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EX-32.2 - EXHIBIT 32.2 - Renewable Energy Group, Inc.regi-2017q3xex322.htm
EX-32.1 - EXHIBIT 32.1 - Renewable Energy Group, Inc.regi-2017q3xex321.htm
EX-31.2 - EXHIBIT 31.2 - Renewable Energy Group, Inc.regi-2017q3xex312.htm
EX-31.1 - EXHIBIT 31.1 - Renewable Energy Group, Inc.regi-2017q3xex311.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, 2017
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, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
   
Large accelerated filer  ¨
   
Accelerated filer  x
   
   
Non-accelerated filer   ¨
   (Do not check if a smaller reporting company)
Smaller reporting company  ¨
 
 
 
 
 
Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 
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, 2017, the registrant had 38,832,605 shares of Common Stock outstanding.




TABLE OF CONTENTS


2



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,
2017
 
December 31,
2016
ASSETS
   

 
   

CURRENT ASSETS:
   

 
   

Cash and cash equivalents
$
112,242

 
$
116,210

Accounts receivable, net
87,723

 
164,949

Inventories
125,507

 
145,408

Prepaid expenses and other assets
65,914

 
36,272

Total current assets
391,386

 
462,839

Property, plant and equipment, net
621,165

 
599,474

Goodwill
16,080

 
16,080

Intangible assets, net
27,714

 
29,470

Investments
13,101

 
12,110

Other assets
9,227

 
12,630

Restricted cash

 
4,000

TOTAL ASSETS
$
1,078,673

 
$
1,136,603

LIABILITIES AND EQUITY
   

 
   

CURRENT LIABILITIES:
   

 
   

Lines of credit
$
92,579

 
$
52,844

Current maturities of long-term debt
10,640

 
15,402

Accounts payable
80,360

 
99,137

Accrued expenses and other liabilities
44,126

 
38,916

Deferred revenue
221

 
27,246

Total current liabilities
227,926

 
233,545

Unfavorable lease obligation
3,670

 
15,515

Deferred income taxes
22,568

 
20,279

Long-term contingent consideration for acquisitions
12,471

 
28,931

Convertible debt conversion liability
51,258

 
27,100

Long-term debt (net of debt issuance costs of $5,694 and $6,286, respectively)
202,789

 
196,203

Other liabilities
4,520

 
4,856

Total liabilities
525,202

 
526,429

COMMITMENTS AND CONTINGENCIES


 


EQUITY:
   

 
   

Common stock ($.0001 par value; 300,000,000 shares authorized; 38,832,605 and 38,553,413 shares outstanding, respectively)
5

 
5

Common stock—additional paid-in-capital
485,654

 
480,906

Retained earnings
151,911

 
214,007

Accumulated other comprehensive loss
(1,094
)
 
(5,751
)
Treasury stock (9,360,784 and 9,246,002 shares outstanding, respectively)
(83,005
)
 
(81,824
)
Total equity attributable to the Company's shareholders
553,471

 
607,343

Non-controlling interest

 
2,831

Total equity
553,471

 
610,174

TOTAL LIABILITIES AND EQUITY
$
1,078,673

 
$
1,136,603

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, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
REVENUES:
   
 
   
 
   
 
   
Biomass-based diesel sales
$
504,016

 
$
419,093

 
$
1,303,681

 
$
1,032,093

Separated RIN sales
120,389

 
104,646

 
245,062

 
191,201

Biomass-based diesel government incentives
741

 
100,336

 
28,503

 
255,890

   
625,146

 
624,075

 
1,577,246

 
1,479,184

Other revenue
1,837

 
565

 
3,733

 
1,627

   
626,983

 
624,640

 
1,580,979

 
1,480,811

COSTS OF GOODS SOLD:
   
 
   
 
   
 
   
Biomass-based diesel
505,871

 
456,441

 
1,328,129

 
1,178,227

Separated RINs
105,131

 
119,515

 
185,978

 
211,654

Other costs of goods sold
1,186

 
1,336

 
3,340

 
1,334

Impairment of long-lived assets

 

 
1,341

 

   
612,188

 
577,292

 
1,518,788

 
1,391,215

GROSS PROFIT
14,795

 
47,348

 
62,191

 
89,596

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
25,880

 
20,799

 
71,599

 
61,426

RESEARCH AND DEVELOPMENT EXPENSE
3,759

 
4,805

 
10,537

 
13,158

INCOME (LOSS) FROM OPERATIONS
(14,844
)
 
21,744

 
(19,945
)
 
15,012

OTHER INCOME (EXPENSE), NET:
   
 
   
 
   
 
   
Change in fair value of contingent consideration
(1,433
)
 
(1,124
)
 
(1,998
)
 
(4,680
)
Change in fair value of convertible debt conversion liability
8,560

 
3,013

 
(24,158
)
 
16,445

Gain on debt extinguishment

 
179

 

 
2,331

Gain on involuntary conversion
942

 
3,470

 
942

 
8,010

Other income (loss), net
12

 
(493
)
 
(278
)
 
(430
)
Interest expense
(4,725
)
 
(4,487
)
 
(13,740
)
 
(11,536
)
   
3,356

 
558

 
(39,232
)
 
10,140

INCOME (LOSS) BEFORE INCOME TAXES
(11,488
)
 
22,302

 
(59,177
)
 
25,152

INCOME TAX BENEFIT (EXPENSE)
115

 
1,203

 
(2,919
)
 
(821
)
NET INCOME (LOSS)
(11,373
)
 
23,505

 
(62,096
)
 
24,331

LESS—NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST

 
(63
)
 

 
(201
)
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY
(11,373
)
 
23,442

 
(62,096
)
 
24,130

LESS—EFFECT OF PARTICIPATING SHARE-BASED AWARDS

 
(513
)
 

 
(462
)
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY’S COMMON STOCKHOLDERS
$
(11,373
)
 
$
22,929

 
$
(62,096
)
 
$
23,668

NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
   
 
   
 
   
 
   
BASIC
$
(0.29
)
 
$
0.59

 
$
(1.61
)
 
$
0.57

DILUTED
$
(0.29
)
 
$
0.59

 
$
(1.61
)
 
$
0.57

WEIGHTED AVERAGE SHARES USED TO COMPUTE NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
   
 
   
 
   
 
   
BASIC
38,772,434

 
38,744,878

 
38,684,412

 
41,673,223

DILUTED
38,772,434

 
38,751,706

 
38,684,412

 
41,678,988

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, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Net income (loss)
$
(11,373
)
 
$
23,505

 
$
(62,096
)
 
$
24,331

Foreign currency translation adjustments
1,476

 
766

 
4,657

 
1,052

Other comprehensive income
1,476

 
766

 
4,657

 
1,052

Comprehensive income (loss)
(9,897
)
 
