UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-35397

 

 

RENEWABLE ENERGY GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   26-4785427
(State of other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
416 South Bell Avenue Ames, Iowa   50010
(Address of principal executive offices)   (Zip code)

(515) 239-8000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YES  ¨     NO  x

As of October 31, 2012, the registrant had 30,524,601 shares of Common Stock issued and outstanding.

 

 

 


PART I. FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

RENEWABLE ENERGY GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

AS OF SEPTEMBER 30, 2012 AND DECEMBER 31, 2011

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

 

 

     September 30,     December 31,  
     2012     2011  

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 88,282      $ 33,575   

Restricted cash

     64        —     

Accounts receivable, net (includes amounts owed by related parties of $47 as of December 31, 2011)

     40,122        52,833   

Inventories

     39,365        42,110   

Deferred income taxes

     1,122        2,416   

Prepaid expenses and other assets

     34,692        19,088   
  

 

 

   

 

 

 

Total current assets

     203,647        150,022   
  

 

 

   

 

 

 

Property, plant and equipment, net

     229,130        185,391   

Property, plant and equipment, net - variable interest entities

     5,464        46,832   

Goodwill

     84,864        84,864   

Deferred income taxes

     2,737        4,051   

Other assets

     12,476        13,287   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 538,318      $ 484,447   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

CURRENT LIABILITIES:

    

Revolving line of credit

   $ 2,861      $ 4,035   

Current maturities of notes payable

     27,116        6,427   

Current maturities of notes payable - variable interest entities

     242        2,046   

Accounts payable (includes amounts owed to related parties of $546 and $3,634 as of September 30, 2012 and December 31, 2011, respectively)

     35,003        30,166   

Accrued expenses and other liabilities

     5,214        10,440   

Deferred revenue

     —          6,748   
  

 

 

   

 

 

 

Total current liabilities

     70,436        59,862   

Unfavorable lease obligation

     9,317        10,164   

Preferred stock embedded conversion feature derivatives

     —          53,822   

Seneca Holdco Liability, at fair value

     —          11,903   

Notes payable (includes amounts owed to related parties of $214 as of December 31, 2011)

     42,014        34,327   

Notes payable - variable interest entities

     4,130        38,752   

Other liabilities

     7,415        7,262   
  

 

 

   

 

 

 

Total liabilities

     133,312        216,092   
  

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES

    

Series A preferred stock ($.0001 par value; 14,000,000 shares authorized; 13,455,522 shares issued and outstanding at December 31, 2011; redemption amount $222,016 at December 31, 2011)

     —          147,779   

Series B preferred stock ($.0001 par value; 3,000,000 shares authorized; 2,999,493 shares issued and outstanding at September 30, 2012; redemption amount $74,987 at September 30, 2012)

     83,165        —     

EQUITY:

    

Company stockholders’ equity:

    

Common stock ($.0001 par value; 300,000,000 shares authorized; 29,622,203 and 0 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively)

     3        —     

Class A Common stock ($.0001 par value; 140,000,000 shares authorized; 0 and 13,962,155 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively)

     —          1   

Common stock - additional paid-in capital

     269,105        80,747   

Warrants - additional paid-in capital

     147        3,698   

Retained earnings

     55,660        36,528   
  

 

 

   

 

 

 

Total paid-in capital and retained earnings

     324,915        120,974   

Cost of treasury stock (441,760 and 21,036 shares outstanding at September 30, 2012 and December 31, 2011, respectively)

     (3,074     (398
  

 

 

   

 

 

 

Total stockholders’ equity

     321,841        120,576   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 538,318      $ 484,447   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

2


RENEWABLE ENERGY GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

 

 

     Three Months     Three Months     Nine Months     Nine Months  
     Ended     Ended     Ended     Ended  
     September 30,     September 30,     September 30,     September 30,  
     2012     2011     2012     2011  

REVENUES:

        

Biodiesel sales

   $ 320,999      $ 232,261      $ 774,814      $ 513,221   

Biodiesel sales - related parties

     6        1,664        6        5,125   

Biodiesel government incentives

     1,868        22,497        8,070        38,763   
  

 

 

   

 

 

   

 

 

   

 

 

 
     322,873        256,422        782,890        557,109   

Services

     39        80        196        140   
  

 

 

   

 

 

   

 

 

   

 

 

 
     322,912        256,502        783,086        557,249   
  

 

 

   

 

 

   

 

 

   

 

 

 

COSTS OF GOODS SOLD:

        

Biodiesel

     308,445        126,987        689,914        264,398   

Biodiesel - related parties

     11,633        74,891        42,199        199,564   

Services

     43        79        199        121   
  

 

 

   

 

 

   

 

 

   

 

 

 
     320,121        201,957        732,312        464,083   
  

 

 

   

 

 

   

 

 

   

 

 

 

GROSS PROFIT

     2,791        54,545        50,774        93,166   

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES (includes related party amounts of $2 and $154 for the three and nine months ended September 30, 2012, respectively, and $388 and $1,091 for the three and nine months ended September 30, 2011, respectively)

     9,902        11,045        33,878        25,134   
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME (LOSS) FROM OPERATIONS

     (7,111     43,500        16,896        68,032   
  

 

 

   

 

 

   

 

 

   

 

 

 

OTHER INCOME (EXPENSE), NET:

        

Change in fair value of preferred stock conversion feature embedded derivatives

     —          (38,483     11,975        (55,571

Change in fair value of Seneca Holdco liability

     —          (977     349        (2,500

Other income (expense), net

     56        239        121        713   

Interest expense (includes related party amounts of $1 and $22 for the three and nine months ended September 30, 2012, respectively, and $239 and $467 for the three and nine months ended September 30, 2011, respectively)

     (1,150     (2,183     (3,262     (5,642
  

 

 

   

 

 

   

 

 

   

 

 

 
     (1,094     (41,404     9,183        (63,000
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES AND INCOME FROM EQUITY INVESTMENTS

     (8,205     2,096        26,079        5,032   

INCOME TAX BENEFIT (EXPENSE)

     2,165        (4,752     (3,669     (4,752

INCOME FROM EQUITY INVESTMENTS

     —          649        —          501   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS)

     (6,040     (2,007     22,410        781   
  

 

 

   

 

 

   

 

 

   

 

 

 

EFFECTS OF RECAPITALIZATION

     —          —          39,107        —     

LESS - ACCRETION OF SERIES A PREFERRED STOCK TO REDEMPTION VALUE

     —          (6,477     (1,808     (18,553

LESS - CHANGE IN UNDISTRIBUTED DIVIDENDS ALLOCATED TO PREFERRED STOCKHOLDERS

     (862     (3,221     (1,685     (9,467

LESS - DISTRIBUTED DIVIDENDS TO PREFERRED STOCKHOLDERS

     —          —          (1,470     —     

LESS - EFFECT OF PARTICIPATING PREFERRED STOCK

     —          —          (8,952     —     

LESS - EFFECT OF PARTICIPATING SHARE-BASED AWARDS

     —          —          (3,145     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY’S COMMON STOCKHOLDERS

   $ (6,902   $ (11,705   $ 44,457      $ (27,239
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(continued)

 

3


RENEWABLE ENERGY GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

 

 

     Three Months     Three Months     Nine Months      Nine Months  
     Ended     Ended     Ended      Ended  
     September 30,     September 30,     September 30,      September 30,  
     2012     2011     2012      2011  

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

         

Basic

   $ (0.24   $ (0.34   $ 1.60       $ (0.81
  

 

 

   

 

 

   

 

 

    

 

 

 

Diluted

   $ (0.24   $ (0.34   $ 0.28       $ (0.81
  

 

 

   

 

 

   

 

 

    

 

 

 

Weighted-average shares used to compute net income (loss) per share attributable to common stockholders:

         

Basic

     29,292,349        34,738,903        27,729,676         33,699,728   
  

 

 

   

 

 

   

 

 

    

 

 

 

Diluted

     29,292,349        34,738,903        33,676,699         33,699,728   
  

 

 

   

 

 

   

 

 

    

 

 

 
     (concluded       

See notes to condensed consolidated financial statements

  

  

 

4


RENEWABLE ENERGY GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND EQUITY (Unaudited)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (IN THOUSANDS EXCEPT SHARE AMOUNTS)

 

                Company Stockholders’ Equity        
    Redeemable                                   Common Stock -     Warrants -     Retained              
    Preferred     Redeemable     Common           Class A     Class A     Additional     Additional     Earnings              
    Stock     Preferred     Stock     Common     Common Stock     Common     Paid-in     Paid-in     (Accumulated     Treasury        
    Shares     Stock     Shares     Stock     Shares     Stock     Capital     Capital     Deficit)     Stock     Total  

BALANCE, December 31, 2010

    13,455,522      $ 122,436        —        $ —          13,251,264      $ 1      $ 82,636      $ 4,820      $ (52,341   $ —        $ 35,116   

Issuance of common stock in acquisitions

    —          —          —          —          673,544        —          16,350        —          —          —          16,350   

Warrants exercised

    —          —          —          —          8,383        —          128        (80     —          —          48   

Warrants expired

    —          —          —          —          —          —          1,042        (1,042     —          —          —     

Stock compensation expense

    —          —          —          —          —          —          3,047        —          —          —          3,047   

Accretion of preferred stock to redemption value

    —          18,553        —          —          —          —          (18,553     —          —          —          (18,553

Net income

    —          —          —          —          —          —          —          —          781        —          781   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, September 30, 2011

    13,455,522      $ 140,989        —        $ —          13,933,191      $ 1      $ 84,650      $ 3,698      $ (51,560   $ —        $ 36,789   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, December 31, 2011

    13,455,522      $ 147,779        —        $ —          13,962,155      $ 1      $ 80,747      $ 3,698      $ 36,528      $ (398   $ 120,576   

Derecognition of Series A Preferred Stock

    (13,455,522     (149,587     —          —          —          —          —          —          —          —          —     

Issuance of Series B Preferred Stock and common stock

    2,999,493        83,165        —          —          7,660,612        1        111,795        (3,551     —          —          108,245   

Issuance of common stock in initial public offering, net of issue cost of $8,780

    —          —          7,200,000        1        (342,860     —          59,918        —          —          —          59,919   

Issuance of common stock

    —          —          —          —          318,501        —          3,958        —          —          —          3,958   

Conversion of Class A common stock to common stock

    —          —          21,598,408        2        (21,598,408     (2     —          —          —          —          —     

Conversion of restricted stock units to common stock (net of 420,724 shares of treasury stock purchased)

    —          —          823,795        —          —          —          —          —          —          (2,676     (2,676

Stock compensation expense

    —          —          —          —          —          —          12,687        —          —          —          12,687   

Accretion of Series A Preferred Stock to redemption value

    —          1,808        —          —          —          —          —          —          (1,808     —          (1,808

Series B Preferred Stock dividends paid

    —          —          —          —          —          —          —          —          (1,470     —          (1,470

Net income

    —          —          —          —          —          —          —          —          22,410        —          22,410   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, September 30, 2012

    2,999,493      $ 83,165        29,622,203      $ 3        —        $ —        $ 269,105      $ 147      $ 55,660      $ (3,074   $ 321,841   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

5


RENEWABLE ENERGY GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(IN THOUSANDS)

 

     Nine Months     Nine Months  
     Ended     Ended  
     September 30,     September 30,  
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 22,410      $ 781   

Adjustments to reconcile net income to net cash flows from operating activities:

    

Depreciation expense

     6,192        5,245   

Amortization expense (benefit) of assets and liabilities, net

     (291     1,252   

Provision for doubtful accounts

     707        1,349   

Stock compensation expense

     12,687        3,047   

Loss from equity method investees

     —          (501

Expense for deferred taxes and uncertain tax positions

     3,008        (3,363

Change in fair value of preferred stock conversion feature embedded derivatives

     (11,975     55,571   

Change in fair value of Seneca Holdco Liability

     (249     2,050   

Premium paid for Seneca Landlord investment

     (7,063     —     

Expense settled with stock issuance

     1,898        —     

Changes in asset and liabilities, net of effects from mergers and acquisitions:

    

Accounts receivable

     12,004        (20,698

Inventories

     2,745        (16,430

Prepaid expenses and other assets

     (18,631     (14,578

Accounts payable

     4,305        5,124   

Accrued expenses and other liabilities

     (3,968     12,411   

Deferred revenue

     (6,748     (8,300
  

 

 

   

 

 

 

Net cash flows provided from operating activities

     17,031        22,960   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Cash paid for purchase of property, plant and equipment

     (6,399     (2,293

Change in restricted cash

     (64     396   

Cash paid for investment

     (4     —     

Consolidation of Bell, LLC

     —          22   
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (6,467     (1,875
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Borrowings on line of credit

     1,074,905        1,000   

Repayments on line of credit

     (1,076,079     —     

Cash received for issuance of note payable from related party

     —          10,000   

Cash paid on notes payable

     (8,050     (3,517

Repayment of investment in Seneca Landlord

     (4,000     —     

Cash received from initial public offering

     63,747        —     

Cash paid for issuance of common stock and preferred stock

     (1,699     (1,293

Cash received upon exercise of warrants

     —          48   

Cash paid for treasury stock

     (3,074     —     

Cash paid for debt issuance costs

     (137     (699

Cash paid for preferred stock dividends

     (1,470     —     
  

 

 

   

 

 

 

Net cash flows provided from financing activities

     44,143        5,539   
  

 

 

   

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

     54,707        26,624   

CASH AND CASH EQUIVALENTS, Beginning of period

     33,575        4,259   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, End of period

   $ 88,282      $ 30,883   
  

 

 

   

 

 

 

 

(continued)

 

6


RENEWABLE ENERGY GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(IN THOUSANDS)

 

     Nine Months      Nine Months  
     Ended      Ended  
     September 30,      September 30,  
     2012      2011  

Cash paid for income taxes

   $ 3,435       $ 420   
  

 

 

    

 

 

 

Cash paid for interest

   $ 3,048       $ 4,086   
  

 

 

    

 

 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

     

Effects of recapitalization

   $ 39,107      
  

 

 

    

Accretion of preferred stock to redemption value

   $ 1,808       $ 18,553   
  

 

 

    

 

 

 

Amounts included in period-end accounts payable for:

     

Purchases of property, plant and equipment

   $ 2,514       $ 680   
  

 

 

    

 

 

 

Debt financing costs

      $ 43   
     

 

 

 

Equity issuance costs

      $ 964   
     

 

 

 

Incentive common stock liability for supply agreement

   $ 362       $ 1,388   
  

 

 

    

 

 

 

Issuance of common stock per exercise of Seneca Landlord put/call option

   $ 591      
  

 

 

    

Assets (liabilities) acquired through consolidation of 416 Bell, LLC

     

Cash

      $ 22   

Property, plant and equipment

        5,881   

Other noncurrent assets

        4   

Other current liabilities

        (17

Notes payable

        (4,757

Other noncurrent liabilities

        (567
     

 

 

 

Removal of equity method investee as a result of consolidation

      $ 566   
     

 

 

 

Assets (liabilities) acquired through the issuance of stock:

     

Other current assets

      $ 78   

Property, plant and equipment

        18,886   

Notes payable

        (1,001

Fair value of investment prior to allocation

        (1,613
     

 

 

 
      $ 16,350   
     

 

 

 

(concluded)

 

F-7


RENEWABLE ENERGY GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited

For The Three and Nine Months Ended September 30, 2012 and 2011

(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), without audit, 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. The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. It is suggested that these interim financial statements be read in conjunction with the consolidated financial statements and the notes thereto appearing in the Company’s latest annual report on Form 10-K. Results for interim periods are not necessarily indicative of those to be expected for the fiscal year.

On January 3, 2012, the Company filed its Second Amended and Restated Certificate of Incorporation which executed a one-for-2.5 reverse stock split of the issued and outstanding shares of its common stock. All numbers of common shares and per share data in the accompanying condensed consolidated financial statements and related notes have been retroactively adjusted. On January 24, 2012, the Company completed an initial public offering (IPO) of shares of Common Stock in which it sold 7,200,000 shares at a price to the public of $10 per share, which included 342,860 shares of Common Stock from selling shareholders. The IPO raised approximately $59,919 net of underwriting fees and offering costs. On January 24, 2012, the Company acquired the Seneca Facility pursuant to the exercise of its option under the Funding, Investor Fee and Put/Call Agreement, by and among the Company, Seneca Landlord, LLC (Seneca Landlord) and certain subsidiaries of the Company. See “Note 3 – Stockholders’ Equity of the Company” for a further description of the IPO. See “Note 5 – Acquisitions” for a description of the acquisition.

As of September 30, 2012, the Company owned biodiesel production facilities with a total of 212 million gallons per year (mmgy) of nameplate production capacity.

The biodiesel industry and the Company’s business have benefited from the continuation of certain federal and state incentives. The federal blenders’ tax credit expired on December 31, 2011 and it is uncertain whether it will be reinstated. This revocation along with other amendments of any one or more of those laws, regulations or programs could adversely affect the financial results of the Company. Revenues include amounts related to federal subsidies and regulatory support totaling $1,868 and $8,070 for the three and nine months ended September 30, 2012, respectively, and $22,497 and $38,763 for the three and nine months ended September 30, 2011, respectively.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company, consolidated with the accounts of all of its subsidiaries and affiliates in which the Company holds a controlling financial interest as of the financial statement date. Normally, a controlling financial interest reflects ownership of a majority of the voting interests. Other factors considered in determining whether a controlling financial interest is held include whether the Company possesses the authority to purchase or sell assets or make other operating decisions that significantly affect the entity’s results of operations and whether the Company is the primary beneficiary of the economic benefits and financial risks of the entity. The Company continues to re-evaluate whether it is the primary beneficiary of variable interest entities each reporting period. Intercompany accounts and transactions have been eliminated.

