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, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-35397
RENEWABLE ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)
   
Delaware
   
26-4785427
(State of other jurisdiction of
incorporation or organization)
   
(I.R.S. Employer
Identification No.)
   
   
416 South Bell Avenue Ames, Iowa
   
50010
(Address of principal executive offices)
   
(Zip code)
(515) 239-8000
(Registrant’s telephone number, including area code)
      

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
   
Large accelerated filer  ¨
   
Accelerated filer  x
   
   
Non-accelerated filer  ¨
   
Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO   x
As of July 29, 2016, the registrant had 38,679,201 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,
2016
 
December 31,
2015
ASSETS
   

 
   

CURRENT ASSETS:
   

 
   

Cash and cash equivalents
$
74,078

 
$
47,081

Accounts receivable, net
97,493

 
310,731

Inventories
129,849

 
85,890

Prepaid expenses and other assets
73,069

 
31,882

Total current assets
374,489

 
475,584

Property, plant and equipment, net
602,409

 
574,584

Goodwill
16,080

 
16,080

Intangible assets, net
30,301

 
30,941

Investments
12,181

 
8,797

Other assets
12,215

 
11,819

Restricted cash
105,815

 
105,815

TOTAL ASSETS
$
1,153,490

 
$
1,223,620

LIABILITIES AND EQUITY
   

 
   

CURRENT LIABILITIES:
   

 
   

Lines of credit
$
48,603

 
$
23,149

Current maturities of long-term debt
7,959

 
5,206

Accounts payable
83,343

 
236,817

Accrued expenses and other liabilities
25,978

 
28,466

Deferred revenue
2,090

 
333

Total current liabilities
167,973

 
293,971

Unfavorable lease obligation
16,429

 
17,343

Deferred income taxes
18,779

 
19,186

Contingent consideration for acquisitions
34,366

 
26,949

Convertible debt conversion liability
26,713

 

Long-term debt (net of debt issuance costs of $6,748 and $4,105, respectively)
306,207

 
247,251

Other liabilities
4,724

 
4,910

Total liabilities
575,191

 
609,610

COMMITMENTS AND CONTINGENCIES


 


EQUITY:
   

 
   

Common stock ($.0001 par value; 300,000,000 shares authorized; 39,179,201 and 43,837,714 shares outstanding, respectively)
5

 
4

Common stock—additional paid-in-capital
477,169

 
474,367

Retained earnings
178,352

 
169,680

Accumulated other comprehensive loss
(3,598
)
 
(4,009
)
Treasury stock (8,617,567 and 3,178,372 shares outstanding, respectively)
(76,219
)
 
(28,762
)
Total equity attributable to the Company's shareholders
575,709

 
611,280

              Non-controlling interest
2,590

 
2,730

                       Total equity
578,299

 
614,010

TOTAL LIABILITIES AND EQUITY
$
1,153,490

 
$
1,223,620

See notes to condensed consolidated financial statements.

1



RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share amounts)
 
Three months ended
 
Six months ended
   
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
REVENUES:
   
 
   
 
   
 
   
Biomass-based diesel sales
$
460,115

 
$
366,455

 
$
707,279

 
$
587,481

Biomass-based diesel government incentives
97,153

 
7,278

 
155,554

 
17,066

   
557,268

 
373,733

 
862,833

 
604,547

Other revenue
1,033

 
29

 
1,062

 
133

   
558,301

 
373,762

 
863,895

 
604,680

COSTS OF GOODS SOLD:
   
 
   
 
   
 
   
Biomass-based diesel
533,439

 
357,832

 
813,925

 
600,342

Biomass-based diesel—related parties

 

 

 
4,542

Other costs of goods sold

 
23

 
2

 
84

   
533,439

 
357,855

 
813,927

 
604,968

GROSS PROFIT (LOSS)
24,862

 
15,907

 
49,968

 
(288
)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
20,850

 
15,359

 
40,626

 
32,034

RESEARCH AND DEVELOPMENT EXPENSE
4,427

 
4,390

 
8,353

 
8,250

GAIN ON INVOLUNTARY CONVERSION
(997
)
 

 
(4,540
)
 

INCOME (LOSS) FROM OPERATIONS
582

 
(3,842
)
 
5,529

 
(40,572
)
OTHER INCOME (EXPENSE), NET:
   
 
   
 
   
 
   
Change in fair value of contingent consideration
(3,571
)
 
2,121

 
(3,556
)
 
1,828

Change in fair value of convertible debt conversion liability
13,432

 

 
13,432

 

Gain on debt extinguishment
2,152

 

 
2,152

 

Other income (loss), net
154

 
1,779

 
67

 
2,344

Interest expense
(3,738
)
 
(2,928
)
 
(7,049
)
 
(5,671
)
   
8,429

 
972

 
5,046

 
(1,499
)
INCOME (LOSS) BEFORE INCOME TAXES
9,011

 
(2,870
)
 