24,271

 
(57,439
)
 
25,383

Less—Comprehensive loss attributable to noncontrolling interest

 
(26
)
 

 
(125
)
Comprehensive income (loss) attributable to the Company
$
(9,897
)
 
$
24,297

 
$
(57,439
)
 
$
25,508

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, 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

BALANCE, January 1, 2017
38,553,413

 
$
5

 
$
480,906

 
$
214,007

 
$
(5,751
)
 
$
(81,824
)
 
$
2,831

 
$
610,174

Conversion of restricted stock units to common stock (net of 79,404 shares of treasury stock purchased)
206,619

 

 

 

 

 
(852
)
 

 
(852
)
Settlement of stock appreciation rights in common stock (net of 35,378 shares of treasury stock purchased)
72,573

 

 

 

 

 
(329
)
 

 
(329
)
Acquisition of noncontrolling interest

 

 
(271
)
 

 

 

 
(2,831
)
 
(3,102
)
Stock compensation expense

 

 
5,019

 

 

 

 

 
5,019

Other comprehensive income

 

 

 

 
4,657

 

 

 
4,657

Net loss

 

 

 
(62,096
)
 

 

 

 
(62,096
)
BALANCE, September 30, 2017
38,832,605

 
$
5

 
$
485,654

 
$
151,911

 
$
(1,094
)
 
$
(83,005
)
 
$

 
$
553,471

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, 2017
 
September 30, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
   
 
   
Net income (loss)
$
(62,096
)
 
$
24,331

Adjustments to reconcile net income (loss) to net cash flows from operating activities:
   
 
   
Depreciation expense
25,585

 
23,447

Amortization expense of assets and liabilities, net
1,455

 
676

Gain on involuntary conversion
(942
)
 
(8,010
)
Accretion of convertible note discount
4,044

 
3,820

Change in fair value of contingent consideration
1,998

 
4,680

Change in fair value of convertible debt conversion liability
24,158

 
(16,445
)
Gain on debt extinguishment

 
(2,331
)
Provision for doubtful accounts
(57
)
 
42

Impairment of long-lived assets
1,341

 

Stock compensation expense
5,019

 
4,067

Deferred tax expense
2,292

 
505

Other operating activities
35

 
(43
)
Changes in assets and liabilities, net of effects from acquisitions:
   
 
   
Accounts receivable, net
77,534

 
205,733

Inventories
21,683

 
(10,482
)
Prepaid expenses and other assets
(27,244
)
 
(13,857
)
Accounts payable
(19,544
)
 
(147,268
)
Accrued expenses and other liabilities
(13,574
)
 
1,114

Deferred revenue
(27,025
)
 
1,159

Net cash flows provided by operating activities
14,662

 
71,138

CASH FLOWS FROM INVESTING ACTIVITIES:
   
 
   
Cash receipts for involuntary conversion
3,000

 
8,010

Cash receipts of restricted cash
4,000

 
1,985

Cash paid for purchase of property, plant and equipment
(48,556
)
 
(42,809
)
Cash paid for acquisitions and additional interests, net of cash acquired
(3,639
)
 
(12,720
)
Cash paid for investments
(816
)
 
(3,249
)
Net cash flows used in investing activities
(46,011
)
 
(48,783
)
CASH FLOWS FROM FINANCING ACTIVITIES:
   
 
   
Net borrowings (repayments) on revolving line of credit
38,862

 
(20,855
)
Borrowings on other lines of credit
3,873

 
8,807

Repayments on other lines of credit
(3,000
)
 
(263
)
Cash received from notes payable
6,363

 
163,646

Cash paid on notes payable
(7,874
)
 
(72,548
)
Cash paid for debt issuance costs
(892
)
 
(5,876
)
Cash paid for treasury stock

 
(51,474
)
Cash paid for contingent consideration settlement
(10,978
)
 
(4,871
)
Cash received on partial termination of capped call options

 
159

Cash paid for conversion of restricted stock units and stock appreciation rights
(1,181
)
 

Net cash flows provided by financing activities
25,173

 
16,725

NET CHANGE IN CASH AND CASH EQUIVALENTS
(6,176
)
 
39,080

CASH AND CASH EQUIVALENTS, Beginning of period
116,210

 
47,081

Effect of exchange rate changes on cash
2,208

 
370

CASH AND CASH EQUIVALENTS, End of period
$
112,242

 
$
86,531

(continued)

5




RENEWABLE ENERGY GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
Nine months ended
 
September 30, 2017
 
September 30, 2016
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
   
 
   
Cash paid for income taxes
$
238

 
$
203

Cash paid for interest
$
6,603

 
$
5,496

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
   
 
   
Amounts included in period-end accounts payable for:
   
 
   
Purchases of property, plant and equipment
$
3,174

 
$
4,220

Debt issuance cost
$
73

 
$
135

Issuance of common stock for acquisitions
$

 
$
4,050

Contingent consideration for acquisitions
$

 
$
4,500

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

 
 
 
 
 
 
 
 
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, 2017 and 2016
(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 10, 2017. 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, 2017, the Company operates a network of fourteen biorefineries, with twelve locations in North America and two locations in Europe, which includes thirteen operating biomass-based diesel production facilities with aggregate nameplate production capacity of 502 million gallons per year ("mmgy") and one fermentation facility. REG also has one feedstock processing facility. The Company's network includes the addition of a 20-million gallon annual nameplate capacity biomass-based diesel refinery located in DeForest, Wisconsin, acquired in March 2016. Ten 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 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") was reinstated for 2015, in effect throughout 2016 and lapsed on January 1, 2017. During the nine months ended September 30, 2017, the Company recognized $26,897 as BTC revenue out of the $26,897 deferred BTC revenue that was outstanding as of December 31, 2016. It is uncertain whether the BTC will be reinstated and whether any reinstatement will be retroactive for 2017. The expiration or modification of any one or more of those incentives, could adversely affect the financial results of the Company.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies should be read in conjunction with a summary of the significant accounting policies the Company has disclosed in its Annual Report on Form 10-K for the year ended December 31, 2016.
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, 2017, the Company has received approximately $85,779 of the $89,266 outstanding related to the 2016 biodiesel mixture excise tax credit, which results in $3,486 remaining as outstanding receivables at September 30, 2017.
Renewable Identification Numbers (RINs)
When the Company produces and sells a gallon of biomass-based diesel, 1.5 to 1.7 RINs per gallon are generated. RINs are used to track compliance with Renewable Fuel Standards (RFS2). RFS2 allows the Company to attach between zero and 2.5 RINs to any gallon of biomass-based diesel. As a result, a portion of the selling price for a gallon of biomass-based diesel is generally attributable to RFS2 compliance. However, RINs that the Company generates are a form of government incentive and not a result of the physical attributes of the biomass-based diesel production. Therefore, no cost is allocated to the RIN when it is generated, regardless of whether the RIN is transferred with the biomass-based diesel produced or held by the Company pending attachment to other biomass-based diesel production sales.
In addition, the Company also obtains RINs from third parties who have separated the RINs from gallons of biomass-based diesel. From time to time, the Company holds varying amounts of these separated RINs for resale. RINs obtained from

7



third parties are initially recorded at their cost and are subsequently revalued at the lower of cost or net realizable value as of the last day of each accounting period. The resulting adjustments are reflected in costs of goods sold for the period. The value of these RINs is reflected in “Prepaid expenses and other assets” on the Condensed Consolidated Balance Sheets. The cost of goods sold related to the sale of these RINs is determined using the average cost method, while market prices are determined by RIN values, as reported by the Oil Price Information Service ("OPIS").