 

8


Valuation of Series A Preferred Stock Conversion Feature Embedded Derivatives

In connection with the Company’s IPO on January 24, 2012, the Company gave effect to the one-time conversion of Series A Preferred Stock and certain common stock warrants into 7,660,612 shares of newly-issued Class A Common Stock and 2,999,493 shares of Series B preferred stock with a $74,987 aggregate liquidation preference and cumulative dividends of 4.5% per annum. No shares of Series A Preferred Stock remain outstanding after the IPO.

The Series A Preferred Stock terms provided for voluntary and, under certain circumstances, automatic conversion of the Series A Preferred Stock to Class A Common Stock based on a prescribed formula. In addition, shares of Series A Preferred Stock were subject to redemption at the election of the holder beginning February 26, 2014. The redemption price was equal to the greater of (i) an amount equal to $13.75 per share of Series A Preferred Stock plus any and all accrued dividends, not to exceed $16.50 per share, or (ii) the fair market value of the Series A Preferred Stock. In accordance with ASC Topic 815, Derivatives and Hedging (ASC Topic 815), the Company was required to bifurcate certain derivatives embedded in its contractual obligations and account for as a separate liability. An “embedded derivative” is a provision within a contract, or other instrument, that affects some or all of the cash flows or the value of that contract, similar to a derivative instrument. Essentially, the embedded provision within the contract contained all of the attributes of a free-standing derivative, such as an underlying market variable, a notional amount or payment provision, and can be settled “net,” but the contract, in its entirety, does not meet the ASC Topic 815 definition of a derivative.

The Company determined that the conversion feature of the Series A Preferred Stock was an embedded derivative because the redemption feature allowed the holder to redeem Series A Preferred Stock for cash at a price which could vary based on the fair market value of the Series A Preferred Stock, which effectively provided the holders with a mechanism to “net settle” the conversion option. Consequently, the embedded conversion option must be bifurcated and accounted for separately because the economic characteristics of this conversion option were not considered to be clearly and closely related to the economic characteristics of the Series A Preferred Stock, which was considered more like a debt instrument than equity.

Upon issuance of the Series A Preferred Stock, the Company recorded a liability representing the estimated fair value of the right of holders of the Series A Preferred Stock to receive the fair market value of the Common Stock issuable upon conversion of the Series A Preferred Stock on the redemption date. This liability was adjusted each quarter based on changes in the estimated fair value of such right, and a corresponding income or expense was recorded in change in fair value of the preferred stock conversion feature embedded derivatives in the Company’s statements of operations.

The Company used the option pricing method to value the embedded derivative. The Company used the Black-Scholes options pricing model to estimate the fair value of the conversion option embedded in the Series A Preferred Stock. The Black-Scholes options pricing model requires the development and use of highly subjective assumptions. These assumptions include the expected volatility of the value of the Company’s equity, the expected conversion date, an appropriate risk-free interest rate and the estimated fair value of the Company’s equity. The expected volatility of the Company’s equity is estimated based on the volatility of the value of the equity of publicly traded companies in a similar industry and general stage of development as the Company. The expected term of the conversion option was based on the period remaining until the contractually stipulated redemption date of February 26, 2014. The risk-free interest rate was based on the yield on U.S. Treasury STRIPs with a remaining term equal to the expected term of the conversion option. The development of the estimated fair value of the Company’s equity is discussed below in “Valuation of the Company’s Equity.”

The significant assumptions utilized in the Company’s valuation of the embedded derivative are as follows:

 

     January 24,     December 31,  
     2012     2011  

Expected volatility

     40.00     40.00

Risk-free rate

     2.80     2.60

Valuation of Seneca Holdco Liability

On January 24, 2012, the Company acquired the Seneca Facility pursuant to the exercise of its call option and the Seneca Holdco liability no longer exists. See “Note 5 – Acquisitions” for a description of the acquisition.

Associated with the Company’s transaction for the Seneca Facility, the Company had the option to purchase (Call Option) and Seneca Holdco, LLC had the option to require the Company to purchase (Put Option) the membership interest of Seneca Landlord whose assets consist primarily of a biodiesel plant located in Seneca, Illinois. Both the Put Option and the Call Option had a term of seven years and were exercisable by either party at a price based on a pre-defined formula. The Company determined the fair value of the amounts financed by Seneca Holdco, LLC, the Put Option and the Call Option using an option pricing model. The fair value represented the probability weighted present value of the gain, or loss, that is realized upon exercise of each option. The option pricing model required the development and use of highly subjective assumptions. These assumptions included (i) the value of Seneca Landlord’s equity, (ii) expectations regarding future changes in the value of Seneca Landlord’s equity, (iii) expectations about the probability of either option being exercised, including the Company’s ability to list its securities on an exchange or complete a public

 

9


offering and (iv) an appropriate risk-free rate. Company management considered current public equity markets, relevant regulatory issues, industry conditions and the Company’s position within the industry when estimating the probability that the Company will raise additional capital.

The significant assumptions utilized in the Company’s valuation of the Seneca Holdco liability are as follows:

 

     December 31,  
     2011  

Expected volatility

     50.00

Risk-free rate

     2.60

Probability of IPO

     100.00

Preferred Stock Accretion

Beginning October 1, 2007, the Company determined that there was a more than remote likelihood that the Series A Preferred Stock would become redeemable; therefore commenced accretion of the carrying value of the Series A Preferred Stock over the period until the earliest redemption date to the Series A Preferred Stock’s redemption value, plus accrued but unpaid dividends using the effective interest method. This determination was based upon the state of the public equity markets at that time which restricted the Company’s ability to execute a qualified public offering, the Company’s historical operating results and the volatility in the biodiesel industry which resulted in lower projected profitability.

Accretion of $0 and $1,808 for the three and nine months ended September 30, 2012, respectively, and $6,477 and $18,553 for the three and nine months ended September 30, 2011, respectively, has been recognized as a reduction to income available to common stockholders in accordance with paragraph 15 of ASC Topic 480-10-S99, Classification and Measurement of Redeemable Securities (ASC Topic 480-10-S99).

On January 24, 2012, in connection with the IPO, the Series A Preferred Stock was converted into a combination of shares of Series B preferred stock and Class A Common Stock. Accretion of the Series A Preferred Stock was terminated at the time of the conversion. The Company recorded the Series B preferred stock at fair value, which was a premium over its redemption value; therefore no accretion is recorded for the Series B preferred stock.

Valuation of the Company’s Equity

Prior to the Company’s IPO, the Company considered three generally accepted valuation approaches to estimate the fair value of the aggregate equity of the Company: the income approach, the market approach and the cost approach. Ultimately, the estimated fair value of the aggregate equity of the Company was developed using the Income Approach - Discounted Cash Flow (DCF) method.

Material underlying assumptions in the DCF analysis include the gallons produced and managed, gross margin per gallon, expected long-term growth rates and an appropriate discount rate. Gallons produced and managed as well as the gross margin per gallon were determined based on historical and forward-looking market data.

The discount rate used in the DCF analysis was based on macroeconomic, industry and Company-specific factors and reflects the perceived degree of risk associated with realizing the projected cash flows. The selected discount rate represents the weighted average rate of return that a market participant investor would require on an investment in the Company’s debt and equity. The percent of total capital assumed to be comprised of debt and equity when developing the weighted average cost of capital was based on a review of the capital structures of the Company’s publicly traded industry peers. The cost of debt was estimated utilizing the adjusted average U.S. Industrials B Interest Rate Curve during the previous 12 months representing a reasonable market participant rate based on the Company’s publicly traded industry peers. The Company’s cost of equity was estimated utilizing the capital asset pricing model, which develops an estimated market rate of return based on the appropriate risk-free rate adjusted for the risk of the alternative energy industry relative to the market as a whole, an equity risk premium and a company specific risk premium. The risk premiums included in the discount rate were based on historical and forward-looking market data. The discount rate utilized in the Company’s December 31, 2011 DCF model was 22.2%.

On January 24, 2012, the Company completed an IPO of shares of Common Stock. See “Note 3 – Stockholders’ Equity of the Company” for further description of the IPO. Since the Company is publicly traded, the valuation of the Company’s equity is no longer necessary as the Company relies on the market value created on the open market for its Common Stock.

Goodwill

The Company accounts for goodwill in accordance with ASC Topic 350, Intangibles – Goodwill and Other. The Company reviews the carrying value of goodwill for impairment annually on July 31 or when impairment indicators exist. Goodwill is allocated and reviewed for impairment by reporting units. The Company’s reporting units consist of its two operating segments, the biodiesel operating segment and services operating segment. The analysis is based on a comparison of the carrying value of the reporting unit to

 

10


its fair value, determined utilizing a discounted cash flow methodology that also took into consideration other selected public guideline company information. Additionally, the Company reviews the carrying value of goodwill whenever events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. Changes in estimates of future cash flows caused by items such as unforeseen events or sustained unfavorable changes in market conditions could negatively affect the fair value of the reporting unit’s goodwill asset and result in an impairment charge. The annual impairment test determined that the fair value of each of the reporting units exceeded its carrying value by over 45% margins. There was no impairment of goodwill recorded during the period.

Stock-Based Compensation

On August 31, 2011, the Company’s Board of Directors (Company Board) approved the Amended and Restated 2009 Stock Incentive Plan, which was then approved by the Company’s shareholders on October 26, 2011. Eligible award recipients are employees, non-employee directors and advisors who provide service to the Company. The Company accounts for stock-based compensation in accordance with ASC Topic 718, Stock Compensation (ASC Topic 718). Compensation expense is measured at the grant-date fair value of the award and recognized as compensation expense over the vesting period. Compensation expense of $2,965 and $12,687 for the three and nine months ended September 30, 2012, respectively, and $1,067 and $3,047 for the three and nine months ended September 30, 2011, respectively, was recorded for restricted stock units and stock appreciation rights awarded to employees and non-employee directors. During the nine months ended September 30, 2012, the Company granted 769,266 shares of restricted stock units and 1,055,805 shares of stock appreciation rights to employees with vesting periods of three to four years, respectively. During March 2012, the Company also granted 50,000 shares of restricted stock units to an employee that will vest in nine months based upon meeting certain performance requirements and in May 2012 granted 42,190 shares of restricted stock units to non-employee directors that will vest over the next year.

Income Taxes

The Company accounts for income taxes during interim periods based on its best estimate of the annual effective tax rate in accordance with ASC Topic 740, Income Taxes (ASC Topic 740), which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred income taxes are recognized for differences between the financial statement and tax bases of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Further, during interim periods certain items are given discrete period treatment and, as a result, the tax effects of such items are reported in full in the relevant interim period.

In addition, ASC Topic 740 requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. If it is more likely than not that all or a portion of the Company’s deferred tax assets will not be realized, based on all available evidence, a deferred tax valuation allowance would be established. Consideration is given to positive and negative evidence related to the realization of the deferred tax assets. Significant judgment is required in making this assessment. In evaluating the available evidence during the current period, the Company considered, among other factors, historical financial performance in the form of positive cumulative book income for the past three years, expectation of future earnings, length of statutory carry forward periods, the ability to file carry back claims and realize the benefit of recognized assets, experience with operating loss and tax credit carry forwards not expiring unused, and timing of reversals of temporary differences. During the nine months ended September 30, 2012, the Company estimated that all of its net deferred taxes previously subject to a valuation allowance will reverse in the current annual period. As a result, the income tax expense recorded for the three and nine months ended September 30, 2012 reflects the estimated reversal of the associated valuation allowance during 2012. The Company will continue to evaluate the need for a valuation allowance in future periods. As of September 30, 2012 and December 31, 2011, respectively, the Company had deferred income tax assets of $5,635 and $13,804 with an offsetting valuation allowance of $1,776 and $7,337, which resulted in a net deferred tax asset of $3,859 and $6,467. The net amount is offset by an accrued liability for unrecognized tax benefits in the amount of $1,900 and $1,500 as of September 30, 2012 and December 31, 2011, respectively. The increase was recorded as a result of the purchase of Seneca Landlord.

Uncertain tax positions are evaluated and amounts are recorded when it is more-likely-than-not that the income tax position will be sustained upon examination by federal, state, or local taxing authorities, including resolutions of any related appeals or litigation processes, based on the technical merits. Judgment is required in evaluating each uncertain tax position to determine whether the more likely than not recognition threshold has been met.

Income tax benefit for the three months ended September 30, 2012 was $2,165 and income tax expense for the nine months ended September 30, 2012 was $3,669 compared to $4,752 for the three and nine months ended September 30, 2011. The effective tax rate was approximately 26% and 14% for the three and nine months ended September 30, 2012, respectively. The difference between the effective tax rate and the federal statutory rate, 35%, is primarily a result of state income taxes (net of federal income tax effects), reversal of the valuation allowance offsetting deferred tax assets, income or loss from the change in fair value of the embedded conversion feature of preferred stock, the domestic production activities deduction, tax consequences of Seneca Landlord, various disallowed deductions and discrete items that occur during the period. The 2012 annual effective tax rate can be affected as a result of variances among the estimates of full-year sources of taxable income, the realization of net operating losses and tax credits, the release of valuation allowances, and the Company’s assessment of its liability for unrecognized tax benefits.

 

11


Net Income (Loss) Per Share

Basic and diluted net income (loss) per common share are presented in conformity with the two-class method required for participating securities. The two-class method includes an earnings allocation formula that determines earnings for each class of common stock according to dividends declared and undistributed earnings for the period.

The holders of the Series A Preferred Stock accrued dividends at a rate of $0.88 per share per annum. Dividends were cumulative, accrued on a daily basis from the date of issuance and compounded annually from the date of issuance. If dividends on the Series A Preferred Stock had not been paid or declared, the deficiency would have been paid or declared before any dividend is declared for Common Stock. Dividends in arrears did not bear interest. Holders of the Series A Preferred Stock were allowed to participate in the dividends to common stockholders in the event that dividends on Common Stock exceeded that of the Series A Preferred Stock as if the Series A Preferred Stock had been converted to Common Stock at the beginning of the year.

The holders of the Series B preferred stock accrue dividends at a rate of $1.125 per share per annum. Dividends are cumulative, accrue on a daily basis from the date of issuance and compound annually from the date of issuance. If dividends on the Series B preferred stock have not been paid or declared, the deficiency shall be paid or declared before any dividend is declared for Common Stock. Dividends in arrears do not bear interest. Holders of the Series B preferred stock are allowed to participate in the dividends to common stockholders in the event that dividends on Common Stock exceed that of the Series B preferred stock as if the Series B preferred stock had been converted to Common Stock at the beginning of the year.

The Company calculates the effects of the convertible Series A Preferred Stock and Series B preferred stock on diluted earnings per share (EPS) under the “if-converted” method unless the conversion of the convertible preferred stock is anti-dilutive to basic EPS. The effects of Common Stock options, warrants, restricted stock units and stock appreciation rights on diluted EPS are calculated using the treasury stock method unless the effects are anti-dilutive to EPS.

The following potentially dilutive weighted average securities were excluded from the calculation of diluted net income (loss) per share attributable to common stockholders during the periods presented as the effect was anti-dilutive:

 

     Three Months      Three Months      Nine Months      Nine Months  
     Ended      Ended      Ended      Ended  
     September 30,      September 30,      September 30,      September 30,  
     2012      2011      2012      2011  

Options to purchase common stock

     87,026         87,026         87,026         87,268   

Restricted stock units

     1,134,421         1,163,442         1,409,659         1,157,226   

Stock appreciation rights

     1,043,693         —           655,762         —     

Warrants to purchase common stock

     17,916         305,476         42,054         372,874   

Redeemable preferred shares

     5,998,986         5,382,209         —           5,382,209   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     8,282,042         6,938,153         2,194,501         6,999,577   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

12


The following table presents the calculation of diluted net income per share for the nine months ended September 30, 2012. For the three months ended September 30, 2012 and the three and nine months ended September 30, 2011, the effect from all convertible securities was anti-dilutive (in thousands, except share and per share data):

 

     Nine Months  
     Ended  
     September 30,  
     2012  

Net income attributable to the Company’s common stockholders

   $ 44,457   

Less: effects of recapitalization

     (39,107

Plus: undistributed dividends allocated to Preferred Stockholders

     1,685   

Plus: distributed dividends to Preferred Stockholders

     1,470   

Plus: accretion of Series A Preferred Stock to redemption value

     1,808   

Plus: (gain) loss due to change in fair value of Series A preferred stock conversion feature embedded derivatives

     (11,975

Plus: effect of participating dividends

     12,097   
  

 

 

 

Adjusted net income available to common stockholders

     10,435   

Less: effect of participating share-based awards

     1,108   
  

 

 

 

Net income attributable to the Company’s common stockholders after dilutive effects

   $ 11,543   
  

 

 

 

Shares:

  

Weighted-average shares used to compute basic net income per share

     27,729,676   

Adjustment to reflect conversion of preferred stock

     5,947,023   
  

 

 

 

Weighted-average shares used to compute diluted net income per share

     33,676,699   
  

 

 

 

Net income per share attributable to common stockholders

  

Diluted

   $ 0.28   
  

 

 

 

New Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and the International Financial Reporting Standards (IFRS). The amendments in the update are intended to result in convergence between U.S. GAAP and IFRS requirements for measurement of, and disclosures about, fair value. ASU 2011-04 clarifies or changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. The amendments in this update are to be applied prospectively. The amendments are effective during interim and annual periods beginning after December 15, 2011. The Company adopted this statement effective January 1, 2012. The adoption of this guidance did not have a material effect on the Company’s financial statements.