10,575

 
(42,071
)
INCOME TAX (EXPENSE) BENEFIT
(1,887
)
 
707

 
(1,765
)
 
1,604

NET INCOME (LOSS)
7,124

 
(2,163
)
 
8,810

 
(40,467
)
LESS—NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST
108

 
(162
)
 
138

 
(359
)
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY
7,016

 
(2,001
)
 
8,672

 
(40,108
)
LESS—EFFECT OF PARTICIPATING SHARE-BASED AWARDS
(149
)
 

 
(155
)
 

NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY’S COMMON STOCKHOLDERS
$
6,867

 
$
(2,001
)
 
$
8,517

 
$
(40,108
)
NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
   
 
   
 
   
 
   
BASIC
$
0.16

 
$
(0.05
)
 
$
0.20

 
$
(0.91
)
DILUTED
$
0.16

 
$
(0.05
)
 
$
0.20

 
$
(0.91
)
WEIGHTED AVERAGE SHARES USED TO COMPUTE NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
   
 
   
 
   
 
   
BASIC
42,407,888

 
43,736,366

 
43,153,486

 
44,048,017

DILUTED
42,418,841

 
43,736,366

 
43,158,601

 
44,048,017

See notes to condensed consolidated financial statements.

2



RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands)
 
Three months ended
 
Six months ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
Net income (loss)
$
7,124

 
$
(2,163
)
 
$
8,810

 
$
(40,467
)
Unrealized gains (losses) on marketable securities, net of taxes of $0 and $0, respectively

 
(24
)
 

 
(15
)
Foreign currency translation adjustments
(1,352
)
 
765

 
312

 
(3,876
)
Other comprehensive income (loss)
(1,352
)
 
741

 
312

 
(3,891
)
Comprehensive income (loss)
5,772

 
(1,422
)
 
9,122

 
(44,358
)
Less—Comprehensive income (loss) attributable to noncontrolling interest
(184
)
 
(570
)
 
(99
)
 
(570
)
Comprehensive income (loss) attributable to the Company
$
5,956

 
$
(852
)
 
$
9,221

 
$
(43,788
)
See notes to condensed consolidated financial statements.


3



RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
(in thousands, except share amounts)
   
Company Stockholders’ Equity
 
 
 
   
   
Common
Stock
Shares
 
Common
Stock
 
Common Stock -
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Loss
 
Treasury
Stock
 
Noncontrolling Interest
 
Total
BALANCE, January 1, 2015
44,422,881

 
$
4

 
$
453,109

 
$
321,083

 
$
(11
)
 
$
(4,412
)
 
$
8,889

 
$
778,662

Issuance of common stock
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
)
Acquisition of noncontrolling interest

 

 

 

 

 

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

 

 
2,236

 

 

 

 

 
2,236

Other comprehensive loss

 

 

 

 
(3,321
)
 

 
(570
)
 
(3,891
)
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

BALANCE, January 1, 2016
43,837,714

 
$
4

 
$
474,367

 
$
169,680

 
$
(4,009
)
 
$
(28,762
)
 
$
2,730

 
$
614,010

Issuance of common stock
33,973

 

 
316

 

 

 

 

 
316

Issuance of common stock in acquisition
500,000

 
1

 
4,049

 

 

 

 

 
4,050

Conversion of restricted stock units to common stock (net of 68,424 shares of treasury stock purchased)
178,285

 

 

 

 

 
(752
)
 

 
(752
)
Partial termination of capped call options

 

 
1,588

 

 

 

 

 
1,588

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

 

 
(5,085
)
 

 

 

 

 
(5,085
)
Treasury stock purchases
(5,370,771
)
 

 

 

 

 
(46,705
)
 

 
(46,705
)
Acquisition of noncontrolling interest

 

 

 

 

 

 
(179
)
 
(179
)
Stock compensation expense

 

 
1,934

 

 

 

 

 
1,934

Other comprehensive income (loss)

 

 

 

 
411

 

 
(99
)
 
312

Net income

 

 

 
8,672

 

 

 
138

 
8,810

BALANCE, June 30, 2016
39,179,201

 
$
5

 
$
477,169

 
$
178,352

 
$
(3,598
)
 
$
(76,219
)
 
$
2,590

 
$
578,299

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, 2016
 
June 30, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
   
 
   
Net income (loss)
$
8,810

 
$
(40,467
)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
   
 
   
Depreciation expense
15,498

 
11,747

Amortization expense of assets and liabilities, net
354

 
213

Gain on involuntary conversion
(4,540
)
 

Accretion of convertible note discount
2,462

 
2,327

Amortization of marketable securities

 
103

Change in fair value of contingent consideration
3,556

 
(1,828
)
Change in fair value of convertible debt conversion liability
(13,432
)
 

Gain on debt extinguishment
(2,152
)
 

Provision for doubtful accounts
(34
)
 
