Attached files

file filename
EX-32 - EXHIBIT 32.2 - Renewable Energy Group, Inc.regi-2018q1xex322.htm
EX-32 - EXHIBIT 32.1 - Renewable Energy Group, Inc.regi-2018q1xex321.htm
EX-31 - EXHIBIT 31.2 - Renewable Energy Group, Inc.regi-2018q1xex312.htm
EX-31 - EXHIBIT 31.1 - Renewable Energy Group, Inc.regi-2018q1xex311.htm
EX-10 - EXHIBIT 10.1 PRSU TEMPLATE - Renewable Energy Group, Inc.exhibit1012018formofperfor.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549   
Form 10-Q
      
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2018
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 April 30, 2018, the registrant had 37,315,929 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)
   
March 31,
2018
 
December 31,
2017
ASSETS
   

 
   

CURRENT ASSETS:
   

 
   

Cash and cash equivalents
$
69,290

 
$
77,627

Accounts receivable, net
466,509

 
90,648

Inventories
171,933

 
135,547

Prepaid expenses and other assets
42,225

 
51,880

Total current assets
749,957

 
355,702

Property, plant and equipment, net
594,722

 
587,397

Goodwill
16,080

 
16,080

Intangible assets, net
26,537

 
27,127

Investments
12,193

 
12,250

Other assets
7,565

 
7,040

TOTAL ASSETS
$
1,407,054

 
$
1,005,596

LIABILITIES AND EQUITY
   

 
   

CURRENT LIABILITIES:
   

 
   

Lines of credit
$
105,535

 
$
65,525

Current maturities of long-term debt
14,207

 
13,397

Accounts payable
238,517

 
84,608

Accrued expenses and other liabilities
38,886

 
39,187

Deferred revenue
1,740

 
2,218

Total current liabilities
398,885

 
204,935

Unfavorable lease obligation
3,106

 
3,388

Deferred income taxes
6,913

 
8,192

Long-term contingent consideration for acquisitions
5,846

 
8,849

Long-term debt (net of debt issuance costs of $5,513 and $6,627, respectively)
213,078

 
208,536

Other liabilities
3,718

 
4,114

Total liabilities
631,546

 
438,014

COMMITMENTS AND CONTINGENCIES


 


EQUITY:
   

 
   

Common stock ($.0001 par value; 300,000,000 shares authorized; 38,342,069 and 38,837,749 shares outstanding, respectively)
5

 
5

Common stock—additional paid-in-capital
517,058

 
515,452

Retained earnings
349,317

 
134,928

Accumulated other comprehensive income
997

 
278

Treasury stock (10,086,459 and 9,363,166 shares outstanding, respectively)
(91,869
)
 
(83,081
)
Total equity
775,508

 
567,582

TOTAL LIABILITIES AND EQUITY
$
1,407,054

 
$
1,005,596

See notes to condensed consolidated financial statements.

1



RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share amounts)
 
Three months ended
   
March 31, 2018
 
March 31, 2017
REVENUES:
   
 
   
Biomass-based diesel sales
$
274,761

 
$
343,737

Separated RIN sales
47,179

 
57,324

Biomass-based diesel government incentives
365,285

 
16,941

   
687,225

 
418,002

Other revenue
2,027

 
891

   
689,252

 
418,893

COSTS OF GOODS SOLD:
   
 
   
Biomass-based diesel
405,809

 
353,851

Separated RINs
32,737

 
46,629

Other costs of goods sold
1,138

 
1,130

   
439,684

 
401,610

GROSS PROFIT
249,568

 
17,283

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
31,654

 
22,907

RESEARCH AND DEVELOPMENT EXPENSE
6,598

 
3,598

INCOME (LOSS) FROM OPERATIONS
211,316

 
(9,222
)
OTHER INCOME (EXPENSE), NET:
   
 
   
Change in fair value of contingent consideration
1,540

 
(589
)
Change in fair value of convertible debt conversion liability

 
(172
)
Loss on debt extinguishment
(232
)
 

Gain on involuntary conversion
4,000

 

Other income (loss), net
1,213

 
(320
)
Interest expense
(4,651
)
 
(4,536
)
   
1,870

 
(5,617
)
INCOME (LOSS) BEFORE INCOME TAXES
213,186

 
(14,839
)
INCOME TAX BENEFIT (EXPENSE)
1,203

 
(1,075
)
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY
214,389

 
(15,914
)
LESS—EFFECT OF PARTICIPATING SHARE-BASED AWARDS
5,151

 

NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY’S COMMON STOCKHOLDERS
$
209,238

 
$
(15,914
)
NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
   
 
   
BASIC
$
5.39

 
$
(0.41
)
DILUTED
$
5.30

 
$
(0.41
)
WEIGHTED AVERAGE SHARES USED TO COMPUTE NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
   
 
   
BASIC
38,819,443

 
38,599,048

DILUTED
39,484,087

 
38,599,048

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
 
March 31, 2018
 
March 31, 2017
Net income (loss)
$
214,389

 
$
(15,914
)
Foreign currency translation adjustments
719

 
551

Other comprehensive income
719

 
551

Comprehensive income (loss) attributable to the Company
$
215,108

 
$
(15,363
)
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 Income (Loss)
 
Treasury
Stock
 
Noncontrolling Interest
 
Total
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 24,494 shares of treasury stock purchased)
40,853

 

 

 

 

 
(383
)
 

 
(383
)
Acquisition of noncontrolling interest

 

 
(271
)
 

 

 

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

 


 
1,308

 

 

 

 

 
1,308

Other comprehensive income

 

 

 

 
551

 

 

 
551

Net loss

 

 

 
(15,914
)
 

 

 

 
(15,914
)
BALANCE, March 31, 2017
38,594,266

 
$
5

 
$
481,943

 
$
198,093

 
$
(5,200
)
 
$
(82,207
)
 
$

 
$
592,634

BALANCE, January 1, 2018
38,837,749

 
$
5

 
$
515,452

 
$
134,928

 
$
278

 
$
(83,081
)
 
$

 
$
567,582

Conversion of restricted stock units to common stock (net of 51,995 shares of treasury stock purchased)
127,470

 

 

 

 

 
(621
)
 

 
(621
)
Settlement of stock appreciation rights in common stock (net of 14,558 shares of treasury stock purchased)
33,463

 

 


 

 

 
(172
)
 

 
(172
)
Partial termination of capped call options
(15,012
)
 

 
252

 

 

 
(167
)
 

 
85

Convertible debt extinguishment impact (net of tax impact of $68)

 

 
(440
)
 

 

 

 

 
(440
)
Treasury stock purchases
(641,601
)
 

 


 

 

 
(7,828
)
 

 
(7,828
)
Stock compensation expense

 

 
1,794

 

 

 

 

 
1,794

Other comprehensive income

 

 

 

 
719

 

 

 
719

Net income

 

 

 
214,389

 

 

 

 
214,389

BALANCE, March 31, 2018
38,342,069

 
$
5

 
$
517,058

 
$
349,317

 
$
997

 
$
(91,869
)
 
$

 
$
775,508

See notes to condensed consolidated financial statements.

4



RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
Three months ended
   
March 31, 2018
 
March 31, 2017
CASH FLOWS FROM OPERATING ACTIVITIES:
   
 
   
Net income (loss)
$
214,389

 
$
(15,914
)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
   
 
   
Depreciation expense
8,859

 
8,423

Amortization expense of assets and liabilities, net
634

 
440

Gain on involuntary conversion
(4,000
)
 

Accretion of convertible note discount
1,357

 
1,338

Change in fair value of contingent consideration
(1,540
)
 
589

Change in fair value of convertible debt conversion liability

 
172

Gain on sale of assets
(990
)
 

Loss on debt extinguishment
232

 

Provision for doubtful accounts
314

 
255

Stock compensation expense
1,794

 
1,308

Deferred tax expense
(1,487
)
 
650

Other operating activities
10

 
222

Changes in assets and liabilities:
   
 
   
Accounts receivable, net
(376,072
)
 
106,094

Inventories
(35,891
)
 
(24,195
)
Prepaid expenses and other assets
9,731

 
(13,022
)
Accounts payable
153,449

 
(29,173
)
Accrued expenses and other liabilities
1,042

 
(6,907
)
Deferred revenue
(479
)
 
(8,304
)
Net cash flows provided by (used in) operating activities
(28,648
)
 
21,976

CASH FLOWS FROM INVESTING ACTIVITIES:
   
 
   
Cash receipts for involuntary conversion
4,000

 

Cash receipts of restricted cash

 
1,500

Cash paid for purchase of property, plant and equipment
(16,822
)
 
(16,636
)
Cash receipts for sale of assets
1,629

 