In September 2011, the FASB issued ASU 2011-08, Intangibles—Goodwill and Other, which amends ASC Topic 350 and the current guidance on testing goodwill for impairment. Under the revised guidance, entities testing goodwill for impairment have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit exceeds its carrying amount. If an entity determines it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, then performing the two-step impairment test is unnecessary. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company adopted this statement effective January 1, 2012, however, the Company did not utilize the qualitative option for assessing impairment in its annual 2012 goodwill impairment test.

In December 2011, the FASB issued ASU No. 2011-10, Derecognition of in Substance Real Estate – a Scope Clarification a consensus of the FASB Emerging Issues Task Force (Topic 360). The amendments in this update are intended to resolve the diversity in practice about whether the guidance in Subtopic 360-20, Property, Plant, and Equipment—Real Estate Sales, applies to a parent that ceases to have a controlling financial interest (as described in Subtopic 810-10, Consolidation—Overall) in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. This update does not address whether the guidance in Subtopic 360-20 would apply to other circumstances when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. Early adoption is permitted. The Company does not believe the adoption of this standard will have a material impact on its condensed consolidated financial statements.

 

13


In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities (Topic 210). The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, the standard requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. The amendments are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The disclosures required by the amendments are required to be applied retrospectively for all comparative periods presented. The Company does not believe the adoption of this standard will have a material impact on its condensed consolidated financial statements.

NOTE 3 — STOCKHOLDERS’ EQUITY OF THE COMPANY

Common Stock

On February 26, 2010, the Company filed its restated certificate of incorporation with the Secretary of State of Delaware. The restated certificate of incorporation authorized 140,000,000 shares of Common Stock at a par value of $0.0001 per share.

Each holder of Common Stock is entitled to one vote for each share of Common Stock held on all matters submitted to a vote of stockholders. Subject to preferences that may apply to shares of previously outstanding Series A Preferred Stock and currently outstanding Series B preferred stock as outlined below, the holders of outstanding shares of Common Stock are entitled to receive dividends. After the payment of all preferential amounts required to the holders of Series B preferred stock, all of the remaining assets of the Company available for distribution shall be distributed ratably among the holders of Common Stock.

On January 3, 2012, the Company filed its Second Amended and Restated Certificate of Incorporation which effected a one-for-2.5 reverse stock split on the shares issued and outstanding. The Amended and Restated Certificate of Incorporation authorized capital stock consisting of 450,000,000 shares, all with a par value of $0.0001 per share which includes 300,000,000 shares of Common Stock (the class of common stock offered in the IPO), 140,000,000 shares of Class A Common Stock and 10,000,000 shares of preferred stock including 3,000,000 shares of Series B preferred stock.

Common Stock Issued During 2012

On January 24, 2012, the Company completed an IPO of shares of Common Stock in which it sold 7,200,000 shares at a price to the public of $10 per share, which included 342,860 shares of Common Stock from selling shareholders. The IPO raised approximately $59,919 net of underwriting fees and offering costs. In connection with the Company’s IPO on January 24, 2012, the Company gave effect to the one-time conversion of Series A Preferred Stock and certain common stock warrants into 7,660,612 shares of newly issued Class A Common Stock and 2,999,493 shares of $74,987 aggregate liquidation preference Series B preferred stock with cumulative dividends of 4.50% per annum. On June 30, 2015, each holder of Series B preferred stock will have the right to require the Company to redeem its shares at the redemption price of $25.00 per share plus an amount equal to any accumulated and unpaid dividends (Redemption Price). As of July 17, 2012, the holder of any shares of Series B preferred stock has the right to convert such shares, together with accumulated and unpaid dividends (whether or not declared) into shares of Common Stock at the conversion rate in effect at such time. If, at any time, the closing sale price of the Common Stock exceeds certain pricing thresholds, then the Company may, at its option, cause up to all of the then outstanding shares of Series B preferred stock (and corresponding accumulated and unpaid dividends) to be converted into shares of the Company’s Common Stock at the then-applicable conversion rate.

On January 24, 2012, we exercised an option to purchase our Seneca facility, which we previously operated under lease. The exercise price of the option was $12,000, of which approximately $937 was previously paid, and 60,000 shares of our Class A Common Stock were issued to each of USRG Holdco IX, LLC, Bunge North America, Inc. and West Central Cooperative.

On January 24, 2012, we issued 200,000 shares of Class A Common Stock to USRG Holdco IX, LLC pursuant to a Termination Agreement and Mutual Release, dated as of July 15, 2011, by and among USRG Holdco IX, LLC, the Company and REG Services Group, LLC, which related to the termination of a previous glycerin purchase agreement between the parties.

On February 28, 2012, we issued 59,301 shares of Class A Common Stock with respect to the intangible supply agreement in connection with the purchase of substantially all Tellurian Biodiesel, Inc. and American BDF, LLC assets.

On July 16, 2012, the Company converted all of its 21,599,208 shares of Class A Common Stock into Common Stock due to the expiration of the lock-up agreement and also had 127,062 restricted stock units vest into Common Stock.

On August 16, 2012, the Company had 696,733 restricted stock units vest into Common Stock.

Common Stock Warrants

Under the Company’s outstanding warrants, the holder may purchase the number of shares of Common Stock underlying each warrant held for a purchase price of $11.16 per share. The warrant holder may “net exercise” the warrants and use the common stock received upon exercise of the warrants outstanding as the consideration for payment of the exercise price.

 

14


The warrant holders are generally protected from anti-dilution by adjustments for any stock dividends, stock split, combination or other recapitalization.

On January 24, 2012, certain common stock warrant holders were converted to Class A Common Stock as part of the stock recapitalization. Warrant holders converted 287,560 common stock warrants to 134,181 shares of Common Stock.

Stock Issuance Costs

In addition to the warrants, other direct costs of obtaining capital by issuing the common and preferred stock were deducted from related proceeds with the net amount recorded as preferred stock or stockholders’ equity. Direct costs incurred for the three and nine months ended September 30, 2012 were $0 and $5,749, respectively, and $1,118 and $2,257 for the three and nine months ended September 30, 2011, respectively.

NOTE 4 — REDEEMABLE PREFERRED STOCK

The Company’s restated certificate of incorporation filed on February 26, 2010 authorized 60,000,000 shares of preferred stock, including 14,000,000 shares of Series A Preferred Stock, with a par value of $0.0001. The Company’s Board of Directors had discretion, subject to the approval of certain shareholders, as to the designation of voting rights, dividend rights, redemption price, liquidation preference and other provisions of each issuance.

On July 15, 2011, holders of the Company’s Series A Preferred Stock approved the Second Amended and Restated Certificate of Incorporation, to be effective prior to the completion of the Company’s IPO, to, among other things, convert and redeem the Company’s outstanding Series A Preferred Stock for a combination of Class A Common Stock and Series B preferred stock. This was approved by the Company’s preferred stockholders in an action by written consent in July 2012 and by the common stockholders during the Company’s annual stockholder meeting on October 26, 2011.

On January 3, 2012, the Company filed its Second Amended and Restated Certificate of Incorporation which affected a one-for-2.5 reverse stock split of the issued and outstanding shares of common stock. The Second Amended and Restated Certificate of Incorporation authorized capital stock consisting of 450,000,000 shares, all with a par value of $.0001 per share which includes 300,000,000 shares of Common Stock (the class of common stock offered in the IPO), 140,000,000 shares of Class A Common Stock and 10,000,000 shares of preferred stock including 3,000,000 shares of Series B preferred stock.

In connection with the Company’s IPO on January 24, 2012, the Company gave effect to the one-time conversion of Series A Preferred Stock and certain common stock warrants into 7,660,612 shares of newly-issued Common Stock and 2,999,493 shares of $74,987 aggregate liquidation preference Series B preferred stock with cumulative dividends of 4.5% per annum. All Series A Preferred Stock was converted and no Series A Preferred Stock remain outstanding.

The rights, preferences, privileges and restrictions granted to and imposed on the Preferred Stock are set forth below. The holders of Preferred Stock are generally protected from anti-dilution by adjustments for any stock dividends, stock split, combination or other recapitalization.

Series A Preferred Stock

Dividend Provisions

The holders of the Series A Preferred Stock accrued dividends at the rate of $0.88 per share per annum. Dividends are cumulative, accrued on a daily basis from the date of issuance and compound annually from the date of issuance. If dividends on the Series A Preferred Stock were not paid or declared, the deficiency was to be paid or declared before any dividend was declared for Common Stock. Dividends in arrears do not bear interest. Holders of the Series A Preferred Stock were allowed to participate in the dividends to common stockholders in the event that dividends on Common Stock exceed that of the Series A Preferred Stock as if the Series A Preferred Stock had been converted to Common Stock at the beginning of the year. Holders of at least seventy-five percent of the outstanding shares of the Series A Preferred Stock that were issued (Preferred Supermajority) could have voted to waive the timing or amount of any dividend payment. The Company has not declared any dividends on the Series A Preferred Stock and as a result of the recapitalization where all Series A Preferred Stock was converted and all associated accumulated and unpaid dividends were cancelled.

Liquidation Rights

Upon the occurrence of a voluntary or involuntary liquidation (including consolidations, mergers or sale of assets as defined by the preferred stock agreement), if the remaining net assets of the Company were sufficient, the holders of the Series A Preferred Stock would have been paid no less than liquidation value plus all dividends in arrears (whether or not declared), out of the assets of the Company legally available for distribution to its stockholders, before any payment or distribution was made to any holders of Common Stock.

If upon any liquidation or dissolution, the remaining net assets of the Company are insufficient to pay the amount that the Series A Preferred Stockholders are due as indicated above, the holders of Series A Preferred Stock will share ratably in any distribution of the remaining assets of the Company.

 

15


Conversion Rights

All shares of the Series A Preferred Stock were converted into shares of Common Stock at a 1 to 2.5 conversion ratio.

Voting Rights

Each holder of the Series A Preferred Stock was entitled to the number of votes equal to the number of shares of Common Stock into which the Series A Preferred Stock held by such holder were convertible.

Additionally, the Company was prohibited, without obtaining the approval of the Preferred Supermajority, from performing certain activities including, but not limited to, amending shareholder agreements, redeeming or purchasing any outstanding shares of the Company, declaring dividends, making certain capital expenditures and merging or consolidating with other entities.

Redemption Rights

On or after February 26, 2014, the Preferred Supermajority could have required that the Company redeem all or part of the issued and outstanding shares of the Series A Preferred Stock out of funds lawfully available; provided, however, that any such redemptions equal in the aggregate $5,000. The redemption price was the greater of the fair market value per share at the date of the redemption election or $13.75 per share of the Series A Preferred Stock, plus accrued and unpaid preferred stock dividends, not to exceed $16.50 per share.

Series B Preferred Stock

Dividend Provisions

The holders of the Series B preferred stock are entitled to receive, when, as and if declared by the Company Board, cumulative dividends on each outstanding share of Series B preferred stock at the annual rate of 4.50% of the stated value. Dividends are payable semi-annually in arrears on June 30 and December 30 of each year. The Company may, at its option, defer a regularly scheduled dividend payment and instead pay accumulated and unpaid dividends on the following dividend payment date. The Company can only defer two such dividend payments and may not defer consecutive dividend payments. The Company will pay any dividend in cash, by delivering shares of Common Stock or through any combination of cash and shares of Common Stock. During May 2012, the Company Board declared its first dividend with respect to the Series B preferred stock in the amount of $0.49 per share in cash. Total dividends paid on June 30, 2012 were $1,470. The payment was pro-rated to give effect to the fact that the Series B preferred stock was not issued until January 24, 2012.

Liquidation Rights

In the event of any voluntary or involuntary liquidation, dissolution or winding up of affairs, a holder of Series B preferred stock will be entitled to be paid, before any distribution or payment may be made to any holders of junior stock, an amount per share of Series B preferred stock, which we refer to as the Liquidation Preference, equal to the sum of the stated value of a share of Series B preferred stock of $25.00, which we refer to as the Stated Value, plus the amount of any accumulated and unpaid dividends, whether or not declared, to, but excluding, the date of payment.

If upon any liquidation or dissolution, the remaining net assets of the Company are insufficient to pay the amount that the Series B preferred stockholders are due as indicated above, the holders of Series B preferred stock will share ratably in any distribution of the remaining assets of the Company.

Conversion Rights

As of July 17, 2012, the holder of any shares of Series B preferred stock will have the right to convert such shares, together with accumulated and unpaid dividends (whether or not declared) into shares of Common Stock at a conversion rate in effect at the time of conversion. The initial conversion rate for each $25.00 of Liquidation Preference will be equal to $25.00 divided by $12.50 which is 125% of the public offering price in the IPO.

As of July 17, 2012, if the closing sale price of the Common Stock exceeds $15.00 for at least 20 trading days in any 30 consecutive trading day period and the average daily trading volume of the Common Stock for at least 20 trading days in such period exceeds 200,000 shares or $2,500, then the Company may, at its option, cause up to 50% of the then-outstanding shares of Series B preferred stock, and corresponding accumulated and unpaid dividends, to be converted into shares of Common Stock at the then-applicable conversion rate. If, at any time, the closing sale price of the Common Stock exceeds $16.00 for at least 20 trading days in any 30 consecutive trading day period and the average daily trading volume of the Common Stock for at least 20 trading days in such period exceeds 200,000 shares or $2,500, the Company may, at its option, cause up to all of the then-outstanding shares of Series B preferred stock, and corresponding accumulated and unpaid dividends, to be converted into shares of Common Stock at the then-applicable conversion rate.

 

16


Voting Rights

Each holder of the Series B preferred stock is entitled to vote their shares of Series B preferred stock on an as-converted basis on any matters presented to holders of Common Stock. Except as required by law, holders of Series B preferred stock will vote on an as-converted basis together with the holders of Common Stock and with the holders of any other class or series of the Company’s capital stock entitled to vote with the Common Stock, as a single class.

The vote or consent of at least 75% of the outstanding shares of the Series B preferred stock, voting as a separate class, shall be necessary to amend, alter or repeal the terms of the Series B preferred stock so as to adversely affect the powers, preferences or rights of the Series B preferred stock.

Redemption Rights

Except as set forth below, the Company may not redeem the Series B preferred stock prior to January 14, 2014, which is referred to as the Initial Optional Redemption Date. On or after the Initial Optional Redemption Date, the Series B preferred stock may be redeemed at the Company’s option, in whole or in part, for cash at a price per share equal to the Stated Value, plus any accumulated and unpaid dividends, which the Company refers to as the Redemption Price. If a change of control transaction occurs any time before the Initial Optional Redemption Date, then the Company may elect to redeem all, but not part, of the outstanding shares of Series B preferred stock for cash at the Redemption Price plus a “make-whole” payment for each share of Series B preferred stock equal to $2.25 less the amount of any dividends paid on such share since the original issuance date of the Series B preferred stock.

If before March 31, 2015, the Company conducts an equity offering or offerings for cash that results in aggregate net proceeds in excess of $20,000, then, subject to the Company having legally available funds, the Company will offer to purchase or redeem the maximum number of shares of Series B preferred stock at a price equal to the Stated Value plus the amount of any accumulated and unpaid dividends to, but excluding, the purchase date that may be purchased or redeemed using 25% of those net proceeds. Before the Initial Optional Redemption Date, the Company will use those net proceeds to offer to purchase, in a tender offer, Series B preferred stock, and after the Initial Optional Redemption Date, the Company will use those net proceeds to redeem Series B preferred stock.

On June 30, 2015, each holder of Series B preferred stock will have the right to require the Company to redeem its shares at the Redemption Price, subject to the Company having legally available funds. If at any time dividends on any shares of Series B preferred stock are unpaid as of the specific dividend payment date and the non-payment continues for a period of 30 days, then the holders of not less than 25% of the then-outstanding Series B preferred stock may require the Company, subject to our having legally available funds, to redeem all outstanding shares of Series B preferred stock at the Redemption Price.

NOTE 5 – ACQUISITIONS

Seneca Landlord, LLC

On January 24, 2012, the Company acquired the Seneca Facility pursuant to the exercise of its option under the Funding, Investor Fee and Put/Call Agreement (Put/Call Agreement). Pursuant to the Put/Call Agreement, the Company acquired all of the equity interest of Seneca Landlord, which owned the Seneca Facility, in exchange for $12,000, of which approximately $937 was previously paid, and 60,000 shares of the Company’s Class A Common Stock.