(986
)
Stock compensation expense
1,934

 
2,236

Deferred tax expense (benefit)
1,709

 
(1,749
)
Other operating activities
(504
)
 
(11
)
Changes in asset and liabilities, net of effects from acquisitions:
   
 
   
Accounts receivable, net
213,219

 
246,260

Inventories
(42,240
)
 
1,473

Prepaid expenses and other assets
(41,158
)
 
(987
)
Accounts payable
(150,093
)
 
(141,340
)
Accrued expenses and other liabilities
(1,686
)
 
(10,028
)
Deferred revenue
1,757

 
(16,680
)
Net cash flows provided by (used in) operating activities
(6,540
)
 
50,283

CASH FLOWS FROM INVESTING ACTIVITIES:
   
 
   
Cash paid for marketable securities

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

 
38,597

Cash receipts for involuntary conversion
4,540

 

Transfer into restricted cash

 
(2,000
)
Transfer out of restricted cash

 
12,845

Cash paid for purchase of property, plant and equipment
(27,467
)
 
(27,707
)
Cash paid for acquisitions and additional interests, net of cash acquired
(12,720
)
 
(4,171
)
Cash paid for investments
(3,249
)
 

Other investing activities
376

 

Net cash flows used in investing activities
(38,520
)
 
(34,589
)
CASH FLOWS FROM FINANCING ACTIVITIES:
   
 
   
Net borrowings on revolving line of credit
21,373

 
9,661

Borrowings on other lines of credit
4,081

 

Cash received from notes payable
163,408

 
411

Cash paid on notes payable
(64,530
)
 
(2,673
)
Cash paid for debt issuance costs
(5,329
)
 
(365
)
Cash paid for treasury stock
(45,869
)
 
(12,118
)
Cash paid for contingent consideration settlement
(1,390
)
 
(1,995
)
Net cash flows provided by (used in) financing activities
71,744

 
(7,079
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
26,684

 
8,615

CASH AND CASH EQUIVALENTS, Beginning of period
47,081

 
63,516

Effect of exchange rate changes on cash
313

 
(1,153
)
CASH AND CASH EQUIVALENTS, End of period
$
74,078

 
$
70,978

(continued)

5




RENEWABLE ENERGY GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
Six months ended
 
June 30, 2016
 
June 30, 2015
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
   
 
   
Cash paid (received) for income taxes
$
244

 
$
(44
)
Cash paid for interest
$
3,976

 
$
3,372

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
   
 
   
Amounts included in period-end accounts payable for:
   
 
   
Purchases of property, plant and equipment
$
4,135

 
$
8,812

Debt issuance cost
$
34

 
$
14

Incentive stock liability for raw material supply agreement
$

 
$
159

Issuance of common stock for acquisitions
$
4,050

 
$

Contingent consideration for acquisitions
$
4,500

 
$

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

 
$
11,027

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



6



RENEWABLE ENERGY GROUP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For The Three and Six Months Ended June 30, 2016 and 2015
(unaudited)
(in thousands, except share and per share amounts)
NOTE 1 — BASIS OF PRESENTATION AND NATURE OF THE BUSINESS
The condensed consolidated financial statements have been prepared by Renewable Energy Group, Inc. and its subsidiaries (the "Company" or "REG"), pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted as permitted by such rules and regulations. All adjustments, consisting of normal recurring adjustments, have been included. Management believes that the disclosures are adequate to present fairly the financial position, results of operations and cash flows at the dates and for the periods presented. It is suggested that these interim financial statements be read in conjunction with the consolidated financial statements and the notes thereto appearing in the Company’s latest annual report on Form 10-K filed on March 14, 2016. Results for interim periods are not necessarily indicative of those to be expected for the fiscal year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates.
As of June 30, 2016, the Company operates a network of twelve biorefineries in North America, which includes eleven operating biomass-based diesel production facilities with aggregate nameplate production capacity of 452 million gallons per year, or mmgy, along with a fermentation facility. The Company's network includes the addition of a 20-million gallon nameplate capacity biomass-based diesel refinery located in DeForest, Wisconsin resulting from its acquisition of the biorefinery and related assets of Sanimax Energy, LLC ("Sanimax Energy") in March 2016. A number of these plants are “multi-feedstock capable” which allows them to use a broad range of lower cost feedstocks, such as inedible corn oil, used cooking oil and inedible animal fats in addition to vegetable oils, such as soybean oil and canola oil.
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 mixture excise tax credit (the "BTC") is in effect throughout 2016 and will expire on December 31, 2016. It is uncertain whether the BTC will be reinstated thereafter. The expiration, along with other amendments of any one or more of 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, 2015. There have been no material changes from the policies previously disclosed other than those noted below.
Accounts Receivable
Accounts receivable are carried at invoiced amount less allowance for doubtful accounts. Management estimates the allowance for doubtful accounts based on existing economic conditions, the financial conditions of customers, and the amount and age of past due accounts. Receivables are considered past due if full payment is not received by the contractual due date. Past due accounts are generally written off against the allowance for doubtful accounts only after reasonable collection attempts have been exhausted. Through June 30, 2016, the Company received approximately $242,139 related to the 2015 biodiesel mixture excise tax credit, which results in $1,650 remaining as outstanding receivables at June 30, 2016.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost less accumulated depreciation. Maintenance and repairs are expensed as incurred. Depreciation expense is computed on a straight-line method based upon estimated useful lives of the assets.
In April 2015, the Company experienced a fire at its Geismar facility, resulting in the shutdown of the facility. The Company estimated fixed assets with a net book value of approximately $11,027 were impaired as a result of the fire. At June 30, 2016, the Company has received property insurance proceeds of $17,600, of which $15,567 was related to the property damage. The excess of the property insurance proceeds over the net book value of the impaired assets, $997 and