Cash paid for acquisitions and additional interests, net of cash acquired

 
(3,291
)
Cash paid for investments

 
(816
)
Net cash flows used in investing activities
(11,193
)
 
(19,243
)
CASH FLOWS FROM FINANCING ACTIVITIES:
   
 
   
Net borrowings (repayments) on revolving line of credit
40,514

 
(31,853
)
Borrowings on other lines of credit
12,358

 
2,671

Repayments on other lines of credit
(12,992
)
 
(1,100
)
Cash received from notes payable
10,890

 

Cash paid on notes payable
(8,018
)
 
(2,254
)
Cash paid for debt issuance costs
(78
)
 
(434
)
Cash paid for treasury stock
(7,828
)
 

Cash paid for contingent consideration settlement
(2,813
)
 
(3,980
)
Cash received on partial termination of capped call options
85

 

Cash paid for conversion of restricted stock units and stock appreciation rights
(793
)
 

Net cash flows provided by (used in) financing activities
31,325

 
(36,950
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
(8,516
)
 
(34,217
)
CASH AND CASH EQUIVALENTS, Beginning of period
77,627

 
116,210

Effect of exchange rate changes on cash
179

 
242

CASH AND CASH EQUIVALENTS, End of period
$
69,290

 
$
82,235

(continued)

5




RENEWABLE ENERGY GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
Three months ended
 
March 31, 2018
 
March 31, 2017
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
   
 
   
Cash paid for income taxes
$

 
$
14

Cash paid for interest
$
1,154

 
$
715

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
   
 
   
Amounts included in period-end accounts payable for:
   
 
   
Purchases of property, plant and equipment
$
7,123

 
$
3,484

Debt issuance cost
$
52

 
$
45

 
 
 
 
(concluded)
   
See notes to condensed consolidated financial statements.



6



RENEWABLE ENERGY GROUP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For The three Months Ended March 31, 2018 and 2017
(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 9, 2018. Results for interim periods are not necessarily indicative of those to be expected for the fiscal year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates.
As of March 31, 2018, 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 520 million gallons per year ("mmgy") and one fermentation facility. REG also has one feedstock processing facility. 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, lapsed on January 1, 2017 and retroactively reinstated on February 9, 2018 for the fiscal year 2017, but was not reinstated for 2018 and accordingly we are currently operating without the benefit of the BTC. It is uncertain whether the BTC will be reinstated to apply to 2018. 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, 2017.
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. As of and for the three months ended March 31, 2018, the Company has recognized $365,155 and $16,688 as receivables from the federal government and customers, respectively, related to the 2017 biodiesel mixture excise tax credit.
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 third parties are initially recorded at their cost and are subsequently revalued at the lower of cost or net realizable value as of

7



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").

Low Carbon Fuel Standards
The Company generates Low Carbon Fuel Standards ("LCFS") credits for its low carbon fuels or blendstocks when its qualified low carbon fuels are transported into an LCFS market. LCFS credits are used to track compliance with the LCFS. As a result, a portion of the selling price for a gallon of biomass-based diesel sold into an LCFS market 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. At March 31, 2018 and December 31, 2017, the Company held no LCFS credits purchased from third parties.
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. To date, the Company impaired fixed assets with a total net book value of approximately $2,671 as a result of the fire in June 2017 and received payments in the amounts of $12,000 and $3,620 to cover initial costs incurred for property losses and business interruption, respectively.
Convertible Debt
In June 2016, the Company issued $152,000 aggregate principal amount of 4% convertible senior notes due in 2036 (the "2036 Convertible Senior Notes"). The embedded conversion option was initially accounted for as an embedded derivative liability as the Company could 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 unless the Company received stockholder approval for such issuance. On December 8, 2017, at the special meeting of stockholders, the Company obtained approval from its stockholders to remove the common stock issuance restrictions in connection with conversions of the 2036 Convertible Notes. Accordingly, the embedded conversion option, valued at $45,933 and net of tax of $18,025, was reclassified into Additional Paid-in Capital at December 8, 2017. See "Note 7 - Debt" for a further description of the transaction.

Capped Call Transaction
In connection with the issuance of the 2014 Convertible Senior Notes, the Company entered into capped call transactions. The purchased capped call transactions were recorded as a reduction to common stock-additional paid-in-capital. Because this was considered to be an equity transaction and qualifies for the derivative scope exception, no future changes in the fair value of the capped call will be recorded by the Company. During 2016, in connection with the issuance of the 2036 Convertible Notes, certain call options covered by the original capped call transaction were rebalanced and reset to cover 100% of the total number of shares of the Company's Common Stock underlying the remaining principal of the 2019 Convertible Notes. The impact of these transactions, net of tax, was reflected as an addition/reduction to common stock-additional paid-in capital as presented in the Consolidated Statements of Stockholders' Equity.


8



Security Repurchase Programs
In December 2017, the Company's board of directors approved a repurchase program of up to $75,000 of the Company's convertible notes and/or shares of common stock. Under the program, the Company may repurchase convertible notes or shares from time to time in open market transactions, privately negotiated transactions or by other means. The timing and amount of repurchase transactions are determined by the Company's management based on its evaluation of market conditions, share price, bond price, legal requirements and other factors. During the three months ended March 31, 2018, the Company repurchased 641,601 shares of Common Stock for $7,828 under this program. In addition, the Company used approximately $6,689 to repurchase $6,311 principal amount of the 2019 Convertible Senior Notes.
Research and Development
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.
Revenue Recognition
In the first quarter of 2018, the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). Under the ASU, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company applied the five-step method outlined in the ASU to all contracts with customers and elected the modified retrospective implementation method. The Company has generally a single performance obligation in its arrangements with customers. The Company believes for most of its contracts with customers, control is transferred at a point in time, typically upon delivery to the customers. When the Company performs shipping and handling activities after the transfer of control to the customers (e.g., when control transfers prior to delivery), they are considered as fulfillment activities, and accordingly, the costs are accrued for when the related revenue is recognized. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenues. The Company generally expenses sales commissions when incurred because the amortization period would have been less than one year. The Company records these costs within selling, general and administrative expenses. The implementation of the new standard did not have any material impact on the measurement or recognition of revenue of prior periods, however additional disclosures have been added in accordance with the ASU.
The following is a description of principal activities from which we generate revenue. Revenues from contracts with customers are recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services.
sales of biodiesel and renewable diesel produced at our facilities, including RINs and LCFS credits;
resale of finished biomass-based diesel, RINs and LCFS credits acquired from third parties, and raw material feedstocks acquired from others;
revenues from our sale of petroleum-based heating oil and ultra-low sulfur diesel, or ULSD, acquired from third parties, along with the sale of these petroleum-based products further blended with biodiesel produced at our wholly owned facilities;
sales of glycerin, other co-products of the biomass-based diesel production process;
incentive payments from federal and state governments, including the BTC, and from the USDA Advanced Biofuel Program; and
other revenue:
collaborative research and development and other service revenue for research and development activities to continue to build out the technology platform; and
sales of renewable chemical products.

Disaggregation of revenue:
All revenue recognized in the income statement, except for Biomass-based diesel Government Incentives, is considered to be revenue from contracts with customers. The following table depicts the disaggregation of revenue according to product line and segment:

9




Reportable Segment
Three months ended March 31, 2018
Biomass-based
Diesel
 
Services
 
Renewable
Chemicals
 
Corporate
and other
 
Intersegment
Revenues
 
Consolidated
Total
Biomass-based diesel sales, net of BTC related amount due to customers of $144,944
$
166,191

 
$

 
$

 
$
3,579

 
$
(17,683
)
 
$
152,087

Petroleum diesel sales

 

 

 
70,964

 

 
70,964

Other biomass-based diesel revenue
51,710

 

 

 

 

 
51,710

Separated RIN sales
47,179

 

 

 

 

 
47,179

Other revenues

 
35,215

 
1,860

 

 
(35,048
)
 
2,027

Total revenues from contracts with customers
$
265,080

 
$
35,215

 
$
1,860

 
$
74,543

 
$
(52,731
)
 
$
323,967

Biomass-based diesel government incentives
365,285

 

 

 

 

 
$
365,285

Total revenues
$
630,365

 
$
35,215

 
$
1,860

 
$
74,543

 
$
(52,731
)
 
$
689,252


Contract balances:

The following table provides information about receivables and contract liabilities from contracts with customers:
 
