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 June 30, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-35397
RENEWABLE ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)
   
Delaware
   
26-4785427
(State of other jurisdiction of
incorporation or organization)
   
(I.R.S. Employer
Identification No.)
   
   
416 South Bell Avenue Ames, Iowa
   
50010
(Address of principal executive offices)
   
(Zip code)
(515) 239-8000
(Registrant’s telephone number, including area code)
      

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
   
Large accelerated filer  ¨
   
Accelerated filer  x
   
   
Non-accelerated filer  ¨
   
Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO   x
As of July 31, 2015, the registrant had 43,441,688 shares of Common Stock outstanding.




PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL INFORMATION
RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share and per share amounts)
   
June 30,
2015
 
December 31,
2014
ASSETS
   

 
   

CURRENT ASSETS:
   

 
   

Cash and cash equivalents
$
70,978

 
$
63,516

Marketable securities
30,225

 
16,770

Accounts receivable, net (includes amounts owed by related parties of $0 and $36, respectively)
59,888

 
294,669

Inventories
95,166

 
97,508

Deferred income taxes
12

 

Prepaid expenses and other assets
41,943

 
43,135

Restricted cash

 
12,845

Total current assets
298,212

 
528,443

Property, plant and equipment, net
500,516

 
493,196

Goodwill
191,444

 
188,275

Intangible assets, net
28,508

 
28,837

Investments
10,331

 
9,736

Other assets
17,578

 
19,586

Restricted cash
106,815

 
104,815

TOTAL ASSETS
$
1,153,404

 
$
1,372,888

LIABILITIES AND EQUITY
   

 
   

CURRENT LIABILITIES:
   

 
   

Revolving lines of credit
$
26,340

 
$
16,679

Current maturities of long-term debt
5,940

 
5,746

Accounts payable (includes amounts owed to related parties of $0 and $1,101, respectively)
62,175

 
202,821

Accrued expenses and other liabilities
16,002

 
28,486

Deferred income taxes
11,150

 
14,899

Deferred revenue

 
16,680

Total current liabilities
121,607

 
285,311

Unfavorable lease obligation
18,257

 
19,170

Deferred income taxes
12,119

 
6,905

Contingent consideration for acquisitions
29,681

 
30,091

Long-term debt
247,001

 
247,183

Other liabilities
4,076

 
5,566

Total liabilities
432,741

 
594,226

COMMITMENTS AND CONTINGENCIES


 


EQUITY:
   

 
   

Common stock ($.0001 par value; 300,000,000 shares authorized; 43,441,688 and 44,422,881 shares outstanding, respectively)
4

 
4

Common stock—additional paid-in-capital
455,757

 
453,109

Retained earnings
280,975

 
321,083

Accumulated other comprehensive loss
(3,332
)
 
(11
)
Treasury stock (1,843,785 and 585,150 shares outstanding, respectively)
(16,530
)
 
(4,412
)
Total equity attributable to the Company's shareholders
716,874

 
769,773

              Non-controlling interest
3,789

 
8,889

                       Total equity
720,663

 
778,662

TOTAL LIABILITIES AND EQUITY
$
1,153,404

 
$
1,372,888

See notes to condensed consolidated financial statements.

1



RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share amounts)
 
Three months ended
 
Six months ended
   
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
REVENUES:
   
 
   
 
   
 
   
Biomass-based diesel sales
$
366,455

 
$
327,837

 
$
587,481

 
$
536,959

Biomass-based diesel government incentives
7,278

 
5,022

 
17,066

 
14,912

   
373,733

 
332,859

 
604,547

 
551,871

Services
29

 
59

 
133

 
87

   
373,762

 
332,918

 
604,680

 
551,958

COSTS OF GOODS SOLD:
   
 
   
 
   
 
   
Biomass-based diesel
357,832

 
303,462

 
600,342

 
503,767

Biomass-based diesel—related parties

 
14,283

 
4,542

 
21,429

Services
23

 
22

 
84

 
47

   
357,855

 
317,767

 
604,968

 
525,243

GROSS PROFIT (LOSS)
15,907

 
15,151

 
(288
)
 
26,715

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
15,359

 
12,410

 
32,034

 
24,064

RESEARCH AND DEVELOPMENT EXPENSE
4,390

 
3,217

 
8,250

 
5,090

LOSS FROM OPERATIONS
(3,842
)
 
(476
)
 
(40,572
)
 
(2,439
)
OTHER INCOME (EXPENSE), NET:
   
 
   
 
   
 
   
Change in fair value of contingent consideration
2,121

 
384

 
1,828

 
384

Other income, net
1,779

 
384

 
2,344

 
432

Interest expense
(2,928
)
 
(1,204
)
 
(5,671
)
 
(1,755
)
   
972

 
(436
)
 
(1,499
)
 
(939
)
LOSS BEFORE INCOME TAXES
(2,870
)
 
(912
)
 
(42,071
)
 
(3,378
)
INCOME TAX BENEFIT
707

 
11,919

 
1,604

 
12,026

NET INCOME (LOSS)
(2,163
)
 
11,007

 
(40,467
)
 
8,648

LESS—NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
(162
)
 

 
(359
)
 

NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY
(2,001
)
 
11,007

 
(40,108
)
 
8,648

PLUS—GAIN ON REDEMPTION OF PREFERRED STOCK

 

 

 
378

LESS—EFFECT OF CHANGES TO PREFERRED STOCK

 

 

 
(40
)
LESS—EFFECT OF PARTICIPATING SHARE-BASED AWARDS

 
(172
)
 

 
(128
)
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY’S COMMON STOCKHOLDERS
$
(2,001
)
 
$
10,835

 
$
(40,108
)
 
$
8,858

NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
   
 
   
 
   
 
   
BASIC
$
(0.05
)
 
$
0.27

 
$
(0.91
)
 
$
0.23

DILUTED
$
(0.05
)
 
$
0.27

 
$
(0.91
)
 
$
0.22

WEIGHTED AVERAGE SHARES USED TO COMPUTE NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
   
 
   
 
   
 
   
BASIC
43,736,366

 
39,939,346

 
44,048,017

 
39,119,430

DILUTED
43,736,366

 
39,954,587

 
44,048,017

 
39,129,136

See notes to condensed consolidated financial statements.

2



RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
(in thousands)
 
Three months ended
 
Six months ended
 
June 30, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
Net income (loss)
$
(2,163
)
 
$
11,007

 
$
(40,467
)
 
$
8,648

Unrealized gains (losses) on marketable securities, net of taxes of $0 and $0, respectively
(24
)
 
30

 
(15
)
 
(22
)
Foreign currency translation adjustments
765

 

 
(3,876
)
 

Other comprehensive income (loss)
741

 
30

 
(3,891
)
 
(22
)
Comprehensive income (loss)
(1,422
)
 
11,037

 
(44,358
)
 
8,626

Less—Comprehensive income (loss) attributable to noncontrolling interest
(570
)
 

 
(570
)
 

Comprehensive income (loss) attributable to the Company
$
(852
)
 
$
11,037

 
$
(43,788
)
 
$
8,626

See notes to condensed consolidated financial statements.


3



RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND EQUITY
(unaudited)
(in thousands, except share amounts)
   
   
 
   
 
Company Stockholders’ Equity
 
 
 
   
   
Redeemable
Preferred
Stock
Shares
 
Redeemable
Preferred
Stock
 
Common
Stock
Shares
 
Common
Stock
 
Common Stock -
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Loss
 
Treasury
Stock
 
Noncontrolling Interest
 
Total
BALANCE, January 1, 2014
143,313

 
$
3,963

 
36,506,221

 
$
4

 
$
359,818

 
$
238,134

 
$

 
$
(3,886
)
 
$

 
$
594,070

Issuance of common stock

 

 
49,662

 

 
582

 

 

 

 

 
582

Conversion of Series B Preferred Stock to common stock
(816
)
 
(23
)
 
1,634

 

 
23

 

 

 

 

 
23

Preferred stock redemption
(142,497
)
 
(3,940
)
 

 

 

 
378

 

 

 

 
378

Issuance of common stock in acquisition (net of issuance costs of $884)

 

 
5,724,172

 

 
60,201

 

 

 

 

 
60,201

Conversion of restricted stock units to common stock

 

 
24,906

 

 

 

 

 

 

 

Convertible notes conversion feature (net of taxes of $5,082 and net of issuance cost of $881)

 

 

 

 
19,068

 

 

 

 

 
19,068

Purchase of capped call transactions

 

 

 

 
(11,904
)
 

 

 

 

 
(11,904
)
Stock compensation expense

 

 

 

 
2,649

 

 

 

 

 
2,649

Series B Preferred Stock dividends paid

 

 

 

 

 
(40
)
 

 

 

 
(40
)
Net change in unrealized losses on marketable securities

 

 

 

 

 

 
(22
)
 

 

 
(22
)
Net income

 

 

 

 

 
8,648

 

 

 

 
8,648

BALANCE, June 30, 2014

 
$

 
42,306,595

 
$
4

 
$
430,437

 
$
247,120

 
$
(22
)
 
$
(3,886
)
 
$

 
$
673,653

BALANCE, January 1, 2015

 
$

 
44,422,881

 
$
4

 
$
453,109

 
$
321,083

 
$
(11
)
 
$
(4,412
)
 
$
8,889

 
$
778,662

Issuance of common stock

 

 
37,966

 

 
412

 

 

 

 

 
412

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

 

 
174,498

 

 

 

 

 
(599
)
 

 
(599
)
Treasury stock purchases

 

 
(1,193,657
)
 

 

 

 

 
(11,519
)
 

 
(11,519
)
Acquisitions of noncontrolling interests

 

 

 

 

 

 

 

 
(4,171
)
 
(4,171
)
Stock compensation expense

 

 

 

 
2,236

 

 

 

 

 
2,236

Net change in unrealized losses on marketable securities

 

 

 

 

 

 
(15
)
 

 

 
(15
)
Foreign currency translation adjustment

 

 

 

 

 

 
(3,306
)
 

 
(570
)
 
(3,876
)
Net loss

 

 

 

 

 
(40,108
)
 

 

 
(359
)
 
(40,467
)
BALANCE, June 30, 2015

 
$

 
43,441,688

 
$
4

 
$
455,757

 
$
280,975

 
$
(3,332
)
 
$
(16,530
)
 
$
3,789

 
$
720,663

See notes to condensed consolidated financial statements.