7



$4,540, was recorded as gain on involuntary conversion on the Condensed Consolidated Statements of Operations during the three and six months ended June 30, 2016, respectively.
In September 2015, another fire occurred at the Geismar facility. The Company estimated fixed assets with a net book value of approximately $1,414 were impaired by the September fire. The Company believes it is probable that it will recover all the net book value of the assets damaged by the fire under its insurance policies. As such, a receivable was recorded as an offset to the estimated impairment loss. No impact on earnings was recognized.
Goodwill
Goodwill is tested for impairment annually on July 31 or when impairment indicators exist. Goodwill is allocated and
tested for impairment by reporting units. At June 30, 2016 and December 31, 2015, the Company had goodwill in the Services reporting unit. The annual impairment test at July 31, 2015 determined that the fair value of the Services reporting unit exceeded its carrying value by approximately 21%. The interim goodwill impairment test as of October 31, 2015 determined that the fair value of the Services reporting unit exceeded its carrying value by 24%. There have been no impairment indicators in the first six months of 2016 that would indicate an additional assessment should be performed.
Convertible Debt
In June 2016, the Company issued $152,000 aggregate principal amount of 4% convertible senior notes due 2036 (the "2036 Convertible Notes"). The Company may not elect to issue shares of common stock upon conversion of the 2036 Convertible Notes to the extent such election would result in the issuance of more than 19.99% of the common stock outstanding immediately before the issuance of the 2036 Convertible Notes until the Company receives stockholder approval for such issuance. As a result, the embedded conversion option is accounted for as an embedded derivative liability. This liability is recorded at fair value, and a $13,432 fair value adjustment was recorded in the second quarter of 2016. The Company expects to continue marking the embedded conversion option to market until shareholders authorize additional common shares at its Annual Shareholder Meeting in May 2017. See "Note 7 - Debt" for a further description of the transaction.
Share Repurchase Programs
In February 2015, the Company's board of directors approved a share repurchase program of up to $30,000 of the Company's shares of common stock. Shares may be repurchased from time to time in open market transactions, privately negotiated transactions or by other means. The Company accounts for share repurchases using the cost method. Under this method, the cost of the share repurchase is recorded entirely in treasury stock, a contra equity account. During the three months ended June 30, 2016, the Company used all of the remaining available funds of approximately $870 authorized under this program to repurchase 90,654 shares, resulting in total repurchases in the amount of $6,687 for the six months ended June 30, 2016 under this share repurchase program.
In March 2016, the Company's board of directors approved a repurchase program of up to $50,000 of the Company's
shares of common stock and/or convertible notes, in effect through March 5, 2018. Under the program, which is in addition to the $30,000 common stock repurchase program announced in February 2015, the Company may repurchase shares or convertible notes from time to time in open market transactions, privately negotiated transactions or by other means. The timing and amount of repurchase transactions will be determined by the Company's management based on its evaluation of market conditions, share price, bond price, legal requirements and other factors. During the three and six months ended June 30, 2016, the Company repurchased 4,442,823 shares of Common Stock for $38,429 under this program.
New Accounting Standards
In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Consideration (Reporting Revenue Gross versus Net)" that clarifies how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions. The guidance also re-frames the indicators to focus on evidence that an entity is acting as a principal rather than an agent. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is evaluating the impact this guidance will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”. The amendments in this updated guidance include changes to simplify the codification for several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. For public entities, this guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted. The Company is evaluating the impact this new guidance will have on its consolidated financial statements.

