June 30, 2016.
The correction decreased biomass-based diesel sales by $7,724 for the three months ended March 31, 2016 (from previously reported $247,164 to $239,440) and decreased net income (loss) by $8,574 (from the previously reported net income of $1,686 to a net loss of $6,888). The correction also decreased biomass-based diesel sales by $7,724 for the six months ended June 30, 2016 (from previously reported $707,279 to $699,555) and decreased net income (loss) by $8,574 (from the previously reported net income of $8,810 to a net income of $236). This correction is reflected in the accompanying unaudited Condensed Consolidated Statements of Operations for the nine-month period ended September 30, 2016.
Based on an evaluation of all relevant facts, the Company assessed the materiality of these errors on the first and second quarter interim financial statements in accordance with SEC Staff Accounting Bulletin No. 99, codified in the Accounting Standards Classification (ASC) 250, Presentation of Financial Statements. The Company concluded under ASC 250 that the correction was immaterial to the Company’s results for the three months ended March 31, 2016 and six months ended June 30, 2016 and an amendment of previously filed reports was not required. In accordance with ASC 250, the Company elected to correct these errors by revising the consolidated financial statements and other financial information included in this Quarterly Report on Form 10-Q. This correction will be reflected in future 10-K and 10-Q filings.


7




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, 2015. There have been no material changes from the policies previously disclosed other than those noted below.
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. Through September 30, 2016, the Company has received approximately $243,737 related to the 2015 biodiesel mixture excise tax credit, which results in $52 remaining as outstanding receivables at September 30, 2016.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost less accumulated depreciation. Maintenance and repairs are expensed as incurred. Depreciation expense is computed on a straight-line method based upon estimated useful lives of the assets.
In April 2015, the Company experienced a fire at its Geismar facility, resulting in the shutdown of the facility. The Company estimated fixed assets with a net book value of approximately $11,027 were impaired as a result of the fire. At September 30, 2016, the Company has received property insurance proceeds of $19,037. The excess of the property insurance proceeds over the net book value of the impaired assets, $3,470 and $8,010, was recorded as gain on involuntary conversion on the Condensed Consolidated Statements of Operations during the three and nine months ended September 30, 2016, respectively. The aforementioned proceeds for property damage were final and have been approved and paid by the insurance carriers.
In September 2015, another fire occurred at the Geismar facility. The Company estimated fixed assets with a net book value of approximately $1,414 were impaired by the September fire. The Company believes it is probable that it will recover all the net book value of the assets damaged by the fire under its insurance policies. As such, a receivable was recorded as an offset to the estimated impairment loss and no impact on earnings was recognized from impairment.
Goodwill
Goodwill is tested for impairment annually on July 31 or when impairment indicators exist. Goodwill is allocated and
tested for impairment by reporting units. At September 30, 2016 and December 31, 2015, the Company had goodwill in the Services reporting unit. The annual impairment test at July 31, 2016 determined that the fair value of the Services reporting unit exceeded its carrying value by approximately 16%. No impairment of goodwill was recorded during the three and nine months ended September 30, 2016.
Convertible Debt
In June 2016, the Company issued $152,000 aggregate principal amount of 4% convertible senior notes due 2036 (the "2036 Convertible Notes"). The Company may not elect to issue shares of common stock upon conversion of the 2036 Convertible Notes to the extent such election would result in the issuance of more than 19.99% of the common stock outstanding immediately before the issuance of the 2036 Convertible Notes until the Company receives stockholder approval for such issuance. As a result, the embedded conversion option is accounted for as an embedded derivative liability. This liability is recorded at fair value, and $3,013 and $16,445 fair value adjustments were recorded for the three and nine months ended September 30, 2016. The Company expects to continue marking the embedded conversion option to market unless and until shareholders authorize additional common shares at its Annual Shareholder Meeting in May 2017. See "Note 7 - Debt" for a further description of the transaction.
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. The Company used the remaining available funds authorized under this program to repurchase shares of Common Stock during the first 6 months of 2016.

8



In March 2016, the Company's board of directors approved a repurchase program of up to $50,000 of the Company's
shares of common stock and/or convertible notes, in effect through March 5, 2018. Under the program, which is in addition to the $30,000 common stock repurchase program announced in February 2015, the Company may repurchase shares or convertible notes from time to time in open market transactions, privately negotiated transactions or by other means. The timing and amount of repurchase transactions were determined by the Company's management based on its evaluation of market conditions, share price, bond price, legal requirements and other factors. During the three and nine months ended September 30, 2016, the Company repurchased 627,552 and 5,070,375 shares of Common Stock for $5,590 and $44,019, respectively, under this program. In addition, the Company used approximately $5,584 under this program to repurchase $6,000 principal amount of the Company's 2.75% senior notes due 2019 (the "2019 Convertible Notes") during the three and nine months ended September 30, 2016.
New Accounting Standards
In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Consideration (Reporting Revenue Gross versus Net)" which clarifies how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions. The guidance also re-frames the indicators to focus on evidence that an entity is acting as a principal rather than an agent. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is evaluating the impact of this guidance, but does not expect it to have any material impact on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” The amendments in this updated guidance include changes to simplify the codification for several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. For public entities, this guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted. The Company is evaluating the impact this new guidance will have on its consolidated financial statements.
In May 2016, the FASB issued ASU 2016-12, which amends certain aspects of the new revenue standard, ASU 2014-09. The amendments address issues such as collectability; presentation of sales tax and other similar taxes collected from customers; noncash consideration; contract modifications and completed contracts at transition; and transition technical correction. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company is evaluating the impact of this guidance, but does not expect it to have any material impact on its consolidated financial statements.
In September 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The guidance addresses the classification of cash flows related to (1) debt prepayment or extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after a business combination, (4) proceeds from settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance, (6) distributions received from equity method investees and (7) beneficial interests in securitization transactions. The guidance will generally be applied retrospectively and is effective for public business entities for fiscal years beginning December 15, 2017. The Company has evaluated the impact and elected to early adopt the guidance for the three and nine months ended September 30, 2016, which has no material impact on its consolidated financial statements.
NOTE 3 — ACQUISITIONS
Sanimax Energy, LLC
On March 15, 2016, the Company acquired fixed assets and inventory from Sanimax Energy, including the 20 mmgy nameplate capacity biomass-based diesel refinery in DeForest, Wisconsin. The Company completed its initial accounting of this business combination as the valuation of the real and personal property was finalized as of September 30, 2016.
The following table summarizes the consideration paid for the acquisition from Sanimax Energy:

9



 
March 15, 2016
Consideration at fair value for acquisition from Sanimax:
 
Cash
$
12,541

Common stock
4,050

Contingent consideration
4,500

Total
$
21,091

The fair value of the 500,000 shares of Common Stock issued was determined using the closing market price of the Company's common shares at the date of acquisition.
REG Madison may pay contingent consideration of up to $5,000 (Earnout Payments) over a seven-year period after the acquisition, subject to achievement of certain milestones related to the biomass-based diesel gallons produced and sold by REG Madison. The Earnout Payments are payable in cash and cannot exceed $1,700 in any one year period beginning March 15, 2016 through 2023 and up to $5,000 in aggregate. As of September 30, 2016, the Company has recorded a contingent liability of $4,166, approximately $1,532 of which has been classified as current on the Condensed Consolidated Balance Sheets.
The following table summarizes the fair values of the assets acquired at the acquisition date.
   
March 15, 2016
Assets acquired from Sanimax Energy:
   
Inventory
$
1,591

Property, plant and equipment
19,500

Net identifiable assets acquired
$
21,091


The following pro forma condensed combined results of operations assume that the acquisition from Sanimax Energy was completed as of January 1, 2015.
 
Three Months 
 Ended 
 September 30, 
 2016
 
Three Months 
 Ended 
 September 30, 
 2015
 
Nine Months 
 Ended 
 September 30, 
 2016
 
Nine Months 
 Ended 
 September 30, 
 2015
Revenues
$
624,640

 
$
399,665

 
$
1,489,237

 
$
1,013,963

Net income (loss)
22,929

 
(17,208
)
 
23,670

 
(60,382
)
Basic net income (loss) per share
$
0.59

 
$
(0.39
)
 
$
0.57

 
$
(1.36
)
NOTE 4 — INVENTORIES
Inventories consist of the following:
   
September 30, 2016
 
December 31, 2015
Raw materials
$
46,636

 
$
28,989

Work in process
3,879

 
3,014

Finished goods
47,707

 
53,887

Total
$
98,222

 
$
85,890

NOTE 5 — OTHER ASSETS
Prepaid expense and other assets consist of the following:

10



   
September 30, 2016
 
December 31, 2015
Commodity derivatives and related collateral, net
$
11,187

 
$
10,097

Prepaid expenses
14,540

 
8,504

Deposits
2,758

 
3,824

RIN inventory
12,229

 
5,656

Taxes receivable
1,135

 
1,814

Other
3,903

 
1,987

Total
$
45,752

 
$
31,882

RIN inventory values were adjusted in the amounts of $1,723 and $3,027 at September 30, 2016 and December 31, 2015, respectively, to reflect the lower of cost or net realizable value.
Other noncurrent assets consist of the following:
 
September 30, 2016
 
December 31, 2015
Spare parts inventory
$
2,922

 
$
2,922

Deposits
2,280

 
2,370

Other
6,631

 
6,527

Total
$
11,833

 
$
11,819

NOTE 6— INTANGIBLE ASSETS
Intangible assets consist of the following:
 
September 30, 2016
 
Cost
 
Accumulated Amortization
 
Net
 
Weighted Average Remaining Life
Raw material supply agreement
$
6,230

 
$
(1,875
)
 
$
4,355

 
9.3 years
Renewable hydrocarbon diesel technology
8,300

 
(1,291
)
 
7,009

 
12.8 years
Ground lease
200

 
(123
)
 
77

 
5.1 years
Acquired customer relationships
2,900

 
(324
)
 
2,576

 
8.8 years
Total amortizing intangibles
17,630

 
(3,613
)
 
14,017

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

 

 
15,956

 
 
Total intangible assets
$
33,586

 
$
(3,613
)
 
$
29,973

 
 
 
December 31, 2015
 
Cost
 
Accumulated Amortization
 
Net
 
Weighted Average Remaining Life
Raw material supply agreement
$
6,230

 
$
(1,551
)
 
$
4,679

 
10.0 years
Renewable hydrocarbon diesel technology
8,300

 
(876
)
 
7,424

 
13.5 years
Ground lease
200

 
(112
)
 
88

 
5.9 years
Acquired customer relationships
2,900

 
(106
)
 
2,794

 
9.6 years
Total amortizing intangibles
17,630

 
(2,645
)
 
14,985

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

 

 
15,956

 
 
Total intangible assets
$
33,586

 
$
(2,645
)
 
$
30,941

 
 
The Company recorded intangible amortization expense of $328 and $968 for the three and nine months ended September 30, 2016, respectively, and $257 and $745 for the three and nine months ended September 30, 2015, respectively.
The estimated intangible asset amortization expense for the remainder of fiscal year 2016 through fiscal year 2022 and thereafter is as follows:

11



October 1, 2016 through December 31, 2016
$
324

2017
1,302

2018
1,309

2019
1,315

2020
1,322

2021
1,328

2022 and thereafter
7,117

Total
$
14,017

NOTE 7 — DEBT
The Company’s debt is as follows:
   
September 30, 2016
 
December 31, 2015
4.00% Convertible Senior Notes, $152,000 face amount, due in June 2036
$
112,755

 
$

2.75% Convertible Senior Notes, $73,838 face amount, due in June 2019
66,619

 
126,053

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

 
100,000

REG Danville term loan, secured, variable interest rate of LIBOR plus 4%, due in December 2017
8,800

 

REG Newton term loan, secured, variable interest rate of LIBOR plus 4%, due in December 2018
13,789

 
16,800

REG Mason City term loan, fixed interest rate of 5%, due in July 2019
2,898

 
3,675

REG Ames term loans, secured, fixed interest rates of 3.5% and 4.25%, due in January 2018 and December 2019, respectively
3,651

 
3,901

REG Grays Harbor term loan, variable interest of minimum of 3.5% or Prime Rate plus 0.25%, due in May 2022
9,500