Seneca Landlord was determined to be a consolidated variable interest entity (VIE) prior to the exercise of the option available under the Put/Call Agreement, thus the basis of the assets recorded were not impacted by its exercise. See “Note 6 – Variable Interest Entities”. The payment of cash and Class A Common Stock shown below was used to relieve the Company’s obligation reflected on the condensed consolidated balance sheet as the Seneca Holdco Liability.

A summary of the acquisition price is as follows:

 

     Final Value at January 24, 2012  
     Fair Value      Fair Value
per Share
 

Fair value of consideration issued:

     

Cash

   $ 11,063      

Class A Common Stock

   $ 591       $ 9.85   

NOTE 6 – VARIABLE INTEREST ENTITIES

A VIE must be consolidated if the enterprise has both (a) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

The Company has invested in two plants owned by independent investment groups. Those companies are Western Iowa Energy, LLC (WIE) and Western Dubuque Biodiesel, LLC (WDB). The Company evaluated each investment and determined we do not hold

 

17


an interest in any of our investments in third party plants that would give us the power to direct the activities that most significantly impact the economic performance of the network plant. As a result, the Company is not the primary beneficiary and does not consolidate these VIEs.

The Company has 50% ownership in Bell, LLC, a VIE joint venture that owns and leases to the Company its corporate office building in Ames, Iowa. Commencing January 1, 2011, the Company has the right to execute a call option with the joint venture member, Dayton Park, LLC, to purchase Bell, LLC; therefore, the Company determined it was the primary beneficiary of Bell, LLC and consolidated Bell, LLC into the Company’s financial statements. The Company is the primary beneficiary due to its ownership interest and having an exercisable call option that allows the Company to direct the activities that most significantly impact Bell, LLC’s economic performance and gives the Company the majority of the benefit from the use of Bell, LLC’s assets.

On April 8, 2010, the Company determined that Seneca Landlord was a VIE and it was consolidated into the Company’s financial statements as it is the primary beneficiary. The Company had a put/call option with Seneca Holdco to purchase Seneca Landlord and leased the plant for production of biodiesel, both of which represented a variable interest in Seneca Landlord that were significant to the VIE. Although the Company did not have an ownership interest in Seneca Holdco, it was determined that the Company was the primary beneficiary due to the related party nature of the entities involved, the Company’s ability to direct the activities that most significantly impact Seneca Landlord’s economic performance and the design of Seneca Landlord that ultimately gave the Company the majority of the benefit from the use of Seneca’s assets. The Company elected the fair value option available under ASC Topic 825 on the $4,000 investment made by Seneca Holdco and the associated put /call option (the Seneca Holdco Liability). Changes in the fair value after the date of the transaction were recorded in earnings. Those assets were owned by, and those liabilities were obligations of, Seneca Landlord, not the Company.

On January 24, 2012, the Company acquired the Seneca Facility pursuant to the exercise of its option under the Put/Call Agreement. See “Note 5 – Acquisitions” for a description of the acquisition.

The carrying values and maximum exposure for all unconsolidated VIE’s are as follows:

 

     September 30, 2012      December 31, 2011  
            Maximum             Maximum  
Investment:    Investments      Exposure      Investments      Exposure  

WIE

   $ 580       $ 580       $ 576       $ 576   

WDB

     2,005         2,005         2,005         2,005   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,585       $ 2,585       $ 2,581       $ 2,581   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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NOTE 7 — INVENTORIES

Inventories consist of the following:

 

     September 30,      December 31,  
     2012      2011  

Raw materials

   $ 10,675       $ 13,820   

Work in process

     710         677   

Finished goods

     27,980         27,613   
  

 

 

    

 

 

 

Total

   $ 39,365       $ 42,110   
  

 

 

    

 

 

 

NOTE 8 — OTHER ASSETS

Prepaid expense and other assets consist of the following:

 

     September 30,      December 31,  
     2012      2011  

Commodity derivatives and related collateral, net

   $ 4,843       $ 8,527   

Prepaid expenses

     2,806         2,446   

Deposits

     1,326         1,295   

RIN inventory

     23,058         3,477   

Common stock issuance costs

     —           3,152   

Income tax receivable

     2,220         —     

Other

     439         191   
  

 

 

    

 

 

 

Total

   $ 34,692       $ 19,088   
  

 

 

    

 

 

 

RIN inventory is valued at the lower of cost or market. RIN values, as reported by the Oil Price Information Service (OPIS), declined sharply during the third quarter of 2012. Consequently, RIN inventory values as of September 30, 2012 have been adjusted in the amount of $8,209, which reflects the lower of cost or market. There was no RIN inventory adjustment for lower of cost or market at December 31, 2011.

NOTE 9 — BORROWINGS

The Company’s term borrowings are as follows:

 

     September 30,      December 31,  
     2012      2011  

REG Danville term loan

   $ 10,660       $ 15,889   

REG Newton term loan

     21,562         22,695   

REG Seneca term loan

     35,042         —     

Revenue bond

     1,700         1,700   

Other

     166         470   
  

 

 

    

 

 

 

Total notes payable

   $ 69,130       $ 40,754   
  

 

 

    

 

 

 

Seneca Landlord term loan

   $ —         $ 36,250   

Bell, LLC promisory note

     4,372         4,548   
  

 

 

    

 

 

 

Total notes payable - variable interest entities

   $ 4,372       $ 40,798   
  

 

 

    

 

 

 

On May 1, 2012, REG Seneca, LLC (REG Seneca), formally Seneca Landlord, entered into a second amendment to the amended and restated credit agreement, dated April 9, 2010, with WestLB due to the acquisition of Seneca Landlord on January 24, 2012. See “Note 5 – Acquisitions” for a description of the acquisition. The second amendment retains the original repayment terms of the credit agreement. The note requires that interest be accrued at different rates based on whether it is a Base Rate Loan or Eurodollar Loan at either 2.0% over the higher of 50 basis points above the Federal Funds Effective Rate or the WestLB prime rate for Base Rate Loans or 3.0% over adjusted LIBOR for Eurodollar Loans. The loan was a Eurodollar Loan through September 30, 2012 (effective rate at September 30, 2012 and December 31, 2011 was 3.23% and 3.27%, respectively). Interest is paid monthly. In April 2012, Seneca Landlord started making quarterly principal payments of approximately $604 with remaining unpaid principal due at maturity on April 8, 2017. The note payable is secured by the property at the REG Seneca location.

 

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In March 2010, as part of the CIE Asset Purchase, REG Newton assumed the term debt of CIE and refinanced certain term debt (AgStar Loan). Beginning in October 2011, REG Newton is required to make principal payments of $120 plus interest until the maturity date of March 8, 2013. On October 22, 2012, the Company requested a renewal of the AgStar Loan for a period of one year. The Company is working with the bank to obtain this renewal.

The Company was in compliance with all restrictive covenants associated with its borrowings as of September 30, 2012.

NOTE 10 — RELATED PARTY TRANSACTIONS

Related parties include certain investors as well as entities in which the Company has an equity method investment or an investment combined with a MOSA or board seat. Investors defined as related parties include (i) the investor having ten percent or more ownership, including convertible preferred stock, in the Company or (ii) the investor holding a board seat on the Company Board. After the IPO, the number of related parties decreased due to the dilution of ownership of prior investors as well as the reduction of the number of board seats on the Company Board held by related party investors. The Company will report related party transactions before and after the IPO based on the related party characteristics mentioned above.

 

Summary of Related Party Transactions

 
     Three Months     Three Months     Nine Months     Nine Months  
     Ended     Ended     Ended     Ended  
     September 30,     September 30,     September 30,     September 30,  
     2012     2011     2012     2011  

Revenues - Biodiesel sales

   $ 6 (a)    $ 1,664 (a)    $ 6 (a)    $ 5,125 (a) 

Cost of goods sold - Biodiesel

   $ 11,633 (b)    $ 74,891 (b)    $ 42,199 (b)    $ 199,564 (b) 

Selling, general, and administrative expenses

   $ 2 (c)    $ 388 (c)    $ 154 (c)    $ 1,091 (c) 

Interest expense

   $ 1 (d)    $ 239 (d)    $ 22 (d)    $ 467 (d) 

(a) Represents transactions with related parties as follows:

        

West Central

   $ 6      $ 8      $ 6      $ 11   

Bunge

     —          —          —          2,100   

E D & F Man

     —          1,656        —          3,014   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 6      $ 1,664      $ 6      $ 5,125   
  

 

 

   

 

 

   

 

 

   

 

 

 

(b) Represents transactions with related parties as follows:

        

West Central

   $ 11,633      $ 11,697      $ 38,250      $ 35,968   

Bunge

     —          59,890        3,949        151,636   

E D & F Man

     —          3,304        —          11,960   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 11,633      $ 74,891      $ 42,199      $ 199,564   
  

 

 

   

 

 

   

 

 

   

 

 

 

(c) Represents transactions with related parties as follows:

        

West Central

   $ 2      $ 19      $ 41      $ 89   

Bunge

     —          369        113        1,002   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 2      $ 388      $ 154      $ 1,091   
  

 

 

   

 

 

   

 

 

   

 

 

 

(d) Represents transactions with related parties as follows:

        

West Central

   $ 1      $ 23      $ 13      $ 88   

Bunge

     —          78        9        241   

USRG

     —          138        —          138   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1      $ 239      $ 22      $ 467   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

20


 

Summary of Related Party Balances

 
     As of     As of  
     September 30,     December 31,  
     2012     2011  

Accounts receivable

   $ —   (a)    $ 47 (a) 

Accounts payable

   $ 546 (b)    $ 3,634 (b) 

Long-term maturities of notes payable

   $ —   (c)    $ 214 (c) 

(a) Represents balances with related parties as follows:

    

West Central

   $ —        $ 22   

Bunge

     —          25   
  

 

 

   

 

 

 
   $ —        $ 47   
  

 

 

   

 

 

 

(b) Represents balances with related parties as follows:

    

West Central

   $ 546      $ 784   

Bunge

     —          2,850   
  

 

 

   

 

 

 
   $ 546      $ 3,634   
  

 

 

   

 

 

 

(c) Represents balances with West Central

    

West Central Cooperative

The Company purchases once-refined soybean oil from West Central Cooperative (West Central) and is required to pay interest for amounts owed on extended trade terms. The Company also had biodiesel and co-product sales.

West Central leases the land under the Company’s production facility at Ralston, Iowa to the Company at an annual cost of one dollar. The Company is responsible for the property taxes, insurance, utilities and repairs for the facility relating to this lease. The lease has an initial term of twenty years and the Company has options to renew the lease for an additional thirty years.

In 2006, the Company executed an asset use agreement with West Central to provide for the use of certain assets, such as office space, maintenance equipment and utilities. The agreement required the Company to pay West Central its proportionate share of certain costs incurred by West Central. This agreement had the same term as the land lease. During February 2012, the Company renegotiated the asset use agreement. The new agreement provides for the use of certain assets, such as buildings, equipment and utilities, which will be charged to the Company based on fixed and variable components.

At the time of the signing of the contribution agreement, the Company entered into a contract for services with West Central, to provide certain corporate and administrative services, such as human resources, information technology and accounting. The agreement required the Company to pay West Central the proportionate share of the costs associated with the provision of services, plus a 15% margin. The agreement had an initial one-year term and was cancellable thereafter upon six months notice by either party. As part of the renegotiated asset usage agreement, the services agreement was cancelled in February 2012.

In connection with the SoyMor acquisition, REG Albert Lea, LLC (REG Albert Lea) assumed a loan with West Central. REG Albert Lea was required to make monthly interest payments. The loan was paid off in May 2012.

Bunge North America

The Company purchased feedstocks from Bunge North America, Inc. (Bunge) for the production of biodiesel. The costs associated with the purchased feedstocks are reflected in costs of goods sold – biodiesel when sold to the end customer. The Company also made sales of biodiesel and raw materials to Bunge.

The Company entered into an agreement for Bunge to provide services related to the procurement of raw materials and the purchase and resale of biodiesel produced by the Company. The Company was required to pay interest for the aggregate outstanding amounts owed to Bunge. Also, as part of the agreement, the Company was required to pay an incentive fee to Bunge for meeting certain hedging goals utilizing Bunge’s advice. On November 8, 2011, the Company gave notice of termination to Bunge in accordance with the agreement. The agreement expired in May 2012.

ED & F Man Holdings Ltd.

In August 2006, the Company entered into a glycerin marketing agreement and various terminal lease agreements with one of ED & F Man Holdings Ltd’s (ED & F Man) then wholly-owned subsidiaries, Westway Feed Products, Inc. (Westway). This contract was terminated and expired in August 2011.

 

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The Company also entered into a tolling agreement with ED & F Man for biodiesel to be produced out of the Company’s Houston, Texas biodiesel production facility during 2010. Additionally, the Company purchased biodiesel from ED & F Man for resale and had raw material sales to ED & F Man. There has been no activity or agreements in place during 2012.

USRG Holdco IX, LLC

In August 2011, REG Albert Lea entered into a loan with USRG in the amount of $10,000 for the purpose of purchasing feedstocks and chemicals for REG Albert Lea’s biodiesel production facility. REG Albert Lea was required to pay interest monthly for the aggregate amount owed to URSG. The loan was paid off in December 2011.

NOTE 11 — DERIVATIVE INSTRUMENTS

The Company has entered into derivatives to hedge its exposure to price risk related to feedstock inventory and biodiesel finished goods inventory. Additionally, the Company has entered into an interest rate swap with the objective of managing risk caused by fluctuations in interest rates associated with the REG Danville note payable. The Company does not enter into derivative transactions for trading purposes.

These derivative contracts are accounted for in accordance with ASC Topic 815, Derivatives and Hedging (ASC Topic 815). ASC Topic 815 requires that an entity recognize and record all derivatives on the balance sheet at fair value. All of the Company’s derivatives are designated as non-hedge derivatives and are utilized to manage cash flow. Although the contracts may be effective economic hedges of specified risks, they are not designated as, nor accounted for, as hedging instruments. Unrealized gains and losses on commodity futures, swaps and options contracts used to hedge feedstock purchases or biodiesel inventory are recognized as a component of biodiesel costs of goods sold reflected in current results of operations. Commodity hedge gains and losses are generally offset by other corresponding changes in gross margin through changes in either biodiesel sales price and/or feedstock price. Unrealized gains and losses on the interest rate swap are recorded in other income (expense), net in the Company’s statements of operations. ASC 815 requires all derivative financial instruments to be recorded on the balance sheet at fair value. The Company’s derivatives are not designated as hedges and are utilized to manage cash flow. The changes in fair value of the derivative instruments are recorded through earnings in the period of change.

As of September 30, 2012, the Company has entered into heating oil and soybean oil derivative instruments and an interest rate swap agreement. The Company has entered into heating oil and soybean oil commodity-based derivatives in order to protect gross profit margins from potentially adverse effects of price volatility on biodiesel sales where the prices are set at a future date. As of September 30, 2012, the Company had 3,680 open commodity contracts. In addition, the Company manages interest rate risk associated with the REG Danville variable interest rate note payable using a fixed rate swap. The interest rate swap agreement had outstanding notional values of $5,470 and $7,870 as of September 30, 2012 and December 31, 2011, respectively. The agreement effectively fixes the variable component of the interest rate on the Term Loan at 0.92% through July 2015.

As of September 30, 2012 and December 31, 2011, the Company posted $6,027 and $7,850, respectively, of collateral associated with its commodity-based derivatives with a net liability position of $1,179 and a net asset position of $677, respectively.

The Company’s preferred stock embedded conversion feature related to the Series A Preferred Stock that was converted upon our IPO is further discussed in “Note 2 – Summary of Significant Accounting Policies”.

 

22


The following tables provide details regarding the Company’s derivative financial instruments:

 

    

As of September 30, 2012

 
    

Asset Derivatives

    

Liability Derivatives

 
     Balance Sheet    Fair      Balance Sheet    Fair  
     Location    Value      Location    Value  

Interest rate swap

      $ —        

Other liabilities

   $ 55   

Commodity swaps

  

Prepaid expenses and other assets

     176      

Prepaid expenses and other assets

     1,538   

Commodity options

  

Prepaid expenses and other assets

     995      

Prepaid expenses and other assets

     812   
     

 

 

       

 

 

 

Total derivatives

      $ 1,171          $ 2,405   
     

 

 

       

 

 

 
    

As of December 31, 2011

 
    

Asset Derivatives

    

Liability Derivatives

 
     Balance Sheet    Fair      Balance Sheet    Fair  
     Location    Value      Location    Value  

Embedded derivative

      $ —        

Preferred stock embedded conversion feature derivatives

   $ 53,822   

Interest rate swap

        —        

Other liabilities

     41   

Commodity swaps

  

Prepaid expenses and other assets

     880      

Prepaid expenses and other assets

     203   
     

 

 

       

 

 

 

Total derivatives

      $ 880          $ 54,066   
     

 

 

       

 

 

 

 

         Three Months     Three Months     Nine Months     Nine Months  
         Ended     Ended     Ended     Ended  
         September 30,     September 30,     September 30,     September 30,  
         2012     2011     2012     2011  
         Amount of     Amount of     Amount of     Amount of  
         Gain (Loss)     Gain (Loss)     Gain (Loss)     Gain (Loss)  
         Recognized     Recognized     Recognized     Recognized  
     Location of Gain (Loss)   in Income on     in Income on     in Income on     in Income on  
     Recognized in Income   Derivatives     Derivatives     Derivatives     Derivatives  

Embedded derivative

  

Change in fair value of preferred stock conversion feature embedded derivatives

  $ —        $ (38,483   $ 11,975      $ (55,571

Interest rate swap

  

Other income (expense), net

    (2     170        (14     502   

Commodity futures

  

Cost of goods sold - Biodiesel

    (4     (10     (4     (97

Commodity swaps

  

Cost of goods sold - Biodiesel

    (17,962     6,074        (4,916     3,571   

Commodity options

  

Cost of goods sold - Biodiesel

    (4     42        64        567   
    

 

 

   

 

 

   

 

 

   

 

 

 

Total

     $ (17,972   $ (32,207   $ 7,105      $ (51,028
    

 

 

   

 

 

   

 

 

   

 

 

 

 

23


NOTE 12 — FAIR VALUE MEASUREMENT

ASC Topic 820, Fair Value Measurement (ASC Topic 820), establishes a framework for measuring fair value in GAAP and expands disclosures about fair market value measurements. ASC Topic 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering assumptions, ASC Topic 820 establishes a three-tier fair value hierarchy, which 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.