8



In May 2016, the FASB issued ASU 2016-12, which amends certain aspects of the new revenue standard, ASU 2014-09. The amendments address issues such as collectability; presentation of sales tax and other similar taxes collected from customers; noncash consideration; contract modifications and completed contracts at transition; and transition technical correction. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company is evaluating the impact this guidance will have on its consolidated financial statements.
NOTE 3 — ACQUISITIONS
Sanimax Energy, LLC
On March 15, 2016, the Company acquired fixed assets and inventory from Sanimax Energy, including the 20 mmgy nameplate capacity biomass-based refinery in DeForest, Wisconsin. The Company has not completed its initial accounting of this business combination as the valuation of the real and personal property has not been finalized as of June 30, 2016.
The following table summarizes the consideration paid for the acquisition from Sanimax Energy:
 
March 15, 2016
Consideration at fair value for acquisition from Sanimax:
 
Cash
$
12,541

Common stock
4,050

Contingent consideration
4,500

Total
$
21,091

The fair value of the 500,000 shares of Common Stock issued was determined using the closing market price of the Company's common shares at the date of acquisition.
REG Madison may pay contingent consideration of up to $5,000 (Earnout Payments) over a seven-year period after the acquisition, subject to achievement of certain milestones related to the biomass-based diesel gallons produced and sold by REG Madison. The Earnout Payments are payable in cash and cannot exceed $1,700 in any one year period beginning March 15, 2016 through 2023 and up to $5,000 in aggregate. As of June 30, 2016, the Company has recorded a contingent liability of $4,427, approximately $1,276 of which has been classified as current on the Condensed Consolidated Balance Sheets.
The following table summarizes the estimated fair values of the assets acquired at the acquisition date.
   
March 15, 2016
Assets acquired from Sanimax Energy:
   
Inventory
$
1,591

Property, plant and equipment
19,500

Net identifiable assets acquired
$
21,091


The following pro forma condensed combined results of operations assume that the acquisition from Sanimax Energy was completed as of January 1, 2015.
 
Three Months 
 Ended 
 June 30, 
 2016
 
Three Months 
 Ended 
 June 30, 
 2015
 
Six Months 
 Ended 
 June 30, 
 2016
 
Six Months 
 Ended 
 June 30, 
 2015
Revenues
$
558,301

 
$
378,571

 
$
872,321

 
$
614,298

Net income (loss)
6,933

 
(3,534
)
 
8,599

 
(43,174
)
Basic net income (loss) per share
$
0.16

 
$
(0.08
)
 
$
0.20

 
$
(0.97
)
NOTE 4 — INVENTORIES
Inventories consist of the following:

9



   
June 30, 2016
 
December 31, 2015
Raw materials
$
54,803

 
$
28,989

Work in process
3,723

 
3,014

Finished goods
71,323

 
53,887

Total
$
129,849

 
$
85,890

NOTE 5 — OTHER ASSETS
Prepaid expense and other assets consist of the following:
   
June 30, 2016
 
December 31, 2015
Commodity derivatives and related collateral, net
$
17,273

 
$
10,097

Prepaid expenses
13,323

 
8,504

Deposits
2,921

 
3,824

RIN inventory
34,323

 
5,656

Taxes receivable
2,338

 
1,814

Other
2,891

 
1,987

Total
$
73,069

 
$
31,882

RIN inventory values were adjusted in the amounts of $2,671 and $3,027 at June 30, 2016 and December 31, 2015, respectively, to reflect the lower of cost or net realizable value.
Other noncurrent assets consist of the following:
 
June 30, 2016
 
December 31, 2015
Spare parts inventory
$
2,922

 
$
2,922

Deposits
2,280

 
2,370

Other
7,013

 
6,527

Total
$
12,215

 
$
11,819

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

 
$
(1,762
)
 
$
4,468

 
9.5 years
Renewable hydrocarbon diesel technology
8,300

 
(1,153
)
 
7,147

 
13.0 years
Ground lease
200

 
(119
)
 
81

 
5.3 years
Acquired customer relationships
2,900

 
(251
)
 
2,649

 
9.1 years
Total amortizing intangibles
17,630

 
(3,285
)
 
14,345

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

 

 
15,956

 
 
Total intangible assets
$
33,586

 
$
(3,285
)
 
$
30,301

 
 

10



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

 
$
(1,551
)
 
$
4,679

 
10.0 years
Renewable hydrocarbon diesel technology
8,300

 
(876
)
 
7,424

 
13.5 years
Ground lease
200

 
(112
)
 
88

 
5.9 years
Acquired customer relationships
2,900

 
(106
)
 
2,794

 
9.6 years
Total amortizing intangibles
17,630

 
(2,645
)
 
14,985

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

 

 
15,956

 
 
Total intangible assets
$
33,586

 
$
(2,645
)
 
$
30,941

 
 
The Company recorded intangible amortization expense of $323 and $640 for the three and six months ended June 30, 2016, respectively, and $252 and $489 for the three and six months ended June 30, 2015, respectively.
The estimated intangible asset amortization expense for the remainder of fiscal year 2016 through fiscal year 2022 and thereafter is as follows:
July 1, 2016 through December 31, 2016
$
648

2017
1,302

2018
1,309

2019
1,315

2020
1,322

2021
1,328

2022 and thereafter
7,121

Total
$
14,345

NOTE 7 — DEBT
The Company’s debt is as follows:
   
June 30, 2016
 
December 31, 2015
4.00% Convertible Senior Notes, $152,000 face amount, due in June 2036
$
112,068