March 31,
2018
Accounts receivable
$
98,593

Short-term contract liabilities (deferred revenue)
$
1,740

Short-term contract liabilities (accounts payable)
$
150,776


The Company receives payments from customers based upon contractual billing schedules; accounts receivable are recorded when the right to consideration becomes unconditional. Contract liabilities include payments received in advance of performance under the contract, and are realized with the associated revenue recognized under the contract. While in general the Company has not historically offered sales incentives to customers, the uncertainty around the reinstatement of the federal biodiesel tax credit led to the Company and other market participants acting as if the federal biodiesel tax credit would be reinstated throughout the year and entering into agreements with both customers and vendors throughout the year to capture the credit when or if reinstated. The impacts of the agreements with customers are recorded as contract liabilities in accounts payable and as adjustments to Biomass-based diesel sales, whereas agreements with vendors are recorded net as adjustments to Biomass-based diesel costs of goods sold on the Condensed Consolidated Statements of Operations. Significant changes to the contract liabilities during the quarter are as follows:
 
January 1, 2018
 
Cash receipts
(Payments)
 
Less: Impact on
Revenue
 
Other
 
March 31, 2018
Deferred revenue
$
2,218

 
$
10,507

 
$
10,985

 
$

 
$
1,740

Payables to customers related to BTC

 

 
(144,944
)
 
5,832

 
150,776

 
$
2,218

 
$
10,507

 
$
(133,959
)
 
$
5,832

 
$
152,516


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. 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.
On January 25, 2018, the FASB issued ASU 2018-01, which amends the Board’s new leasing standard, ASU 2016-02 (codified in ASC 842), to provide a transition practical expedient for existing or expired land easements (i.e., rights to access, cross, or otherwise use someone else’s land for a specified purpose) that were not previously accounted for in accordance with

10



ASC 840. The practical expedient would allow entities to elect not to assess whether those land easements are, or contain, leases in accordance with ASC 842 when transitioning to the new leasing standard. However, the ASU clarifies that land easements entered into (or existing land easements modified) on or after the effective date of the new leasing standard must be assessed under ASC 842. The Company is evaluating the impact of this guidance on its consolidated financial statements as part of the lease standard adoption project, but does not expect the impact to be significant.
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 preparers. The Company is evaluating the impact on its consolidated financial statements.
On December 22, 2017, President Donald Trump signed into law “H.R. 1”, formerly known as the “Tax Cuts and Jobs Act” (the “Tax Legislation”). The Tax Legislation, which became effective on January 1, 2018, significantly revises the U.S. tax code by, among other things, lowering the corporate income tax rate from 35% to 21%, limiting deductibility of interest expense, implementing a hybrid-territorial tax system imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries (the “transition tax”), and enacted additional international tax provisions, including a minimum tax on global intangible low-taxed income (“GILTI”) and a new base erosion anti-abuse tax (“BEAT”). The Company recorded a provisional non-cash tax benefit of $13,712 in the fourth quarter of 2017. The Company finalized its accounting for the transition tax during the quarter ended March 31, 2018, but continue to evaluate the financial statement impact of the other provisions within the Tax Legislation as guidance is issued by the Internal Revenue Services and U.S. Department of Treasury.
On February 28, 2018, the FASB issued ASU 2018-03, which makes technical corrections to certain aspects of ASU 2016-016 (on recognition of financial assets and financial liabilities), including equity securities without a readily determinable fair value (discontinuation and adjustments); forward contracts and purchased options; presentation requirements for certain fair value option liabilities; fair value option liabilities denominated in a foreign currency and transition guidance for equity securities without a readily determinable fair value. For public business entities, the amendments in ASU 2018-03 are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt the amendments until the interim period beginning after June 15, 2018. The Company is evaluating the impact of this guidance on its consolidated financial statements.
NOTE 3 — ACQUISITIONS
Sanimax Energy, LLC
On March 15, 2016, the Company acquired fixed assets and inventory from Sanimax Energy, including the 20 mmgy nameplate capacity biomass-based diesel refinery in DeForest, Wisconsin. The Company completed its initial accounting of this business combination as the valuation of the real and personal property was finalized as of September 30, 2016.
The following table summarizes the consideration paid for the acquisition from Sanimax Energy:
 
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 March 31, 2018, the Company has recorded a contingent liability of $2,648, approximately $1,595 of which has been classified as current on the Condensed Consolidated Balance Sheets.

11



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

NOTE 4 — INVENTORIES
Inventories consist of the following:
   
March 31, 2018
 
December 31, 2017
Raw materials
$
43,085

 
$
39,975

Work in process
4,007

 
3,523

Finished goods
124,841

 
92,049

Total
$
171,933

 
$
135,547

NOTE 5 — OTHER ASSETS
Prepaid expense and other assets consist of the following:
   
March 31, 2018
 
December 31, 2017
Commodity derivatives and related collateral, net
$
4,054

 
$
1,610

Prepaid expenses
19,028

 
11,733

Deposits
1,902

 
2,899

RIN inventory
9,952

 
27,028

Taxes receivable
3,685

 
6,356

Other
3,604

 
2,254

Total
$
42,225

 
$
51,880

RIN inventory values were adjusted in the amounts of $1,784 and $2,629 at March 31, 2018 and December 31, 2017, respectively, to reflect the lower of cost or net realizable value.
Other noncurrent assets consist of the following:
 
March 31, 2018
 
December 31, 2017
Spare parts inventory
$
2,700

 
$
2,764

Catalysts
2,686

 
2,962

Deposits
690

 
381

Other
1,489

 
933

Total
$
7,565

 
$
7,040


12



NOTE 6— INTANGIBLE ASSETS
Intangible assets consist of the following:
 
March 31, 2018
 
Cost
 
Accumulated Amortization
 
Net
 
Weighted Average Remaining Life
Raw material supply agreement
$
6,230

 
$
(2,518
)
 
$
3,712

 
7.8 years
Renewable diesel technology
8,300

 
(2,121
)
 
6,179

 
11.3 years
Ground lease
200

 
(144
)
 
56

 
3.6 years
Acquired customer relationships
2,900

 
(759
)
 
2,141

 
7.3 years
In-process research and development
15,956

 
(1,507
)
 
14,449

 
13.6 years
Total intangible assets
$
33,586

 
$
(7,049
)
 
$
26,537

 
 
 
December 31, 2017
 
Cost
 
Accumulated Amortization
 
Net
 
Weighted Average Remaining Life
Raw material supply agreement
$
6,230

 
$
(2,408
)
 
$
3,822

 
8.0 years
Renewable diesel technology
8,300

 
(1,983
)
 
6,317

 
11.5 years
Ground lease
200

 
(141
)
 
59

 
3.9 years
Acquired customer relationships
2,900

 
(686
)
 
2,214

 
7.6 years
In-process research and development
15,956

 
(1,241
)
 
14,715

 
13.8 years
Total intangible assets
$
33,586

 
$
(6,459
)
 
$
27,127

 
 
The Company recorded intangible amortization expense of $590 for the three months ended March 31, 2018 and $584 for the three months ended March 31, 2017, respectively.
The estimated intangible asset amortization expense for the remainder of 2018 through 2023 and thereafter is as follows:
April 1, 2018 through December 31, 2018
$
1,781

2019
2,382

2020
2,389

2021
2,395

2022
2,388

2023
2,395

2024 and thereafter
12,807

Total
$
26,537


13



NOTE 7 — DEBT
The following table shows the Company’s term debt:
   
March 31, 2018
 
December 31, 2017
4.00% Convertible Senior Notes, $152,000 face amount, due in June 2036
$
116,968

 
$
116,255

2.75% Convertible Senior Notes, $67,527 face amount, due in June 2019
64,497

 
69,859

REG Danville term loan, secured, variable interest rate of LIBOR plus 4%, due in July 2022
10,836

 
11,460

REG Newton term loan, secured, variable interest rate of LIBOR plus 4%, due in December 2018
7,405

 
8,189

REG Ralston term loan, variable interest rate of Prime Rate plus 0.5%, due in July 2025
17,074

 
6,183

REG Mason City term loan, fixed interest rate of 5%, due in July 2019
979

 
1,153

REG Grays Harbor term loan, variable interest of minimum of 3.5% or Prime Rate plus 0.25%, due in May 2022
7,523

 
7,882

REG Capital term loan, fixed interest rate of 3.99%, due in January 2028
7,368

 
7,400

Other
148

 
179

Total term debt before debt issuance costs
232,798

 
228,560

Less: Current portion of long-term debt
14,207

 
13,397

Less: Debt issuance costs (net of accumulated amortization of $3,442 and $3,510, respectively)
5,513

 
6,627

Total long-term debt
$
213,078

 
$
208,536


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

Prior to December 15, 2035, the 2036 Convertible Senior 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 Senior Notes may convert their notes at any time. The 2036 Convertible Senior 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 Senior 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 Senior 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 Senior Notes (equivalent to an initial conversion price of approximately $10.78 per common share).