California’s Low Carbon Fuel Standard
The Company generates Low Carbon fuel Standard ("LCFS") credits for its low carbon fuels or blendstocks when its qualified low carbon fuels are transported into California. LCFS credits are used to track compliance with California’s LCFS. As a result, a portion of the selling price for a gallon of biomass-based diesel sold into California is also attributable to LCFS compliance. However, LCFS credits that the Company generates are a form of government incentive and not a result of the physical attributes of the biomass-based diesel production. Therefore, no cost is allocated to the LCFS credit when it is generated, regardless of whether the LCFS credit is transferred with the biomass-based diesel produced or held by the Company pending attachment to other biomass-based diesel sales that do not transfer credits.
In addition, the Company also obtains LCFS credits from third-party trading activities. From time to time, the Company holds varying amounts of these third-party LCFS credits for resale. LCFS credits obtained from third parties are initially recorded at their cost and are subsequently revalued at the lower of cost or net realizable value as of the last day of each accounting period, and the resulting adjustments are reflected in costs of goods sold for the period. The value of LCFS credits obtained from third parties is reflected in “Prepaid expenses and other assets” on the Condensed Consolidated Balance Sheet. The cost of goods sold related to the sale of these LCFS credits is determined using the average cost method, while market prices are determined by LCFS values, as reported by the OPIS.
The Company records assets acquired and liabilities assumed through the exchange of non-monetary assets based on the fair value of the assets and liabilities acquired or the fair value of the consideration exchanged, whichever is more readily determinable.
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 June 2017, the Company experienced a fire at its Madison facility, resulting in the shutdown of the facility. Through September 30, 2017, the Company impaired fixed assets with a total net book value of approximately $2,058 as a result of the fire in June 2017. During the third quarter of 2017, the Company received a payment in the amounts of $3,000 and $2,000 to cover initial costs incurred for property losses and business interruption, respectively.
In June 2017, the Company entered into an agreement to terminate the ground lease and purchase the land it had leased for its Geismar, Louisiana biorefinery as well as more than 61 adjacent acres from Lion Copolymer for $20,000. The Company recorded a loss of $3,967 as a result of the lease termination in the three months ended June 30, 2017.
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, 2017 and December 31, 2016, the Company had goodwill in the Services reporting unit. The annual impairment test at July 31, 2017 determined that the fair value of the Services reporting unit exceeded its carrying value by approximately 49%. No impairment of goodwill was recorded during the three and nine months ended September 30, 2017.
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 a gain of $8,560 and loss of $24,158 of fair value adjustments were recorded for the three and nine months ended September 30, 2017, respectively. The Company expects to continue marking the embedded conversion option to market unless and until stockholders vote to approve removal of the restriction on issuance. See "Note 7 - Debt" for a further description of the transaction.
Research and Development

8



Research and development ("R&D") costs are charged to expense as incurred. In process research and development ("IPR&D") assets acquired in connection with acquisitions are recorded on the Condensed Consolidated Balance Sheets as intangible assets. During October 2016, the Company entered into the first commercial sale agreement to sell certain products made from the IPR&D platform. This triggered the review of the impairment and useful life of the IPR&D assets. The Company performed a final discounted cash flow analysis at October 31, 2016 prior to assigning a useful life to the IPR&D assets. The Company determined the useful life of the IPR&D assets to be 15 years and has utilized a straight line method to amortize these assets over the useful life.
New Accounting Standards
On February 25, 2016, the FASB issued ASU 2016-02, which introduces a lessee model that brings most leases on the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in ASC 606, the FASB’s new revenue recognition standard (e.g., those related to evaluating when profit can be recognized). Furthermore, the ASU addresses other concerns related to the current leases model. The ASU is effective for annual periods beginning after December 15, 2018 and interim periods therein. The Company has started the process to compile and review all of its leases. While the Company is continuing to assess all potential impacts of the standard, the Company currently believes the most significant impact relates to its accounting for office, railcar and terminal operating leases. The Company plans to apply a modified retrospective transition approach to each applicable lease that exists at January 1, 2017 as well as leases entered after this date.
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 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.
Effective January 1, 2018, the Company will be required to adopt the new guidance of ASC Topic 606, Revenue from Contracts with Customers (Topic 606), which will supersede the revenue recognition requirements in ASC Topic 605, Revenue Recognition. Topic 606 requires the Company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance requires the Company to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation. The Company will be required to adopt Topic 606 either on a full retrospective basis to each prior reporting period presented or on a modified retrospective basis with the cumulative effect of initially applying the new guidance recognized at the date of initial application. The Company will adopt Topic 606 on a modified retrospective basis and will be required to provide additional disclosures of the amount by which each financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect before the change, and an explanation of the reasons for significant changes. The Company has established a cross-functional implementation team consisting of representatives from all of its business segments. The majority of the Company's revenues are generated from sales of biomass-based diesel products and revenue is recognized when customers take control of the goods as the Company's performance obligation would be complete. In most cases, the Company's impact assessment indicates that the majority of the Company's contracts will continue to be recognized at a point in time and that the number of performance obligations and the accounting for variable consideration are not expected to be significantly different from current practice. The Company will complete its assessment during the 4th quarter in preparation for adoption of the new standard on January 1, 2018.
On August 28, 2017, the FASB issued ASU 2017-12, which amends the hedge accounting recognition and presentation requirements in ASC 815 to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and simplify the application of hedge accounting by

9



preparers. The Company is evaluating, but does not expect this guidance to have any 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 December 31, 2016.
The following table summarizes the consideration paid for the acquisition from Sanimax Energy:
 
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, 2017, the Company has recorded a contingent liability of $2,522, approximately $805 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, 2016.
 