4



RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
Six months ended
   
June 30, 2015
 
June 30, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
   
 
   
Net income (loss)
$
(40,467
)
 
$
8,648

Adjustments to reconcile net loss to net cash flows from operating activities:
   
 
   
Depreciation expense
11,747

 
6,194

Amortization expense of assets and liabilities, net
213

 
(155
)
Accretion of convertible note discount
2,327

 
351

Amortization of marketable securities
103

 

Change in fair value of contingent consideration
(1,828
)
 
(384
)
Provision for doubtful accounts
(986
)
 
(33
)
Stock compensation expense
2,236

 
2,649

Deferred tax benefit
(1,749
)
 
(12,810
)
Other operating activities
(11
)
 
257

Changes in asset and liabilities, net of effects from acquisitions:
   
 
   
Accounts receivable, net
246,260

 
35,070

Inventories
1,473

 
17,610

Prepaid expenses and other assets
(987
)
 
(12,637
)
Accounts payable
(141,340
)
 
(2,769
)
Accrued expenses and other liabilities
(10,028
)
 
(5,319
)
Deferred revenue
(16,680
)
 
(12,499
)
Net cash flows provided by operating activities
50,283

 
24,173

CASH FLOWS FROM INVESTING ACTIVITIES:
   
 
   
Cash paid for marketable securities
(52,153
)
 
(70,553
)
Cash received from maturities of marketable securities
38,597

 

Change in restricted cash
10,845

 
(101,315
)
Cash paid for purchase of property, plant and equipment
(27,707
)
 
(32,310
)
Cash paid for acquisitions and additional interests, net of cash acquired
(4,171
)
 
(31,469
)
Other investing activities

 
27

Net cash flows used in investing activities
(34,589
)
 
(235,620
)
CASH FLOWS FROM FINANCING ACTIVITIES:
   
 
   
Net borrowings on lines of credit
9,661

 
8,839

Cash received from issuance of debt
411

 
143,750

Cash paid for capped call transactions

 
(11,904
)
Cash paid on debt
(2,673
)
 
(17,285
)
Cash paid for debt issuance costs
(365
)
 
(3,904
)
Cash paid for equity issuance costs

 
(1,522
)
Cash paid for treasury stock
(12,118
)
 
(529
)
Cash paid for preferred stock dividends

 
(40
)
Cash paid for redemption of preferred stock

 
(3,562
)
Cash paid for contingent consideration settlement
(1,995
)
 

Net cash flows provided by (used in) financing activities
(7,079
)
 
113,843

NET CHANGE IN CASH AND CASH EQUIVALENTS
8,615

 
(97,604
)
CASH AND CASH EQUIVALENTS, Beginning of period
63,516

 
153,227

Effect of exchange rate changes on cash
(1,153
)
 

CASH AND CASH EQUIVALENTS, End of period
$
70,978

 
$
55,623

(continued)

5




RENEWABLE ENERGY GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
Six months ended
 
June 30, 2015
 
June 30, 2014
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
   
 
   
Cash paid/(received) for income taxes
$
(44
)
 
$
84

Cash paid for interest
$
3,372

 
$
1,059

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
   
 
   
Amounts included in period-end accounts payable for:
   
 
   
Purchases of property, plant and equipment
$
8,812

 
$
4,700

Debt issuance cost
$
14

 
$
469

Incentive stock liability for raw material supply agreement
$
159

 
$
206

Equity issuance costs


 
$
218

Issuance of common stock for acquisitions


 
$
61,085

Contingent consideration for acquisitions


 
$
45,950

Debt assumed in acquisition


 
$
113,553

Gain on redemption of preferred stock


 
$
378

Impairment of property, plant and equipment
$
11,027

 
 
(concluded)
   
See notes to condensed consolidated financial statements.



6



RENEWABLE ENERGY GROUP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For The Three and Six Months Ended June 30, 2015 and 2014
(unaudited)
(in thousands, except share and per share amounts)
NOTE 1 — BASIS OF PRESENTATION AND NATURE OF THE BUSINESS
The condensed consolidated financial statements have been prepared by Renewable Energy Group, Inc. and its subsidiaries (the Company), pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted as permitted by such rules and regulations. All adjustments, consisting of normal recurring adjustments, have been included. Management believes that the disclosures are adequate to present fairly the financial position, results of operations and cash flows at the dates and for the periods presented. It is suggested that these interim financial statements be read in conjunction with the consolidated financial statements and the notes thereto appearing in the Company’s latest annual report on Form 10-K filed on March 6, 2015. Results for interim periods are not necessarily indicative of those to be expected for the fiscal year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates.
As of June 30, 2015, the Company operates a network of nine operating biomass-based diesel production facilities with aggregate nameplate production capacity of 332 million gallons per year, or mmgy. A number of these plants are “multi-feedstock capable” which allows them to use a broad range of lower cost feedstocks, such as inedible corn oil, used cooking oil and inedible animal fats in addition to vegetable oils, such as soybean oil and canola oil.
The Company expanded its business to Europe by acquiring a majority interest in Petrotec AG (Petrotec) in December 2014. Petrotec is a fully-integrated company that produces biodiesel at its two biorefineries in Emden and Oeding, Germany to sell to the European market.
The biomass-based diesel industry and the Company’s business have benefited from the continuation of certain federal and state incentives. The federal biodiesel tax credit expired on December 31, 2014 and it is uncertain whether it will be reinstated. This revocation along with other amendments of any one or more of those laws, could adversely affect the financial results of the Company.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company has disclosed a summary of the Company's significant accounting policies in its Annual Report on Form 10-K for the year ended December 31, 2014. There have been no material changes from the policies previously disclosed other than those noted below.
Restricted Cash
At June 30, 2015, current restricted cash was $0. At December 31, 2014, current restricted cash was $12,845, which was held in certificates of deposit as pledges for a letter of credit to support a subsidiary's trade activities and the Company's tender offer to acquire the remaining interest at Petrotec. Non-current restricted cash consists of $101,315 as of June 30, 2015 and December 31, 2014, respectively, which is held in a certificate of deposit and pledged to Bank of America, who issued a letter of credit on the Company's behalf to support the payments on the Company's GOZone Bonds. In addition, at June 30, 2015 and December 31, 2014, non-current restricted cash included amounts of $5,500 and $3,500, respectively, which is held in a certificate of deposit and pledged to Bank of America, who issued a letter of credit to support a subsidiary's trade activities. The Company classifies restricted cash between current and non-current assets based on the length of time of the restricted use.
Accounts Receivable
Accounts receivable are carried at invoiced amount less allowance for doubtful accounts. Management estimates the allowance for doubtful accounts based on existing economic conditions, the financial conditions of customers, and the amount and age of past due accounts. Receivables are considered past due if full payment is not received by the contractual due date. Past due accounts are generally written off against the allowance for doubtful accounts only after reasonable collection attempts have been exhausted. At June 30, 2015, most outstanding receivable amounts related to the 2014 biodiesel mixture excise tax credit reinstatement were received.
Property, Plant and Equipment