 
$

2.75% Convertible Senior Notes, $79,838 face amount, due in June 2019
71,351

 
126,053

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 4%, due in December 2017
9,413

 

REG Newton term loan, secured, variable interest rate of LIBOR plus 4%, due in December 2018
14,921

 
16,800

REG Mason City term loan, fixed interest rate of 5%, due in July 2019
3,213

 
3,675

REG Ames term loans, secured, fixed interest rates of 3.5% and 4.25%, due in January 2018 and December 2019, respectively
3,735

 
3,901

REG Grays Harbor term loan, variable interest of minimum of 3.5% or Prime Rate plus 0.25%, due in May 2022
5,225

 
5,225

Other
988

 
908

Total term debt before debt issuance costs
320,914

 
256,562

Less: Current portion of long-term debt
7,959

 
5,206

Less: Debt issuance costs (net of accumulated amortization of $2,805 and $2,296, respectively
6,748

 
4,105

Total long-term debt
$
306,207

 
$
247,251


On October 31, 2015, REG Danville, LLC entered into a Second Amended and Restated Loan Agreement with Fifth Third Bank regarding the construction/term loan (the "Fifth Third Construction/Term Loan"). The renewed Fifth Third Construction/

11



Term Loan increased the principal amount of the Construction/Term Loan to $12,000 and had a three year term with the maturity of the loan being extended to December 19, 2017. The loan requires monthly principal payments of $212 and interest to be charged using LIBOR plus 4% per annum. The loan agreement contains various loan covenants. As of June 30, 2016, there was $9,413 outstanding under the Fifth Third Construction/Term Loan.

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

Prior to December 15, 2035, the 2036 Convertible Notes will be convertible only upon satisfaction of certain conditions and during certain periods as stipulated in the indenture. On or after December 15, 2035 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the 2036 Convertible Notes may convert their notes at any time. Unless and until the Company obtains stockholder approval under applicable NASDAQ Stock Market rules, the 2036 Convertible Notes will be convertible, subject to certain conditions, into cash. If the Company obtains such stockholder approval, the 2036 Convertible Notes may be settled in cash, the Company’s common shares or a combination of cash and the Company’s common shares, at the Company’s election. The Company may not redeem the 2036 Convertible Notes prior to June 15, 2021. Holders of the 2036 Convertible Notes will have the right to require the Company to repurchase for cash all or some of their notes at 100% of their principal, plus any accrued and unpaid interest on each of June 15, 2021, June 15, 2026 and June 15, 2031. Holders of the 2036 Convertible Notes will have the right to require the Company to repurchase for cash all or some of their notes at 100% of their principal, plus any accrued and unpaid interest upon the occurrence of certain fundamental changes. The initial conversion rate is 92.8074 common shares per $1,000 (one thousand) principal amount of 2036 Convertible Notes (equivalent to an initial conversion price of approximately $10.78 per common share).

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

The Company evaluated the terms of the conversion features under the applicable accounting literature, including Derivatives and Hedging, ASC 815, and determined that a certain feature required separate accounting as a derivative. This derivative was recorded as a long-term liability, "Convertible Debt Conversion Liability" on the Condensed Consolidated Balance Sheets and will be adjusted to reflect fair value each reporting date. The fair value of the convertible debt conversion liability at issuance was $40,145. The fair value of the convertible debt conversion liability at June 30, 2016 was $26,713. The Company recognized a gain of $13,432, which is reflected in the "Change in Fair Value of Convertible Debt Conversion Liability" on the Condensed Consolidated Statements of Operations. As a result, the debt liability component of 2036 Convertible Notes was determined to be $111,855 at issuance, reflecting a debt discount of $40,145. The debt discount is to be amortized through June 2036. The effective interest rate on the debt liability component was 2.45%.

Approximately $35,101 of the net proceeds from the offering of the 2036 Convertible Notes were used to repurchase 4,060,323 shares of the Company's Common Stock in privately negotiated transactions. In addition, approximately $61,954 of the net proceeds from the offering were used to repurchase $63,912 principal amount of the Company's 2.75% convertible senior notes due 2019 (the "2019 Convertible Notes") in privately negotiated transactions, resulting in a gain on debt extinguishment of $2,152, which is reflected on the Condensed Consolidated Statements of Operations.
Lines of Credit
 