 
5,225

Other
709

 
908

Total term debt before debt issuance costs
218,721

 
256,562

Less: Current portion of long-term debt
10,349

 
5,206

Less: Debt issuance costs (net of accumulated amortization of $2,973 and $2,296, respectively)
6,488

 
4,105

Total long-term debt
$
201,884

 
$
247,251


REG Danville
On October 31, 2015, REG Danville, LLC entered into a Second Amended and Restated Loan Agreement with Fifth Third Bank regarding the construction/term loan (the "Fifth Third Construction/Term Loan"). The renewed Fifth Third Construction/Term Loan increased the principal amount of the Construction/Term Loan to $12,000 and had a three-year term with the maturity of the loan being extended to December 19, 2017. The loan requires monthly principal payments of $212 and interest to be charged using LIBOR plus 4% per annum. The loan agreement contains various loan covenants. As of September 30, 2016, there was $8,800 outstanding under the Fifth Third Construction/Term Loan.

Convertible Senior Notes
On June 2, 2016, the Company issued $152,000 aggregate principal amount of the 2036 Convertible Notes in a private offering to qualified institutional buyers. The 2036 Convertible Notes bear interest at a rate of 4.00% per year payable semi-annually in arrears on June 15 and December 15 of each year, beginning December 15, 2016. The notes will mature on June 15, 2036, unless repurchased, redeemed or converted in accordance with their terms prior to such date.

Prior to December 15, 2035, the 2036 Convertible Notes will be convertible only upon satisfaction of certain conditions and during certain periods as stipulated in the indenture. On or after December 15, 2035 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the 2036 Convertible Notes may convert their notes at any time. Unless and until the Company obtains stockholder approval under applicable NASDAQ Stock Market rules, the 2036 Convertible Notes will be convertible, subject to certain conditions, into cash. If the Company obtains such

12



stockholder approval, the 2036 Convertible Notes may be settled in cash, the Company’s common shares or a combination of cash and the Company’s common shares, at the Company’s election. The Company may not redeem the 2036 Convertible Notes prior to June 15, 2021. Holders of the 2036 Convertible Notes will have the right to require the Company to repurchase for cash all or some of their notes at 100% of their principal, plus any accrued and unpaid interest on each of June 15, 2021, June 15, 2026 and June 15, 2031. Holders of the 2036 Convertible Notes will have the right to require the Company to repurchase for cash all or some of their notes at 100% of their principal, plus any accrued and unpaid interest upon the occurrence of certain fundamental changes. The initial conversion rate is 92.8074 common shares per $1,000 (one thousand) principal amount of 2036 Convertible Notes (equivalent to an initial conversion price of approximately $10.78 per common share).

The net proceeds from the offering of the 2036 Convertible Notes were approximately $147,118, after deducting fees and offering expenses of $4,882, which was capitalized as debt issuance costs and is being amortized through June 2036.

The Company evaluated the terms of the conversion features under the applicable accounting literature, including Derivatives and Hedging, ASC 815, and determined that a certain feature required separate accounting as a derivative. This derivative was recorded as a long-term liability, "Convertible Debt Conversion Liability" on the Condensed Consolidated Balance Sheets and will be adjusted to reflect fair value each reporting date. The fair value of the convertible debt conversion liability at issuance was $40,145. The fair value of the convertible debt conversion liability at September 30, 2016 was $23,700. The Company recognized gains of $3,013 and $16,445 for the three and nine months ended September 30, 2016, respectively, which are reflected in the "Change in Fair Value of Convertible Debt Conversion Liability" on the Condensed Consolidated Statements of Operations. The debt liability component of 2036 Convertible Notes was determined to be $111,855 at issuance, reflecting a debt discount of $40,145. The debt discount is to be amortized through June 2036. The effective interest rate on the debt liability component was 2.45%.

In June 2016, approximately $35,101 of the net proceeds from the offering of the 2036 Convertible Notes were used to repurchase 4,060,323 shares of the Company's Common Stock in privately negotiated transactions. In addition, approximately $61,954 of the net proceeds from the offering were used to repurchase $63,912 principal amount of the Company's 2019 Convertible Notes in privately negotiated transactions, resulting in a gain on debt extinguishment of $2,152, which is reflected on the Condensed Consolidated Statements of Operations.

In September 2016, the Company used approximately $5,584 under the March 2016 share repurchase program to repurchase an additional $6,000 principal amount of the 2019 Convertible Notes.

REG Grays Harbor, LLC

In July 2015, REG Grays Harbor entered into a credit agreement with Umpqua Bank, or Umpqua Credit Agreement, whereby it can borrow up to $10.0 million for capital expenditure projects. Amounts borrowed under the Umpqua Credit Agreement bear interest at a per annum rate at of minimum of 3.50% or Prime Rate plus 0.25%. In addition, in July 2015 REG Grays Harbor entered into a line of credit note or Umpqua Line of Credit Note in conjunction with the Umpqua Credit Agreement for a maximum borrowing amount of $5,000. In September 2016, REG Grays Harbor entered into the first loan modification agreement with Umpqua Bank, or the First Modification, to extend the maturity date of the Umpqua Line of Credit to July 31, 2018. The terms of the Umpqua Credit Agreement provides that any principal outstanding under the Umpqua Line of Credit Note on July 31, 2016 shall be converted into term debt. At September 30, 2016, the total outstanding borrowing under the Umpqua Credit Agreement was all term debt and amounted to $9,500, bearing an interest rate of 4.30% per annum.