7



Property, plant and equipment is recorded at cost less accumulated depreciation. Maintenance and repairs are expensed as incurred. Depreciation expense is computed on a straight-line method based upon estimated useful lives of the assets.
In April 2015, the Company experienced a fire at its Geismar facility, resulting in the shutdown of the facility. The Company estimated fixed assets of approximately $11,027 were impaired as a result of the fire. As of the date of this report, the Company has recovered an interim receivable amount of $5,000 from insurance for the property damage and believes it is probable that it will recover the remaining costs under its insurance policies. As such, an amount equal to the estimated impairment loss was recorded as part of accounts receivable on the Condensed Consolidated Balance Sheets at June 30, 2015 and no impact on earnings was recognized. The Company intends to file insurance claims under its business interruption policies as a result of the business interruption it experienced in connection with the fire at the Geismar facility. As a result, the full amount of proceeds to be received has not been determined and no amounts related to business interruption insurance have been recognized in earnings at June 30, 2015.
Goodwill
Goodwill is tested for impairment annually on July 31 or when impairment indicators exist. Goodwill is allocated and tested for impairment by reporting units. The analysis is based on a comparison of the carrying value of the reporting unit to its fair value, determined utilizing both a discounted cash flow methodology and a market comparable methodology. The determination of whether or not the asset has become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the value of the Company’s reporting units. Changes in estimates of future cash flows caused by items such as unforeseen events or sustained unfavorable changes in market conditions could negatively affect the fair value of the reporting unit’s goodwill asset and result in an impairment charge. The 2014 annual impairment test determined that the fair value of the biomass-based diesel reporting unit exceeded its carrying value by approximately 7% and the services reporting unit exceeded its carrying value by approximately 66%. The Company also reviewed goodwill recorded from the acquisitions of LS9, Inc., Syntroleum Corporation and Dynamic Fuels, LLC during the annual impairment testing. There have been no impairment indicators in the first six months of 2015 that indicate an additional assessment needs to be performed.
Share Repurchase Programs
In February 2015, the Company's board of directors approved a share repurchase program of up to $30,000 of the Company's shares of Common Stock. Shares may be repurchased from time to time in open market transactions, privately negotiated transactions or by other means. The Company accounts for share repurchases using the cost method. Under this method, the cost of the share repurchase is recorded entirely in treasury stock, a contra equity account. During the six months ended June 30, 2015, the Company repurchased shares of Common Stock in the amount of $11,519 under this share repurchase program.
Foreign Currency Transactions and Translation
The Company’s reporting and functional currency is U.S. dollars. Monetary assets and liabilities denominated in currencies other than U.S. dollars are remeasured into their respective functional currencies at exchange rates in effect at the balance sheet date. The resulting exchange gain or loss is included in the Company’s Condensed Consolidated Statements of Operations as foreign exchange gain (loss) unless the remeasurement gain or loss relates to an intercompany transaction that is of a long-term investment nature and for which settlement is not planned or anticipated in the foreseeable future. Gains or losses arising from translation of such transactions are reported as a component of accumulated other comprehensive income (loss) in the Company’s Condensed Consolidated Balance Sheets.
The Company translates the assets and liabilities of its foreign subsidiaries from their respective functional currencies to U.S. dollars at the appropriate spot rates as of the balance sheet date. Generally, our foreign subsidiaries use the local currency as their functional currency. Changes in the carrying value of these assets and liabilities attributable to fluctuations in spot rates are recognized in foreign currency translation adjustment, a component of accumulated other comprehensive income (loss) in the Company’s Condensed Consolidated Balance Sheets.
Income Taxes
The Company uses the asset and liability method to account for income taxes. Accordingly, deferred income taxes are recognized for differences between the financial statement and tax bases of assets and liabilities at enacted statutory tax rates in effect for the years in which differences are expected to reverse. Changes in tax rates are recognized directly to the income statement as they arise. Consideration is given to positive and negative evidence related to the realization of the deferred tax assets and valuation allowances are established to reduce deferred tax assets to the amounts expected to be realized. Significant judgment is required in making this assessment.

8



For uncertain tax positions, the Company recognizes tax benefits that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized.
With regard to non-US subsidiaries, the Company will indefinitely reinvest any future earnings outside of the U.S. and currently does not have any undistributed earnings. 
New Accounting Standards
In April 2015, the FASB issued ASU 2015-03 simplifying the presentation of debt issuance costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance in the ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within fiscal years beginning after December 15, 2016. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements.
In July 2015, the FASB decided to defer by one year the effective dates of the new revenue recognition standard as provided by the ASU 2014-09, Revenue from Contracts with Customers: Summary and Amendments that Create Revenue from Contracts with Customers and Other Assets and Deferred Costs—Contracts with Customers. Early adoption is permitted for all entities, but not before the original public entity effective date. For public companies, the update will now be effective for interim and annual periods beginning after December 15, 2017. The Company is currently continuing to assess the impact that this guidance will have on its consolidated financial statements.
NOTE 3 — ACQUISITIONS AND EQUITY TRANSACTIONS
Petrotec AG
On December 24, 2014, the Company acquired 69.08% of the outstanding common shares and voting interest of Petrotec. The results of Petrotec’s operations have been included in the consolidated financial statements since that date. The Company has not completed its initial accounting for this business combination as the valuation of the real and personal property and goodwill has not been finalized.
The following table summarizes the consideration paid for Petrotec:
 
December 24, 2014
Consideration at fair value for Petrotec:
 
Common stock
$
20,022

The fair value of the 2,070,538 shares of the Company's Common Stock issued for the acquisition was determined on the basis of the closing market price of the Company's Common Stock at the date of acquisition.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date.

9



   
December 24, 2014
Assets (liabilities) acquired of Petrotec:
   
Cash
$
13,523

Accounts receivable
4,989

Inventory
9,470

Other current assets
3,583

Property, plant and equipment
25,026

Total identifiable assets acquired
56,591

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

Goodwill
369

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

The $369 of goodwill was assigned to the Biomass-based diesel segment, all of which is expected to be deductible for income tax purposes.
At December 31, 2014, the fair value of the 30.92% noncontrolling interest in Petrotec was estimated to be $8,962. The fair value of the noncontrolling interest was estimated using a combination of the income approach and a market approach.
The Company recognized $1,289 of acquisition related costs that were expensed in the last quarter of 2014. In addition, during the six months ended June 30, 2015, the Company acquired additional common shares of Petrotec as part of the cash tender offer and open market purchases for $4,171. At June 30, 2015, the Company owned 84.91% of the outstanding common shares and voting interest of Petrotec.
In April 2015, Petrotec's application to de-list its shares of common stock from the Frankfurt Stock Exchange was approved. As a result, Petrotec's shares of common stock will no longer be traded on any regulated market of any stock exchange at the end of the October 8, 2015 trading day.
NOTE 4 — MARKETABLE SECURITIES
The Company's investments in marketable securities are stated at fair value and are available-for-sale. The following table summarizes the Company's marketable securities:
 
As of June 30, 2015
 
Maturity
 
Gross Amortized Cost
 
Total Unrealized Gains
 
Total Unrealized Losses
 
Fair Value
Commercial paper
Within one year
 
$
6,979

 
$
1

 
$

 
$
6,980

Corporate bonds
Within one year
 
23,032

 

 
(27
)
 
23,005

Certificates of deposit
Within one year
 
240

 

 

 
240

Total

 
$
30,251

 
$
1

 
$
(27
)
 
$
30,225

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

 
$

 
$
(6
)
 
$
6,775

Certificates of deposit
Within one year
 
10,000

 

 
(5
)
 
9,995

Total
 
 
$
16,781

 
$

 
$
(11
)
 
$
16,770


10



NOTE 5 — INVENTORIES
Inventories consist of the following:
   
June 30, 2015
 
December 31, 2014
Raw materials
$
37,263

 
$
23,117

Work in process
3,132

 
2,879

Finished goods
54,771

 
71,512

Total
$
95,166

 
$
97,508

NOTE 6 — PREPAID EXPENSES AND OTHER ASSETS
Prepaid expense and other assets consist of the following:
   
June 30, 2015
 
December 31, 2014
Commodity derivatives and related collateral, net
$
8,093

 
$
12,938

Prepaid expenses
6,650

 
7,901

Deposits
3,948

 
4,481

RIN inventory
17,459

 
10,795

Taxes receivable
2,062

 
2,843

Other
3,731

 
4,177

Total
$
41,943

 
$
43,135

RIN inventory values were adjusted in the amounts of $695 and $1,042 at June 30, 2015 and December 31, 2014, respectively, to reflect the lower of cost or market.
Other noncurrent assets consist of the following:
 
June 30, 2015
 
December 31, 2014
Debt issuance costs (net of accumulated amortization of $1,653 and $1,474, respectively)
$
4,556

 
$
5,152

Spare parts inventory
3,410

 
3,440

Deposits
3,370

 
4,370

Other
6,242

 
6,624

Total
$
17,578

 
$
19,586

NOTE 7 — GOODWILL
The following table shows the carrying amount of goodwill by reportable segment as of December 31, 2014 and the changes in goodwill for the six months ended June 30, 2015:
 
Biomass-based diesel
 
Services
 
Total
Balance, December 31, 2014
$
172,195

 
$
16,080

 
$
188,275

Finalization of purchase accounting
3,202

 

 
3,202

Effect of exchange rate changes on goodwill
(33
)
 

 
(33
)
Balance, June 30, 2015
$
175,364

 
$
16,080

 
$
191,444

NOTE 8 — INTANGIBLE ASSETS
Intangible assets consist of the following:

11



 
June 30, 2015
 
Cost
 
Accumulated Amortization
 
Net
 
Weighted Average Remaining Life
Raw material supply agreement
$
6,073

 
$
(1,318
)
 
$
4,755

 
10.5 years
Renewable hydrocarbon diesel technology
8,300

 
(599
)
 
7,701

 
14.0 years
Ground lease
200

 
(104
)
 
96

 
6.4 years
Total amortizing intangibles
14,573

 
(2,021
)
 
12,552

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

 

 
15,956

 
 
Total intangible assets
$
30,529

 
$
(2,021
)
 
$
28,508

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

 
$
(1,113
)
 
$
4,801

 
11.0 years
Renewable hydrocarbon diesel technology
8,300

 
(323
)
 
7,977

 
14.5 years
Ground lease
200

 
(97
)
 
103

 
6.9 years
Total amortizing intangibles
14,414

 
(1,533
)
 
12,881

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

 

 
15,956

 
 
Total intangible assets
$
30,370

 
$
(1,533
)
 
$
28,837

 
 