The net proceeds from the offering of the 2036 Convertible Senior 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 initially recorded as a long-term liability, "Convertible Debt Conversion Liability", on the Condensed Consolidated Balance Sheets and was adjusted to reflect fair value each reporting date. The fair value of the convertible debt conversion liability at issuance was $40,145. On December 8, 2017, at the Company's Special Meeting of Stockholders, the Company obtained the approval from its stockholders to remove the common stock issuance restrictions in connection with conversions of the 2036 Convertible Notes. Accordingly, on December 8, 2017, the Convertible Debt Conversion Liability was remeasured at fair value at $45,933 and was then reclassified into equity. The debt liability component of 2036 Convertible Senior 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%.

14




REG Ralston

In April 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 $20.0 million during the construction period at REG Ralston and convert it into an amortizing term debt thereafter. The loan has a maturity date of July 15, 2025. The loan requires monthly principal payments and interest to be charged using prime rate plus 0.5% per annum. The loan agreement contains various loan covenants. At March 31, 2018, the effective interest rate on the amount borrowed under this Construction Loan Agreement was 5.25% per annum.

REG Danville

In July 2017, REG Danville, LLC ("REG Danville") entered into an amended loan agreement ("Loan Agreement") with Fifth Third Bank. The Loan Agreement allowed REG Danville to borrow $12,500 maturing in July 2022. The loan requires monthly principal payments and bears LIBOR-based variable interest rates. The loan agreement contains various loan covenants. At March 31, 2018, the effective interest rate on the amount borrowed under this Loan Agreement was 5.75% per annum.

REG Capital

In December 2017, REG Capital, LLC ("REG Capital") entered into a mortgage refinancing loan agreement ("Mortgage
Refinancing Loan Agreement") with First National Bank to refinance existing mortgages on our office buildings in Ames, IA.
The outstanding principal under the Mortgage Refinancing Loan Agreement is $7,368 with a maturity date of January 3,
2028. The loan requires monthly principal payments and bears a fixed interest rate of 3.99% per annum.

Lines of Credit
The following table shows the Company's lines of credit:
 
March 31, 2018
 
December 31, 2017
Amount outstanding under lines of credit
$
105,535

 
$
65,525

Maximum available to be borrowed under lines of credit
$
56,615

 
$
60,839

The Company's wholly-owned subsidiaries, REG Services Group, LLC and REG Marketing & Logistics Group, LLC, are borrowers under a Credit Agreement dated December 23, 2011 with the lenders party thereto (“Lenders”) and Wells Fargo Capital Finance, LLC, as the agent, (as amended, the “M&L and Services Revolver”). The maximum commitment of the Lenders under the M&L and Services Revolver to make revolving loans is $150,000, subject to an accordion feature, which allows the borrowers to request commitments for additional revolving loans in an aggregate amount not to exceed to $50,000, the making of which is subject to customary conditions, including the consent of Lenders providing such additional commitments.
The maturity date of the M&L and Services Revolver is September 30, 2021. Loans advanced under the M&L and Services Revolver bear interest based on a one-month LIBOR rate (which shall not be less than zero), plus a margin based on Quarterly Average Excess Availability (as defined in the Revolving Credit Agreement), which may range from 1.75% per annum to 2.25% per annum.
The M&L and Services Revolver contains various loan covenants that restrict each subsidiary borrower’s ability to take certain actions, including restrictions on incurrence of indebtedness, creation of liens, mergers or consolidations, dispositions of assets, repurchase or redemption of capital stock, making certain investments, making distributions to the Company unless certain conditions are satisfied, entering into certain transactions with affiliates or changing the nature of the subsidiary’s business. In addition, the subsidiary borrowers are required to maintain a fixed charge coverage ratio of at least 1.0 to 1.0 if excess availability under the M&L and Services Revolver is less than 10% of the total $150,000 of current revolving loan commitments, or $15,000 currently. The M&L and Services Revolver is secured by the subsidiary borrowers’ membership interests and substantially all of their assets. In addition, the M&L and Services Revolver is secured by the accounts receivable and inventory of REG Albert Lea, LLC, REG Houston, LLC, REG New Boston, LLC, and REG Geismar, LLC (collectively, the "Plant Loan Parties") subject to a $40,000 limitation with respect to each of the Plant Loan Parties.


15



In March 2018, REG Energy Services, LLC ("REG Energy Services") amended its operating and revolving line of credit agreement with Bankers Trust Company (“Bankers Trust”) that was entered in March 2016. As amended, this operating and revolving line of credit ("the Line of Credit") was decreased to $15,000, subject to customary borrowing base limitations and the maturity was extended to September 2018. Amounts outstanding under the Line of Credit bear variable interest as stipulated in the agreement. The Line of Credit contains various loan covenants that restrict REG Energy Services’ ability to take certain actions, including prohibiting it in certain circumstances from making payments to the Company. In addition, the Line of Credit is secured by substantially all of REG Energy Services’ accounts receivable and inventory.

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 March 31, 2018, the nominal interest rates ranged from 1.50% to 2.00% 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 March 31, 2018, the net notional volumes of NY Harbor ULSD and CBOT Soybean Oil covered under the open commodity derivative contracts were approximately 107 million gallons and 2 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:
   
March 31, 2018
 
December 31, 2017
   
Assets
 
Liabilities
 
Assets
 
Liabilities
Gross amounts of derivatives recognized at fair value
$
1,472

 
$
7,074

 
$
812

 
$
8,001

Cash collateral
9,656

 

 
8,799

 

Total gross amount recognized
11,128

 
7,074

 
9,611

 
8,001

Gross amounts offset
(7,074
)
 
(7,074
)
 
(8,001
)
 
(8,001
)
Net amount reported in the condensed consolidated balance sheets
$
4,054

 
$

 
$
1,610

 
$

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 
 March 31, 
 2018
 
Three Months 
 Ended 
 March 31, 
 2017
Commodity derivatives
Cost of goods sold – Biomass-based diesel
 
$
(2,438
)
 
$
8,289


16



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.
A summary of assets (liabilities) measured at fair value is as follows:
   
As of March 31, 2018
   
Total
 
Level 1
 
Level 2
 
Level 3
Commodity contract derivatives
$
(5,602
)
 
$
(2,657
)
 
$
(2,945
)
 
$

Contingent considerations for acquisitions
(30,040
)
 

 

 
(30,040
)
 
$
(35,642
)
 
$
(2,657
)
 
$
(2,945
)
 
$
(30,040
)
   
As of December 31, 2017
   
Total
 
Level 1
 
Level 2
 
Level 3
Commodity contract derivatives
$
(7,189
)
 
$
(3,742
)
 
$
(3,447
)
 
$

Contingent considerations for acquisitions
(34,393
)
 

 

 
(34,393
)
   
$
(41,582
)
 
$
(3,742
)
 
$
(3,447
)
 
$
(34,393
)
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
 
2018
 
2017
Balance at beginning of period, January 1
$
34,393

 
$
46,568

Change in estimates included in earnings
(1,540
)
 
589

Settlements
(2,813
)
 
(3,980
)
Balance at end of period, March 31
30,040

 
43,177

The estimated fair values of the Company’s financial instruments, which are not recorded at fair value, are as follows:
   
As of March 31, 2018
 
As of December 31, 2017
   
Asset (Liability)
Carrying
Amount
 
Fair Value
 
Asset (Liability)
Carrying
Amount
 
Fair Value
Financial liabilities:
   
 
   
 
   
 
   
Debt and lines of credit
$
(338,333
)
 
$
(427,838
)
 
$
(294,085
)
 
$
(273,983
)
The carrying amounts reported in the Condensed Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair values. Money market funds are included in cash and cash equivalents on the Condensed Consolidated Balance Sheets.
The Company used the following methods and assumptions to estimate fair value of its financial instruments:
Commodity derivatives: The instruments held by the Company consist primarily of futures contracts, swap agreements, purchased put options and written call options. The fair value of contracts based on quoted prices of identical assets in an active exchange-traded market is reflected in Level 1. Contract fair value that is determined based on quoted prices of similar contracts in over-the-counter markets is reflected in Level 2.
Contingent consideration for acquisitions: The fair value of the contingent consideration regarding REG Life Sciences, LLC ("REG Life Sciences") is determined using an expected present value technique. Expected cash flows are determined using the probability weighted-average of possible outcomes that would occur should

17



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. During November 2016, the Company's Board of Directors authorized a review of strategic alternatives for the Life Sciences business. The course of action chosen as a result of this strategic review might affect the timeline and assumptions used to estimate the fair value of REG Life Sciences contingent consideration.
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.
For the convertible senior notes, the Company’s current intent and policy is to settle conversions using cash for the principal amount of convertible senior notes converted, with the remaining value satisfied at the Company’s option in cash, stock or a combination of cash and stock. Therefore, the dilutive effect of the convertible senior notes is limited to the conversion premium.
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 
 March 31, 
 2018
 