In addition, ASC Topic 820 requires disclosures about the use of fair value to measure assets and liabilities to enable the assessment of inputs used to develop fair value measures, and for unobservable inputs, to determine the effects of the measurements on earnings.

A summary of assets (liabilities) measured at fair value is as follows:

 

     As of September 30, 2012  
     Total     Level 1      Level 2     Level 3  

Interest rate swap

   $ (55   $ —         $ (55   $ —     

Commodity swaps

   $ (1,362     —           (1,362     —     

Commodity options

   $ 183        —           183        —     
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ (1,234   $ —         $ (1,234   $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 
     As of December 31, 2011  
     Total     Level 1      Level 2     Level 3  

Preferred stock embedded derivatives

   $ (53,822   $ —         $ —        $ (53,822

Interest rate swap

   $ (41     —           (41     —     

Seneca Holdco liability

   $ (11,903     —           —          (11,903

Commodity swaps

   $ 677        —           677        —     
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ (65,089   $ —         $ 636      $ (65,725
  

 

 

   

 

 

    

 

 

   

 

 

 

 

24


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) during the nine months ended September 30, 2012 and 2011:

 

     Series A        
     Preferred        
     Stock     Seneca  
     Embedded     Holdco  
     Derivatives     Liability  

Ending balance - December 31, 2010

   $ (61,761   $ (10,406

Total unrealized gains

     2,557        727   

Purchases

     —          —     

Issuance

     —          —     

Settlements

     —          150   
  

 

 

   

 

 

 

Ending balance - March 31, 2011

     (59,204     (9,529

Total unrealized losses

     (19,645     (2,250

Purchases

     —          —     

Issuance

     —          —     

Settlements

     —          150   
  

 

 

   

 

 

 

Ending balance - June 30, 2011

     (78,849     (11,629

Total unrealized losses

     (38,483     (977

Purchases

     —          —     

Issuance

     —          —     

Settlements

     —          150   
  

 

 

   

 

 

 

Ending balance - September 30, 2011

   $ (117,332   $ (12,456
  

 

 

   

 

 

 

Ending balance - December 31, 2011

   $ (53,822   $ (11,903

Total unrealized gains

     11,975        349   

Purchases

     —          —     

Issuance

     —          —     

Settlements

     41,847        11,554   
  

 

 

   

 

 

 

Ending balance - March 31, 2012

     —          —     

Total unrealized gains

     —          —     

Purchases

     —          —     

Issuance

     —          —     

Settlements

     —          —     
  

 

 

   

 

 

 

Ending balance - September 30, 2012

   $ —        $ —     
  

 

 

   

 

 

 

The company used the following methods and assumptions to estimate fair value of its financial instruments:

Valuation of Preferred Stock embedded conversion feature derivatives: The estimated fair value of the derivative instruments embedded in the Company’s outstanding preferred stock was determined using the option pricing method to allocate the fair value of the underlying stock to the various components comprising the security, including the embedded derivative. The allocation was performed based on each class of preferred stock’s liquidation preference and relative seniority. Derivative liabilities are adjusted to reflect fair value at each period end. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments.

Interest rate swap: The fair value of the interest rate swap was determined based on a discounted cash flow approach using market observable swap curves.

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. Contracts whose fair value is determined based on quoted prices of similar contracts in over-the-counter markets are reflected in Level 2.

Seneca Holdco liability: The liability represents the combination of the Call Option and the Put Option related to the purchase of the membership interest of Seneca Landlord. The fair value of the Seneca Holdco liability was determined using an option pricing model and represents the probability weighted present value of the gain that is realized upon exercise of each option.

Notes payable 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.

 

25


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

 

     September 30, 2012     December 31, 2011  
     Asset (Liability)
Carrying Amount
    Estimated Fair Value     Asset (Liability)
Carrying Amount
    Estimated Fair Value  

Financial Liabilities:

        

Notes payable and lines of credit

   $ (76,363   $ (77,462   $ (85,587   $ (85,592

NOTE 13 — REPORTABLE SEGMENTS

The Company reports its reportable segments based on services provided to customers, which include Biodiesel, Services 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 Company has chosen to differentiate the reportable segments based on the products and services each segment offers.

The Biodiesel segment processes waste vegetable oils, animal fats, virgin vegetable oils and other feedstocks and methanol into biodiesel. The Biodiesel segment also includes the Company’s purchases and resale of biodiesel produced by third parties. Revenue is derived from the purchases and sales of biodiesel and raw material feedstocks acquired from third parties, sales of biodiesel produced under toll manufacturing arrangements with third party facilities, sales of processed biodiesel from the Company facilities, including RINs, related by-products and renewable energy government incentive payments. The Services segment offers services for managing the construction of biodiesel 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. Intersegment revenues are reported by the Services segment, which manages the construction and operations of facilities included in the Biodiesel segment. Revenues are recorded by the Services segment at cost. Corporate expenses consist of corporate office expenses including compensation, benefits, occupancy and other administrative costs, including management service expenses.

 

26


The following table represents the significant items by reportable segment:

 

     Three Months     Three Months     Nine Months     Nine Months  
     Ended     Ended     Ended     Ended  
     September 30,     September 30,     September 30,     September 30,  
     2012     2011     2012     2011  

Revenues:

        

Biodiesel

   $ 322,873      $ 256,422      $ 782,890      $ 557,109   

Services

     9,666        3,483        26,223        7,399   

Intersegment revenues

     (9,627     (3,403     (26,027     (7,259
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 322,912      $ 256,502      $ 783,086      $ 557,249   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes and loss from equity investments:

        

Biodiesel

   $ 2,795      $ 54,544      $ 50,777      $ 93,147   

Services

     (4     1        (3     19   

Corporate and other (a)

     (10,996     (52,449     (24,695     (88,134
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (8,205   $ 2,096      $ 26,079      $ 5,032   
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization expense, net:

        

Biodiesel

   $ 1,771      $ 2,309      $ 5,307      $ 6,025   

Services

     12        2        21        3   

Corporate and other

     197        155        573        469   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 1,980      $ 2,466      $ 5,901      $ 6,497   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenditures for property, plant, and equipment:

        

Biodiesel

   $ 1,613      $ 874      $ 5,369      $ 1,866   

Services

     345        —          387        33   

Corporate and other

     49        213        643        394   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 2,007      $ 1,087      $ 6,399      $ 2,293   
  

 

 

   

 

 

   

 

 

   

 

 

 
                 September 30,     December 31,  
                 2012     2011  

Goodwill:

        

Biodiesel

       $ 68,784      $ 68,784   

Services

         16,080        16,080   
      

 

 

   

 

 

 
       $ 84,864      $ 84,864   
      

 

 

   

 

 

 

Assets:

        

Biodiesel

       $ 360,772      $ 341,863   

Services

         20,373        20,474   

Corporate and other (b)

         157,173        122,110   
      

 

 

   

 

 

 
       $ 538,318      $ 484,447   
      

 

 

   

 

 

 

 

(a) Corporate and other includes income/(expense) not associated with the reportable segments, such as corporate general and administrative expenses, shared service expenses, interest expense and interest income.
(b) Corporate and other includes cash and other assets not associated with the reportable segments, including investments.

NOTE 14 — COMMITMENTS AND CONTINGENCIES

During July 2009, the Company entered into a series of agreements with one of its shareholders, Bunge, whereby Bunge would purchase raw material inputs for later resale to the Company and use in producing biodiesel. Additionally, the agreements provided for Bunge to purchase biodiesel produced by the Company for resale to the Company’s customers. These agreements provided financing for the Company’s raw material and finished goods inventory not to exceed aggregate amounts outstanding of $10,000. In exchange for this financing, Bunge received fees equal to the greater of 30 day LIBOR plus 7.5% or 10% as determined based on the amount of inventory financed, plus a monthly service fee of $40 and incentive fees not to exceed $1,500 per annum. As of September 30, 2012 and December 31, 2011, there was $0 and $281, respectively, in incentive fees due to Bunge. On November 11, 2011, the Company gave notice of termination to Bunge in accordance with the agreement. The agreement expired in May 2012.

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.

 

27


NOTE 15 — SUBSEQUENT EVENTS

The Company has performed an evaluation of subsequent events through the date the financial statements were issued.

Pursuant to an Asset Purchase Agreement, dated as of October 26, 2012, the Company acquired substantially all of the assets of North Texas Bio Energy, LLC in exchange for 900,000 shares of the Company’s common stock and $300 in cash. The acquired assets consist of a 15 mmgy nameplate capacity biodiesel facility and related assets, located in New Boston, Texas. The facility is not currently in operation.

* * * * * *

 

28


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 or the Company, that involve risks and uncertainties such as anticipated financial performance, business prospects, technological developments, products, possible strategic initiatives and similar matters. In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “predict,” “potential,” “plan,” or the negative of these terms, and similar expressions intended to identify forward-looking statements.

These forward-looking statements include, but are not limited to, statements about facilities currently under development progressing to the construction and operational stages, including planned capital expenditures and our ability to obtain financing for such construction; existing or proposed legislation affecting the biodiesel industry, including governmental incentives and tax credits; our utilization of forward contracting and hedging strategies to minimize feedstock and other input price risk; anticipated future revenue sources from our operational management and facility construction services; the expected effect of current and future environmental laws and regulations on our business and financial condition; our ability to renew existing and expired contracts at similar or more favorable terms; expected technological advances in biodiesel production methods; our competitive advantage relating to input costs relative to our competitors; the market for biodiesel and potential biodiesel consumers; our ability to further develop our financial, managerial and other internal controls and reporting systems to accommodate future growth; expectations regarding the realization of deferred tax assets and the establishment and maintenance of tax reserves and anticipated trends; expectations regarding our expenses and sales; anticipated cash needs and estimates regarding capital requirements and needs for additional financing; and challenges in our business and the biodiesel 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 under “Risk Factors” in Part I of our Annual Report on Form 10-K for the twelve months ended December 31, 2011 as well as those disclosed in Item 1A in our Quarterly Report on Form 10-Q for the three-months ended June 30, 2012. 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 are the largest producer of biodiesel in the United States. We have been a leader in the biodiesel industry since 1996. We have transitioned from being primarily an operator of a third party-owned network of facilities to now owning six operating biodiesel production facilities with aggregate annual operational nameplate production capacity of 212 million gallons per year, or mmgy. We have transitioned from producing biodiesel from higher cost virgin vegetable oils, such as soybean oil, to primarily producing biodiesel from lower cost feedstocks, such as inedible animal fat, used cooking oil and inedible corn oil. We own biodiesel production facilities with nameplate capacities consisting of: a 12 mmgy facility in Ralston, Iowa, a 35 mmgy facility near Houston, Texas, a 45 mmgy facility in Danville, Illinois, a 30 mmgy facility in Newton, Iowa, a 60 mmgy facility in Seneca, Illinois, and a 30 mmgy facility in Albert Lea, Minnesota.

During 2011, we sold approximately 150 million gallons, including approximately 16 million gallons we purchased from third parties and resold and approximately six million gallons we manufactured for others. In the three and nine months ended September 30, 2012, we sold approximately 62 and 150 million gallons, respectively, including 13 and 21 million gallons, respectively, that we purchased from third parties and resold.

On January 24, 2012, we acquired our Seneca Facility that was previously operated under a lease pursuant to the exercise of our option under a Funding, Investor Fee and Put/Call Agreement. See “Note 5 – Acquisitions” to our condensed consolidated financial statements for a description of the transaction.

On October 26, 2012, we acquired a 15 mmgy nameplate capacity biodiesel facility located in New Boston, Texas in exchange for 900,000 shares of our common stock and $0.3 million in cash. The facility is currently not operating and we expect it to commence operations in the first quarter of 2013. This acquisition will increase the Company’s aggregate annual nameplate biodiesel production capacity to 227 million gallons.

The implementation of the Renewable Fuel Standard, or RFS2, led to a significant year-over-year increase in demand and substantial increase in sales price per gallon during 2011 compared to 2010. The average price for B100 Upper Midwest Biodiesel as reported by The Jacobsen increased from $3.40 per gallon in 2010 to $5.03 per gallon in 2011. The average price for B100 Upper Midwest Biodiesel as reported by The Jacobsen declined slightly for the first nine months of 2012, compared to the 2011 average, and was $4.71 per gallon.

 

29


During the second half of 2010, we and the biodiesel industry began to benefit from RFS2, which became effective July 1, 2010 and requires Obligated Parties, including petroleum refiners and petroleum importers in the 48 contiguous states and Hawaii that have annual renewable fuel volume obligations, to use specified amounts of biomass-based diesel, which includes biodiesel, as discussed further below. In addition, the $1.00 per gallon federal blenders’ tax credit, which had expired as of December 31, 2009, was reinstated in December 2010 retroactively for all of 2010 and prospectively for 2011. As a result of these regulatory changes, as well as improving general economic conditions and relatively high petroleum prices, the price of and demand for biodiesel increased significantly in 2011 and 2012 when compared to 2010. The federal blenders’ tax credit expired as of December 31, 2011 and it is uncertain whether it will be reinstated.

We own three partially completed biodiesel production facilities located in New Orleans, Louisiana, Emporia, Kansas and Clovis, New Mexico. In 2007, we began construction of two 60 mmgy nameplate production capacity facilities, one near New Orleans, Louisiana and the other in Emporia, Kansas. In February 2008, we halted construction of these facilities as a result of conditions in the biodiesel industry and our inability to obtain financing necessary to complete construction of the facilities. Construction of the New Orleans facility is approximately 45% complete and construction of the Emporia facility is approximately 20% complete. Further, during the third quarter of 2010, we acquired a 15 mmgy nameplate biodiesel production capacity facility in Clovis, New Mexico which is approximately 40% complete. In advance of completing construction of the Clovis facility, we have completed the wholesale terminal infrastructure to allow the Clovis facility to operate as a terminal location and begin serving regional customers. We plan to complete construction of these facilities as financing becomes available, subject to market conditions. We expect that the aggregate cost to complete construction of these three facilities is in the range of approximately $130 to $140 million.

On January 24, 2012, we completed an initial public offering, or IPO, of shares of Common Stock in which we sold 7.2 million shares at a price to the public of $10 per share, which included 0.3 million shares sold by selling shareholders. The IPO raised proceeds to us of approximately $59.9 million after underwriting fees and offering costs. In connection with the IPO, we executed a 1-for-2.5 reverse stock-split of our Common Stock. In connection with the IPO, our outstanding Series A Preferred Stock were converted into shares of Common Stock and Series B preferred stock. Our Common Stock is traded on the NASDAQ Global Market under the ticker “REGI.”

We derive revenues from two reportable business segments: Biodiesel and Services

Biodiesel Segment

Our Biodiesel segment, as reported herein, includes:

 

   

the operations of the following biodiesel production facilities:

 

   

a 12 mmgy nameplate biodiesel production facility located in Ralston, Iowa;

 

   

a 35 mmgy nameplate biodiesel production facility located near Houston, Texas, since its acquisition in June 2008;

 

   

a 45 mmgy nameplate biodiesel production facility located in Danville, Illinois, since its acquisition in February 2010;

 

   

a 30 mmgy nameplate biodiesel production facility located in Newton, Iowa, since its acquisition in March 2010;

 

   

a 60 mmgy nameplate biodiesel production facility located in Seneca, Illinois, which began production in August 2010, which we operated under a lease starting April 2010 and subsequently acquired in January 2012;

 

   

a 30 mmgy nameplate biodiesel production facility located in Albert Lea, Minnesota, since its acquisition in July 2011;

 

   

purchases and resale of biodiesel and raw material feedstocks, including Renewable Identification Numbers, or RINs, acquired from third parties;

 

   

our sales of biodiesel produced under toll manufacturing arrangements with third party facilities using our feedstocks;

 

   

our production of biodiesel under toll manufacturing arrangements with third parties using their feedstocks at our facilities; and

 

   

incentives received from federal and state programs for renewable fuels.

We derive a small portion of our revenues from the sale of glycerin, free fatty acids and other co-products of the biodiesel production process. In 2011 and the nine months ended September 30, 2012, our revenues from the sale of co-products were less than five percent of our total Biodiesel segment revenues.