The Company recorded intangible amortization expense of $252 and $489 for the three and six months ended June 30, 2015, respectively and $93 and $177 for the three and six months ended June 30, 2014, respectively.
The estimated intangible asset amortization expense for fiscal year 2015 through fiscal year 2021 and thereafter is as follows:
July 1, 2015 through December 31, 2015
$
515

2016
1,044

2017
1,058

2018
1,073

2019
1,088

2020
1,104

2021 and thereafter
6,670

Total
$
12,552

NOTE 9 — DEBT
The Company’s debt is as follows:
   
June 30, 2015

December 31, 2014
2.75% Convertible Senior Notes, $143,750 face amount, due in June 2019
$
123,681

 
$
121,354

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

 
100,000

REG Danville term loan, secured, variable interest rate of LIBOR plus 5%, due in December 2017
763

 
1,513

REG Newton term loan, secured, variable interest rate of LIBOR plus 4%, due in December 2018
18,548

 
19,868

REG Mason City term loan, fixed interest rate of 5%, due in July 2019
4,126

 
4,566

REG Ames term loans, secured, fixed interest rates of 3.5% and 4.25%, due in January 2018 and December 2019, respectively
4,065

 
4,226

Other
1,758

 
1,402

Total debt
$
252,941

 
$
252,929


12




Revolving Lines of Credit
 
June 30, 2015
 
December 31, 2014
Amount borrowed under revolving lines of credit
$
26,340

 
$
16,679

Maximum available to be borrowed under revolving line of credit
$
7,984

 
$
20,719

NOTE 10 — RELATED PARTY TRANSACTIONS
The Company reassesses its related parties at reporting dates and has determined that West Central Cooperative (West Central) is no longer a related party as West Central no longer holds ten percent or more of the Company’s outstanding Common Stock nor a board seat on the Company board.
Summary of Related Party Balances - Condensed Consolidated Statements of Operations
   
Three Months 
 Ended 
 June 30, 
 2015
 
Three Months 
 Ended 
 June 30, 
 2014
 
Six Months 
 Ended 
 June 30, 
 2015
 
Six Months 
 Ended 
 June 30, 
 2014
Cost of goods sold – Biomass-based diesel
$


$
14,283


$
4,542

 
$
21,429

Selling, general and administrative expenses
$


$
39


$

 
$
39

Summary of Related Party Balances - Condensed Consolidated Balance Sheets
   
As of
June 30, 2015
 
As of
December 31, 2014
Accounts receivable
$

 
$
36

Accounts payable
$

 
$
1,101

NOTE 11 — DERIVATIVE INSTRUMENTS
The Company enters into heating oil and soybean oil futures, swaps and options (commodity contract derivatives) to reduce the risk of price volatility related to anticipated purchases of feedstock raw materials and to protect gross profit margins from potentially adverse effects of price volatility on biomass-based diesel sales where prices are set at a future date. All of the Company’s commodity contract derivatives are designated as non-hedge derivatives and recorded at fair value on the Condensed Consolidated Balance Sheets. Unrealized gains and losses are recognized as a component of biomass-based diesel costs of goods sold reflected in current results of operations. As of June 30, 2015, the Company had 3,655 open commodity contracts.
The Company offsets the fair value amounts recognized for its commodity contract derivatives with cash collateral with the same counterparty under a master netting agreement. The net position is presented within prepaid and other assets in the Condensed Consolidated Balance Sheets. The following table sets forth the fair value of the Company's commodity contract derivatives and amounts that offset within the Condensed Consolidated Balance Sheets:
   
June 30, 2015
 
December 31, 2014
   
Assets
 
Liabilities
 
Assets
 
Liabilities
Gross amounts of derivatives recognized at fair value
$
4,058

 
$
594

 
$
14,901

 
$
205

Cash collateral
4,629

 

 
2,870

 
4,628

Total gross amount recognized
8,687

 
594

 
17,771

 
4,833

Gross amounts offset
(594
)
 
(594
)
 
(4,833
)
 
(4,833
)
Net amount reported in the condensed consolidated balance sheet
$
8,093

 
$

 
$
12,938

 
$


13



The following table sets forth the commodity contract derivatives gains (losses) included in the Condensed Consolidated Statements of Operations:
   
Location of Gain (Loss)
Recognized in income

Three Months 
 Ended 
 June 30, 
 2015
 
Three Months 
 Ended 
 June 30, 
 2014
 
Six Months 
 Ended 
 June 30, 
 2015
 
Six Months 
 Ended 
 June 30, 
 2014
Commodity derivatives
Cost of goods sold – Biomass-based diesel

$
(3,570
)

$
(2,744
)
 
$
(3,990
)
 
$
(3,438
)
NOTE 12 — FAIR VALUE MEASUREMENT
The fair value hierarchy prioritizes the inputs used in measuring fair value as follows:
Level 1 — Quoted prices for identical instruments in active markets.
Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.
Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
A summary of assets (liabilities) measured at fair value is as follows:
   
As of June 30, 2015
   
Total
 
Level 1
 
Level 2
 
Level 3
Money market funds
$
1,690

 
$
1,690

 
$

 
$

Certificates of deposit
240

 

 
240

 

Commercial paper
6,980

 

 
6,980

 

Commercial notes/bonds
23,005

 

 
23,005

 

Commodity contract derivatives
3,464

 
847

 
2,617

 

Contingent consideration for LS9 acquisition
(6,159
)
 

 

 
(6,159
)
Contingent consideration for Dynamic Fuels acquisition
(29,337
)
 

 

 
(29,337
)
 
$
(117
)
 
$
2,537

 
$
32,842

 
$
(35,496
)
   
As of December 31, 2014
   
Total
 
Level 1
 
Level 2
 
Level 3
Money market funds
$
302

 
$
302

 
$

 
$

Certificates of deposit
9,995

 

 
9,995

 

Commercial notes/bond
6,775

 

 
6,775

 

Commodity contract derivatives
14,696

 
6,885

 
7,811

 

Contingent consideration for LS9 acquisition
(8,624
)
 

 

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

 

 
(30,695
)
   
$
(7,551
)
 
$
7,187

 
$
24,581

 
$
(39,319
)
The following is a reconciliation of the beginning and ending balances for liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

14



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

 
$
30,695

Change in estimates included in earnings
(31
)
 
324

Settlements

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

 
29,967

Change in estimates included in earnings
(2,434
)
 
313

Settlements

 
(943
)
Balance at end of period, June 30, 2015
$
6,159

 
$
29,337

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

 
$

Fair value of contingent consideration at measurement date
17,050

 

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

 

Fair value of contingent consideration at measurement date

 
28,900

Change in estimates included in earnings
(384
)
 

Settlements

 

Balance at end of period, June 30, 2014
$
16,666

 
$
28,900

The estimated fair values of the Company’s financial instruments, which are not recorded at fair value, are as follows:
   
As of June 30, 2015
 
As of December 31, 2014
   
Asset (Liability)
Carrying
Amount
 
Fair Value
 
Asset (Liability)
Carrying
Amount
 
Fair Value
Financial liabilities:
   
 
   
 
   
 
   
Debt and lines of credit
$
(279,281
)
 
$
(276,788
)
 
$
(269,608
)
 
$
(270,331
)
The carrying amounts reported in the Condensed Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair values. Money market funds are included in cash and cash equivalents on the Condensed Consolidated Balance Sheets.
The Company used the following methods and assumptions to estimate fair value of its financial instruments:
Marketable securities: The fair value of marketable securities, which include certificates of deposit, commercial papers and commercial notes/bonds are obtained using quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets in markets that are not active; and inputs other than quoted prices, e.g., interest rates and yield curves. The Company utilizes a pricing service to assist in obtaining fair value pricing for the majority of this investment portfolio.
Commodity derivatives: The instruments held by the Company consist primarily of futures contracts, swap agreements, purchased put options and written call options. The fair value of contracts based on quoted prices of identical assets in an active exchange-traded market is reflected in Level 1. Contract fair value that is determined based on quoted prices of similar contracts in over-the-counter markets is reflected in Level 2.
Contingent consideration for acquisitions: The fair value of the LS9 contingent consideration is determined using an expected present value technique. Expected cash flows are determined using the probability weighted-average of possible outcomes that would occur should achievement of certain milestones related to the development and commercialization of products from LS9’s technology occur. There is no observable market data available to use in valuing the contingent consideration; therefore, the Company developed its own assumptions related to the expected future delivery of product enhancements to estimate the fair value of these liabilities. An 8.0% discount rate is used to estimate the fair value of the expected payments.