Three Months 
 Ended 
 September 30, 
 2017
 
Three Months 
 Ended 
 September 30, 
 2016
 
Nine Months 
 Ended 
 September 30, 
 2017
 
Nine Months 
 Ended 
 September 30, 
 2016
Revenues
$
626,983

 
$
624,640

 
$
1,580,979

 
$
1,489,237

Net income (loss)
(11,373
)
 
22,929

 
(62,096
)
 
23,670

Basic net income (loss) per share
$
(0.29
)
 
$
0.59

 
$
(1.58
)
 
$
0.57

NOTE 4 — INVENTORIES

10



Inventories consist of the following:
   
September 30, 2017
 
December 31, 2016
Raw materials
$
47,889

 
$
34,560

Work in process
3,330

 
3,775

Finished goods
74,288

 
107,073

Total
$
125,507

 
$
145,408

NOTE 5 — OTHER ASSETS
Prepaid expense and other assets consist of the following:
   
September 30, 2017
 
December 31, 2016
Commodity derivatives and related collateral, net
$
5,881

 
$
7,127

Prepaid expenses
10,038

 
10,665

Deposits
2,823

 
2,897

RIN inventory
38,164

 
9,398

Taxes receivable
7,732

 
4,539

Other
1,276

 
1,646

Total
$
65,914

 
$
36,272

RIN inventory values were adjusted in the amounts of $440 and $612 at September 30, 2017 and December 31, 2016, respectively, to reflect the lower of cost or net realizable value.
Other noncurrent assets consist of the following:
 
September 30, 2017
 
December 31, 2016
Spare parts inventory
$
2,854

 
$
3,532

Catalysts
3,341

 
4,479

Deposits
381

 
2,392

Other
2,651

 
2,227

Total
$
9,227

 
$
12,630

NOTE 6— INTANGIBLE ASSETS
Intangible assets consist of the following:
 
September 30, 2017
 
Cost
 
Accumulated Amortization
 
Net
 
Weighted Average Remaining Life
Raw material supply agreement
$
6,230

 
$
(2,301
)
 
$
3,929

 
8.3 years
Renewable diesel technology
8,300

 
(1,844
)
 
6,456

 
11.8 years
Ground lease
200

 
(138
)
 
62

 
4.1 years
Acquired customer relationships
2,900

 
(614
)
 
2,286

 
7.8 years
In-process research and development
15,956

 
(975
)
 
14,981

 
14.1 years
Total intangible assets
$
33,586

 
$
(5,872
)
 
$
27,714

 
 

11



 
December 31, 2016
 
Cost
 
Accumulated Amortization
 
Net
 
Weighted Average Remaining Life
Raw material supply agreement
$
6,230

 
$
(1,987
)
 
$
4,243

 
9.0 years
Renewable diesel technology
8,300

 
(1,429
)
 
6,871

 
12.5 years
Ground lease
200

 
(127
)
 
73

 
4.9 years
Acquired customer relationships
2,900

 
(396
)
 
2,504

 
8.6 years
In-process research and development
15,956

 
(177
)
 
15,779

 
14.8 years
Total intangible assets
$
33,586

 
$
(4,116
)
 
$
29,470

 
 
The Company recorded intangible amortization expense of $587 and $1,756 for the three and nine months ended September 30, 2017, and $328 and $968 for the three and nine months ended September 30, 2016, respectively.
The estimated intangible asset amortization expense for the remainder of 2017 through 2023 and thereafter is as follows:
October 1, 2017 through December 31, 2017
$
1,553

2018
2,373

2019
2,379

2020
2,386

2021
2,384

2022
2,385

2023 and thereafter
14,254

Total
$
27,714

NOTE 7 — DEBT
The Company’s debt is as follows:
   
September 30, 2017
 
December 31, 2016
4.00% Convertible Senior Notes, $152,000 face amount, due in June 2036
$
115,547

 
$
113,446

2.75% Convertible Senior Notes, $73,838 face amount, due in June 2019
69,198

 
67,254

REG Danville term loan, secured, variable interest rate of LIBOR plus 4%, due in July 2022
12,084

 
8,163

REG Newton term loan, secured, variable interest rate of LIBOR plus 4%, due in December 2018
8,966

 
13,063

REG Mason City term loan, fixed interest rate of 5%, due in July 2019
1,412

 
2,659

REG Ames term loans, secured, fixed interest rates of 3.5% and 4.25%, due in January 2018 and December 2019, respectively
3,305

 
3,565

REG Grays Harbor term loan, variable interest of minimum of 3.5% or Prime Rate plus 0.25%, due in May 2022
8,235

 
9,273

Other
376

 
468

Total term debt before debt issuance costs
219,123

 
217,891

Less: Current portion of long-term debt
10,640

 
15,402

Less: Debt issuance costs (net of accumulated amortization of $3,048 and $2,396, respectively)
5,694

 
6,286

Total long-term debt
$
202,789

 
$
196,203


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.


12



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 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, 2017 was $51,258. The Company recognized a gain of $8,560 and loss of $24,158 for the three and nine months ended September 30, 2017, respectively, which is 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%.

REG Ralston

On April, 19, 2017, REG Ralston, LLC ("REG Ralston") entered into a construction loan agreement ("Construction Loan Agreement") with First Midwest Bank. The Construction Loan Agreement allows REG Ralston to borrow up to $20,000 during the construction period at REG Ralston and convert it into an amortizing term debt thereafter. The loan has a maturity date of October 19, 2025. The loan requires monthly principal payments after the construction period and interest to be charged using prime rate plus 0.5% per annum. The loan agreement contains various loan covenants. At September 30, 2017, the Company had not made any borrowings under this Construction Loan Agreement.

REG Danville

On July 28, 2017, REG Danville, LLC ("REG Danville") entered into an amended loan agreement ("Loan Agreement") with Fifth Third Bank. The Loan Agreement allows REG Danville to borrow $12,500 with a maturity date of July 1, 2022. The loan requires monthly principal payments and bears LIBOR-based variable interest rates. The loan agreement contains various loan covenants. At September 30, 2017, the effective interest rate on the amount borrowed under this Loan Agreement was 5.25% per annum.

Lines of Credit
 
September 30, 2017
 
December 31, 2016
Amount outstanding under lines of credit
$
92,579

 
$
52,844

Maximum available to be borrowed under lines of credit
$
9,520

 
$
100,237


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

13



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 March 16, 2017, the Agreement was amended to extend the maturity date to March 18, 2018.