When we produce a gallon of biodiesel, we generate 1.5 biomass-based diesel RINs per gallon. RINs are used to track compliance with RFS2 using the EPA moderated transaction system, or EMTS. RFS2 allows us to attach between zero and 2.5 RINs to any gallon of biodiesel. When we sell a gallon of biodiesel we generally attach 1.5 RINs. As a result, a portion of our selling price for a gallon of biodiesel is attributable to RFS2 compliance. RINs may also be separated from the gallons of renewable fuel and once separated may be sold. From time to time, we may choose to acquire and hold varying amounts of RINs for separate sale to Obligated Parties. The value of these RINs is reflected in “Prepaid expenses and other assets” on our condensed consolidated balance sheet. At the end of each accounting period, our RIN inventory is valued at the lower of cost or market and resulting adjustments are reflected in our cost of goods sold for the period.

 

30


Services Segment

Our Services segment includes:

 

   

biodiesel facility management and operational services, whereby we provide day-to-day management and operational services to biodiesel production facilities as well as other clean-tech companies; and

 

   

construction management services, whereby we act as the construction management and general contractor for the construction and upgrade of biodiesel production facilities.

Historically, we provided facility operations management services to owners of biodiesel production facilities. Pursuant to a Management Operations Service Agreement, or MOSA, with a facility owner, we provided a broad range of management and operations services, typically for a monthly fee based on gallons of biodiesel produced or marketed and a contingent payment based on the facility’s net income. We do not recognize revenues from the sale of biodiesel produced at managed facilities, which is sold for the account of the third party owner.

In addition, historically we have provided construction management services to the biodiesel industry, including assistance with pre-construction planning, such as site selection and permitting, facility and process design and engineering, engagement of subcontractors to perform construction activity and supply biodiesel processing equipment and project management services. Because we do not have internal construction capabilities and do not manufacture biodiesel processing equipment, we rely on our prime subcontractors to fulfill the bulk of our obligations to our customers. Payments to these prime subcontractors historically represented most of the costs of goods sold for our Services segment.

Demand for our construction management and facility management and operational services depend on capital spending by potential customers and existing customers, which is directly affected by trends in the biodiesel industry. We have not received any orders or provided services to outside parties for new facility construction services since 2009. We have, however, utilized our construction management expertise internally to upgrade two of our facilities during the last three years. We anticipate revenues derived from construction management services will be minimal in future periods.

Factors Influencing Our Results of Operations

The principal factors affecting our segments are the market prices for biodiesel and the feedstocks used to produce biodiesel, as well as governmental programs designed to create incentives for the production and use of biodiesel.

Governmental programs favoring biodiesel production and use

Biodiesel has been more expensive to produce than petroleum-based diesel fuel and as a result the industry depends on federal and, to a lesser extent, state usage requirements and tax and production incentives.

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 meets two categories of an Obligated Party’s annual renewable fuel volume requirement, or RVO—biomass-based diesel and advanced biofuel. The RFS2 program required the domestic use of 800 million gallons of biomass-based diesel in 2011 and one billion gallons in 2012. In September 2012, the EPA finalized the requirement for domestic use of biomass-based diesel by Obligated Parties of 1.28 billion gallons in 2013. Our sales volumes and revenues increased during 2011 and 2012 compared to 2010 as a result of increased demand relating to the implementation of RFS2.

RFS2 required the use of 800 million gallons of biomass-based diesel in 2011. According to EMTS data, approximately 1.1 billion gallons of biomass-based diesel was produced in 2011, approximately 4% of which was imported. We believe more gallons were produced in 2011 than were required by RFS2 as a result of the fact that the blenders’ tax credit was set to expire on December 31, 2011. Since Obligated Parties are allowed to satisfy up to 20% of their 2012 RVO with 2011 RINs, we believe many purchasers of biodiesel were taking advantage of the blenders’ tax credit while it was still available. This 2011 overproduction has had an impact on demand for biodiesel in 2012. The 2012 RFS2 requirement for biomass-based diesel is one billion gallons. The 2011 carry-over can be used to satisfy up to 200 million gallons of the one billion 2012 requirement. According to EMTS data, approximately 897 million gallons of biomass-based diesel was produced during the first nine months of 2012, indicating that between the 2011 carry-over and 2012 year to date production as of September 30, there was sufficient biomass-based diesel produced to satisfy the 2012 RVO of one billion gallons.

The federal blenders’ tax credit provided a $1.00 refundable tax credit per gallon of 100% pure biodiesel, or B100, to the first blender of biodiesel with petroleum-based diesel fuel. The blenders’ tax credit expired on December 31, 2009, but was reinstated on December 17, 2010, retroactively for 2010 and prospectively for 2011. The blenders’ tax credit has again expired as of December 31, 2011 and it is uncertain whether it will be reinstated.

Biodiesel, RINs and feedstock price fluctuations

Our operating results generally reflect the relationship between the price of biodiesel and the price of feedstocks used to produce biodiesel.

 

31


Biodiesel 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. Biodiesel prices have historically been correlated to petroleum-based diesel fuel prices. Accordingly, biodiesel prices have generally been impacted by the same factors that affect petroleum prices, such as worldwide economic conditions, wars and other political events, OPEC production quotas, changes in refining capacity and natural disasters.

Regulatory and legislative factors influence the price of biodiesel, in addition to petroleum prices. Biomass-based diesel RIN pricing, a value component that was introduced via RFS2 in July 2010, has had a significant impact on our biodiesel pricing. For example, the value of RINS, as reported by Oil Price Information Service, or OPIS, has been significant to the price of biodiesel, contributing approximately $1.11, or 26%, of the average B100 Upper Midwest spot price of a gallon of biodiesel as reported by The Jacobsen in December 2010 and $1.83, or 38% of the average B100 Upper Midwest spot price of a gallon of biodiesel as reported by The Jacobsen in December 2011. In September 2012, the value of RINs, as reported by OPIS, contributed approximately $1.40, or 30%, of the average B100 Upper Midwest spot price of a gallon of biodiesel as reported by The Jacobsen. During 2012, the value of RINs, as reported by OPIS, have contributed to the average B100 spot price of a gallon of biodiesel, as reported by The Jacobsen, range from $2.39, or 50%, per gallon in January to $1.08, or 24%, in September. There was a sharp decline in RIN prices during third quarter 2012. During this period, RIN pricing declined from $1.17 per RIN at June 30, 2012 to $0.74 per RIN at September 30, 2012, as reported by OPIS, which contributed to the decline in the price of biodiesel.

This decrease in the value of RINs during the third quarter of 2012 along with a significant increase in the number of RINs we held in inventory at the end of the most recent quarter resulted in an adjustment to our cost of goods sold of $8.2 million to reflect the lower of cost or market on RIN inventory held as of September 30, 2012. See “Note 8 – Other Assets” to our condensed consolidated financial statements.

During 2011, feedstock expense accounted for 73% of our costs of goods sold, while methanol and chemical catalysts expense accounted for 8% and 3% of our costs of goods sold, respectively. Methanol, a reactant in the production process, represents our second largest cost, the price of which is related to the cost of production, as well as world supply and demand factors for methanol.

Feedstocks for biodiesel 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 biodiesel and petroleum-based diesel fuels. The following table outlines some of the factors influencing supply for each feedstock:

 

Feedstock

  

Factors Influencing Supply

Inedible Corn Oil    Export demand
   Implementation of inedible corn oil separation systems into existing and new ethanol facilities
   Extraction system yield
   Ethanol production
Used Cooking Oil    Export demand
   Population
   Number of restaurants in the vicinity of collection facilities
   and terminals which is dependent on population density
   Eating habits, which can be impacted by the economy
Inedible Animal Fat    Export demand
   Number of slaughter kills in the United States
   Demand for inedible animal fat from other markets
Soybean Oil    Export demand
   Weather conditions
   Soybean meal demand
   Farmer planting decisions
   Government policies and subsidies
   Crop disease

During 2011, 83% of our feedstocks were comprised of inedible corn oil, used cooking oil and inedible animal fats while in 2007 we used 100% refined vegetable oil. We have increased the use of these feedstocks because they are lower cost than refined vegetable oils.

Historically, most biodiesel in the United States has been made from soybean oil. Soybean oil prices have fluctuated greatly, but have generally remained at historically high levels since early 2007 due to higher overall commodity prices. Over the period January 2006 to September 2012, soybean oil prices (based on daily closing nearby futures prices on the CBOT for crude soybean oil) have ranged from $0.21 per pound, or $1.58 per gallon of biodiesel, in January 2006 to $0.70 per pound, or $5.28 per gallon of biodiesel, in March 2008, assuming 7.5 pounds of soybean oil yields one gallon of biodiesel. The average closing price for soybean oil during 2011 was $0.55 per pound, or $4.13 per gallon of biodiesel, compared to $0.42 per pound, or $3.16 per gallon of biodiesel, in 2010.

Over the period from January 2008 to September 2012, the price of choice white grease, an inedible animal fat (based on daily closing nearby futures prices for The Jacobsen reported Missouri River delivery of choice white grease), have ranged from $0.095 per

 

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pound, or $0.76 per gallon of biodiesel, in December 2008 to $0.5250 per pound, or $4.20 per gallon of biodiesel, in June 2011, assuming 8.0 pounds of choice white grease yields one gallon of biodiesel. The average price for choice white grease during 2011 was $0.46 per pound, or $3.68 per gallon of biodiesel, compared to $0.29 per pound, or $2.32 per gallon of biodiesel, in 2010.

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 feedstocks. 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.

 

LOGO

 

   

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 gallons).

 

(1) Used cooking oil prices are based on the monthly average of the daily low sales price of Missouri River yellow grease as reported by The Jacobsen (based on 8.5 pounds per gallon).
(2) Inedible corn oil prices are reported as the monthly average of the daily market values (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) Tech tallow prices are based on the monthly average of the daily low sales prices of Chicago tech tallow as reported by The Jacobsen (based on 7.6 pounds per gallon).

Our results of operations generally will benefit when the spread between biodiesel prices and feedstock prices widens and will be harmed when this spread narrows. The following graph shows feedstock cost data of choice white grease and soybean oil on a per gallon basis compared to the sale price data for biodiesel, and the spread between the two, from December 2009 to September 2012.

 

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LOGO

 

(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.

The 2012 drought in the Midwestern United States increased the cost of corn and soybeans and may increase the cost of biodiesel feedstocks in the future. We have seen a recent decrease in the price of animal fats, which may be related to increases in slaughter rates, putting more supply on the market and decreased demand from the biodiesel industry. If the increased slaughter rates or increased cost of corn and soybeans reduces future slaughter rates, the price of animal fats may rise as supply decreases in the future. Used cooking oil and inedible corn oil, our largest sources of feedstock after animal fats, have also seen recent price decreases, which may be related to decreased demand from the biodiesel industry. The impact of the drought on the prices of our feedstocks is uncertain, but the drought may increase the prices of some or all of our feedstocks as the market adjusts to higher corn and soybean prices.

Seasonality

Our operating results are influenced by seasonal fluctuations in the price of biodiesel. Our sales tend to decrease during the winter season due to blending concentrations being reduced to compensate for performance during colder weather. Colder seasonal temperatures can cause the higher cloud point biodiesel we make from inedible animal fats to become cloudy and eventually gel at a higher temperature than petroleum-based diesel or lower cloud point biodiesel made from soybean oil, canola oil or inedible corn oil. Such gelling can lead to plugged fuel filters and other fuel handling and performance problems for customers and suppliers. Reduced demand in the winter for our higher cloud point biodiesel can result in excess supply of such higher cloud point biodiesel and lower prices for such higher cloud point biodiesel. In addition, most of our production facilities are located in colder Midwestern states and our costs of shipping biodiesel to warmer climates generally increase in cold weather months.

Industry capacity and production

Our operating results are influenced by our industry’s capacity and production, including in relation to RFS2 production requirements. According to EMTS data, approximately 1.1 billion gallons of biomass-based diesel was produced in the United States in 2011, primarily reflecting the recommencement of, or increase in, operations at underutilized facilities in response to RFS2 requirements. Such production was in excess of the 800 million gallon RFS2 requirement for 2011 and would be in excess of the 1 billion gallon RFS2 requirement for 2012. Biodiesel production has continued to remain above RFS2 required volumes for the first nine months of 2012, which we believe has put downward pressure on our margins for biodiesel, negatively affecting our profitability. In addition, because the level of production in 2011 exceeded the 2011 RFS2 requirement, the demand for biodiesel in 2012 could be less than 2012 RFS2 required volumes. Under RFS2, Obligated Parties are entitled to satisfy up to 20% of their annual requirement for 2012 with gallons used in 2011, meaning that 2011 gallons could be used to satisfy up to 200 million gallons of the one billion gallon requirement for 2012. We believe the carry-over of gallons from 2011, which may have been the result of parties taking advantage of the federal blenders’ credit that expired on December 31, 2011, is adversely affecting demand for biodiesel in 2012. According to EMTS data, approximately 897 million gallons of biomass-based diesel was produced during the first nine months of 2012.

 

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Risk Management

The profitability of the biodiesel production business largely depends on the spread between prices for feedstocks and for biodiesel fuel, each of which is subject to fluctuations due to market factors. Adverse price movements for these commodities directly affect our operating results. We attempt to protect operating margins by entering into risk management contracts that mitigate price volatility of our feedstocks and energy prices. We create offsetting positions by using a combination of forward physical purchases and sales contracts on feedstock and biodiesel, including risk management futures contracts, swaps and options primarily on heating oil and soybean oil; however, the extent to which we engage in risk management activities varies substantially from time to time, and from feedstock to feedstock, depending on market conditions and other factors. In making risk management decisions, we utilize research conducted by outside firms to provide additional market information.

Inedible animal fat, inedible corn oil and used cooking oil are the primary feedstocks that we used to produce biodiesel in 2011 and the first nine months of 2012. We utilize several varieties of inedible animal fat, such as beef tallow and choice white grease derived from pork and poultry fat. We manage lower cost feedstock supply risks related to biodiesel production through supply contracts with lower cost feedstock suppliers/producers. There is no established futures market for lower cost feedstocks. The purchase price 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 inedible animal fat, inedible corn oil and used cooking oil prices have involved entering into futures contracts, swaps or options on other commodity products, such as soybean oil or heating oil. However, these products do not always experience the same price movements as lower cost feedstocks, making risk management for these feedstocks challenging.

We manage our feedstock supply risks in a number of ways, including, where available, through long-term supply contracts. For example, most of the feedstock requirements for our Ralston facility were supplied under a three-year agreement with West Central which expired on July 8, 2010 and was renewed October 1, 2012. The purchase price for soybean oil under these contracts may be indexed to prevailing Chicago Board of Trade, or CBOT, soybean oil market prices with a negotiated market basis. We utilize futures contracts, swaps and options to risk manage, or lock in, the cost of portions of our future soybean oil requirements generally for varying periods up to one year.

Our ability to mitigate our risk of falling biodiesel prices is limited. We have entered into forward contracts to supply biodiesel. 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 biodiesel futures in the United States. Our efforts to hedge against falling biodiesel prices, which have been relatively limited to date, generally involve entering into futures contracts, swaps and options on other commodity products, such as diesel fuel and heating oil. However, these products do not always experience the same price movements as biodiesel.

When we produce a gallon of biodiesel, we generate 1.5 biomass-based diesel RINs per gallon. There is no established futures market for RINs, which severely limits the ability to risk manage the price of RINs without the use of futures contracts, swaps and options.

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 physical contracts on feedstocks and biodiesel 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 and the purchase or sale of feedstocks or delivery of biodiesel has not yet occurred and thus the offsetting gain or loss will be recognized in a later accounting period.

We incurred risk management losses of $18.0 million and $4.9 million from our derivative financial instrument trading activity for the three and nine months ended September 30, 2012, respectively, compared to risk management gains of $6.1 million and $4.0 million for the three and nine months ended September 30, 2011, respectively. Our increased losses were largely due to a decrease in soybean oil prices and an increase in heating oil prices at the end of September 2012. Over the first nine months of 2012, risk management losses have represented an expense of $0.03 per gallon sold.

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, 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.

 

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We have disclosed under the heading “Critical Accounting Policies” in our December 31, 2011 Annual Report on Form 10-K the critical accounting policies which materially affect our financial statements. There have been no material changes from the critical accounting policies previously disclosed other than those noted below. You should carefully consider the critical accounting policies set forth in our Annual Report on Form 10-K along with information described below.

We believe the following critical accounting policies affect our more significant judgments used in the preparation of our consolidated financial statements:

Goodwill asset valuation. While goodwill is not amortized, it is subject to periodic reviews for impairment. As required by ASC Topic 350, “Intangibles—Goodwill and Other,” we review the carrying value of goodwill for impairment annually on July 31 or when we believe impairment indicators exist. Goodwill is allocated and reviewed for impairment by reporting units. The Company’s reporting units consist of its two operating segments, the biodiesel operating segment and services operating segments. The analysis is based on a comparison of the carrying value of the reporting unit to its fair value, determined utilizing a discounted cash flow methodology that also took into consideration other selected public guideline company information. Additionally, we review the carrying value of goodwill whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Changes in estimates of future cash flows caused by items such as unforeseen events or sustained unfavorable changes in market conditions could negatively affect the fair value of the reporting unit’s goodwill asset and result in an impairment charge.