REG Geismar

REG Geismar was the obligor with respect to $100,000 aggregate principal amount of Gulf Opportunity Zone tax-exempt bonds, or GOZone Bonds, originally due in October 2033, through a loan agreement with the Louisiana Public Facilities Authority. REG Geismar’s payment obligations on the GOZone Bonds were supported by a letter of credit issued by a financial institution. REG Geismar was party to an agreement to reimburse the financial institution for any draws on the letter of credit and that obligation was secured by a $101,315 certificate of deposit by the Company and pledged in favor of the financial institution. On September 6, 2016, REG Geismar caused the Louisiana Public Facilities Authority to call for redemption all of the outstanding GOZone Bonds as of September 6, 2016. The redemption was funded by application of the funds generated by release of the certificate of deposit.
Lines of Credit

13



 
September 30, 2016
 
December 31, 2015
Amount outstanding under lines of credit
$
6,354

 
$
23,149

Maximum available to be borrowed under lines of credit
$
67,972

 
$
23,067


On March 16, 2016, REG Energy Services, LLC ("REG Energy Services") entered into an operating and revolving line of credit agreement (the "Agreement") with Bankers Trust Company (“Bankers Trust”). Pursuant to the Agreement, Bankers Trust agreed to provide an operating and revolving line of credit (the "Line of Credit") to REG Energy Services in the amount of $30,000. Amounts outstanding under the Agreement bear variable interest as stipulated in the Agreement. The Agreement contains various loan covenants that restrict REG Energy Services’ ability to take certain actions, including prohibiting it in certain circumstances from making payments to the Company. In addition, the Line of Credit is secured by substantially all of REG Energy Services’ accounts receivable and inventory.

On September 30, 2016, REG Services Group, LLC and REG Marketing & Logistics Group, LLC, the Company's wholly-owned subsidiaries entered into a Joinder and Amendment No. 11 to Credit Agreement (the “Amendment”) to that certain Credit Agreement originally dated as of December 23, 2011, by and among Borrowers, the lenders party thereto (“Lenders”) and Wells Fargo Capital Finance, LLC, as the agent, and Fifth Third Bank, as a new lender (as amended, the “Revolving Credit Agreement”). Pursuant to the Amendment, the maximum commitment of the Lenders under the Revolving Credit Agreement to make revolving loans was increased from $60,000 to $150,000, and an accordion feature was added to the Revolving Credit Agreement, which allows the Company to request commitments for additional revolving loans in aggregate amount not to exceed to $50,000, subject to customary conditions, including the consent of Lenders providing such additional commitments. The Amendment extends the maturity date of the Revolving Credit Agreement to September 30, 2021. In addition, the interest rate under the Revolving Credit Agreement was modified so that loans advanced thereunder will now bear interest based on a one-month LIBOR rate (which shall not be less than zero), plus a margin based on Quarterly Average Excess Availability (as defined in the Revolving Credit Agreement), which may range from 1.75% per annum to 2.25% per annum. Certain financial covenants applicable to the Borrowers under the Revolving Credit Agreement were also modified.
NOTE 8 — RELATED PARTY TRANSACTIONS
The Company reassesses its related parties at reporting dates and has determined that West Central Cooperative, now known as Landus Cooperative ("Landus"), is no longer a related party because it does not hold ten percent or more of the Company’s outstanding Common Stock, and no longer has the right to a seat on the Company's board for the three and nine months ended September 30, 2016. Transactions with Landus, prior to the Company's determination that Landus was no longer a related party, amounted to $4,542 for the three and nine months ended September 30, 2015, primarily related to raw material purchases at market prices. This amount was included in the "Costs of goods sold - Biomass-based diesel" on the Condensed Consolidated Statements of Operations.
NOTE 9 — DERIVATIVE INSTRUMENTS
The Company enters into New York Mercantile Exchange NY Harbor ULSD ("NY Harbor ULSD" or previously referred to as heating oil) and CBOT Soybean Oil (previously referred to as 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 cash 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 September 30, 2016, the net notional volumes of NY Harbor ULSD and CBOT Soybean Oil covered under the open commodity derivative contracts were approximately 85 million gallons and 51 million pounds, respectively.
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

14



derivatives and amounts that offset within the Condensed Consolidated Balance Sheets:
   
September 30, 2016
 
December 31, 2015
   
Assets
 
Liabilities
 
Assets
 
Liabilities
Gross amounts of derivatives recognized at fair value
$
861

 
$
5,831

 
$
4,644

 
$
185

Cash collateral
16,157

 

 
5,638

 

Total gross amount recognized
17,018

 
5,831

 
10,282

 
185

Gross amounts offset
(5,831
)
 
(5,831
)
 
(185
)
 
(185
)
Net amount reported in the condensed consolidated balance sheets
$
11,187

 
$

 
$
10,097

 
$

The following table sets forth the commodity contract derivatives gains and (losses) included in the Condensed Consolidated Statements of Operations:
   
Location of Gain (Loss)
Recognized in income
 
Three Months 
 Ended 
 September 30, 
 2016
 
Three Months 
 Ended 
 September 30, 
 2015
 
Nine Months 
 Ended 
 September 30, 
 2016
 
Nine Months 
 Ended 
 September 30, 
 2015
Commodity derivatives
Cost of goods sold – Biomass-based diesel
 
$
5,865

 
$
23,349

 
$
(28,931
)
 
$
19,358

NOTE 10 — FAIR VALUE MEASUREMENT
The fair value hierarchy prioritizes the inputs used in measuring fair value as follows:
Level 1 — Quoted prices for identical instruments in active markets.
Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.
Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
A summary of assets (liabilities) measured at fair value is as follows:
   
As of September 30, 2016
   
Total
 
Level 1
 
Level 2
 
Level 3
Commodity contract derivatives
$
(4,970
)
 
$
(2,782
)
 
$
(2,188
)
 
$

Convertible debt conversion liability
(23,700
)
 

 
(23,700
)
 

Contingent considerations for acquisitions
(46,021
)
 

 

 
(46,021
)
 
$
(74,691
)
 
$
(2,782
)
 
$
(25,888
)
 
$
(46,021
)
   
As of December 31, 2015
   
Total
 
Level 1
 
Level 2
 
Level 3
Commodity contract derivatives
$
4,459

 
$
2,196

 
$
2,263

 
$

Contingent considerations for acquisitions
(41,712
)
 

 

 
(41,712
)
   
$
(37,253
)
 
$
2,196

 
$
2,263

 
$
(41,712
)
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):

15



 
Contingent Consideration for Acquisitions
 
2016
 
2015
Balance at beginning of period, January 1
$
41,712

 
$
39,319

Fair value of contingent consideration at measurement date
4,500

 

Change in estimates included in earnings
(15
)
 
293

Settlements
(581
)
 
(1,052
)
Balance at end of period, March 31
45,616

 
38,560

Change in estimates included in earnings
3,571

 
(2,121
)
Settlements
(809
)
 