Three Months 
 Ended 
 March 31, 
 2017
Stock appreciation rights
1,006,849

 
2,291,803

2019 Convertible Senior Notes
5,377,690

 
5,567,112

2036 Convertible Senior Notes
13,545,060

 
14,106,725

Total
19,929,599

 
21,965,640


18



The following table presents the calculation of diluted net loss per share:
   
Three Months 
 Ended 
 March 31, 
 2018
 
Three Months 
 Ended 
 March 31, 
 2017
Net income (loss) attributable to the Company’s common stockholders - Basic
$
209,238

 
$
(15,914
)
Less: effect of participating securities

 

Net income (loss) attributable to common stockholders - Dilutive
$
209,238

 
$
(15,914
)
Shares:

 

Weighted-average shares used to compute basic net income per share
38,819,443

 
38,599,048

Adjustment to reflect conversion of convertible notes
561,665

 

Adjustment to reflect stock appreciation right conversions
102,979

 

Weighted-average shares used to compute diluted net income per share
39,484,087

 
38,599,048

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

 

Diluted
$
5.30

 
$
(0.41
)
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 March 31, 2018 and for the year ended December 31, 2017 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.

19



The following table represents the significant items by reportable segment:
   
Three Months 
 Ended 
 March 31, 
 2018
 
Three Months 
 Ended 
 March 31, 
 2017
Net revenues:
   
 
   
Biomass-based Diesel (includes REG Germany's net sales of $46,356 and $53,551, respectively)
$
630,365

 
$
390,105

Services
35,215

 
22,833

Renewable Chemicals
1,860

 
828

Corporate and Other
74,543

 
37,773

Intersegment revenues
(52,731
)
 
(32,646
)
   
$
689,252

 
$
418,893

Income (loss) before income taxes:
   
 
   
Biomass-based Diesel (includes REG Germany's income (loss) of ($4,654) and $760, respectively)
$
215,529

 
$
(10,716
)
Services
5,024

 
(110
)
Renewable Chemicals
(7,484
)
 
(5,007
)
Corporate and Other
117

 
994

   
$
213,186

 
$
(14,839
)
Depreciation and amortization expense, net:
   
 
   
Biomass-based Diesel (includes REG Germany's amounts of $798 and $686, respectively)
$
8,303

 
$
7,740

Services
329

 
231

Renewable Chemicals
394

 
384

Corporate and Other
467

 
508

   
$
9,493

 
$
8,863

Cash paid for purchases of property, plant and equipment:
   
 
   
Biomass-based Diesel (includes REG Germany's amounts of $413 and $1,168, respectively)
$
15,603

 
$
15,882

Services
851

 
582

Renewable Chemicals
335

 
7

Corporate and Other
33

 
165

   
$
16,822

 
$
16,636


   
March 31, 2018
 
December 31, 2017
Goodwill:
   
 
   
Services
$
16,080

 
$
16,080

 
 
 
 
Assets:
   
 
   
Biomass-based Diesel (including REG Germany's assets of $46,462 and $55,761, respectively)
$
1,306,370

 
$
898,180

Services
60,043

 
55,581

Renewable Chemicals
20,783

 
21,168

Corporate and Other
388,454

 
386,590

Intersegment eliminations
(368,596
)
 
(355,923
)
   
$
1,407,054

 
$
1,005,596



20



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 
 March 31, 
 2018
 
Three Months 
 Ended 
 March 31, 
 2017
Net revenues:
   
 
   
United States
$
640,924

 
$
365,342

Germany
46,356

 
53,551

Other Foreign
1,972

 

Non-United States
48,328

 
53,551

 
$
689,252

 
$
418,893

   
March 31, 2018
 
December 31, 2017
Long-lived assets:
   
 
   
United States
$
573,866

 
$
566,028

Germany
20,211

 
20,689

Other Foreign
645

 
680

 
$
594,722

 
$
587,397

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.  
These forward-looking statements include, but are not limited to statements about planned capital expenditures and our ability to maintain financing for such construction; existing or proposed legislation affecting the biomass-based diesel industry, including governmental incentives and tax credits; any impact of the results from the investigation and subsequent determination by the U.S. International Trade Commission regarding trade practices by Argentinean 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; 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; results in respect of the strategic review of our life sciences business; statements about using acquired land to improve existing production capacity and future expansion opportunities at our Geismar facility; 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; the potential impact following the establishment of applicable accounting standards; the impact of recent U.S. tax legislation on our financial condition and results of operations; expectations regarding the realization of deferred tax assets and the establishment and maintenance of tax reserves and anticipated trends; expectations regarding our expenses and sales; anticipated general market conditions; anticipated cash

21



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 March 31, 2018. We encourage you to read this Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the accompanying condensed consolidated financial statements and related notes. Forward-looking statements contained in this report present management’s views only as of the date of this report. Except as required under applicable law, we do not intend to issue updates concerning any future revisions of management’s views to reflect events or circumstances occurring after the date of this report.
Overview
We focus on providing cleaner, lower carbon products and services. We are North America's largest producer of advanced biofuels. We utilize a nationwide production, distribution and logistics system as part of an integrated value chain model designed to convert natural fats, oils and greases into advanced biofuels. We are also engaged in research and development efforts focused on the conversion of diverse feedstocks into various renewable chemicals, advanced biofuels and other products. We believe our fully integrated approach, which includes acquiring feedstock, managing biorefinery facility construction and upgrades, operating biorefineries, and distributing fuel through a network of terminals, positions us to serve the market for biomass-based diesel, other advanced biofuels and other products and services.
We own and operate a network of 14 biorefineries. Twelve biorefineries are located in the United States and two in Germany. Twelve biorefineries produce traditional biodiesel, one produces renewable diesel (“RD”), and one is a microbial fermentation facility used in connection with our development of renewable chemicals. Our thirteen operational biomass-based diesel production facilities have an aggregate nameplate production capacity of 520 million gallons per year ("mmgy").
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, such as soybean oil or canola oil, which are more widely available, but 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.
We also sell petroleum-based heating oil and diesel fuel, which enables us to offer additional biofuel blends, while expanding our customer base. We sell heating oil and ultra-low sulfur diesel, or ULSD, at terminals throughout the northeastern U.S., as well as BioHeat® blended heating fuel at one of these terminal locations. In 2015, we expanded our sales of biofuel blends to Midwest terminal locations and look to potentially expand in other areas across North America.
Our development-stage industrial biotechnology business, which we refer to as REG Life Sciences, is developing proprietary microbial fermentation processes to produce renewable chemicals, advanced biofuels and other products. Fatty acids are one of three product areas that we are focused on, along with esters and alcohols.
During the three months ended March 31, 2018, we sold 135 million total gallons of fuel, including 8 million gallons of biomass-based diesel that we purchased from third parties and resold, 12 million biomass-based diesel gallons produced by REG Germany and 36 million petroleum-based diesel gallons. During 2017, we sold 587 million gallons of fuel, which included 52 million biomass-based gallons we purchased from third parties, 38 million biomass-based diesel gallons produced by REG Germany and 83 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 30 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;

22



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 2017 and for the three months ended March 31, 2018, our revenues from the sale of co-products were less than five percent of our total Biomass-based Diesel segment revenues. For the three months ended March 31, 2018, 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 ten percent 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 EMTS. RFS2 allows us to attach between zero and 2.5 RINs to any gallon of biomass-based diesel we sell. When we attach 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; but no cost is allocated to the RINs generated by our biomass-based diesel production because 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 sale 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 March 31, 2018, we had approximately 16.8 million biomass-based diesel RINs and 1.4 million advanced biofuel RINs available to be sold, as compared to 37.8 million biomass-based diesel RINs and 1.2 million advanced biofuel RINs held for sale at December 31, 2017. According to the Oil Pricing Information System ("OPIS"), the median closing price at March 31, 2018 was $0.75 and $0.74 per biomass-based diesel RIN and advanced biofuel RIN, respectively, compared to $0.79 and $0.78 at December 31, 2017, 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 an LCFS market. LCFS credits are used to track compliance with states' LCFS. As a result, a portion of the selling price for a gallon of biomass-based diesel sold into an LCFS market 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 March 31, 2018, we held for sale approximately 11,690 California LCFS credits, compared to 5,700 credits at December 31, 2017. According to OPIS, the median closing price at March 31, 2018 and December 31, 2017 was $142.5 and $113.00, respectively, per California 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.