We engaged an independent external valuation specialist to provide assistance in measuring the fair value of our biodiesel and services reporting units using an income approach. The income approach uses a discounted cash flow, or DCF, analysis based on cash flow estimates prepared by us in addition to comparing other selected public guideline company information. The selected DCF method is an invested capital method. In performing the services reporting unit goodwill impairment analysis, cash flows generated from services provided to third parties and to the biodiesel segment were used to determine the reporting unit’s fair value.

The annual impairment tests as of July 31, 2012 determined that the fair value at each of the reporting units exceeded its carrying value by over 45% margins. There can be no assurances that future circumstances and/or conditions will not change, which could result in an impairment of goodwill. Such circumstances and/or conditions could include, but are not limited to, further decline in the price of the Company’s common stock, deterioration in the Company’s financial condition or results of operations, and/or adverse changes in the fair value of the Company’s assets and liabilities. Management continues to monitor circumstances and conditions for events that could result in an impairment of the Company’s goodwill.

Income before income taxes and loss from equity investments, as it appears in the segment footnote disclosure, presents only the income from third parties after the elimination of intersegment revenues and associated costs. The Company’s declines in income before income taxes and loss from equity investments for the services reporting unit are primarily a result of construction revenues being derived from company-owned facilities during this period and the termination of four third party MOSAs, which occurred in early 2010. Two of these MOSAs ceased because the facilities to which services were being provided were acquired in business combinations. During the periods presented in the annual financial statements the amount of service revenues earned from third parties declined, but the amount of service revenues earned from the biodiesel segment increased. After incorporating intersegment revenues, presented in the segment footnote, income before income taxes and loss from equity investments increased from 2011 to 2012. Additionally, the operating results for the services segment were significantly impacted by the improvement in the biodiesel industry induced by the volume requirements set forth in RFS2. Since services revenue from facility management and operations is principally earned on a per gallon basis, improvements in industry production volumes generally yield similar improvements in the services reporting unit operating income, cash flows and estimated fair value. Therefore, we do not believe the recent operational results of the services segment represent an indicator of impairment for the reporting unit.

 

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Results of Operations

Three and nine months ended September 30, 2012 and 2011

Set forth below is a summary of certain unaudited financial information (in thousands) for the periods indicated:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2012     2011     2012     2011  

Revenues

        

Biodiesel

   $ 321,005      $ 233,925      $ 774,820      $ 518,346   

Biodiesel government incentives

     1,868        22,497        8,070        38,763   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total biodiesel

     322,873        256,422        782,890        557,109   

Services

     39        80        196        140   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     322,912        256,502        783,086        557,249   

Costs of goods sold

        

Biodiesel

     320,078        201,878        732,113        463,962   

Services

     43        79        199        121   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     320,121        201,957        732,312        464,083   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     2,791        54,545        50,774        93,166   

Selling, general and administrative expenses

     9,902        11,045        33,878        25,134   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (7,111     43,500        16,896        68,032   

Other income (expense), net

     (1,094     (41,404     9,183        (63,000

Income tax benefit (expense)

     2,165        (4,752     (3,669     (4,752

Income from equity investments

     —          649        —          501   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to REG

     (6,040     (2,007     22,410        781   

Effects of recapitalization

     —          —          39,107        —     

Accretion of preferred stock to redemption value

     —          (6,477     (1,808     (18,553

Change in undistributed dividends allocated to preferred stockholders

     (862     (3,221     (1,685     (9,467

Distributed dividends to preferred stockholders

     —          —          (1,470     —     

Effects of participating preferred stock

     —          —          (8,952     —     

Effects of participating share-based awards

     —          —          (3,145     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the Company’s common stockholders

   $ (6,902   $ (11,705   $ 44,457      $ (27,239
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenues. Our total revenues increased $66.4 million, or approximately 26%, and $225.9 million, or approximately 41%, to $322.9 million and $783.1 million for the three and nine months ended September 30, 2012, respectively, from $256.5 million and $557.2 million for the three and nine months ended September 30, 2011, respectively. This increase was due to an increase in biodiesel gallons sold, partially offset by lower biodiesel prices, as follows:

Biodiesel. Biodiesel revenues, including government incentives, increased $66.5 million, or 26%, and $225.8 million, or 41%, to $322.9 million and $782.9 million during the three and nine months ended September 30, 2012, respectively, from $256.4 million and $557.1 million for the three and nine months ended September 30, 2011, respectively. This increase in biodiesel revenues was due to an increase in gallons sold which was partially offset by a decrease in our average B100 sales price per gallon. Gallons sold, excluding tolled gallons, increased 21.5 million gallons, or 53%, and 56.3 million gallons, or 60%, to 61.7 million gallons and 150.0 million gallons during the three and nine months ended September 30, 2012, respectively, compared to 40.2 million gallons and 93.7 million gallons during the three and nine months ended September 30, 2011, respectively. The increase in gallons sold for the nine months ended September 30, 2012 accounted for a revenue increase of $259.0 million using pricing for the first nine months of 2012. This increase in gallons sold during 2012 reflects the added production from our Albert Lea facility and the start-up of the third operating line at our Seneca facility. Due to lower RIN and energy prices for the nine months of 2012, our average B100 sales price per gallon decreased $1.28, or 22%, and $0.64, or 12%, to $4.44 and $4.60 during the three and nine months ended September 30, 2012, respectively, from $5.72 and $5.24 during the three and nine months ended September 30, 2011, respectively. The decrease in sales price from the first nine months of 2011 compared to the first nine months of 2012 contributed to a $60.0 million revenue decrease when applied to the number of gallons sold during the first nine months of 2011. See “Biodiesel, RINs and feedstock price fluctuations” above for a discussion of RIN pricing for the three and nine months ended September 30, 2012.

Services. Services revenues were $0.1 million and $0.2 million for the three and nine months ended September 30, 2012, respectively.

 

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Costs of goods sold. Our costs of goods sold increased $118.1 million, or 58% and $268.2 million, or 58%, to $320.1 million and $732.3 million for the three and nine months ended September 30, 2012, respectively, from $202.0 million and $464.1 million for the three and nine months ended September 30, 2011, respectively. This increase was primarily due to costs associated with the increase in gallons sold in the three and nine months ended September 30, 2012 as follows:

Biodiesel. Biodiesel costs of goods sold increased $118.2 million, or 59%, and $268.1 million, or 58%, to $320.1 and $732.1 for the three and nine months ended September 30, 2012, respectively, compared to $201.9 million and $464.0 million for the three and nine months ended September 30, 2011, respectively. The increase in biodiesel cost of goods sold is primarily the result of the additional gallons sold in the 2012 periods as discussed above as the average inedible animal fat feedstock prices remained consistent when compared between the first nine months of 2012 to 2011. Average inedible animal fat costs for the three and nine months ended September 30, 2012 were $0.42 and $0.44 per pound, respectively, compared to $0.50 and $0.47 per pound for the three and nine months ended September 30, 2011, respectively. Soybean oil costs for the three and nine months ended September 30, 2012, were $0.56 and $0.55 per pound, respectively, and were $0.59 and $0.58 per pound for the three and nine months ended September 30, 2011, respectively. We incurred risk management losses of $18.0 million and $4.9 million from our risk management trading activity for the three and nine months ended September 30, 2012, respectively, compared to gains of $6.1 million and $4.0 million from risk management activity for the three and nine months ended September 30, 2011, respectively. Our increased losses were largely due to a decrease in soybean oil prices in September 2012 and an increase in heating oil prices from July 1, 2012 to September 30, 2012, which resulted in reduced market value of our derivative financial instruments relating to fourth quarter biodiesel sales. In addition, the decrease in the value of RINs during the third quarter of 2012 resulted in an adjustment of $8.2 million to reflect the lower of cost or market on RIN inventory held as of September 30, 2012.

Services. Costs of services were $0.1 million and $0.2 million for the three and nine months ended September 30, 2012, respectively.

Selling, general and administrative expenses. Our selling, general and administrative, or SG&A, expenses decreased $1.1 million, or 10%, and increased $8.8 million, or 35%, to $9.9 million and $33.9 million for the three and nine months ended September 30, 2012, respectively, from $11.0 million and $25.1 million for the three and nine months ended September 30, 2011, respectively. The change was primarily related to non-cash stock compensation expense of $3.0 million and $12.7 million for the three and nine months ended September 30, 2012, respectively, compared to $1.1 million and $3.0 million for the three and nine months ended September 30, 2011, respectively. The increase in non-cash stock compensation expense is due to the accelerated vesting of certain restricted stock units, or RSUs, which vested on August 16, 2012. The accelerated vesting was triggered as a result of a successful IPO. These RSUs are being expensed using market values based upon discounted cash flow valuation analysis conducted by an independent external valuation specialist using management’s assumptions and projections. The weighted average exercise price used to expense these accelerated RSUs was approximately $23.75 per share. Additionally, wages & benefits decreased $0.7 million when comparing the three months ended September 30, 2012 and 2011 due to the Company not accruing a cash incentive in 2012 as compared to the $3.1 million accrued in 2011. The change offsets the increase in stock compensation expense of $3.0 million noted above. Also, professional fee expense decreased $0.6 million and $0.3 million for the three and nine months ended September 30, 2012 and 2011, respectively.

Other income (expense), net. Other expense was $1.1 million and other income was $9.2 million for the three and nine months ended September 30, 2012, respectively, and other expense was $41.4 million and $63.0 million for the three and nine months ended September 30, 2011, respectively. Other income is primarily comprised of the changes in fair value of the Series A Preferred Stock conversion feature embedded derivative, changes in fair value of Seneca Holdco liability, interest expense, interest income and the other non-operating items. The change in fair value of the Series A Preferred Stock conversion feature embedded derivative resulted in $0 million and $12.0 million of income for the three and nine months ended September 30, 2012, respectively, and $38.5 million and $55.6 million of expense for the three and nine months ended September 30, 2011, respectively. The Series A Preferred Stock was converted into common stock and Series B preferred stock in January 2012. The change in fair value of the Seneca Holdco liability was $0 million and $0.3 million of income for the three and nine months ended September 30, 2012, respectively, and was $1.0 million and $2.5 million of expense for the three and nine months ended September 30, 2011, respectively. The Seneca Holdco Liability no longer exists following our exercise of the call option to acquire the Seneca Facility in January 2012. See “Note 2 – Summary of Significant Accounting Policies” in our condensed consolidated financial statements. Interest expense decreased $1.0 million and $2.3 million to $1.2 million and $3.3 million for the three and nine months ended September 30, 2012, respectively, from $2.2 million and $5.6 million for the three and nine months ended September 30, 2011, respectively. This decrease was primarily attributable to the decrease of debt and the decrease of debt financing related amortization when comparing the first nine months of 2012 and 2011.

Income tax benefit (expense). There was income tax benefit recorded during the three months ended September 30, 2012 of $2.2 million and income tax expense of $3.7 million for the nine months ended September 30, 2012 compared to $4.8 million of income tax expense for the three and nine months ended September 30, 2011. The recording of expense for the nine months ended September 30, 2012 and 2011 is due in part to the increase in taxable income, the release of the deferred tax valuation allowance and tax deficiencies. At September 30, 2012, we had net deferred income tax assets of approximately $5.6 million with a valuation allowance of $1.8 million, which resulted in a net deferred tax asset of $3.8 million and was partially offset by an accrued liability of $1.9 million for unrecognized tax benefits.

 

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Income (loss) from equity investments. We had no gain or loss from equity investments during the first nine months of 2012 compared to a gain of $0.5 million for the first three quarters of 2011. The change is due our purchase of SoyMor Biodiesel, LLC, an equity investment, in July 2011.

Effects of Series A Preferred Stock Recapitalization. In connection with our IPO on January 24, 2012, we gave affect to a one-time conversion of Series A Preferred Stock and certain common stock warrants into 7,660,612 shares of newly-issued Common Stock and 2,999,493 shares of $74,987 aggregate face value of Series B preferred stock with cumulative dividends of 4.50% per annum. For the three and nine months ended September 30, 2012, recapitalization effects were $0 and $39.1 million, respectively.

Preferred stock accretion. Preferred stock accretion was $0 million and $1.8 million for the three and nine months ended September 30, 2012, respectively, compared to $6.5 million and $18.6 million for the three and nine months ended September 30, 2011, respectively. During the first quarter of 2012, we accreted one month of the previously issued Series A Preferred Stock until the preferred stock was recapitalized into Common Stock and Series B preferred stock. The newly issued Series B preferred stock does not require accretion.

Undistributed dividends. Undistributed preferred stock dividends were a net reduction of $0.9 million and $1.7 million for the three and nine months ended September 30, 2012, respectively, compared to $3.2 million and $9.5 million for the three and nine months ended June 30, 2011, respectively. During the first quarter of 2012, we recapitalized our preferred stock by exchanging the Series A Preferred Stock for Class A Common Stock and Series B preferred stock. All undistributed dividends of the Series A Preferred Stock were cancelled as part of the recapitalization agreement.

Distributed dividends. Distributed dividends related to the Series B preferred stock were $0 and $1.5 million for the three and nine months ended September 30, 2012. No dividends were declared or distributed during 2011. With the recapitalization taking place during the first quarter of 2012 as previously described, Series B preferred stock dividends were declared by the Company’s Board of Directors in May 2012 and paid during June 2012.

Effects of participating preferred stock. Effects of participating preferred stock was $0 million and $9.0 million for the three and nine months ended September 30, 2012, respectively.

Effects of participating share-based awards. Effects of participating share-based awards were $0 million and $3.1 million for the three and nine months ended September 30, 2012, respectively.

Liquidity and Capital Resources

Sources of liquidity. Since inception, a significant portion of our operations have been financed through the sale of our capital stock. From August 1, 2006 through September 30, 2012, we received cash proceeds of $201.0 million from private sales of preferred stock and private and public sales of common stock. During 2011, we began financing operations from positive cash flow from operations. At September 30, 2012 and December 31, 2011, we had cash and cash equivalents of $88.3 million and $33.6 million, respectively, and working capital of $133.2 million and $90.2 million, respectively. At September 30, 2012, we had total assets of $538.3 million, compared to total assets of $484.4 million at December 31, 2011. At September 30, 2012, we had debt of $76.4 million, compared to debt of $85.6 million at December 31, 2011.

Our borrowings (in millions) are as follows:

 

     September 30,      December 31,  
     2012      2011  

REG Danville term loan

   $ 10.7       $ 15.9   

REG Newton term loan

     21.6         22.7   

REG Seneca term loan

     35.0         —     

Other

     1.8         2.2   
  

 

 

    

 

 

 

Total notes payable

   $ 69.1       $ 40.8   
  

 

 

    

 

 

 

Seneca Landlord term loan

   $ —         $ 36.3   

Bell, LLC promissory note

     4.4         4.5   
  

 

 

    

 

 

 

Total notes payable - variable interest entities

   $ 4.4       $ 40.8   
  

 

 

    

 

 

 

Our revolving borrowings (in millions) are as follows:

 

     September 30,      December 31,  
     2012      2011  

Revolving lines of credit

   $ 2.9       $ 4.0   

 

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We have disclosed under the heading “Liquidity and Capital Resources” in our December 31, 2011 Annual Report on Form 10-K the capital resources which materially affect our financial statements. There have been no material changes from the capital resources previously disclosed other than those noted below. You should carefully consider the liquidity and capital resources set forth in our Annual Report on Form 10-K along with the information described below.

During July 2009, we and certain subsidiaries entered into an agreement with Bunge North America, or Bunge, to provide services related to the procurement of raw materials and the purchase and resale of biodiesel produced. The agreement provides for Bunge to purchase up to $10.0 million in feedstock for, and biodiesel from, us. Feedstock was paid for daily as it was processed. Biodiesel was purchased and paid for by Bunge the following day. In November 2011, we gave notice of termination to Bunge in accordance with the agreement. This agreement expired May 2012. In September 2009, we entered into an extended payment terms agreement with West Central to provide up to $3.0 million in outstanding payables for up to 45 days. Both of these agreements provide additional working capital resources to us. As of September 30, 2012, we had $0.5 million outstanding under the West Central agreement.

We have a $40.0 million Credit Agreement with Wells Fargo Capital Finance, LLC, or the Wells Fargo Revolver. Amounts borrowed under our Wells Fargo Revolver bear interest, in the case of LIBOR rate loans, at a per annum rate equal to the LIBOR rate plus the LIBOR Rate Margin (as defined), which may range from 2.50 to 3.25 percent, based on the Quantity Average Excess Availability Amount (as defined). All other amounts borrowed that are not LIBOR rate loans bear interest at a rate equal to the greatest of (i) (A) 1.75% per annum, (B) the Federal Funds Rate plus 0.5%, (C) the LIBOR Rate (which rate shall be calculated based upon an interest period of three months and will be determined on a daily basis), plus 1.5% points, and (D) the rate of interest announced, from time to time, within Wells Fargo Bank, National Association at its principal office in San Francisco as its “prime rate,” plus (ii) the Base Rate Margin (as defined in the Credit Agreement), which may range from 1.00 to 1.75 percent, based on the Quantity Average Excess Availability Amount. The Base Rate Margin is subject to reduction or increase depending on the amount available for borrowing under the new revolving credit agreement.