15



The fair value of the Dynamic Fuels contingent consideration is determined using an expected present value technique. Expected cash flows are determined using the probability weighted-average of possible outcomes that would occur should the achievement of certain milestones related to the sale of renewable hydrocarbon diesel at the REG Geismar's production facility. A 5.8% discount rate is used to estimate the fair value of the expected payments.
Debt and lines of credit: The fair value of long-term debt and lines of credit was established using discounted cash flow calculations and current market rates reflecting Level 2 inputs.
NOTE 13 — NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is presented in conformity with the two-class method required for participating securities. Participating securities include, or have included, Series B Preferred Stock and restricted stock units (RSUs).
Under the two-class method, net income is reduced for distributed and undistributed dividends earned in the current period. The remaining earnings are then allocated to Common Stock and the participating securities. The Company calculates the effects of participating securities on diluted earnings per share (EPS) using both the “if-converted or treasury stock” and "two-class" methods and discloses the method which results in a more dilutive effect. The effects of Common Stock options, warrants, stock appreciation rights and convertible notes on diluted EPS are calculated using the treasury stock method unless the effects are anti-dilutive to EPS.
The following potentially dilutive weighted average securities were excluded from the calculation of diluted net income (loss) per share attributable to common stockholders during the periods presented as the effect was anti-dilutive:
   
Three Months 
 Ended 
 June 30, 
 2015
 
Three Months 
 Ended 
 June 30, 
 2014
 
Six Months 
 Ended 
 June 30, 
 2015
 
Six Months 
 Ended 
 June 30, 
 2014
Options to purchase common stock
87,026

 
87,026

 
87,026

 
87,026

Stock appreciation rights
2,433,636

 
1,129,018

 
2,119,168

 
1,389,189

Warrants to purchase common stock

 
17,916

 

 
17,916

Convertible notes
10,838,218

 
5,419,109

 
10,838,218

 
5,419,109

Total
13,358,880

 
6,653,069

 
13,044,412

 
6,913,240

The following table presents the calculation of diluted net loss per share:
   
Three Months 
 Ended 
 June 30, 
 2015
 
Three Months 
 Ended 
 June 30, 
 2014
 
Six Months 
 Ended 
 June 30, 
 2015
 
Six Months 
 Ended 
 June 30, 
 2014
Net income (loss) attributable to the Company’s common stockholders - Basic
$
(2,001
)
 
$
10,835

 
$
(40,108
)
 
$
8,858

Plus: distributed dividends to Preferred Stockholders

 

 

 
40

Less: effect of participating securities

 

 

 
(406
)
Net income (loss) attributable to common stockholders - Dilutive
$
(2,001
)
 
$
10,835

 
$
(40,108
)
 
$
8,492

Shares:

 
 
 

 

Weighted-average shares used to compute basic net income (loss) per share
43,736,366

 
39,939,346

 
44,048,017

 
39,119,430

Adjustment to reflect stock appreciation right conversions

 
15,241

 

 
9,706

Weighted-average shares used to compute diluted net income (loss) per share
43,736,366

 
39,954,587

 
44,048,017

 
39,129,136

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

 
 
 

 

Diluted
$
(0.05
)
 
$
0.27

 
$
(0.91
)
 
$
0.22


16



NOTE 14 — REPORTABLE SEGMENTS
The Company reports its reportable segments based on products and services provided to customers, which include Biomass-based diesel, Services and Corporate and other. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company has chosen to differentiate the reportable segments based on the products and services each segment offers.
The Biomass-based diesel segment processes waste vegetable oils, animal fats, virgin vegetable oils and other feedstocks and methanol into biomass-based diesel. The Biomass-based diesel segment also includes the Company’s purchases and resale of biomass-based diesel produced by third parties. Revenues are derived from the purchases and sales of biomass-based diesel and raw material feedstocks acquired from third parties, sales of biomass-based diesel produced under toll manufacturing arrangements with third party facilities, sales of processed biomass-based diesel from Company facilities, sales of RINs, related by-products and renewable energy government incentive payments. The Services segment offers services for managing the construction of biomass-based diesel production facilities and managing ongoing operations of internal and third party plants and collects fees related to the services provided. The Company does not allocate items that are of a non-operating nature or corporate expenses to the business segments. Intersegment revenues are reported by the Services segment, which manages the construction and operations of facilities included in the Biomass-based diesel segment. Revenues are recorded by the Services segment at cost. Corporate expenses consist of corporate office expenses including compensation, benefits, occupancy and other administrative costs, including management service expenses.
The following table represents the significant items by reportable segment:
   
Three Months 
 Ended 
 June 30, 
 2015
 
Three Months 
 Ended 
 June 30, 
 2014
 
Six Months 
 Ended 
 June 30, 
 2015
 
Six Months 
 Ended 
 June 30, 
 2014
Net revenues:
   
 
   
 
   
 
   
Biomass-based diesel
$
373,733

 
$
332,859

 
$
604,547

 
$
551,871

Services
31,489

 
26,066

 
50,300

 
46,590

Intersegment revenues
(31,460
)
 
(26,007
)
 
(50,167
)
 
(46,503
)
   
$
373,762

 
$
332,918

 
$
604,680

 
$
551,958

Income (loss) before income taxes:
   
 
   
 
   
 
   
Biomass-based diesel
$
11,511

 
$
15,114

 
$
(8,588
)
 
$
26,675

Services
6

 
37

 
49

 
40

Corporate and other (a)
(14,387
)
 
(16,063
)
 
(33,532
)
 
(30,093
)
   
$
(2,870
)
 
$
(912
)
 
$
(42,071
)
 
$
(3,378
)
Depreciation and amortization expense, net:
   
 
   
 
   
 
   
Biomass-based diesel
$
5,450

 
$
2,836

 
$
10,658

 
$
5,425

Services
76

 
52

 
138

 
93

Corporate and other (a)
708

 
268

 
1,164

 
521

   
$
6,234

 
$
3,156

 
$
11,960

 
$
6,039

Cash paid for purchases of property, plant and equipment:
   
 
   
 
   
 
   
Biomass-based diesel
$
15,055

 
$
18,352

 
$
25,545

 
$
30,906

Services
403

 
631

 
1,125

 
631

Corporate and other (a)
72

 
554

 
1,037

 
773

   
$
15,530

 
$
19,537

 
$
27,707

 
$
32,310



17



   
As of
June 30, 2015
 
As of
December 31, 2014
Assets:
   
 
   
Biomass-based diesel
$
912,649

 
$
899,211

Services
21,476

 
20,750

Corporate and other (b)
219,279

 
452,927

   
$
1,153,404

 
$
1,372,888

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

Geographic Information:
The following geographic data include net sales attributed to the countries based on the location of the subsidiary making the sale and long-lived assets based on physical location. Long-lived assets represent the net book value of property, plant and equipment.
   
Three Months 
 Ended 
 June 30, 
 2015
 
Three Months 
 Ended 
 June 30, 2014
 
Six Months 
 Ended 
 June 30, 2015
 
Six Months 
 Ended 
 June 30, 2014
Net revenues:
   
 
   
 
   
 
   
United States
$
335,681

 
$
332,918

 
$
536,606

 
$
551,958

Foreign
38,081

 

 
68,074

 

 
$
373,762

 
$
332,918

 
$
604,680

 
$
551,958

   
As of June 30, 2015
 
As of December 31, 2014
Long-lived assets:
   
 
   
United States
$
478,320

 
$
468,170

Foreign
22,196

 
25,026

 
$
500,516

 
$
493,196

NOTE 15 — COMMITMENTS AND CONTINGENCIES
The Company is involved in legal proceedings in the normal course of business. The Company currently believes that any ultimate liability arising out of such proceedings will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
NOTE 16 — SUBSEQUENT EVENTS
On July 16, 2015, the Company and its wholly-owned subsidiaries, REG Services Group, LLC and REG Marketing & Logistics Group, LLC entered into Amendment No. 9 (the “Amendment”) to that certain Credit Agreement, dated as of December 23, 2011 (as further amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”) with Wells Fargo Capital Finance, LLC, which increased the total maximum revolving loan commitments thereunder from $40,000 to $60,000. In addition, among other more minor changes, the Amendment adjusted the interest rate margins, reduced the unused line fee from 0.50% to 0.375%, and increased the letter of credit sub-facility as of any date of determination from $10,000 to $25,000.
On July 31, 2015, the Company entered into an asset purchase agreement with Imperium Renewables, Inc. (“Imperium”) pursuant to which it has agreed to acquire substantially all the assets of Imperium, including a 100-million gallon nameplate capacity biomass-based diesel refinery and deepwater port terminal at the Port of Grays Harbor, Washington.
Under the terms of the agreement, the Company will pay Imperium $15,000 in cash and issue 1,500,000 shares of its Common Stock in exchange for substantially all of Imperium’s assets. In addition to these payments, the Company will pay