23



During recent years, we have utilized our construction management expertise internally to upgrade our facilities, such as our facilities located in Ralston, Albert Lea, New Boston, Mason City and Newton. In November 2016, we started a $24 million expansion project at our Ralston facility, which was completed on March 6, 2018. 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. The purchase included the acquisition of 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 biomass-based 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 REG Life Sciences to develop technology for the production of biodiesel by fermenting renewable cellulosic sugars from sources such as agricultural waste. In September 2017, we signed a phase II joint development collaboration with ExxonMobil Research and Engineering to continue to develop technology to produce biodiesel 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 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 results of operations and financial condition 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 to produce 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 production and use of biomass-based diesel, which allows biomass-based diesel to be price competitive with petroleum-based diesel.
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 production meets 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 and advanced biofuels volumes for the years 2015 to 2019 as set by the EPA are as follows:
 
2015
 
2016
 
2017
 
2018
 
2019
Biomass-based diesel
1.73 billion gallons
 
1.90 billion gallons
 
2.00 billion gallons
 
2.1 billion gallons
 
2.1 billion gallons
Total Advanced biofuels
2.88 billion RINs*
 
3.61 billion RINs*
 
4.28 billion RINs*
 
4.29 billion RINs*
 
N/A
(*ethanol equivalent gallons)
U.S. production and imports increased significantly in 2016, both modestly decreased in 2017 due to the trade case, lack of tax credit, and uncertainty from the EPA around RVO volumes. Domestic production is trending higher for the first quarter of 2018 while imports have decreased. This decrease is a result of zero imported gallons from Argentina due to the trade case. Volumes listed below show domestic and imported net generation as illustrated by the EMTS data noted below:

24



 
2015
 
2016
 
2017
 
Q1 2018
 
 
Biomass-based diesel produced and imported
1.81 billion gallons
 
2.60 billion gallons
 
2.50 billion gallons
 
0.51 billion gallons
 
 
Total Advanced biofuels*
3.08 billion RINs
 
4.29 billion RINs
 
4.23 billion RINs
 
0.83 billion RINs
 
 
(*included cellulosic, biomass-based diesel, and other advanced biofuels)
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 been allowed to lapse and then been reinstated a number of times. For example, the BTC lapsed on January 1, 2014, was retroactively reinstated for 2014 on December 19, 2014 and then 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 was reinstated on February 9, 2018. It is not currently in effect for 2018.
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. The reinstatement of the 2017 BTC resulted in a net benefit to our Adjusted EBITDA for the year ended December 31, 2017 by $205 million, with another $11 million related to products delivered and sales recognized during the three months ended March 31, 2018 (see "Non-GAAP Financial Measures" below). It is uncertain whether the BTC will be reinstated for 2018 and beyond and if reinstated, whether it would be reinstated retroactively or on the same terms. The modification or failure to reinstate the BTC could have a material adverse effect on 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.
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 2015, 2016, 2017 and the first three months of 2018 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.

25



rinpricevsb100pricecharta20.jpg
At the beginning of the first quarter of 2018, the value of RINs, as reported by OPIS, to the average B100 spot price of a gallon of biodiesel was $1.22 per gallon. The value of RINs to the average B100 spot price of gallon of biodiesel was $1.06 per gallon at the end of March 2018. It reached a high of $1.36 per gallon of biodiesel in February 2018 and a low of $1.02 per gallon in March 2018. The RIN market was largely operating as expected as lower feedstock prices increased the spread between feedstocks and fuels, RINs correspondingly came down in value. The decrease in RIN Value towards the end of the first quarter of 2018 was mainly attributable to market uncertainty related to a possible ethanol RIN cap or other Administration intervention and most recently, the EPA's approval of record levels of Smaller Refiner Exemptions from RIN compliance requirements for 2016 and 2017. The decrease in the value of RINs acquired from third parties and held in inventory resulted in a $3.5 million write-down to lower of cost or net realizable value for the first three months of 2018. We enter into forward contracts to sell RINs and we use risk management position limits to manage RIN exposure.
During 2017, feedstock expense accounted for 80% of our production cost, while methanol and chemical catalysts expense accounted for 3% and 4% of our costs of goods sold, respectively.
Feedstocks for biomass-based diesel production, such as inedible corn oil, used cooking oil, inedible animal fat 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. There are a number of factors that influence the supply and price our feedstocks, such as the following: export demand; biomass-based diesel capacities and demand; government policies and subsidies; weather conditions; ethanol production; cooking habits and eating habits; number of restaurants near collection facilities; hog/beef/poultry slaughter kills; palm oil supply; soybean meal demand and/or production, and crop production in the U.S. and South America, among others.
During 2017, 73% of our feedstocks were comprised of inedible corn oil, used cooking oil and inedible animal fats with the remainder coming from virgin vegetable oil.
The graph below illustrates the spread between the cost of producing one gallon of biodiesel made from soybean oil to the cost of producing one gallon of biodiesel made from a lower-cost feedstock for the period January 2014 to March 31, 2018. 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.

26



graphsbospreada32.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).  
Our results of operations generally will 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 2014 to March 31, 2018.

27



graphspreadpricinga33.jpg  
(1)
Biodiesel prices are based on the monthly average of the midpoint of the high and low prices of B100 (Upper Midwest) as reported by The Jacobsen.
(2)
Soybean oil (crude) prices are based on the monthly average of the daily closing sale price of the nearby soybean oil contract as reported by CBOT (based on 7.5 pounds per gallon).
(3)
Choice white grease prices are based on the monthly average of the daily low price of Missouri River choice white grease as reported by The Jacobsen (based on 8.0 pounds per gallon).
(4)
Spread between biodiesel price and choice white grease price.
(5)
Spread between biodiesel price and soybean oil (crude) price.
During the first quarter of 2018, NY Harbor ULSD prices ranged from a high of $2.1360 per gallon in January to a low of $1.8369 per gallon in February with the average price for the quarter of $1.9838 per gallon. Energy prices were steady in January, dropped significantly in the beginning of February, and saw a price increase during late March.  Consistently strong world demand for diesel fuel, combined with OPEC’s compliance with crude oil production quotas, helped to support prices during the quarter. Biodiesel prices were steady during the quarter with OPIS Chicago B100 prices ranging $3.00 to $3.25 per gallon.  European used cooking oil methyl ester prices declined during the first quarter of 2018, as continued pressure from imported biodiesel and lower feedstock prices pressured biodiesel markets in Germany lower. Feedstock supplies were larger than prior year, which resulted in generally lower feedstock prices during the quarter. Soybean oil prices ranged from a high of $0.3316 per pound in February to a low of $0.3142 per pound in March with an average price for the quarter of $0.3231 per pound. Soybean oil prices traded within a narrow $0.0174 range during the quarter and trended lower due to large soybean supply fundamentals. 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 first quarter of 2018 were again higher than the prior years.
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 ("USITC"), arguing that Argentinean and Indonesian companies were violating trade laws by flooding the U.S. market with dumped and subsidized biodiesel. The Coalition comprises of the National Biodiesel Board and U.S. biodiesel producers. In May 2017, the USITC 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, which would allow 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% since the March 2017 petition was filed. In December 2017, the USITC voted 4-0 affirming countervailing duty rates of 34% to 72%. The Department of Commerce issued a determination effective March 1, 2018 affirming the agency’s earlier preliminary determination that Argentina and Indonesia had dumped biodiesel imports into the U.S. Final anti-dumping rates were set at 60% to 267%. In April 2018, the USITC voted 4-0 affirming the Coalition's assertions that the industry has suffered as a result of unfairly dumped imports. The Department of Commerce issued final orders in April 2018.