REG Germany has a trade finance facility agreement ("Uncommitted Credit Facility Agreement") with BNP Paribas in Europe, which allows it to borrow up to $25,000 for funding the purchase of goods and services. Amounts outstanding under the Uncommitted Credit Facility Agreement bear variable interest and are payable as stipulated in the agreement. The amount that can be borrowed under the agreement can be amended, cancelled or restricted at BNP Paribas's sole discretion and therefore is not included in the maximum available to be borrowed under lines of credit above. The Uncommitted Credit Facility Agreement contains various loan covenants that require REG Germany to maintain certain financial measures. At September 30, 2017, the nominal interest rates ranged from 2.14% to 2.50% per annum.
NOTE 8 — 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, 2017, the net notional volumes of NY Harbor ULSD and CBOT Soybean Oil covered under the open commodity derivative contracts were approximately 68 million gallons and 12 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 derivatives and amounts that offset within the Condensed Consolidated Balance Sheets:
   
September 30, 2017
 
December 31, 2016
   
Assets
 
Liabilities
 
Assets
 
Liabilities
Gross amounts of derivatives recognized at fair value
$
829

 
$
7,916

 
$
1,272

 
$
3,511

Cash collateral
12,968

 

 
9,366

 

Total gross amount recognized
13,797

 
7,916

 
10,638

 
3,511

Gross amounts offset
(7,916
)
 
(7,916
)
 
(3,511
)
 
(3,511
)
Net amount reported in the condensed consolidated balance sheets
$
5,881

 
$

 
$
7,127

 
$

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, 
 2017
 
Three Months 
 Ended 
 September 30, 
 2016
 
Nine Months 
 Ended 
 September 30, 
 2017
 
Nine Months 
 Ended 
 September 30, 
 2016
Commodity derivatives
Cost of goods sold – Biomass-based diesel
 
$
(24,989
)
 
$
5,865

 
$
(6,942
)
 
$
(28,931
)
NOTE 9 — 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.

14



A summary of assets (liabilities) measured at fair value is as follows:
   
As of September 30, 2017
   
Total
 
Level 1
 
Level 2
 
Level 3
Commodity contract derivatives
$
(7,087
)
 
$
(3,189
)
 
$
(3,898
)
 
$

Convertible debt conversion liability
(51,258
)
 

 
(51,258
)
 

Contingent considerations for acquisitions
(37,588
)
 

 

 
(37,588
)
 
$
(95,933
)
 
$
(3,189
)
 
$
(55,156
)
 
$
(37,588
)
   
As of December 31, 2016
   
Total
 
Level 1
 
Level 2
 
Level 3
Commodity contract derivatives
$
(2,239
)
 
$
(1,297
)
 
$
(942
)
 
$

Convertible debt conversion liability
(27,100
)
 

 
(27,100
)
 

Contingent considerations for acquisitions
(46,568
)
 

 

 
(46,568
)
   
$
(75,907
)
 
$
(1,297
)
 
$
(28,042
)
 
$
(46,568
)
The following is a reconciliation of the beginning and ending balances for liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
 
Contingent Consideration for Acquisitions
 
2017
 
2016
Balance at beginning of period, January 1
$
46,568

 
$
41,712

Fair value of contingent consideration at measurement date

 
4,500

Change in estimates included in earnings
589

 
(15
)
Settlements
(3,980
)
 
(581
)
Balance at end of period, March 31
43,177

 
45,616

Change in estimates included in earnings
(24
)
 
3,571

Settlements
(3,698
)
 
(809
)
Balance at end of period, June 30
39,455

 
48,378

Fair value of contingent consideration at measurement date

 

Change in estimates included in earnings
1,433

 
1,124

Settlements
(3,300
)
 
(3,481
)
Balance at end of period, September 30
$
37,588

 
$
46,021

The estimated fair values of the Company’s financial instruments, which are not recorded at fair value, are as follows:
   
As of September 30, 2017
 
As of December 31, 2016
   
Asset (Liability)
Carrying
Amount
 
Fair Value
 
Asset (Liability)
Carrying
Amount
 
Fair Value
Financial liabilities:
   
 
   
 
   
 
   
Debt and lines of credit
$
(311,702
)
 
$
(303,062
)
 
$
(270,735
)
 
$
(264,267
)
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.

15



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.
NOTE 10 — 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, 
 2017
 
Three Months 
 Ended 
 September 30, 
 2016
 
Nine Months 
 Ended 
 September 30, 
 2017
 
Nine Months 
 Ended 
 September 30, 
 2016
Options to purchase common stock

 
87,026

 

 
87,026

Stock appreciation rights
600,909

 
2,484,757

 
1,307,655

 
2,428,095

2019 Convertible notes
5,567,112

 
5,922,068

 
5,567,112

 
8,677,528

2036 Convertible notes
14,106,725

 
14,106,725

 
14,106,725

 
6,229,612

Total
20,274,746

 
22,600,576

 
20,981,492

 
17,422,261


16



The following table presents the calculation of diluted net loss per share:
   
Three Months 
 Ended 
 September 30, 
 2017
 
Three Months 
 Ended 
 September 30, 
 2016
 
Nine Months 
 Ended 
 September 30, 
 2017
 
Nine Months 
 Ended 
 September 30, 
 2016
Net income (loss) attributable to the Company’s common stockholders - Basic
$
(11,373
)
 
$
22,929

 
$
(62,096
)
 
$
23,668

Less: effect of participating securities

 

 

 

Net income (loss) attributable to common stockholders - Dilutive
$
(11,373
)
 
$
22,929

 
$
(62,096
)
 
$
23,668

Shares:

 
 
 

 

Weighted-average shares used to compute basic net income per share
38,772,434

 
38,744,878

 
38,684,412

 
41,673,223

Adjustment to reflect stock appreciation right conversions

 
6,828

 

 
5,765

Weighted-average shares used to compute diluted net income per share
38,772,434

 
38,751,706

 
38,684,412

 
41,678,988

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

 
 
 

 

Diluted
$
(0.29
)
 
$
0.59

 
$
(1.61
)
 
$
0.57

NOTE 11 — 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 segments on an annual basis. The Company has three reportable segments, which generally align the Company's external financial reporting segments with its internal operating segments, which are based on its internal organizational structure, operating decisions and performance assessment. The Company's reportable segments at September 30, 2017 and for the year ended December 31, 2016 are composed of Biomass-based Diesel, Services, Renewable Chemicals and Corporate and other activities. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
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.