June 30, 2016
 
December 31, 2015
Amount outstanding under lines of credit
$
48,603

 
$
23,149

Maximum available to be borrowed under lines of credit
$
9,661

 
$
23,067


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

12



NOTE 8 — RELATED PARTY TRANSACTIONS
The Company reassesses its related parties at reporting dates and has determined that West Central Cooperative, now known as Landus Cooperative ("Landus"), is no longer a related party because it does not hold ten percent or more of the Company’s outstanding Common Stock, and no longer has the right to a seat on the Company's board for the three and six months ended June 30, 2016. Transactions with Landus, prior to the Company's determination that Landus was no longer a related party, amounted to $4,542 for the three and six months ended June 30, 2015, primarily related to raw material purchases at market prices. This amount was included in the "Costs of goods sold - Biomass-based diesel" on the Condensed Consolidated Statements of Operations.
NOTE 9 — DERIVATIVE INSTRUMENTS
The Company enters into New York Mercantile Exchange NY Harbor ULSD and CBOT Soybean Oil futures, swaps and options ("commodity contract derivatives") to reduce the risk of price volatility related to anticipated purchases of feedstock raw materials and to protect cash margins from potentially adverse effects of price volatility on biomass-based diesel sales where prices are set at a future date. All of the Company’s commodity contract derivatives are designated as non-hedge derivatives and recorded at fair value on the Condensed Consolidated Balance Sheets. Unrealized gains and losses are recognized as a component of biomass-based diesel costs of goods sold reflected in current results of operations. As of June 30, 2016, the net notional volumes of New York Mercantile Exchange NY Harbor ULSD and CBOT Soybean Oil covered under the open commodity derivative contracts were approximately 127 million gallons and 194 million pounds, respectively.
The Company offsets the fair value amounts recognized for its commodity contract derivatives with cash collateral with the same counterparty under a master netting agreement. The net position is presented within prepaid and other assets in the Condensed Consolidated Balance Sheets. The following table sets forth the fair value of the Company's commodity contract derivatives and amounts that offset within the Condensed Consolidated Balance Sheets:
   
June 30, 2016
 
December 31, 2015
   
Assets
 
Liabilities
 
Assets
 
Liabilities
Gross amounts of derivatives recognized at fair value
$
2,324

 
$
9,388

 
$
4,644

 
$
185

Cash collateral
24,337

 

 
5,638

 

Total gross amount recognized
26,661

 
9,388

 
10,282

 
185

Gross amounts offset
(9,388
)
 
(9,388
)
 
(185
)
 
(185
)
Net amount reported in the condensed consolidated balance sheets
$
17,273

 
$

 
$
10,097

 
$

The following table sets forth the commodity contract derivatives losses included in the Condensed Consolidated Statements of Operations:
   
Location of Gain (Loss)
Recognized in income
 
Three Months 
 Ended 
 June 30, 
 2016
 
Three Months 
 Ended 
 June 30, 
 2015
 
Six Months 
 Ended 
 June 30, 
 2016
 
Six Months 
 Ended 
 June 30, 
 2015
Commodity derivatives
Cost of goods sold – Biomass-based diesel
 
$
(30,527
)
 
$
(3,570
)
 
$
(34,796
)
 
$
(3,990
)
NOTE 10 — FAIR VALUE MEASUREMENT
The fair value hierarchy prioritizes the inputs used in measuring fair value as follows:
Level 1 — Quoted prices for identical instruments in active markets.
Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.
Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
A summary of assets (liabilities) measured at fair value is as follows:

13



   
As of June 30, 2016
   
Total
 
Level 1
 
Level 2
 
Level 3
Commodity contract derivatives
$
(7,064
)
 
$
(3,438
)
 
$
(3,626
)
 
$

Convertible debt conversion liability
(26,713
)
 

 
(26,713
)
 

Contingent considerations for acquisitions
(48,378
)
 

 

 
(48,378
)
 
$
(82,155
)
 
$
(3,438
)
 
$
(30,339
)
 
$
(48,378
)
   
As of December 31, 2015
   
Total
 
Level 1
 
Level 2
 
Level 3
Commodity contract derivatives
$
4,459

 
$
2,196

 
$
2,263

 
$

Contingent considerations for acquisitions
(41,712
)
 

 

 
(41,712
)
   
$
(37,253
)
 
$
2,196

 
$
2,263

 
$
(41,712
)
The following is a reconciliation of the beginning and ending balances for liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
 
Contingent Consideration for Acquisitions
 
2016
 
2015
Balance at beginning of period, January 1
$
41,712

 
$
39,319

Fair value of contingent consideration at measurement date
4,500

 

Change in estimates included in earnings
(15
)
 
293

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

 
38,560

Change in estimates included in earnings
3,571

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

 
$
35,496

The estimated fair values of the Company’s financial instruments, which are not recorded at fair value, are as follows:
   
As of June 30, 2016
 
As of December 31, 2015
   
Asset (Liability)
Carrying
Amount
 
Fair Value
 
Asset (Liability)
Carrying
Amount
 
Fair Value
Financial liabilities:
   
 
   
 
   
 
   
Debt and lines of credit
$
(362,769
)
 
$
(361,993
)
 
$
(279,711
)
 