28



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 2017 and the first three months of 2018. 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 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 $2.4 million from our derivative financial instrument activity for the three months ended March 31, 2018, compared to gains of $8.3 million for the three months ended March 31, 2017. 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

29



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 the annual RVO of an Obligated Party (as defined under the RFS2) 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.
Year
 
RIN Generation (D4 Biomass-based Diesel)
 
Finalized RVO level for D4 Biomass-based Diesel
2016
 
2.60 billion gallons
 
1.90 billion gallons
2017
 
2.5 billion gallons
 
2.00 billion gallons
Industry capacity, production and imports
Our operating results are influenced by our industry’s capacity and production, including in relation to RFS2 production requirements. Under RFS2, Obligated Parties are entitled to satisfy up to 20% of their annual requirement with prior year RINs. Biomass-based diesel production and/or imports, as reported by EMTS, were 2.60 billion gallons for 2016, 790 million gallons higher than 2015. The amount of biomass-based diesel produced and/or imported into the U.S in 2017 was 2.50 billion gallons. In the first quarter of 2018, according to EMTS data, 0.51 billion gallons of biomass-based diesel were produced and/or imported into the U.S., compared to the equivalent 0.44 billion gallons over the same period in 2017.
The amount of imported biodiesel gallons qualifying under RFS2 decreased from 692.9 million gallons in 2016 to approximately 576.3 million gallons in 2017, based on the information from the Energy Information Administration. Imported gallons will likely make up less of a percentage of the RVO in 2018 as a result of the anti-dumping and countervailing duty trade case mentioned previously. Under RFS2, Obligated Parties are entitled to satisfy up to 20% of their annual requirement with prior year RINs.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, equities, revenues and expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for judgments we make about the carrying values of assets and liabilities that are not readily apparent from other sources. Because these estimates can vary depending on the situation, actual results may differ from the estimates.
We have disclosed under the heading “Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2017 the critical accounting policies which materially affect our financial statements. There have been no material changes from the critical accounting policies previously disclosed other than those noted below. You should carefully consider the critical accounting policies set forth in our Annual Report on Form 10-K along with information described below.
Revenue recognition
Effective January 1, 2018, we adopted the new guidance of ASC Topic 606, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition. Topic 606 requires us 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 us 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, we satisfy a performance obligation. The adoption of this new guidance did not result in any changes to our revenue recognition, but did result in expanded disclosures in our consolidated financial statements.

Income Taxes

30



The Company’s income tax provision, deferred income tax assets and liabilities, and liabilities for uncertain tax benefits represent the company’s best estimate of current and future income taxes to be paid. The annual tax rate is based on income tax laws, statutory tax rates, taxable income levels and tax planning opportunities available in various jurisdictions where the company operates. These tax laws are complex and require significant judgment to determine the consolidated provision for income taxes. Changes in tax laws, statutory tax rates, and estimates of the company’s future taxable income levels could result in actual realization of deferred taxes being materially different from amounts provided for in the consolidated financial statements.
Deferred income taxes represent temporary differences between the tax and the financial reporting basis of assets and liabilities, which will result in taxable or deductible amounts in the future. Deferred tax assets also include loss carryforwards and tax credits. These assets are regularly assessed for the likelihood of recoverability from estimated future taxable income, reversal of deferred tax liabilities and tax planning strategies. To the extent the company determines that it is more likely than not a deferred income tax asset will not be realized, a valuation allowance is established. The recoverability analysis of the deferred income tax assets and the related valuation allowances requires significant judgment and relies on estimates.
On December 22, 2017, President Donald Trump signed into law “H.R. 1”, formerly known as the “Tax Cuts and Jobs Act” (the “Tax Legislation”). The Tax Legislation, which became effective on January 1, 2018, significantly revises the U.S. tax code by, among other things, lowering the corporate income tax rate from 35% to 21%, and implementing a hybrid-territorial tax system imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries (“transition tax”). We are required to recognize the effect of the tax law changes in the period of enactment.
In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows for the recording of provisional amounts during a measurement period not to extend beyond one year of the enactment date. Although the Tax Legislation was passed late in the fourth quarter of 2017, we consider the accounting for the transition tax to be final, along with the impact of the reduction in the corporate tax rate. Because ongoing guidance and accounting interpretation is expected over the coming year, as well as review and updates to certain impacted accounting policies, we consider the accounting for the global intangible low-taxed income (“GILTI”) and a new base erosion anti-abuse tax (“BEAT”) to be incomplete due to such forthcoming guidance and our ongoing analysis of its impact on our financial statements. As a result, we have not recorded any change to the provisional tax benefit of $13.7 million recorded in the fourth quarter 2017 and we expect to complete our analysis and establish applicable accounting policies regarding GILTI and BEAT within the measurement period.
The indefinite reinvestment in the earnings of non-US subsidiaries assertion is determined by management’s judgment about and intentions concerning future investment in operations. Management’s judgment that the Company is no longer indefinitely reinvested in the undistributed earnings of non-US subsidiaries at December 31, 2017 has been finalized. The assertion regarding undistributed non-US earnings does not have a material impact on the company’s consolidated financial statements.

31



Results of Operations
Three months ended March 31, 2018 and 2017
Set forth below is a summary of certain financial information (dollars in thousands and gallons in millions except for per gallon data) for the periods indicated:
 
Three Months Ended
March 31,
 
2018
 
2017
 
 
 
 
Gallons sold
135.3

 
122.1

Average B100 price per gallon (BTC net benefit adjusted ASP of $3.18 and $2.94, respectively)
$
5.29

 
$
2.94

 
 
 
 
Revenues
$
689,252

 
$
418,893

Cost of goods sold
439,684

 
401,610

Gross profit
249,568

 
17,283

Selling, general and administrative expenses
31,654

 
22,907

Research and development expense
6,598

 
3,598

Income (loss) from operations
211,316

 
(9,222
)
Other income (expenses), net
1,870

 
(5,617
)
Income tax benefit (expense)
1,203

 
(1,075
)
Net income (loss) attributable to the Company
214,389

 
(15,914
)
Effect of participating share-based awards
5,151

 

Net income (loss) attributable to the Company's common stockholders
$
209,238

 
$
(15,914
)

Revenues. Our revenues increased significantly by $270.4 million in the three months ended March 31, 2018, or 65%, as compared to the three months ended March 31, 2017. The main driver for the increase in revenues was the recognition of the 2017 BTC that was earned during 2017 yet recognized in the first quarter of 2018 when it was retroactively reinstated. Additional factors for the increase were higher gallons sold due to increased petroleum-based gallons and slightly higher volume from international sales, coupled with higher average selling prices, partially offset by a reduction in sales of separated RIN inventory.
Biomass-based diesel revenues including government incentives increased $269.2 million, or 64%, over the same quarter last year. The recognition of the entire 2017 BTC as revenues in the first quarter of 2018 resulted in a net increase in biomass-based diesel revenues of $203.4 million. Gallons sold in the first quarter of 2018 increased by $13.2 million gallons, or 11%. Our average B100 sales price per gallon increased $2.35, or 80%, for the three months ended March 31, 2018. The average B100 sales price per gallon after adjustment for the 2017 BTC increased $0.24, or 8%. The increases in adjusted average sales price contributed to a $32.5 million increase in revenues for the three months ended March 31, 2018 when applied to the number of gallons sold in th first quarter of 2018. The change in gallons sold for the three months ended March 31, 2018 accounted for a revenue increase of $38.8 million for the first quarter of 2018. Sales of separated RIN inventory were $47.2 million for the three months ended March 31, 2018 as compared to $57.3 million for the three months ended March 31, 2017.
Costs of goods sold. Our costs of goods sold increased $38.1 million, or 9% for the three months ended March 31, 2018. Costs of goods sold as a percentage of revenues were 64% for the three months ended March 31, 2018 and 96% for the three months ended March 31, 2017. The decrease in cost of goods sold as a percentage of revenues during the three months ended March 31, 2018 was primarily due to the recognition of the 2017 BTC in full as revenues in the first quarter of 2018, partially offset by higher risk management losses.
Average prices for lower-cost feedstocks were $0.25 per pound for the three months ended March 31, 2018, as compared to $0.28 per pound for the three months ended March 31, 2017. Average soybean oil costs were $0.34 per pound for three months ended March 31, 2018, as compared to $0.32 per pound for the three months ended March 31, 2017. Average canola oil costs were $0.35 per pound for the three months ended March 31, 2018, as compared to $0.36 per pound for the three months ended March 31, 2017. We recorded risk management losses of $2.4 million from our derivative financial instrument activity for the three months ended March 31, 2018, compared to risk management gains of $8.3 million for the three months ended March 31, 2017. The fluctuation in risk management gains and losses was mainly due to price volatility in the energy markets - NYMEX ULSD prices increased by $0.15/gallon in the last two weeks of March 2018. Costs of goods sold for separated RIN