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either $1,750 in cash or 175,000 shares of its Common Stock at closing as elected by the Company. For two years post-closing, Imperium may receive up to a $0.05/gallon payment for biomass-based diesel produced and sold. In addition at closing, Imperium will retain its net working capital value of approximately $25,000. The Company will also assume $5,200 of Imperium’s debt from Umpqua Bank, which has agreed to provide REG Grays Harbor, LLC, a wholly-owned subsidiary of the Company with an additional loan capacity of up to $5,000 to fund capital expenditures and improvements at the Grays Harbor facility. Closing is subject to satisfaction of customary closing conditions.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements regarding Renewable Energy Group, Inc., or “we,” “our” or “the Company” that involve risks and uncertainties such as anticipated financial performance, business prospects, technological developments, products, possible strategic initiatives and similar matters. In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “predict,” “potential,” “plan,” or the negative of these terms, and similar expressions intended to identify forward-looking statements.  
These forward-looking statements include, but are not limited to, statements about facilities currently under development progressing to the construction and operational stages, including planned capital expenditures and our ability to obtain financing for such construction; existing or proposed legislation affecting the biomass-based diesel industry, including governmental incentives and tax credits; our utilization of forward contracting and hedging strategies to minimize feedstock and other input price risk; anticipated future revenue sources from our operational management and facility construction services; the expected effect of current and future environmental laws and regulations on our business and financial condition; our ability to renew existing and expired contracts at similar or more favorable terms; expected technological advances in biomass-based diesel production methods; our competitive advantage relating to input costs relative to our competitors; the market for biomass-based diesel and potential biomass-based diesel consumers; our ability to further develop our financial, managerial and other internal controls and reporting systems to accommodate future growth; expectations regarding the realization of deferred tax assets and the establishment and maintenance of tax reserves and anticipated trends; expectations regarding our expenses and sales; anticipated cash needs and estimates regarding capital requirements and needs for additional financing; and challenges in our business and the biomass-based diesel market.
These forward-looking statements are based on management’s current expectations, estimates, assumptions and projections, which are subject to risks and uncertainties. These risks and uncertainties could cause actual results to differ materially from those expected. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Risks and uncertainties include, but are not limited to, those risks discussed in Item 1A Part II in this Quarterly Report on Form 10-Q for the three and six months ended June 30, 2015. We encourage you to read this Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the accompanying condensed consolidated financial statements and related notes. Forward-looking statements contained in this report present management’s views only as of the date of this report. Except as required under applicable law, we do not intend to issue updates concerning any future revisions of management’s views to reflect events or circumstances occurring after the date of this report.
Overview
We are a leading advanced biofuels producer and are expanding into the development of renewable chemicals. We have been a leader in the biomass-based diesel industry since 1996. We utilize a nationwide production, distribution and logistics system as part of an integrated value chain model to focus on converting natural fats, oils and greases into advanced biofuels and converting diverse feedstocks into renewable chemicals. We own and operate nine biomass-based diesel, or biodiesel and renewable hydrocarbon diesel, production facilities with aggregate nameplate production capacity of 332 million gallons per year, or mmgy, as well as one fermentation facility.
We expanded into the production of renewable chemicals, additional advanced biofuels and other products through our acquisition of LS9, Inc.'s assets in January 2014 and the creation of REG Life Sciences, LLC. This industrial biotechnology business is a development stage company focusing on harnessing the power of microbial fermentation to develop and produce renewable chemicals, fuels and other products.
We sell petroleum-based heating oil and diesel fuel, which enables us to offer additional biofuel blends, while expanding our customer base. We sell heating oil and ultra-low sulfur diesel, or ULSD, at terminals throughout the northeastern U.S. as well as BioHeat® blended heating fuel at one of our existing Northeast terminal locations. We expanded our sales of additional biofuel blends to Midwest terminal locations and look to potentially expand to other areas across North America.

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We acquired a 75 mmgy nameplate capacity renewable hydrocarbon diesel biorefinery located in Geismar, Louisiana in June 2014. Our Geismar facility had been idled by its previous owner and began operating again by us in October 2014 after our completion of certain upgrades.
We also expanded our business internationally by acquiring a majority interest in Petrotec AG, or Petrotec, in December 2014. During the first quarter 2015, we acquired additional shares in Petrotec through a previously filed and closed cash tender offer. During the second quarter 2015, we acquired additional shares in Petrotec on the open market. Petrotec is a fully-integrated company utilizing more than 15,000 collection points to gather used cooking oil and other waste feedstocks to produce biomass-based diesel at its two biorefineries in Emden and Oeding, Germany.  Petrotec’s nameplate production capacity is approximately 56 mmgy (185,000 metric tons or MT).
On July 31, 2015, we entered into an agreement to acquire substantially all of the assets of Imperium Renewables, in the Port of Grays Harbor, Washington. Imperium operated one of the largest biodiesel refineries in terms of nameplate capacity in the nation. The Grays Harbor biorefinery has a 100 million gallon per year nameplate capacity. To date, its primary feedstock has been canola oil sourced nearby in the Pacific Northwest. This biorefinery is a great fit for us, since it expands our production fleet to the western coast, adds to our extensive distribution network, and is a strategically important location. The renamed REG Grays Harbor, LLC increases our North American nameplate production capacity by nearly one third, strengthening our leadership position in the industry. The facility has a deep-water port terminal, as well as rail access, which will allow feedstock and biofuel to be shipped or railed in and out.
For the three and six months ended June 30, 2015, we sold 96 and 156 million total gallons, including six and ten million gallons of biomass-based diesel that we purchased from third parties and resold, 10 and 19 million international biomass-based diesel gallons from our majority owned investment in Petrotec and four and eight million petroleum-based diesel gallons, respectively. During 2014, we sold a total of 287 million total gallons, including 42 million gallons of biomass-based diesel we purchased from third parties and resold and four million petroleum-based diesel gallons.
We derive revenues from two reportable business segments: Biomass-based diesel and Services.
Biomass-based diesel Segment
Our Biomass-based diesel segment, as reported herein, includes:
the operations of the following biomass-based diesel production facilities:
a 12 mmgy nameplate biomass-based diesel production facility located in Ralston, Iowa;
a 35 mmgy nameplate biomass-based diesel production facility located near Houston, Texas;
a 45 mmgy nameplate biomass-based diesel production facility located in Danville, Illinois;
a 30 mmgy nameplate biomass-based diesel production facility located in Newton, Iowa;
a 60 mmgy nameplate biomass-based diesel production facility located in Seneca, Illinois;
a 30 mmgy nameplate biomass-based diesel production facility located near Albert Lea, Minnesota;
a 15 mmgy nameplate biomass-based diesel production facility located in New Boston, Texas;
a 30 mmgy nameplate biomass-based diesel production facility located in Mason City, Iowa;
a 75 mmgy nameplate renewable hydrocarbon diesel production facility located in Geismar, Louisiana, since its acquisition in June 2014;
a 30 mmgy nameplate biomass-based diesel production facility located in Emden, Germany since its majority ownership of Petrotec was acquired in December 2014;
a 26 mmgy nameplate biomass-based diesel production facility located in Oeding, Germany since its majority ownership of Petrotec was acquired in December 2014; and
a demonstration scale fermentation facility located in Okeechobee, Florida since its acquisition in January 2014.
purchases and resale of biomass-based diesel, Renewable Identification Numbers, or RINs, and raw material feedstocks acquired from third parties;
our sales of biomass-based diesel produced under toll manufacturing arrangements with third party facilities using our feedstocks; and
incentives received from federal and state programs for renewable fuels.

We derive a small portion of our revenues from the sale of glycerin, free fatty acids and other co-products of the biomass-based diesel production process. In 2014 and for the three and six months ended June 30, 2015, our revenues from the sale of co-products were less than five percent of our total Biomass-based diesel segment revenues.

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RINs are used to track compliance with RFS2 using the EPA moderated transaction system, or EMTS. RFS2 allows us to attach between zero and 2.5 RINs to any gallon of biomass-based diesel we sell. When we attach 1.5 to 2.5 RINs to a sale of biomass-based diesel gallons, a portion of our selling price for a gallon of biomass-based diesel is generally attributable to RFS2 compliance; however no cost is allocated to the RINs generated by our biomass-based diesel production as RINs are a form of government incentive and not a result of the physical attributes of the biomass-based diesel production. In addition, RINs, once obtained through the production and sales of gallons of biomass-based diesel, may be separated by the acquirer and sold separately. From time to time, we may obtain these RINs from third parties for resale, and the value of these RINs is reflected in “Prepaid expenses and other assets” on our Condensed Consolidated Balance Sheets. At each balance sheet date, this RIN inventory is valued at the lower of cost or market and resulting adjustments are reflected in our cost of goods sold for the period. The cost of RINs obtained from third parties is determined using the average cost method. Because we do not allocate costs to RINs generated by our biomass-based diesel production, fluctuations in the value of our RIN inventory represent fluctuations in the value of RINs we have obtained from third parties.
In April 2015, the Company experienced a fire at its Geismar facility, resulting in the shutdown of the facility. The Company estimated fixed assets of approximately $11 million were impaired as a result of the fire. As of the date of this report, the Company has recovered an interim receivable amount of $5 million from insurance for the property damage and believes it is probable that it will recover the remaining costs under its insurance policies. The Company intends to file insurance claims under its business interruption policies as a result of the business interruption it experienced in connection with the fire at the Geismar facility. As a result, the full amount of proceeds to be received has not been determined at June 30, 2015. Our Geismar facility has been shut down since the fire and we expect will remain so while repairs are completed during the third quarter 2015. We estimate the margin or EBITDA impact during the second quarter associated with the Geismar fire was approximately negative $7 million.
Services Segment
Our Services segment includes:
biomass-based diesel facility management and operational services, whereby we provide day-to-day management and operational services to biomass-based diesel production facilities; and
construction management services, whereby we act as the construction management and general contractor for the construction of biomass-based diesel production facilities.
During recent years, we have utilized our construction management expertise internally to upgrade our facilities, such as Albert Lea, New Boston, Mason City and Newton. Currently, we are working on a $31 million upgrade to our Danville facility. We anticipate external revenues derived from construction management services will be minimal in future periods. Demand for our construction management and facility management and operational services depend on capital spending by potential customers and existing customers, which is directly affected by trends in the biomass-based diesel industry. We have not received any orders or provided services to outside parties for new facility construction services since 2009.
Factors Influencing Our Results of Operations
The principal factors affecting our operations are the market prices for biomass-based diesel and the feedstocks used to produce biomass-based diesel, as well as governmental programs designed to create incentives or requirements for the production and use of biomass-based diesel.
Governmental programs favoring biomass-based diesel production and use
Biomass-based diesel has historically been more expensive than petroleum-based diesel, excluding biomass-based diesel incentives and credits. The biomass-based diesel industry’s growth has largely been the result of federal and state programs that require or incentivize biomass-based diesel, which allows biomass-based diesel to compete with petroleum-based diesel on price.
On July 1, 2010, RFS2 was implemented, stipulating volume requirements for the amount of biomass-based diesel and other advanced biofuels that must be utilized in the United States each year. Under RFS2, Obligated Parties, including petroleum refiners and fuel importers, must show compliance with these standards. Currently, biodiesel and renewable hydrocarbon diesel RINs meets three categories of an Obligated Party’s annual renewable fuel required volume obligation, or RVO—biomass-based diesel, undifferentiated advanced biofuel and undifferentiated renewable fuel. The RFS2 program required the domestic use of one billion gallons of biomass-based diesel in 2012 and 1.28 billion gallons in 2013. On May 29, 2015, the EPA released its proposed 2014 through 2017 RFS targets whereby it proposed that the 2014, 2015, 2016 and 2017 biomass-based diesel RVO be 1.63 billion, 1.70 billion, 1.80 billion and 1.90 billion gallons, respectively. The EPA agreed to finalize the 2014 and 2015 by November 30, 2015. Additionally, within this announcement, the EPA indicated that they would finalize the RFS standards for 2016 on the same timeline.