The Wells Fargo 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, 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 (as defined in the Wells Fargo Revolver) of at least 1.0 to 1.0 and to have Excess Availability (as defined in the Wells Fargo Revolver) of at least $4 million. The Wells Fargo Revolver is secured by the subsidiary borrowers’ membership interests and substantially all of their assets, and the inventory of certain subsidiaries of the Company, subject to a $25 million limitation.

On May 1, 2012, REG Seneca, LLC (REG Seneca), formally Landlord, entered into a second amendment to the amended and restated credit agreement, dated April 9, 2010, with WestLB due to our acquisition of Landlord on January 24, 2012. See “Note 5 – Acquisitions” to our condensed consolidated financial statements for a description of the acquisition. The second amendment retains the original repayment terms of the credit agreement. The note requires that interest be accrued at different rates based on whether it is a Base Rate Loan or Eurodollar loan. Interest is at either 2.0% over the higher of 50 basis points above the Federal Funds Effective Rate or the WestLB prime rate for Base Rate loans or 3.0% over adjusted LIBOR for Eurodollar loans. The loan was a Eurodollar loan as of September 30, 2012. The effective rate at September 30, 2012 was 3.23%. Interest is paid monthly. Starting April 2012, REG Seneca is required to make quarterly principal payments of $0.6 million, with the remaining unpaid principal due at maturity on April 8, 2017. The note payable is secured by the Seneca facility. The balance of the note as of September 30, 2012 was $35.0 million.

In March 2010, as part of the CIE Asset Purchase, REG Newton assumed the term debt of CIE and refinanced certain term debt, or the AgStar Loan. Beginning in October 2011, REG Newton is required to make principal payments of $0.1 million plus interest on the AgStar Loan until the maturity date of March 8, 2013. The loan agreement allows for a one year extension. On October 22, 2012, we requested a renewal of the Term Loan for a period of one year. We are working with the bank to obtain this renewal, which has not been granted as of the date of this filing.

As of September 30, 2012, we and our subsidiaries were in compliance with all restrictive financial covenants associated with the borrowings.

 

40


Cash flow. The following table presents information regarding our cash flows and cash and cash equivalents for the six months ended September 30, 2012 and 2011:

 

     Nine Months Ended  
     September 30,  
     2012     2011  

Net cash flows from operating activities

   $ 17,031      $ 22,960   

Net cash flows from investing activities

     (6,467     (1,875

Net cash flows from financing activities

     44,143        5,539   

Net change in cash and cash equivalents

     54,707        26,624   

Cash and cash equivalents, end of period

   $ 88,282      $ 30,883   

Operating activities. Net cash provided in operating activities was $17.0 million for the nine months ended September 30, 2012 compared to $23.0 million for the same period in 2011. For the nine months ended September 30, 2012, net income was $22.4 million, which includes depreciation and amortization expense of $6.2 million, non-cash stock compensation expense of $12.7 million, a decrease in the non-cash change in the preferred stock embedded derivative liability of $12.0 million, a decrease in the non-cash change in the Seneca Holdco, LLC liability of $0.2 million, a decrease of $7.1 million for the premium paid to Seneca Landlord on the original investment and an increase in expense for deferred taxes and uncertain tax positions of $3.0 million. We also used $10.3 million to fund net working capital requirements, consisting of a $2.7 million decrease in inventory due to quarter over quarter production and sales volume remaining consistent, $12.0 million decrease in accounts receivable, a $18.6 million increase in prepaid expenses, a decrease in deferred revenues of $6.7 million and a $0.3 million increase in accounts payable and accruals.

The net cash provided in operating activities for the nine months ended September 30, 2011 was $23.0 million. For the nine months ended September 30, 2011, net income was $0.8 million, which includes depreciation and amortization expense of $6.5 million, stock compensation expense of $3.0 million, an increase in the non-cash change in the preferred stock embedded derivative liability of $55.6 million and an increase in the non-cash change in the Seneca Holdco liability of $2.1 million. These charges were offset by non-cash benefits including a $3.4 million increase for changes in the deferred tax benefit. We also used $42.5 million to fund net working capital requirements, which resulted in a net cash source from operations of $23.0 million.

Investing activities. Net cash used for investing activities for the nine months ended September 30, 2012 was $6.5 million, primarily consisting of net cash used to pay for facility construction of $6.4 million.

Net cash used for investment activities for the nine months ended September 30, 2011 was $1.9 million, consisting of net cash used to pay for facility construction of $2.3 million and cash provided from the release of restricted cash in the amount of $0.4 million.

Financing activities. Net cash provided for financing activities for the nine months ended September 30, 2012 was $44.1 million. We received $63.7 million from the completion of our IPO before expenses. We paid down $8.0 million on our term notes, paid down $1.2 million on our line of credit and repaid $4.0 million for the investment in Seneca Landlord. We also paid $1.7 million for the issuance of common stock and preferred stock, $3.1 million for the repurchase of common stock, $1.5 million for the payment of preferred stock dividends and $0.1 million for debt issuance cost.

Net cash provided from financing activities for the nine months ended September 30, 2011 was $5.5 million, which represents $10.0 million in borrowings on our USRG debt and $1.0 million in borrowings on our WestLB Revolver. This was offset by $3.5 million in principal payments in connection with the notes payable. We also paid $1.3 million related to the pending issuance of common and preferred stock and $0.7 million for debt issuance cost.

Capital expenditures. We plan to undertake various facility upgrades to further expand processing capabilities at our existing facilities, most significantly our newly acquired Albert Lea facility. We also plan to make significant capital expenditures when debt or equity financing becomes available to complete construction of three facilities, our New Orleans facility, our Emporia facility and our Clovis facility, with expected aggregate nameplate production capacity of 135 mmgy. In advance of completing construction of the Clovis facility, we have completed the wholesale terminal infrastructure to allow the Clovis facility to operate as a terminal location and begin serving regional customers. We estimate completion of the New Orleans, Emporia and the Clovis facilities will require an estimated $130 to $140 million, excluding working capital. We may enter into additional tolling arrangements with third parties from time to time where third parties will produce biodiesel on our behalf using our feedstocks. Such arrangements may require investments of additional working capital during the tolling periods.

We continue to have discussions with financing sources in an effort to enter into equity and debt financing arrangements to meet our projected financial needs for facilities under construction and capital improvement projects for our operating facilities. We may also use existing cash and cash flow generated from operations to fund construction and upgrade projects. Since discussions are ongoing, we are uncertain when or if financing will be available aside from the cash we have on hand today. The financing may consist of common or preferred stock, debt, project financing or a combination of these financing techniques. Additional debt would increase our leverage and interest costs and would likely be secured by certain of our assets. Additional equity or equity-linked

 

41


financings would likely have a dilutive effect on our existing and future stockholders. It is likely that the terms of any project financing would include customary financial and other covenants on our project subsidiaries, including restrictions on the ability to make distributions, to guarantee indebtedness, and to incur liens on the plants of such subsidiaries.

Adjusted EBITDA

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

The following table provides our Adjusted EBITDA for the periods presented, as well as a reconciliation to net income:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
(In thousands)    2012     2011     2012     2011  

Net income (loss)

   $ (6,040   $ (2,007   $ 22,410      $ 781   

Adjustments:

        

Income from equity investments

     —          (649     —          (501

Income tax expense (benefit)

     (2,165     4,752        3,669        4,752   

Interest expense

     1,150        2,183        3,262        5,642   

Other (income) expense, net

     (56     (239     (121     (713

Change in fair value of Seneca Holdco liability

     —          977        (349     2,500   

Change in fair value of preferred stock conversion feature embedded derivatives

     —          38,483        (11,975     55,571   

Expense settled with stock issuance

     —          —          1,898        —     

Straight-line lease expense

     (31     393        (237     1,809   

Depreciation

     2,097        1,851        6,192        5,245   

Amortization

     (208     (97     (553     (351

Non-cash stock compensation

     2,965        1,067        12,687        3,047   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (2,288   $ 46,714      $ 36,883      $ 77,782   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA is a supplemental performance measure that is not required by, or presented in accordance with, generally accepted accounting principles, or GAAP. Adjusted EBITDA should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP, or as alternatives to cash flows from operating activities or a measure of our liquidity or profitability. Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for any of our results as reported under GAAP. Some of these limitations are:

 

   

Adjusted EBITDA does not reflect our cash expenditures for capital assets or the impact of certain cash clauses that we consider not to be an indication of our ongoing operations;

 

   

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital requirements;

 

   

Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect cash requirements for such replacements;

 

   

non-cash stock 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 our industry, may calculate these measures differently than we do, limiting their usefulness as a comparative measure.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Recent Accounting Pronouncements

For a discussion of new accounting pronouncements affecting the Company, refer to “Note 2 – Summary of Significant Accounting Policies” to our condensed consolidated financial statements.

 

42


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary objectives of our investment activity are to protect margins, preserve principal, provide liquidity and maximize income without significantly increasing risk. Some of the securities we invest in are subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we maintain a portfolio of cash equivalents in short-term investments in money market funds.

Commodity Price Risk

Over the period from January 2007 through September 2012, average diesel prices based on Platts reported pricing for Group 3 (Midwest) have ranged from a high of approximately $4.10 per gallon reported in July 2008 to a low of approximately $1.03 per gallon in March 2009, with prices averaging $2.50 per gallon during this period. Over the period from January 2006 through September 2012, soybean oil prices (based on closing sales prices on the CBOT nearby futures, for crude soybean oil) have ranged from a high of $0.7040 per pound in March 2008 to a low of $0.2108 per pound in January 2006, with closing sales prices averaging $0.4235 per pound during this period. Over the period from January 2008 through September 2012, animal fat prices (based on prices from The Jacobsen Missouri River, for choice white grease) have ranged from a high of $0.5250 per pound in June 2011 to a low of $0.0950 per pound in December 2008, with sales prices averaging $0.3446 per pound during this period.

Higher feedstock prices or lower biodiesel prices result in lower profit margins and, therefore, represent unfavorable market conditions. Traditionally, we have not been able to pass along increased feedstock prices to our biodiesel customers. The availability and price of feedstocks are subject to wide fluctuations due to unpredictable factors such as weather conditions during the growing season, kill ratios, carry-over from the previous crop year and current crop year yield, governmental policies with respect to agriculture and supply and demand.

We have prepared a sensitivity analysis to estimate our exposure to market risk with respect to our sales contracts, lower cost feedstock requirements, soybean oil requirements and the related exchange-traded contracts for 2011. Market risk is estimated as the potential loss in fair value, resulting from a hypothetical 10% adverse change in the fair value of our soybean oil and requirements and biodiesel sales. The results of this analysis, which may differ from actual results, are as follows:

 

                         Change in         
                   Hypothetical     Annual      Percentage  
     2011             Adverse     Gross      Change in  
     Volume             Change in     Profit (in      Gross  
     (in millions)      Units      Price     millions)      Profit  

Biodiesel

     149.8         gallons         10   $ 75.8         59.6

Lower Cost Feedstocks

     858.6         pounds         10   $ 40.1         31.5

Soybean Oil

     182.1         pounds         10   $ 10.6         8.4

We attempt to protect operating margins by entering into risk management contracts that mitigate price volatility of our feedstocks, such as inedible animal fat and inedible corn oil, and energy prices. We create offsetting positions by using a combination of forward physical purchases and sales contracts on feedstock and biodiesel, including risk management futures contracts, swaps and options primarily on heating oil and soybean oil; however, the extent to which we engage in risk management activities varies substantially from time to time, and from feedstock to feedstock, depending on market conditions and other factors. A 10 percent adverse change in the prices of heating oil would have a negative effect on the fair value of these instruments of $8.3 million. A 10 percent adverse change in the price of soybean oil would have a negative effect on the fair value of these instruments of $3.5 million.

Interest Rate Risk

We are subject to interest rate risk in connection with our $1.7 million loan from the proceeds of Variable Rate Demand Industrial Development Revenue Bonds, or IFA Bonds, issued by the Iowa Finance Authority to finance our Ralston facility. The IFA Bonds bear interest at a variable rate determined by the remarketing agent from time to time as the rate necessary to produce a bid for the purchase of all of the Bonds at a price equal to the principal amount thereof plus any accrued interest at the time of determination, but not in excess of 10% per annum. The interest rate on the bonds was 0.23% for the last week of September 2012. A hypothetical increase in interest rate of 10% would not have a material effect on our annual interest expense.

 

43


We are subject to interest rate risk relating to REG Danville’s originally assumed $24.6 million term debt financing which was renewed on November 3, 2011 according to the Amended and Restated Loan Agreement with Fifth Third Bank. The renewed term loan has a three year term with an automatic one year extension upon certain cumulative principal payment thresholds being met. The term loan bears interest at a fluctuating rate based on LIBOR. Interest will accrue on the outstanding balance of the term loan at LIBOR plus 500 basis points. Interest accrued on the outstanding balance of the loan at September 30, 2012 at 5.23%.

REG Danville entered into an interest rate swap agreement in connection with the aforementioned term loan in December 23, 2011 to be effective January 1, 2012. The swap agreement effectively fixes the interest rate at 5.92% on a notional amount of approximately $5.5 million of REG Danville’s term loan through July 2015. The fair value of the interest rate swap agreement was $0.1 million and $0.1 million at September 30, 2012 and December 31, 2011, respectively, and is recorded in the other noncurrent liabilities. The interest rate swap agreement is not designated as a cash flow or fair value hedge. Gains and losses based on the fair value change in the interest rate swap agreement are recognized in the statement of operations as a change in the fair value of interest rate swap agreement. A hypothetical increase in interest rate of 10% would not have a material effect on our annual interest.

REG Newton is subject to interest rate risk relating to its originally assumed $23.6 million term debt financing from AgStar. Interest will accrue on the outstanding balance of the term loan at 30-day LIBOR or 2.00%, whichever is higher, plus 300 basis points (effective rate at September 30, 2012 of 5.0%). A hypothetical increase in interest rate of 10% would not have a material effect on our annual interest expense.

REG Seneca is subject to interest rate risk relating to its note payable agreement with WestLB. A hypothetical increase in interest rate of 10% would not have a material effect on our annual interest expense.

We are subject to interest rate risk under our Wells Fargo Revolver entered into on December 23, 2011 under which we had $2.9 million and $4.0 million outstanding at September 30, 2012 and December 31, 2011, respectively. A hypothetical increase in interest rate of 10% would not have a material effect on our annual interest expense.

Inflation

To date, inflation has not significantly affected our operating results, though costs for petroleum-based diesel fuel, feedstocks, construction, labor, taxes, repairs, maintenance and insurance are all subject to inflationary pressures. Inflationary pressure in the future could affect our ability to sell the biodiesel we produce, maintain our production facilities adequately, build new biodiesel production facilities and expand our existing facilities as well as the demand for our facility construction management and operations management services.

 

ITEM 4. CONTROLS AND PROCEDURES

We maintain a system of disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of September 30, 2012. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2012.

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) that occurred during the three months ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

44


PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

We may from time to time be involved in claims, proceedings and litigation arising from our business and property ownership. We believe, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on our financial position, operations or liquidity.

 

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors previously disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K for the twelve months ended December 31, 2011 and the Quarterly Report on Form 10-Q for the three and six months ended June 30, 2012. You should carefully consider the risk factors set forth in our Annual Report on Form 10-K, our previous Quarterly Report on Form 10-Q and the other information set forth elsewhere in this Quarterly Report on Form 10-Q. You should be aware that these risk factors and other information may not describe every risk facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OR PROCEEDS

Pursuant to an Asset Purchase Agreement, dated as of October 26, 2012, we acquired substantially all of the assets of North Texas Bio Energy, LLC in exchange for 900,000 shares of the Company’s common stock and $300,000 in cash. The acquired assets consist of a 15 million gallon per year nameplate capacity biodiesel facility and related assets, located in New Boston, Texas. The facility is not currently in operation. The shares of common stock were issued without registration under the Securities Act of 1933 pursuant to the exemption contained in Section 4(2) as a transaction by an issuer not involving any public offering.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

ITEM 5. OTHER INFORMATION

None.

 

45


ITEM 6. EXHIBITS

(A) Exhibits:

 

Exhibit

No.

 

Description

  31.1   Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
  31.2   Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
  32.1*   Certification of the Chief Executive Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32.2*   Certification of the Chief Financial Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS**   XBRL Instance Document
101.SCH**   XBRL Taxonomy Extension Schema Document
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**   XBRL Taxonomy Extension Label Linkbase Document
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase Document

 

* In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibit 32.1 and Exhibit 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.
** In accordance with Rule 406T of Regulation S-T, the information furnished in these exhibits will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such exhibits will not be deemed to be incorporated by reference into any filing under the Securities Act or Exchange Act.

 

46


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    RENEWABLE ENERGY GROUP, INC.
Dated: November 8, 2012     By:  

/s/ Daniel J. Oh

      Daniel J. Oh
      Chief Executive Officer (Principal Executive Officer)
Dated: November 8, 2012     By:  

/s/ Chad Stone

      Chad Stone
      Chief Financial Officer (Principal Financial Officer)
Dated: November 8, 2012     By:  

/s/ Chad A. Baker

      Chad A. Baker
     

Controller and Chief Accounting Officer

(Principal Accounting Officer)

 

47