32



inventory sales were $29.3 million for the three months ended March 31, 2018 and $46.6 million for the three months ended March 31, 2017. We recorded a lower of cost or net realizable value write down on RINs of $3.5 million and $0.1 million during the three months ended March 31, 2018 and March 31, 2017, respectively, reflecting lower RIN prices at quarter end.
Selling, general and administrative expenses. Our selling, general and administrative, or SG&A, expenses were $31.7 million, or 5% of total revenue, for the three months ended March 31, 2018 and $22.9 million, or 5% of total revenue, for the three months ended March 31, 2017. This represents an increase of $8.7 million, or 38%, over the same respective period of last year. The increase year over year was driven largely by higher employee related compensation arising from the Company's strong financial performance in 2017 as well as temporary increases in costs related to focused efforts on the trade case and regulatory activities.
Research and development expense. Our research and development expenses were $6.6 million for the three months ended March 31, 2018, compared to $3.6 million for the three months ended March 31, 2017. The majority of the research and development expenses were related to activities of the Renewable Chemicals segment, which is seeking to bring industrial biotechnology products to market and drive growth and is going through increased activities under the strategic review initiative. The increase in our research and development expenses was primarily due to employee-related costs, as well as increased costs for field trials related to our Verdesoil product.
Other income (expense), net. Other income was $1.9 million for the three months ended March 31, 2018, compared to other expense of $5.6 million for the same period in 2017. Other income (expense) is primarily comprised of change in value of contingent consideration, loss on debt extinguishment, change in fair value of convertible debt conversion liability, gain from involuntary conversion, interest expense, interest income and other non-operating items.
Income tax benefit (expense). We recognized an income tax benefit of $1.2 million for the three months ended March 31, 2018, as compared to tax expense of $1.1 million for the same period in 2017. Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising in that quarter.  Our effective tax rate differs from the statutory tax rate primarily due to the fact that we have a valuation allowance on our domestic deferred tax assets and most of our foreign deferred tax assets.
Effects of participating share-based awards. Effects of participating share-based awards was $5.2 million and $0.0 million for the three months ended March 31, 2018 and 2017, respectively.
Non - GAAP Financial Measures:
Adjusted Net Income (Loss) and Adjusted EPS Reconciliation
The Company believes supplementing its consolidated financial statements presented in accordance with generally accepted accounting principles ("GAAP") with non- GAAP measures provides investors with useful information regarding the Company's short-term and long-term trends. Adjusted net income and adjusted diluted earnings per common share are derived from GAAP results by excluding the non-cash impacts related to the change in the estimated fair value of the convertible debt conversion liability, change in fair value of contingent considerations, impairment of assets, and stock compensation, coupled with other items that are not related to our operating activities. The Company excludes these non-operating, non-cash impacts as the Company believes they are not indicative of its core operating results or future performance. Adjusted net income, adjusted diluted earnings per common share and other non-GAAP financial measures used and presented by the Company may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies. Investors should consider non-GAAP measures in addition to, and not as a substitute for, or as superior to, financial performance measures prepared in accordance with GAAP.

33



(In thousands, except per share amounts)
Three Months 
 Ended 
 March 31, 
 2018
 
Three Months 
 Ended 
 March 31, 
 2017
Net income (loss) attributable to the Company
$
214,389

 
$
(15,914
)
Gain on involuntary conversion
(4,000
)
 

Gain on sale of assets
(990
)
 

Change in fair value of convertible debt conversion liability

 
172

Change in fair value of contingent considerations
(1,540
)
 
589

Loss on debt extinguishment
232

 

Other (income) expense, net
(222
)
 
320

Straight-line lease expense
(33
)
 
(32
)
Executive severance payment
165

 

Non-cash stock compensation
1,794

 
1,308

2017 BTC
(204,936
)
 

Adjusted net income (loss) attributable to the Company
$
4,859

 
$
(13,557
)
Effect of participating share-based awards
117

 

Adjusted net income (loss) excluding 2017 BTC allocation attributable to common stockholders
$
4,742

 
$
(13,557
)
 
 
 
 
Adjusted net income (loss) attributable to the Company
$
4,859

 
$
(13,557
)
Allocation of 2017 BTC

 
36,728

Adjusted net income (loss) including 2017 BTC allocation attributable to the Company
4,859

 
23,171

Effect of participating share-based awards
117

 
492

Adjusted net income (loss) including 2017 BTC allocation attributable to common stockholders
$
4,742

 
$
22,679

 
 
 
 
Net income (loss) per share attributable to common stockholders

 

Diluted
$
5.30

 
$
(0.41
)


 

Adjusted net income (loss) excluding 2017 BTC allocation per share attributable to common stockholders
 
 
 
Diluted
$
0.12

 
$
(0.35
)
 
 
 
 
Adjusted net income including 2017 BTC allocation per share attributable to common stockholders

 

Diluted
$
0.12

 
$
0.59

Adjusted EBITDA
EBITDA and Adjusted EBITDA are not measures of financial performance under GAAP. We use earnings before interest, taxes, depreciation and amortization ("EBITDA") and EBITDA adjusted for certain additional items, identified in the table below, or Adjusted EBITDA, as a supplemental performance measure. We present EBITDA and Adjusted EBITDA because we believe they assist investors in analyzing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Adjusted EBITDA to evaluate, assess and benchmark our financial performance on a consistent and a comparable basis and as a factor in determining incentive compensation for our executives.

34



The following table provides our EBITDA and Adjusted EBITDA for the periods presented, as well as a reconciliation to net income (loss):
(In thousands)
Three Months 
 Ended 
 March 31, 
 2018
 
Three Months 
 Ended 
 March 31, 
 2017
Net income (loss)
$
214,389

 
$
(15,914
)
Adjustments:
 
 
 
Income tax (benefit) expense
(1,203
)
 
1,075

Interest expense
4,651

 
4,536

Depreciation
8,859

 
8,423

Amortization
308

 
127

EBITDA
$
227,004

 
$
(1,753
)
Gain on involuntary conversion
(4,000
)
 

Gain on sale of assets
(990
)
 

Change in fair value of convertible debt conversion liability

 
172

Change in fair value of contingent liability
(1,540
)
 
589

Loss on debt extinguishment
232

 

Other (income) expense, net
(222
)
 
320

Straight-line lease expense
(33
)
 
(32
)
Executive severance
165

 

Non-cash stock compensation
1,794

 
1,308

2017 BTC (1)
(204,936
)
 

Adjusted EBITDA excluding 2017 BTC allocation
$
17,474

 
$
604

Allocation of 2017 BTC (1)

 
36,728

Adjusted EBITDA
$
17,474

 
$
37,332

   
(1) On February 9, 2018, the Biodiesel Mixture Excise Tax Credit ("BTC") was retroactively reinstated for the 2017 calendar year. The retroactive credit for 2017 resulted in a net benefit to us that was recognized in the first quarter of 2018 for GAAP purposes. Because this credit relates to the 2017 full year operating performance and results, we removed the net benefit of the 2017 BTC from our 2018 results and allocated a portion of the net benefit of the tax credit to each of the four quarters of 2017 based upon gallons sold.
Adjusted EBITDA is a supplemental performance measure that is not required by, or presented in accordance with, generally accepted accounting principles, or GAAP. Adjusted EBITDA should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP, or as alternatives to cash flows from operating activities or a measure of our liquidity or profitability. Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for any of our results as reported under GAAP. Some of these limitations are:

Adjusted EBITDA does not reflect our cash expenditures for capital assets or the impact of certain cash charges that we consider not to be an indication of our ongoing operations;
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital requirements;
Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect cash requirements for such replacements;
stock-based compensation expense is an important element of our long term incentive compensation program, although we have excluded it as an expense when evaluating our operating performance; and
other companies, including other companies in the industry, may calculate these measures differently than we do, limiting their usefulness as a comparative measure.

35



Liquidity and Capital Resources
Sources of liquidity. At March 31, 2018, the total of our cash and cash equivalents was $69.3 million, compared to $77.6 million at December 31, 2017. At March 31, 2018, we had total assets of $1,407.1 million, compared to $1,005.6 million at December 31, 2017. At March 31, 2018, we had term debt before debt issuance costs of $232.8 million, compared to term debt of $228.6 million at December 31, 2017. Our debt is subject to various financial covenants. We were in compliance with all financial covenants associated with the borrowings as of March 31, 2018.
Our term debt (in thousands) is as follows:
   
March 31, 2018
 
December 31, 2017
4.00% Convertible Senior Notes, $152,000 face amount, due in June 2036
$
116,968

 
$
116,255

2.75% Convertible Senior Notes, $67,527 face amount, due in June 2019
64,497

 
69,859

REG Danville term loan, secured, variable interest rate of LIBOR plus 4%, due in July 2022
10,836

 
11,460

REG Newton term loan, secured, variable interest rate of LIBOR plus 4%, due in December 2018
7,405

 
8,189

REG Mason City term loan, fixed interest rate of 5%, due in July 2019
979

 
1,153

REG Grays Harbor term loan, variable interest of minimum of 3.5% or Prime Rate plus 0.25%, due in May 2022
7,523

 
7,882

REG Capital term loan, fixed interest rate of 3.99%, due in January 2028
7,368

 
7,400

REG Ralston term loan, variable interest rate of Prime Rate plus 0.5%, due in July 2025
17,074

 
6,183

Other
148

 
179

Total term debt before debt issuance costs
$
232,798

 
$
228,560


In addition, we had revolving debt (in thousands) as follows:
 
March 31, 2018
 
December 31, 2017
Amount outstanding under lines of credit
$