(943
)
Balance at end of period, June 30
48,378

 
35,496

Fair value of contingent consideration at measurement date

 
5,000

Change in estimates included in earnings
1,124

 
1,106

Settlements
(3,481
)
 
(111
)
Balance at end of period, September 30
$
46,021

 
$
41,491

The estimated fair values of the Company’s financial instruments, which are not recorded at fair value, are as follows:
   
As of September 30, 2016
 
As of December 31, 2015
   
Asset (Liability)
Carrying
Amount
 
Fair Value
 
Asset (Liability)
Carrying
Amount
 
Fair Value
Financial liabilities:
   
 
   
 
   
 
   
Debt and lines of credit
$
(218,587
)
 
$
(214,761
)
 
$
(279,711
)
 
$
(275,123
)
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:
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 contingent consideration regarding REG Life Sciences, LLC ("REG Life Sciences") 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 REG Life Sciences' 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 all other 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 production and/or sale of biomass-based diesel at the specific production facility. A discount rate ranging from 5.8% to 10.0% is used to estimate the fair value of the expected payments.
Convertible debt conversion liability: The fair value of the convertible debt conversion liability is estimated using the Black-Scholes model incorporating the terms and conditions of the 2036 Convertible Notes and considering changes in the prices of the Company's common stock, Company stock price volatility, risk-free rates and changes in market rates. The valuations are, among other things, subject to changes in the Company's credit worthiness as well as change in general market conditions. As the majority of the assumptions used in the calculations are based on market sources, the fair value of the convertible conversion liability is reflected in Level 2.
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.

16



NOTE 11 — NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is presented in conformity with the two-class method required for participating securities. Participating securities include restricted stock units ("RSUs").
Under the two-class method, net income is reduced for distributed and undistributed dividends earned in the current period. The remaining earnings are then allocated to Common Stock and the participating securities. The Company calculates the effects of participating securities on diluted earnings per share ("EPS") using both the “if-converted or treasury stock” and "two-class" methods and discloses the method which results in a more dilutive effect. The effects of Common Stock options, warrants, stock appreciation rights and convertible notes on diluted EPS are calculated using the treasury stock method unless the effects are anti-dilutive to EPS.
The following potentially dilutive weighted average securities were excluded from the calculation of diluted net income (loss) per share attributable to common stockholders during the periods presented, as the effect was anti-dilutive:
   
Three Months 
 Ended 
 September 30, 
 2016
 
Three Months 
 Ended 
 September 30, 
 2015
 
Nine Months 
 Ended 
 September 30, 
 2016
 
Nine Months 
 Ended 
 September 30, 
 2015
Options to purchase common stock
87,026

 
87,026

 
87,026

 
87,026

Restricted stock units

 
709

 

 
709

Stock appreciation rights
2,484,757

 
2,430,414

 
2,428,095

 
2,120,550

2019 Convertible notes
5,922,068

 
10,838,218

 
8,677,528

 
10,838,218

2036 Convertible notes
14,106,725

 

 
6,229,612

 

Total
22,600,576

 
13,356,367

 
17,422,261

 
13,046,503

The following table presents the calculation of diluted net loss per share:
   
Three Months 
 Ended 
 September 30, 
 2016
 
Three Months 
 Ended 
 September 30, 
 2015
 
Nine Months 
 Ended 
 September 30, 
 2016
 
Nine Months 
 Ended 
 September 30, 
 2015
Net income (loss) attributable to the Company’s common stockholders - Basic
$
22,929

 
$
(15,675
)
 
$
23,668

 
$
(55,783
)
Less: effect of participating securities

 

 

 

Net income (loss) attributable to common stockholders - Dilutive
$
22,929

 
$
(15,675
)
 
$
23,668

 
$
(55,783
)
Shares:

 
 
 

 

Weighted-average shares used to compute basic net income (loss) per share
38,744,878

 
43,844,005

 
41,673,223

 
43,979,266

Adjustment to reflect conversion of preferred stock

 

 

 

Adjustment to reflect warrants to purchase common stock

 

 

 

Adjustment to reflect stock appreciation right conversions
6,828

 

 
5,765

 

Weighted-average shares used to compute diluted net income (loss) per share
38,751,706

 
43,844,005

 
41,678,988

 
43,979,266

Net income (loss) per share attributable to common stockholders:

 
 
 

 

Diluted
$
0.59

 
$
(0.36
)
 
$
0.57

 
$
(1.27
)
NOTE 12 — REPORTABLE SEGMENTS AND GEOGRAPHIC INFORMATION
The Company reports its reportable segments based on products and services provided to customers. The Company re-assesses its reportable segment on an annual basis. During the fourth quarter of 2015, due to the increasing activities surrounding its renewable chemicals business, the Company changed the composition of its operating segments from two reportable segments to three reportable segments by presenting Renewable Chemicals separate from Biomass-based Diesel. The new reportable segments generally align the Company's external financial reporting segments with its new internal operating segments, which are based on its internal organizational structure, operating decisions and performance assessment. As such, the Company's reportable segments at September 30, 2016 and December 31, 2015 include Biomass-based Diesel, Services, Renewable Chemicals and Corporate and other activities. The accounting policies of the segments are the same as

17



those described in the summary of significant accounting policies. All prior period disclosures below have been recast to present results on a comparable basis.
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. Revenue is derived from the purchases and sales of biomass-based diesel, RINs 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, related by-products and renewable energy government incentive payments, in the U.S. and internationally.
The Services segment offers services for managing the construction of biomass-based diesel production facilities and managing ongoing operations of 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. Revenues from services provided to other segments are recorded by the Services segment at cost.
The Renewable Chemicals segment consists of research and development activities involving the production of renewable chemicals, additional advanced biofuels and other products from the Company's proprietary microbial fermentation process and the operations of a demonstration scale facility located in Okeechobee, Florida.
The Corporate and Other segment includes trading activities related to petroleum-based heating oil and diesel fuel as well as corporate activities, which consist of corporate office expenses such as compensation, benefits, occupancy and other administrative costs, including management service expenses. Corporate and Other also includes income/(expense) not associated with the reportable segments, such as corporate general and administrative expenses, shared service expenses, interest expense and interest income, all reflected on an accrual basis of accounting. In addition, Corporate and Other includes cash and other assets not associated with the reportable segments, including investments. Intersegment revenues are reported by the Services and Corporate and Other segments.