17



The following table represents the significant items by reportable segment:
   
Three Months 
 Ended 
 September 30, 
 2017
 
Three Months 
 Ended 
 September 30, 
 2016
 
Nine Months 
 Ended 
 September 30, 
 2017
 
Nine Months 
 Ended 
 September 30, 
 2016
Net revenues:
   
 
   
 
   
 
   
Biomass-based Diesel (includes REG Germany's net sales of $35,736 and $130,761 for the three and nine months ended September 30, 2017, respectively, and $41,671 and $124,388 for the three and nine months ended September 30, 2016, respectively)
$
619,852

 
$
599,198

 
$
1,542,484

 
$
1,423,867

Services
24,152

 
21,051

 
67,907

 
63,184

Renewable Chemicals
1,514

 
565

 
3,344

 
1,565

Corporate and Other
31,134

 
28,781

 
108,273

 
69,412

Intersegment revenues
(49,669
)
 
(24,955
)
 
(141,029
)
 
(77,217
)
   
$
626,983

 
$
624,640

 
$
1,580,979

 
$
1,480,811

Income (loss) before income taxes:
   
 
   
 
   
 
   
Biomass-based Diesel (includes REG Germany's income (loss) of ($1,704) and ($3,036) for the three and nine months ended September 30, 2017, respectively, and $306 and $1,922 for the three and nine months ended September 30, 2016, respectively)
$
(9,833
)
 
$
25,598

 
$
(16,225
)
 
$
27,143

Services
1,316

 
1,753

 
939

 
3,587

Renewable Chemicals
(4,550
)
 
(5,783
)
 
(14,385
)
 
(14,388
)
Corporate and Other
1,579

 
734

 
(29,506
)
 
8,810

   
$
(11,488
)
 
$
22,302

 
$
(59,177
)
 
$
25,152

Depreciation and amortization expense, net:
   
 
   
 
   
 
   
Biomass-based Diesel (includes REG Germany's amounts of $712 and $2,186 for the three and nine months ended September 30, 2017, respectively, and $707 and $2,419 for the three and nine months ended September 30, 2016, respectively)
$
7,947

 
$
7,516

 
$
23,517

 
$
21,584

Services
301

 
108

 
783

 
321

Renewable Chemicals
439

 
382

 
1,207

 
1,164

Corporate and Other
517

 
265

 
1,533

 
1,054

   
$
9,204

 
$
8,271

 
$
27,040

 
$
24,123

Cash paid for purchases of property, plant and equipment:
   
 
   
 
   
 
   
Biomass-based Diesel (includes REG Germany's amounts of $570 and $2,965 for the three and nine months ended September 30, 2017, respectively, and $734 and $1,038 for the three and nine months ended September 30, 2016, respectively)
$
14,294

 
$
10,560

 
$
43,693

 
$
36,059

Services
957

 
4,647

 
2,476

 
5,812

Renewable Chemicals
7

 
16

 
14

 
635

Corporate and Other
1,261

 
119

 
2,373

 
303

   
$
16,519

 
$
15,342

 
$
48,556

 
$
42,809



18



   
September 30, 2017
 
December 31, 2016
Goodwill:
   
 
   
Services
$
16,080

 
$
16,080

 
 
 
 
Assets:
   
 
   
Biomass-based Diesel (including REG Germany's assets of $52,442 and $56,159, respectively)
$
965,113

 
$
1,026,349

Services
50,557

 
53,823

Renewable Chemicals
22,558

 
22,883

Corporate and Other
346,723

 
299,825

Intersegment eliminations
(306,278
)
 
(266,277
)
   
$
1,078,673

 
$
1,136,603


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, 
 2017
 
Three Months 
 Ended 
 September 30, 
 2016
 
Nine Months 
 Ended 
 September 30, 
 2017
 
Nine Months 
 Ended 
 September 30, 
 2016
Net revenues:
   
 
   
 
   
 
   
United States
$
574,594

 
$
582,969

 
$
1,417,704

 
$
1,356,473

Germany
35,736

 
41,671

 
$
130,761

 
124,338

Other Foreign
16,653

 

 
32,514

 

Non-United States
52,389

 
41,671

 
163,275

 
124,338

 
$
626,983

 
$
624,640

 
$
1,580,979

 
$
1,480,811

   
September 30, 2017
 
December 31, 2016
Long-lived assets:
   
 
   
United States
$
599,341

 
$
580,868

Foreign
21,824

 
18,606

 
$
621,165

 
$
599,474

NOTE 12 — 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.  

19



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; the investigation by the U.S. International Trade Commission regarding trade practices by Argentine and Indonesian companies; 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 liabilities, including any liability resulting from the fires at our Geismar and Madison facilities; 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 quarterly period ended September 30, 2017. 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 products and services. 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 own and operate 14 biorefineries with 12 locations in North America and two locations in Germany, which consist of 13 biomass-based diesel plants (biodiesel and renewable diesel), with aggregate nameplate production capacity of 502 gallons per year ("mmgy"), and one demonstration-scale fermentation facility. We also have one feedstock processing facility in Germany. We are also engaged in research and development efforts focused on the conversion of diverse feedstocks into renewable chemicals and bio-based products.
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.
We expanded our business internationally by acquiring a majority interest in what is now known as REG Germany, GmbH, or REG Germany, in December 2014. We continued to acquire additional shares throughout 2015 and 2016, and in January 2017, we acquired full equity ownership of REG Germany. REG Germany is a fully-integrated company that utilizes used cooking oil and other waste feedstocks to produce biomass-based diesel at its two biorefineries in Germany. The combined nameplate production capacity is approximately 50 mmgy.
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 ("ULSD") at terminals throughout the northeastern U.S. as well as BioHeat® blended heating fuel at one of our existing Northeast terminal locations. In 2015, we expanded our sales of additional biofuel blends to Midwest terminal locations and look to potentially expand in other areas across North America.
In January 2014, we acquired a development-stage industrial biotechnology business focusing on microbial fermentation to develop and produce renewable chemicals, fuels and other products.
We acquired a 75 mmgy nameplate capacity renewable diesel biorefinery located in Geismar, Louisiana in June 2014. Our Geismar facility had been idled by its previous owner, began operating again by us in October 2014 and was shut down

20



between April 2015 and early March 2016 due to two separate fires that occurred in April and September 2015. Our Geismar facility has been running at high utilization rates since early October 2016.
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 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. It also possesses significant rail and truck transport capabilities. To date, the production facility's primary feedstock has been canola oil.
In March 2016, we acquired our 20 mmgy nameplate biodiesel refinery located in DeForest, Wisconsin, or REG Madison, which produces biodiesel from yellow grease, rendered animal fats, and inedible corn oil, and also produces refined vegetable oils using our patented technology currently in use at our Seneca, Illinois plant. The facility has both truck and rail capabilities. In June 2017, we experienced a fire at our Madison facility, resulting in the shutdown of the facility.
During the three and nine months ended September 30, 2017, we sold 152 million and 434 million total gallons of fuel, including 15 million and 39 million gallons of biomass-based diesel that we purchased from third parties and resold, 8 million and 28 million biomass-based diesel gallons produced by REG Germany and 13 million and 53 million petroleum-based diesel gallons, respectively. During 2016, we sold 567 million total gallons, including 77 million biomass-based gallons we purchased from third parties and resold, 45 million biomass-based diesel gallons produced by REG Germany and 54 million petroleum-based diesel gallons.
Our businesses are organized into three reportable segments – the Biomass-based Diesel segment, the Services segment and the Renewable Chemicals segment.
Biomass-based Diesel Segment
Our Biomass-based Diesel segment 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 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.
purchases and resales of biomass-based diesel, petroleum-based diesel, Renewable Identification Numbers ("RINs") and Low Carbon Fuel Standard credits, or LCFS 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 2016 and for the three and nine months ended September 30, 2017, our revenues from the sale of co-products were less than five percent of our total Biomass-based Diesel segment revenues. For the three and nine months ended September 30, 2017, 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 approximately three percent and five percent, respectively, of our total revenues.
In accordance with EPA regulations, we generate 1.5 to 1.7 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