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Volumes of biomass-based diesel produced and imported into the United States, in general, increased each year from 2010 to 2014. Based upon the recent announcement made by the EPA noted above, volumes for 2015 through 2017 is expeted to grow. According to EMTS data, 1.75 billion gallons of biomass-based diesel was produced and imported into the U.S. in 2014. In the first half of 2015, according to EMTS data, 0.80 billion gallons of biomass-based diesel was produced and imported into the U.S., compared to 0.78 billion in the first six months of 2014.
The Biodiesel Mixture Excise Tax Credit, or BTC, provided a $1.00 refundable tax credit per gallon of 100% pure biomass-based diesel, or B100, to the first blender of biomass-based diesel with petroleum-based diesel fuel. The BTC became effective January 1, 2005 and then lapsed December 31, 2009 before being reinstated retroactively for 2010 and prospectively for 2011 on December 17, 2010. The BTC again expired as of December 31, 2011 and on January 2, 2013, it was again reinstated, retroactively for 2012 and through December 31, 2013. The BTC expired again on December 31, 2013 and was retroactively reinstated for 2014 on December 19, 2014. Unlike prior years, Congress did not grant a two year reinstatement, but rather only reinstated the BTC for 2014. Accordingly, the BTC expired again on December 31, 2014. We recognized a net benefit from the BTC of $78.8 million in 2014 and expect to recognize a net benefit of $16.5 million in 2015 relating to 2014 activity. In July 2015, the Senate Finance Committee approved an amendment to the tax extenders package that would convert the $1 per gallon biodiesel tax credit to a production tax credit. The amendment would convert the credit to a $1 per gallon biodiesel producers tax credit, beginning January 1, 2016, for fuel produced by a North American producer. The next step is for the House of Representatives to address the extenders package. However, it is still uncertain whether the BTC will be reinstated and if reinstated, whether or not it would be reinstated retroactively and prospectively. The expiration of the BTC, along with any amendments that may be made if the BTC is reinstated or a similar credit is enacted, could adversely affect our financial results in the future.
Biomass-based diesel and feedstock price fluctuations
Our operating results generally reflect the relationship between the price of biomass-based diesel, including credits and incentives, like RINs and the BTC and the price of feedstocks used to produce biomass-based diesel.
Biomass-based diesel is a low carbon, renewable alternative to petroleum-based diesel fuel and is primarily sold to the end user after it has been blended with petroleum-based diesel fuel. Biomass-based diesel prices have historically been heavily influenced by petroleum-based diesel fuel prices. Accordingly, biomass-based diesel prices have generally been impacted by the same factors that affect petroleum prices, such as crude oil supply and demand balance, worldwide economic conditions, wars and other political events, OPEC production quotas, changes in refining capacity and natural disasters.
Regulatory and legislative factors also influence the price of biomass-based diesel. Biomass-based diesel RIN pricing has had a significant impact on our biomass-based diesel pricing. During 2014, the value of RINs, as reported by OPIS, have contributed to the average B100 spot price of a gallon of biodiesel, as reported by The Jacobsen, from a low of $0.64 per gallon, or 19%, in January to a high of $1.15 per gallon, or 34%, per gallon in December. There was a significant decline in RIN prices during the second and third quarters of 2014, but the prices went back up in the fourth quarter and finished the year at their peak. During the first six months of 2015, 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, from a low of $1.16 per gallon or 39% in March to a high of $1.55 per gallon or 53% in January following the release by EPA of its proposed RVO targets for 2014 through 2017.
The changes in the value of RINs during the first six months of 2015 resulted in a $0.7 million write-down to lower of cost or market on the quarter end RIN inventory acquired from third party transactions that occurred throughout the period. See “Note 6 – Prepaid Expenses and Other Assets” to our Condensed Consolidated Financial Statements. We enter into forward contracts to sell RINs and we use risk management position limits to manage RIN exposure. Because of EPA rules limiting the amount of assigned RINs we can hold at any one time, the value of these assigned RINs held in inventory has not had a material effect on margins from period to period.
During 2014, feedstock expense accounted for 80% of our production cost, while methanol and chemical catalysts expense accounted for 5% and 3% of our costs of goods sold, respectively.
Feedstocks for biomass-based diesel production, such as inedible corn oil, used cooking oil, inedible animal fat and soybean oil are commodities and market prices for them will be affected by a wide range of factors unrelated to the price of biomass-based diesel and petroleum-based diesel fuels. The following table outlines some of the factors influencing supply and price for each feedstock:


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Feedstock
      
Factors Influencing Supply and Price
Inedible Corn Oil
      
Demand for inedible corn oil from renewable fuel and other markets
 
 
Ethanol production
   
      
Export demand
   
      
Extraction system yield
 
 
Implementation of inedible corn oil separation systems into existing and new ethanol facilities
Used Cooking Oil
      
Biomass-based diesel demand
 
 
Export demand
   
      
Population
   
      
Number of restaurants in the vicinity of collection facilities and terminals which is dependent on population density
   
      
Cooking methods and eating habits, which can be impacted by the economy
Inedible Animal Fat
      
Export demand
   
      
Number of slaughter kills in the United States
   
      
Demand for inedible animal fat from other markets
Soybean Oil
      
Export demand
   
      
Weather conditions
   
      
Soybean meal demand
   
      
Farmer planting decisions
   
      
Government policies and subsidies
   
      
Crop disease
 
 
Biomass-based diesel demand
During 2014, 85% of our feedstocks were comprised of inedible corn oil, used cooking oil and inedible animal fats with the remainder coming from refined vegetable oil.
The graph below illustrates the spread between the cost of producing one gallon of biodiesel made from soybean oil to the cost of producing one gallon of biodiesel made from a lower cost feedstock from December 2011 to June 30, 2015. The results were derived using assumed conversion factors for the yield of each feedstock and subtracting the cost of producing one gallon of biodiesel made from each respective lower cost feedstock from the cost of producing one gallon of biodiesel made from soybean oil.

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(1)
Soybean oil (crude) prices are based on the monthly average of the daily closing sale price of the nearby soybean oil contract as reported by CBOT (based on 7.5 pounds per gallons).   
(2)
Used cooking oil prices are based on the monthly average of the daily low sales price of Missouri River yellow grease as reported by The Jacobsen (based on 8.5 pounds per gallon).
(3)
Inedible corn oil prices are reported as the monthly average of the daily distillers’ corn oil market values delivered to Illinois as reported by The Jacobsen (based on 8.2 pounds per gallon).
(4)
Choice white grease prices are based on the monthly average of the daily low prices of Missouri River choice white grease as reported by The Jacobsen (based on 8.0 pounds per gallon).
Our results of operations generally will benefit when the spread between biomass-based diesel prices and feedstock prices widens and will be harmed when this spread narrows. The following graph shows feedstock cost data of choice white grease and soybean oil on a per gallon basis compared to the per gallon sale price data for biodiesel, and the spread between the two, from December 2011 to June 30, 2015.
  
(1)
Biodiesel prices are based on the monthly average of the midpoint of the high and low prices of B100 (Upper Midwest) as reported by The Jacobsen.
(2)
Soybean oil (crude) prices are based on the monthly average of the daily closing sale price of the nearby soybean oil contract as reported by CBOT (based on 7.5 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.
Energy prices have continued to decline during the first half of 2015, which has been mainly driven by a decrease in crude oil prices. Feedstock prices traded in a sideways-pattern in the first half of 2015 and trended higher toward the end of the second quarter. US cattle slaughter numbers continued at a historically low rate as a result of the two year drought in the southern plains. During the first half of 2015, hog slaughter numbers continued to increase year over year. A record corn and soybean harvest coupled with lower energy prices helped push feedstock prices lower in the last-half of 2014. From July 1, 2015 through the date of this report, energy prices have declined greater than feedstock prices on a per gallon basis.