18



The following table represents the significant items by reportable segment:
   
Three Months 
 Ended 
 September 30, 
 2016
 
Three Months 
 Ended 
 September 30, 
 2015
 
Nine Months 
 Ended 
 September 30, 
 2016
 
Nine Months 
 Ended 
 September 30, 
 2015
Net revenues:
   
 
   
 
   
 
   
Biomass-based Diesel (includes Petrotec's net sales of $41,671 and $124,388 and $40,777 and $108,851for the three and nine months ended September 30, 2016 and 2015, respectively)
$
599,198

 
$
377,070

 
$
1,423,867

 
$
964,359

Services
21,051

 
28,231

 
63,184

 
71,625

Renewable Chemicals
565

 

 
1,565

 

Corporate and Other
28,781

 
23,154

 
69,412

 
45,716

Intersegment revenues
(24,955
)
 
(33,599
)
 
(77,217
)
 
(82,164
)
   
$
624,640

 
$
394,856

 
$
1,480,811

 
$
999,536

Income (loss) before income taxes:
   
 
   
 
   
 
   
Biomass-based Diesel (includes Petrotec's income (loss) of $306 and $1,922 and $135 and ($1,856) for the three and nine months ended September 30, 2016 and 2015, respectively)
$
25,598

 
$
(10,358
)
 
$
27,143

 
$
(38,458
)
Services
1,753

 
2,464

 
3,587

 
2,716

Renewable Chemicals
(5,783
)
 
(4,573
)
 
(14,388
)
 
(12,780
)
Corporate and Other
734

 
(4,254
)
 
8,810

 
(10,270
)
   
$
22,302

 
$
(16,721
)
 
$
25,152

 
$
(58,792
)
Depreciation and amortization expense, net:
   
 
   
 
   
 
   
Biomass-based Diesel (includes Petrotec's amounts of $707 and $2,419 and $817 and $2,419 for the three and nine months ended September 30, 2016 and 2015, respectively)
$
7,516

 
$
5,559

 
$
21,584

 
$
15,984

Services
108

 
79

 
321

 
217

Renewable Chemicals
382

 
389

 
1,164

 
1,051

Corporate and Other
265

 
390

 
1,054

 
1,125

   
$
8,271

 
$
6,417

 
$
24,123

 
$
18,377

Cash paid for purchases of property, plant and equipment:
   
 
   
 
   
 
   
Biomass-based Diesel (includes Petrotec's amounts of $734 and $1,038 and $256 and $1,233 for the three and nine months ended September 30, 2016 and 2015, respectively)
$
10,560

 
$
23,193

 
$
36,059

 
$
48,283

Services
4,647

 
9,855

 
5,812

 
10,980

Renewable Chemicals
16

 
242

 
635

 
546

Corporate and Other
119

 
17

 
303

 
1,205

   
$
15,342

 
$
33,307

 
$
42,809

 
$
61,014



19



   
September 30, 2016
 
December 31, 2015
Goodwill:
   
 
   
Services
$
16,080

 
$
16,080

 
 
 
 
Assets:
   
 
   
Biomass-based Diesel (including Petrotec's assets of $56,159 and $45,471, respectively)
$
855,486

 
$
1,048,923

Services
48,892

 
60,308

Renewable Chemicals
23,214

 
23,872

Corporate and Other
275,114

 
308,782

Intersegment eliminations
(182,592
)
 
(218,265
)
   
$
1,020,114

 
$
1,223,620


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.
   
Three Months 
 Ended 
 September 30, 
 2016
 
Three Months 
 Ended 
 September 30, 
 2015
 
Nine Months 
 Ended 
 September 30, 
 2016
 
Nine Months 
 Ended 
 September 30, 
 2015
Net revenues:
   
 
   
 
   
 
   
United States
$
582,969

 
$
354,079

 
$
1,356,473

 
$
890,685

Foreign
41,671

 
40,777

 
124,338

 
108,851

 
$
624,640

 
$
394,856

 
$
1,480,811

 
$
999,536

   
September 30, 2016
 
December 31, 2015
Long-lived assets:
   
 
   
United States
$
590,780

 
$
553,987

Foreign
19,780

 
20,597

 
$
610,560

 
$
574,584

NOTE 13 — 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.  

20



These forward-looking statements include, but are not limited to, statements about facilities currently under development progressing to the construction and operational stages, including the expected capabilities of these facilities, 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; 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 ability to develop and market renewable chemicals; anticipated future revenue from products from our life sciences business, which have not been fully developed or commercialized; our competitive advantage relating to input costs relative to our competitors; the market for biomass-based diesel, including the factors that affect such market and our operating results and seasonal fluctuations in demand, 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; our ability to improve our internal control over financial reporting; expectations regarding the realization of deferred tax assets and the establishment and maintenance of tax reserves and anticipated trends; the ability of insurance to protect against losses, including any loss resulting from the fires at our Geismar facility; expectations regarding our expenses and sales; our credit worthiness and anticipated general market conditions; anticipated cash needs and estimates regarding capital requirements and needs for additional financing; and challenges in our business and the biomass-based diesel market.
These forward-looking statements are based on management’s current expectations, estimates, assumptions and projections, which are subject to risks and uncertainties. These risks and uncertainties could cause actual results to differ materially from those expected. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Risks and uncertainties include, but are not limited to, those risks discussed in Item 1A Part II in this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2016. 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
Our Company focuses on providing cleaner, lower carbon intensity fuel products and related services while also providing conventional fuel products and related services. We principally generate revenue as a leading North American advanced biofuels producer. We are the largest producer of biomass-based diesel in the United States. 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. We are also engaged in research and development efforts focused on the conversion of diverse feedstocks into renewable chemicals. We own and operate 12 North American biorefineries, which include 11 biomass-based diesel, or biodiesel and renewable hydrocarbon diesel, production facilities with aggregate nameplate production capacity of 452 million gallons per year, or mmgy, and one demonstration scale fermentation facility.
We are a lower-cost biomass-based diesel producer. We primarily produce our biomass-based diesel from a wide variety of lower cost feedstocks, including inedible corn oil, used cooking oil and inedible animal fat. We also produce biomass-based diesel from virgin vegetable oils, which are more widely available and tend to be higher in price. We believe our ability to process a wide variety of feedstocks provides us with a cost advantage over many biomass-based diesel producers, particularly those that rely primarily on higher cost virgin vegetable oils, such as soybean oil or canola oil.
In 2014, we acquired a development-stage industrial biotechnology business focusing on microbial fermentation to develop and produce renewable chemicals, fuels and other products.
We sell 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 fuel at one of our existing Northeastern terminal locations. In 2015, we expanded our sales of additional biofuel blends to Midwest terminal locations and look to potentially expand to other areas across North America.
We acquired a 75 mmgy nameplate capacity renewable hydrocarbon diesel biorefinery in Geismar, Louisiana in June 2014. We began production at the Geismar facility in October 2014 after completion of upgrades. The facility was idle from April 2015 to March 2016 while repairs were made related to two separate fires that occurred at the facility in April 2015 and September 2015.
We also expanded our business internationally by acquiring a majority interest in Petrotec AG, or Petrotec, in December 2014. During 2015 and the first nine months of 2016, we acquired additional shares in Petrotec and at September 30, 2016, we owned approximately 91% of Petrotec's outstanding shares. Petrotec is a fully-integrated company utilizing used cooking oil and other waste feedstocks to produce biodiesel at its two biorefineries in Emden and Oeding, Germany.  Petrotec’s nameplate production capacity is approximately 50 mmgy.
In August 2015, we acquired our Grays Harbor facility, a 100 mmgy nameplate biodiesel plant and terminal at the Port of Grays Harbor, Washington. This acquisition expanded our production fleet to the west coast of the United States. The Grays