21



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 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. We regularly obtain 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 net realizable value and any 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. At September 30, 2017, we had approximately 38.6 million biomass-based diesel RINs and 1.6 million advanced biofuel RINs available to be sold, as compared to 16.8 million biomass-based diesel RINs and 0.2 million advanced biofuel RINs held for sale at December 31, 2016, respectively. According to the Oil Pricing Information System ("OPIS"), the median closing price at September 30, 2017 was $0.88 and $0.87 per biomass-based diesel RIN and advanced biofuel RIN, respectively, compared to $1.055 and $1.055 at December 31, 2016, respectively, per biomass-based diesel RIN and advanced biofuel RIN, respectively.
We generate Low Carbon fuel Standard credits for our low carbon fuels or blendstocks when our qualified low carbon fuels are imported into California. LCFS credits are used to track compliance with California’s LCFS. As a result, a portion of the selling price for a gallon of biomass-based diesel sold into California is also attributable to LCFS compliance. Like RINs, LCFS credits that we generate are a form of government incentive and not a result of the physical attributes of the biomass-based diesel production. Therefore, no cost is allocated to the LCFS credit when it is generated, regardless of whether the LCFS credit is transferred with the biomass-based diesel produced or held by us. At September 30, 2017, we held for sale approximately 10,300 LCFS credits, increasing from 5,000 credits at December 31, 2016. According to OPIS, the median closing price at September 30, 2017 and December 31, 2016 was $93.00 and $93.00, respectively, per LCFS credit.
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. In November 2016, we started a $24 million expansion project at our Ralston facility. In June 2017, we completed the $20 million acquisition of approximately 82 acres of land at and in close proximity to our Geismar, Louisiana biorefinery from Lion Copolymer. The purchase included the termination of a ground lease and acquires the land we previously leased for our Geismar operations and approximately 61 additional acres in parcels adjacent to and near the facility.  We plan to improve and utilize the new acreage to support existing production capacity and future expansion opportunities using the Services segment.
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 biobased 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.
In January 2016, ExxonMobil Research and Engineering Company entered into an agreement with our subsidiary, REG Life Sciences, LLC ("REG Life Sciences"), to develop technology for the production of biodiesel by fermenting renewable cellulosic sugars from sources such as agricultural waste. In October 2016, REG Life Sciences sold and delivered its first commercial product, a specialty fatty acid. REG Life Sciences developed, produced, sold and delivered approximately one metric ton of the renewable, multi-functional chemical to Aroma Chemical Services International. Fatty acids is one of three product areas REG Life Sciences has focused on, along with esters and alcohols. In November 2016, the Company's Board of Directors authorized a review of strategic alternatives for REG Life Sciences, and that strategic review is ongoing. There can be

22



no assurance that this ongoing strategic review will result in any specific action or transaction or that any action taken or transaction we may enter into will prove to be beneficial to stockholders.
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, when excluding the value of 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 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. The final RVO targets for the biomass-based diesel volumes for the years 2015 to 2018 and proposal for 2019 as set by the EPA are as follows:
 
2015
2016
2017
2018
2019 (proposed)
Biomass-based diesel
1.73 billion gallons
1.90 billion gallons
2.00 billion gallons
2.1 billion gallons
2.1 billion gallons
The EPA Notice of Data Availability (“NODA”) filed on September 26, 2017 announced a downward revision of the 2018 RVO for biomass-based diesel citing a lack of the BTC, reduced imported gallons and concerns about RIN prices. However, in late October 2017, the EPA announced the agency would likely keep the final 2018 biomass-based diesel RVO unchanged and issue the final 2019 biomass-based diesel RVO at or above levels it proposed in July.
The supply of biomass-based diesel in the United States continues to grow as illustrated by the EMTS data notes below:
 
2014
2015
2016
Q3 2017 (YTD)
Biomass-based diesel produced and imported
1.75 billion gallons
1.81 billion gallons
2.60 billion gallons
1.83 billion gallons
The federal biodiesel mixture excise tax credit, or the BTC, has historically provided a $1.00 refundable tax credit per gallon to the first blender of biomass-based diesel with petroleum-based diesel fuel. The BTC became effective January 1, 2005, but since January 1, 2010 it has lapsed and been reinstated a number of times. For example, the BTC lapsed on January 1, 2014 and was retroactively reinstated for 2014 on December 19, 2014 and lapsed again on January 1, 2015. On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 was signed into law, which reinstated and extended a set of tax provisions, including the retroactive reinstatement for 2015 and extension for 2016 of the BTC. The BTC again lapsed on January 1, 2017 and has not been reinstated as of the date of this report. During the nine months ended September 30, 2017, the Company recognized the full $26.9 million of deferred BTC revenue that was outstanding as of December 31, 2016.
When the BTC has lapsed in the past, it has been reinstated by Congress. As a result of this history of retroactive reinstatement of the BTC, we and many other biomass-based diesel industry producers have adopted contractual arrangements with customers and vendors specifying the allocation and sharing of any retroactively reinstated incentive. As of September 30, 2017, we estimate that if the BTC is reinstated on the same terms as in 2016, our net income and Adjusted EBITDA for the quarter and year to date ended September 30, 2017 for business conducted in the periods will increase by approximately $55 million and $153 million, respectively. It is uncertain whether the BTC will be reinstated and if reinstated, whether it would be reinstated retroactively or on the same terms. The modification or failure to reinstate the BTC would adversely affect our 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.