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Risk Management
The profitability of the biomass-based diesel production business largely depends on the spread between prices for feedstocks and biomass-based diesel, including RINs, each of which is subject to fluctuations due to market factors and each of which is not significantly correlated. Adverse price movements for these commodities directly affect our operating results. We attempt to protect operating margins by entering into risk management contracts that mitigate price volatility of our feedstocks, such as inedible corn oil, used cooking oil, inedible animal fat, soybean oil and energy prices. We create offsetting positions by using a combination of forward fixed-price physical purchases and sales contracts on feedstock and biomass-based diesel, including risk management futures contracts, swaps and options primarily on heating oil and soybean oil; however, the extent to which we engage in risk management activities varies substantially from time to time, and from feedstock to feedstock, depending on market conditions and other factors. In making risk management decisions, we utilize research conducted by outside firms to provide additional market information in addition to our internal research and reviews.
Inedible corn oil, used cooking oil, inedible animal fat and soybean oil are the primary feedstocks we used to produce biodiesel in 2014 and the first six months of 2015. We utilize several varieties of inedible animal fat, such as beef tallow, choice white grease and poultry fat derived from livestock. There is no established futures market for these lower cost feedstocks. The purchase prices for lower cost feedstocks are generally set on a negotiated flat price basis or spread to a prevailing market price reported by the USDA price sheet or The Jacobsen. Our limited ability to risk manage against changing inedible corn oil, used cooking oil and inedible animal fat prices have involved entering into futures contracts, swaps or options on other commodity products, such as soybean oil or heating oil. However, these products do not always experience the same price movements as lower cost feedstocks, making risk management for these feedstocks challenging. We manage feedstock supply risks related to biomass-based diesel production in a number of ways, including, where available, through long-term supply contracts. The purchase price for soybean oil under these contracts may be indexed to prevailing CBOT soybean oil market prices with a negotiated market basis. We utilize futures contracts, swaps and options to risk manage, or lock in, the cost of portions of our future feedstock requirements generally for varying periods up to one year.
Our ability to mitigate our risk of falling biomass-based diesel prices is limited. We have entered into forward contracts to supply biomass-based diesel. However, pricing under these forward sales contracts generally has been indexed to prevailing market prices, as fixed price contracts for long periods on acceptable terms have generally not been available. There is no established market for biomass-based diesel futures in the United States. Our efforts to hedge against falling biomass-based diesel prices generally involve entering into futures contracts, swaps and options on other commodity products, such as diesel fuel and heating oil. However, price movements on these products are not highly correlated to price movements of biomass-based diesel.
We generate 1.5 to 1.7 biomass-based diesel RINs for each gallon of biomass-based diesel we produce and sell. We also obtain RINs from third party transactions which we hold for resale. There is no established futures market for RINs, which severely limits the ability to risk manage the price of RINs. We enter into forward contracts to sell RINs and we use risk management position limits to manage RIN exposure.
As a result of our strategy, we frequently have gains or losses on derivative financial instruments that are conversely offset by losses or gains on forward fixed-price physical contracts on feedstocks and biomass-based diesel or inventories. Gains and losses on derivative financial instruments are recognized each period in operating results while corresponding gains and losses on physical contracts are generally not recognized until quantities are delivered or title transfers. Our results of operations are impacted when there is a period mismatch of recognized gains or losses associated with the change in fair value of derivative instruments used for risk management purposes at the end of the reporting period but the purchase or sale of feedstocks or biomass-based diesel has not yet occurred resulting in the offsetting gain or loss will be recognized in a later accounting period.
We recorded risk management losses of $3.6 million and $4.0 million from our derivative financial instrument activity for the three and six months ended June 30, 2015, respectively, compared to losses of $2.7 million and $3.4 million for the three and six months ended June 30, 2014, respectively. Changes in the value of these futures, swaps or options instruments are recognized in current income or loss. Over the first six months of 2015, we had risk management losses of approximately $0.03 per gallon sold. Over the last three years, risk management gains have represented income of approximately $0.07 per gallon sold.
Seasonality
Our operating results are influenced by seasonal fluctuations in the demand for biodiesel. Our biodiesel sales tend to decrease during the winter season due to blending concentrations being reduced to adjust for performance during colder weather. Colder seasonal temperatures can cause the higher cloud point biodiesel we make from inedible animal fats to become cloudy and eventually gel at a higher temperature than petroleum-based diesel or lower cloud point biodiesel made from soybean oil, canola oil or inedible corn oil. Such gelling can lead to plugged fuel filters and other fuel handling and

25



performance problems for customers and suppliers. Reduced demand in the winter for our higher cloud point biodiesel can result in excess supply of such higher cloud point biodiesel and lower prices for such biodiesel. In addition, most of our production facilities are located in colder Midwestern states in proximity to feedstock origination and our costs of shipping increases as more biodiesel is transported to warmer climate states during winter.
RIN prices may also be subject to seasonal fluctuations. A RIN is dated for the calendar year in which it is generated. Since only 20% of an Obligated Party's annual RVO can be satisfied by prior year RINs, most RINs must come from biofuel produced or imported during the RVO year. As a result, RIN prices can be expected to decrease as the calendar year progresses if the RIN market is oversupplied compared to that year's RVO and can be expected to increase if it is undersupplied.
Industry capacity and production
Our operating results are influenced by our industry’s capacity and production, including in relation to RFS2 consumption requirements. Consumption of biomass-based diesel in 2011, 2012 and 2013 was in excess of a continued expanding RFS2 volume requirements. As reported by EMTS, biomass-based diesel RIN generation was 1.78 billion gallons in 2013 when the RVO for biomass-based diesel was 1.28 billion gallons. On May 29, 2015, the EPA released its proposed 2014 through 2017 RFS targets whereby it proposed that the 2014, 2015, 2016 and 2017 biomass-based diesel RVO be 1.63 billion, 1.70 billion, 1.80 billion and 1.90 billion gallons, respectively. The EPA agreed to finalize the 2014 and 2015 by November 30, 2015. Additionally, within this announcement, the EPA indicated that they would finalize the RFS standards for 2016 on the same timeline. Biomass-based diesel consumption, as reported by EMTS, was flat when comparing 2013 gallons produced and imported to the 1.75 billion gallons produced and imported during 2014. In the first six months of 2015, according to EMTS data, 0.80 billion gallons of biomass-based diesel was produced and imported into the U.S., which was similar to the amounts in the first six months of 2014.
During 2013 and 2014, the amount of imported gallons qualifying under RFS2 has increased. Imported gallons will likely make up a growing percentage of the RVO, as the EPA has approved a plan to allow Argentinian biodiesel made from soybean oil to qualify for RINs generation.
Under RFS2, Obligated Parties are entitled to satisfy up to 20% of their annual requirement with prior year RINs. We saw a decline in RIN prices in the first three quarters of 2014, as production rates exceeded the then proposed, yet delayed issuance and not yet finalized, RVO target. During 2015, according to OPIS, RINs prices began the year at $0.92 per RIN, declined in the first few months, went back up with the EPA's release of the proposed RVO targets for 2014 to 2016 and finally closed June lower at $0.83 per RIN.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, equities, revenues and expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for judgments we make about the carrying values of assets and liabilities that are not readily apparent from other sources. Because these estimates can vary depending on the situation, actual results may differ from the estimates.
We have disclosed under the heading “Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2014 the critical accounting policies which materially affect our financial statements. There have been no material changes from the critical accounting policies previously disclosed other than those noted below. You should carefully consider the critical accounting policies set forth in our Annual Report on Form 10-K along with information described below.
Goodwill asset valuation. While goodwill is not amortized, it is subject to periodic reviews for impairment. As required by ASC Topic 350, Intangibles-Goodwill and Other, we review the carrying value of goodwill for impairment annually on July 31 or when we believe impairment indicators exist. Goodwill is allocated and reviewed for impairment by reporting units. The analysis is based on a comparison of the carrying value of the reporting unit to its fair value, determined utilizing a discounted cash flow, or DCF, methodology and consideration of a market approach. Additionally, we review the carrying value of goodwill whenever events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. Changes in estimates of future cash flows caused by items such as unforeseen events or sustained unfavorable changes in market conditions could negatively affect the fair value of the reporting unit’s goodwill asset and result in an impairment charge.
We engaged an independent external valuation specialist to provide assistance in measuring the fair value of our Biomass-based diesel and Services reporting units using an income approach. The income approach uses a discounted cash flow, or DCF,

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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 reporting unit were used to determine the reporting unit’s fair value.
The annual impairment tests as of July 31, 2014 determined that the fair value at the Biomass-based diesel reporting unit exceeded its value by approximately 7% and the Services reporting unit exceeded its value by approximately 66%. We also reviewed goodwill recorded from the acquisitions of LS9, Inc., Syntroleum Corporation and Dynamic Fuels, LLC at July 31, 2014 and determined no impairment was needed. No impairment of goodwill was recorded at June 30, 2015 or during 2014. There can be no assurances that future circumstances and/or conditions will not change, which could result in an impairment of goodwill. Such circumstances and/or conditions could include, but are not limited to, further decline in the price of our Common Stock, deterioration in our financial condition or results of operations, and/or adverse changes in the fair value of our assets and liabilities. Management continues to monitor circumstances and conditions for events that could result in an impairment of our goodwill.
Results of Operations
Three and six months ended June 30, 2015 and 2014
Set forth below is a summary of certain financial information (dollars in thousands and gallons in millions except for per gallon data) for the periods indicated:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014