21



Harbor location includes 18 million gallons of storage capacity and a terminal that can accommodate feedstock intake and fuel delivery on deep-water PANAMAX class vessels as well as possessing significant rail and truck transport capabilities. To date, the production facility's primary feedstock has been canola oil sourced nearby in the Pacific Northwest. 
In March 2016, we acquired our 20 mmgy nameplate biodiesel refinery located in DeForest, Wisconsin, REG Madison, LLC, produces biodiesel from yellow grease, rendered animal fats, and inedible corn oil, in addition to refined vegetable oils using our patented technology currently in use at our Seneca, Illinois plant.  The facility has both truck and rail capabilities.
During the respective three and nine months ended September 30, 2016, we sold 163 million and 411 million total gallons, including 27 and 55 million gallons of biomass-based diesel that we purchased from third parties and resold, 10 and 32 million international biomass-based diesel gallons from our majority owned investment in Petrotec and 11 and 33 million petroleum-based diesel gallons. During 2015, we sold a total of 375 million total gallons, including 40 million gallons of biomass-based diesel we purchased from third parties and resold, 40 million international biomass-based diesel gallons and 30 million petroleum-based diesel gallons.
We re-assess our reportable segments on an annual basis. Prior to 2015, our businesses were organized into two reportable segments - the Biomass-based Diesel segment and the Services segment. As a result of the increased activities surrounding our renewable chemicals business, we began reporting in 2015 a new segment - Renewable Chemicals, which was previously included in the Biomass-based Diesel segment.
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 biodiesel production facility located in Ralston, Iowa;
a 35 mmgy nameplate biodiesel production facility located near Houston, Texas;
a 45 mmgy nameplate biodiesel production facility located in Danville, Illinois;
a 30 mmgy nameplate biodiesel production facility located in Newton, Iowa;
a 60 mmgy nameplate biodiesel production facility located in Seneca, Illinois;
a 30 mmgy nameplate biodiesel production facility located near Albert Lea, Minnesota;
a 15 mmgy nameplate biodiesel production facility located in New Boston, Texas;
a 30 mmgy nameplate biodiesel production facility located in Mason City, Iowa;
a 75 mmgy nameplate renewable hydrocarbon diesel production facility located in Geismar, Louisiana;
a 27 mmgy nameplate biodiesel production facility located in Emden, Germany;
a 23 mmgy nameplate biodiesel production facility located in Oeding, Germany;
a 100 mmgy nameplate biodiesel production facility located in Grays Harbor, Washington; and
a 20 mmgy nameplate biodiesel production facility located in DeForest, Wisconsin, since its acquisition in March 2016.
purchases and resales of biomass-based diesel, petroleum-based diesel, Renewable Identification Numbers ("RINs") and Low Carbon Fuel Standard credits, and raw material feedstocks acquired from third parties;
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.

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 2015 and for the nine months ended September 30, 2016, our revenues from the sale of co-products were less than five percent of our total Biomass-based Diesel segment revenues. For the nine months ended September 30, 2016, revenues from the sale of petroleum-based heating oil and diesel fuel acquired from third parties, along with the sale of these items further blended with biodiesel produced at wholly owned facilities or purchased from third parties, were less than five percent of our total revenues.
In accordance with EPA regulations, we generate 1.5 to 1.7 Renewable Identification Numbers, or RINs, for each gallon of biomass-based diesel we produce. RINs are used to track compliance with Renewable Fuel Standard 2, or 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. When we attach 1.5 to 2.5 RINs to a sale of biomass-based diesel gallons, 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

22



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 our facilities located in Albert Lea, New Boston, Mason City and Newton. In October 2016, we completed a $34.5 million upgrade to our Danville facility. During 2015 and the first quarter of 2016, we spent over $42 million related to repairs and upgrade projects at our Geismar facility, most of which was due to damages from fires in April 2015 and September 2015. The Geismar facility came back on line in early March 2016. Demand for our construction management and facility management and operational services depends on capital spending by potential customers and existing customers, which is directly affected by trends in the biomass-based diesel industry. We have not provided services to outside parties for new facility construction services since 2009.
Renewable Chemicals Segment
Our Renewable Chemicals segment includes:
research and development activities focusing on microbial fermentation to develop and produce renewable chemicals, additional advanced biofuels and other products;
collaborative research and development and other service activities to continue to build out the technology platform; and
the operations of a demonstration scale fermentation facility located in Okeechobee, Florida since its acquisition in January 2014.
In January 2016, ExxonMobil Research and Engineering Company, a global leader in advanced biofuels research, announced an agreement with our subsidiary, REG Life Sciences, LLC to study the production of biodiesel by fermenting renewable cellulosic sugars from sources such as agricultural waste. This collaboration is focused on our patented technology that uses microbes to convert sugars to biodiesel via fermentation.
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 RINs meet three categories of an Obligated Party’s annual renewable fuel required volume obligation, or RVO—biomass-based diesel, undifferentiated advanced biofuel and undifferentiated renewable fuel. On November 30, 2015, the EPA issued the final 2014-2016 RVO targets for biomass-based diesel volumes as follows:

23



 
2014
2015
2016
2017
Biomass-based diesel
1.63 billion gallons
1.73 billion gallons
1.90 billion gallons
2.00 billion gallons
Volumes of biomass-based diesel domestically produced or imported into the United States, in general, increased each year from 2010 to 2014. Based upon the RVO targets established by the EPA, volumes for 2015 through 2017 are expected to continue to grow as illustrated by the EMTS data noted below:
 
2014
2015
First 9 Months of 2016
Biomass-based diesel produced or imported volume
1.75 billion gallons
1.81 billion gallons
1.80 billion gallons
The federal biodiesel mixture excise tax credit, or the BTC, provides a $1.00 refundable tax credit per gallon to the first blender of biomass-based diesel with petroleum-based diesel fuel. The BTC was established on January 1, 2005 and existed until it was allowed to lapse on January 1, 2010. Thereafter, the BTC was periodically reinstated by Congress both prospectively and retroactively, and then again allowed to lapse. For instance, Congress reinstated the BTC in December 2010, covering 2010 retroactively and 2011 prospectively, and allowed it to lapse at the end of 2011. On January 2, 2013, over a full year following its previous expiration, Congress again reinstated the BTC covering 2012 retroactively and 2013 prospectively. The credit lapsed a third time on January 1, 2014 and was reinstated almost one year later on December 19, 2014, covering only 2014 retroactively. Most recently, the credit was reinstated on December 18, 2015, covering 2015 retroactively and 2016 prospectively. As a result, we recognized the related BTC revenue for 2015 in the fourth quarter of that year. It is uncertain whether the BTC will be extended beyond the end of 2016. The lapsing or modification of the BTC or enactment of a different incentive program could adversely affect our future financial results.
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, and the price of feedstocks used to produce biomass-based diesel.
Biomass-based diesel is a low carbon intensity, 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, a value component that was introduced via RFS2 in July 2010, has had a significant impact on biomass-based diesel pricing. The following table shows the contributory value over the years of RINs, as reported by OPIS to the average B100 spot price of a gallon of biodiesel, as reported by The Jacobsen in terms of dollars per gallon and percentages.
rinpricevsb100pricechart.jpg

24



The changes in the value of RINs acquired from third parties and held in inventory at September 30, 2016 resulted in a $15.0 million write-down to lower of cost or net realizable value for the first nine months of 2016. See “Note 5 – 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 has not had a material effect on margins from period to period.
During 2015, feedstock expense accounted for 78% of our production cost, while methanol and chemical catalysts expense accounted for 5% and 4% of our costs of goods sold, respectively.
Feedstocks for biomass-based diesel production, such as inedible corn oil, used cooking oil, inedible animal fat, canola oil 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:

 
 
Feedstock
Factors Influencing Supply and Price
 
Inedible Corn Oil
Used Cooking Oil
Inedible Animal Fat
Canola Oil
Soybean Oil
Demand for inedible corn oil from renewable fuel and other markets
 
þ
 
 
 
 
Ethanol production
 
þ
 
 
 
 
Export demand
 
þ
þ
þ
þ
þ
Extraction system yield
 
þ
 
 
 
 
Implementation of inedible corn oil separation systems into existing and new ethanol facilities
 
þ
 
 
 
 
Implementation of co-located biodiesel/renewable diesel plants with ethanol facilities
 
þ
 
 
 
 
Feed demand
 
þ
þ
þ
 
 
New or expected biodiesel capacity
 
þ
 
 
 
 
Weather conditions
 
þ
 
 
þ
þ
Biomass-based diesel demand
 
 
þ
 
þ
þ
Population
 
 
þ
 
 
 
Number of restaurants in the vicinity of collection facilities and terminals which is dependent on population density
 
 
þ
 
 
 
Cooking methods and eating habits, which can be impacted by the economy
 
 
þ
 
 
 
Number of slaughter kills in the United States
 
 
 
þ
 
 
Demand for inedible animal fat from other markets
 
 
 
þ
 
 
Demand for canola oil for food use
 
 
 
 
þ
 
Canola crush margin
 
 
 
 
þ
 
Canola meal demand
 
 
 
 
þ
 
Crop disease
 
 
 
 
þ
þ
Palm oil supply
 
 
 
 
þ
 
Soybean meal demand
 
 
 
 
 
þ
South American crop production
 
 
 
 
 
þ
Farmer planting decisions
 
 
 
 
 
þ
Government policies and subsidies
 
 
 
 
 
þ
During 2015, 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.

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The graph below illustrates the spread between the cost of producing one gallon of biodiesel made from soybean oil to the cost of producing one gallon of biodiesel made from a lower cost feedstock from December 2011 to September 30, 2016. 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.
 graphsbospreada17.jpg
(1)
Used cooking oil prices are based on the monthly average of the daily low sales price of Missouri River yellow grease as reported by The Jacobsen (based on 8.5 pounds per gallon).
(2)
Inedible corn oil prices are reported as the monthly average of the daily distillers’ corn oil market values delivered to Illinois as reported by The Jacobsen (based on 8.2 pounds per gallon).
(3)
Choice white grease prices are based on the monthly average of the daily low prices of Missouri River choice white grease as reported by The Jacobsen (based on 8.0 pounds per gallon).
(4)
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 7.5 pounds per gallon).  
Historically, our results of operations generally benefit when the spread between biomass-based diesel prices and feedstock prices widens and will be harmed when this spread narrows. The following graph shows feedstock cost data for 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 biodiesel and each of soybean oil and choice white grease, from December 2011 to September 30, 2016.

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graphspreadpricinga18.jpg  
(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 7.5 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).