23



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, 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 for 2014, 2015, 2016 and the first nine months of 2017 the high and low average monthly contributory value 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.rinpricevsb100pricecharta17.jpg
Value of RINs acquired from third parties and held in inventory remained fairly stable in the first nine months of 2017 and resulted in a $1.3 million write-down to lower of cost or net realizable value for the first nine months of 2017. At September 30, 2017, the write-down to lower of cost or net realizable value of RINs was $0.4 million. See “Note 5 – 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.
During 2016, feedstock expense accounted for 78% 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, 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:


24



 
 
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
þ
þ
þ
þ
Weather conditions
 
þ
 
þ
þ
þ
Biomass-based diesel demand
 
þ
þ
þ
þ
þ
Population
 
 
þ
 
 
 
Number of restaurants in the vicinity of collection facilities and terminals which is dependent on population density
 
 
þ
þ
 
 
Cooking methods and eating habits, which can be impacted by the economy
 
 
þ
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
þ
Soybean meal demand
 
 
 
 
 
þ
South American crop production
 
 
 
 
 
þ
Farmer planting decisions
 
 
 
 
þ
þ
Government policies and subsidies
 
þ
þ
þ
þ
þ
During 2016, 72% of our feedstocks were comprised of inedible corn oil, used cooking oil and inedible animal fats with the remainder coming from refined vegetable oils.
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 January 2013 to September 30, 2017. The results were derived using assumed conversion factors for the yield of each feedstock and subtracting the cost of producing one gallon of biodiesel made from each respective lower-cost feedstock from the cost of producing one gallon of biodiesel made from soybean oil.

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graphsbospreada29.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 January 2013 to September 30, 2017.
  
graphspreadpricinga28.jpg

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(1)
Biodiesel prices are based on the monthly average of the midpoint of the high and low prices of B100 (Upper Midwest) as reported by The Jacobsen.
(2)
Soybean oil (crude) prices are based on the monthly average of the daily closing sale price of the nearby soybean oil contract as reported by CBOT (based on 7.5 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).
(4)
Spread between biodiesel price and choice white grease price.
(5)
Spread between biodiesel price and soybean oil (crude) price.
During the third quarter of 2017, NY Harbor ULSD prices ranged from a high of $1.8563 per gallon in September to a low of $1.4482 per gallon in July with the average price for the quarter of $1.6489 per gallon.  Energy prices increased throughout the third quarter of 2017, which was driven by consistent draws in domestic crude supplies coupled with the significant disruption for the oil refiners due to Hurricane Harvey. These items helped lead to a 23% price increase in ULSD during third quarter of 2017.  European used cooking oil methyl ester prices were mostly steady in third quarter 2017. Prices were pressured lower by lower from an increase in imports from Argentina during the quarter. Feedstock supplies were larger than prior year, which were offset by strong demand that drove pricing higher. Soybean oil prices ranged from a high of $0.3531 per pound in September to a low of $0.3257 per pound also in September with an average price for the quarter of $0.3322 per pound.  Soybean oil prices have been trending lower mainly due to the near-record soybean crop predictions. Relatively low priced feed cost along with continued strong demand for pork and beef has continued to lead to expansions in the U.S. hog and cattle industries.  Both hog and cattle slaughter numbers in the third quarter of 2017 were again higher than the prior year.
In March 2017, the National Biodiesel Fair Trade Coalition ("Coalition") filed an antidumping and countervailing duty petition with the U.S. Department of Commerce and the U.S. International Trade Commission ("ITC"), arguing that Argentine and Indonesian companies were violating trade laws by flooding the U.S. market with dumped and subsidized biodiesel. The Coalition is made up of the National Biodiesel Board and U.S. biodiesel producers. On May 5, 2017, the ITC agreed to proceed with an investigation regarding this matter. In relation to this antidumping and countervailing duty petition, the Coalition filed a new allegation in July 2017 that "critical circumstances" exist with respect to imports of biodiesel from Argentina. The critical circumstance provision in antidumping and countervailing duties laws allows for the imposition of duties on imports that enter the U.S. prior to preliminary determinations of subsidization and dumping. The Coalition found that imports of biodiesel from Argentina had jumped 144.5 percent since the March 2017 petition was filed. The Commerce Department has imposed preliminary countervailing duties of 40% to 68% on imports from producers in Argentina and Indonesia. The final determination for countervailing duties is expected to be announced in November 2017. On October 23, 2017, the Department of Commerce announced its affirmative preliminary determinations in the antidumping duty case. The Department of Commerce calculated preliminary dumping rates of 51% to 70%. As a result of the preliminary affirmative determinations, the Department of Commerce has instructed U.S. Customs and Border Protection to require cash deposits based on these preliminary rates. Final anti-dumping determinations are expected in early January 2018.
Risk Management
The profitability of producing biomass-based diesel largely depends on the spread between prices for feedstocks and biomass-based diesel, including incentives, 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 cash margins for our own production and our third-party trading activity by entering into risk management contracts that mitigate the impact on our margins from price volatility in feedstocks and biomass-based diesel. 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 the New York Mercantile Exchange NY Harbor ULSD and CBOT 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 in addition to our internal research and analysis.
Inedible corn oil, used cooking oil, inedible animal fat, canola oil and soybean oil were the primary feedstocks we used to produce biomass-based diesel in 2016 and the first nine months of 2017. 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 efforts to risk manage against changing prices for inedible corn oil, used cooking oil and inedible animal fat have involved entering into futures contracts, swaps or options on other commodity products, such as CBOT Soybean Oil and New York Mercantile Exchange NY Harbor ULSD. However, these products do not always experience the same price movements as lower-cost feedstocks, making risk

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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 New York Mercantile Exchange NY Harbor ULSD. 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 that will be recognized in a later accounting period.
We recorded risk management losses of $25.0 million and $6.9 million from our derivative financial instrument activity for the three and nine months ended September 30, 2017, respectively, compared to gains of $5.9 million and losses of $28.9 million for the three and nine months ended September 30, 2016, respectively. Changes in the value of these futures, swaps or options instruments are recognized in current income or loss.
Seasonality
Our operating results are influenced by seasonal fluctuations in the demand for biodiesel. Our biodiesel sales tend to decrease during the winter season due to blending concentrations being reduced to adjust for performance during colder weather. Colder seasonal temperatures can cause the higher cloud point biodiesel we make from inedible animal fats to become cloudy and eventually gel at a higher temperature than petroleum-based diesel or lower cloud point biodiesel made from soybean oil, canola oil or inedible corn oil. Such gelling can lead to plugged fuel filters and other fuel handling and performance problems for customers and suppliers. Reduced demand in the winter for our higher cloud point biodiesel can result in excess supply of such higher cloud point biodiesel and lower prices for such biodiesel. In addition, most of our production facilities are located in colder Midwestern states in proximity to feedstock origination, and our costs of shipping can increase as more biodiesel is transported to warmer climate states during winter. To mitigate some of these seasonal fluctuations, we have upgraded our Newton and Danville biorefineries to produce distilled biodiesel from low-cost feedstocks, which has improved cold-weather performance.
RIN prices may also be subject to seasonal fluctuations. The RIN is dated for the calendar year in which it is generated, commonly referred to as the RIN vintage. Since 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. See chart below for comparison between actual RIN generation and RVO level for biomass-based diesel as set by the EPA.