$
(275,123
)
The carrying amounts reported in the Condensed Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair values. Money market funds are included in cash and cash equivalents on the Condensed Consolidated Balance Sheets.
The Company used the following methods and assumptions to estimate fair value of its financial instruments:
Commodity derivatives: The instruments held by the Company consist primarily of futures contracts, swap agreements, purchased put options and written call options. The fair value of contracts based on quoted prices of identical assets in an active exchange-traded market is reflected in Level 1. Contract fair value that is determined based on quoted prices of similar contracts in over-the-counter markets is reflected in Level 2.
Contingent consideration for acquisitions: The fair value of the contingent consideration regarding REG Life Sciences, LLC ("REG Life Sciences") is determined using an expected present value technique. Expected cash flows are determined using the probability weighted-average of possible outcomes that would occur should achievement of certain milestones related to the development and commercialization of products from REG Life Sciences' technology occur. There is no observable market data available to use in valuing the contingent consideration; therefore, the Company developed its own assumptions related to the expected future delivery of product enhancements to estimate the fair value of these liabilities. An 8.0% discount rate is used to estimate the fair value of the expected payments.

14



The fair value of all other contingent consideration is determined using an expected present value technique. Expected cash flows are determined using the probability weighted-average of possible outcomes that would occur should the achievement of certain milestones related to the production and/or sale of biomass-based diesel at the specific production facility. A discount rate ranging from 5.8% to 10.0% is used to estimate the fair value of the expected payments.
Convertible debt conversion liability: The fair value of the convertible debt conversion liability is estimated using the Black-Scholes model incorporating the terms and conditions of the 2036 Convertible Notes and considering changes in the prices of the company's common stock, company stock price volatility, risk-free rates and changes in market rates. The valuations are, among other things, subject to changes in the Company's credit worthiness as well as change in general market conditions. As the majority of the assumptions used in the calculations are based on market sources, the fair value of the convertible conversion liability is reflected in Level 2.
Debt and lines of credit: The fair value of long-term debt and lines of credit was established using discounted cash flow calculations and current market rates reflecting Level 2 inputs.
NOTE 11 — NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is presented in conformity with the two-class method required for participating securities. Participating securities include restricted stock units ("RSUs").
Under the two-class method, net income is reduced for distributed and undistributed dividends earned in the current period. The remaining earnings are then allocated to Common Stock and the participating securities. The Company calculates the effects of participating securities on diluted earnings per share ("EPS") using both the “if-converted or treasury stock” and "two-class" methods and discloses the method which results in a more dilutive effect. The effects of Common Stock options, warrants, stock appreciation rights and convertible notes on diluted EPS are calculated using the treasury stock method unless the effects are anti-dilutive to EPS.
The following potentially dilutive weighted average securities were excluded from the calculation of diluted net income (loss) per share attributable to common stockholders during the periods presented, as the effect was anti-dilutive:
   
Three Months 
 Ended 
 June 30, 
 2016
 
Three Months 
 Ended 
 June 30, 
 2015
 
Six Months 
 Ended 
 June 30, 
 2016
 
Six Months 
 Ended 
 June 30, 
 2015
Options to purchase common stock
87,026

 
87,026

 
87,026

 
87,026

Stock appreciation rights
2,251,132

 
2,433,636

 
2,422,353

 
2,119,168

2019 Convertible notes
9,302,579

 
10,838,218

 
10,070,399

 
10,838,218

2036 Convertible notes
4,495,550

 

 
2,247,775

 

Total
16,136,287

 
13,358,880

 
14,827,553

 
13,044,412


15



The following table presents the calculation of diluted net loss per share:
   
Three Months 
 Ended 
 June 30, 
 2016
 
Three Months 
 Ended 
 June 30, 
 2015
 
Six Months 
 Ended 
 June 30, 
 2016
 
Six Months 
 Ended 
 June 30, 
 2015
Net income (loss) attributable to the Company’s common stockholders - Basic
$
6,867

 
$
(2,001
)
 
$
8,517

 
$
(40,108
)
Less: effect of participating securities

 

 

 

Net income (loss) attributable to common stockholders - Dilutive
$
6,867

 
$
(2,001
)
 
$
8,517

 
$
(40,108
)
Shares:

 
 
 

 

Weighted-average shares used to compute basic net income (loss) per share
42,407,888

 
43,736,366

 
43,153,486

 
44,048,017

Adjustment to reflect stock appreciation right conversions
10,953

 

 
5,115

 

Weighted-average shares used to compute diluted net income (loss) per share
42,418,841

 
43,736,366

 
43,158,601

 
44,048,017

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

 
 
 

 

Diluted
$
0.16

 
$
(0.05
)
 
$
0.20

 
$
(0.91
)
NOTE 12 — REPORTABLE SEGMENTS AND GEOGRAPHIC INFORMATION
The Company reports its reportable segments based on products and services provided to customers. The Company re-assesses its reportable segment on an annual basis. During the fourth quarter of 2015, due to the increasing activities surrounding its renewable chemicals business, the Company changed the composition of its operating segments from two reportable segments to three reportable segments by presenting Renewable Chemicals separate from Biomass-based Diesel. The new reportable segments generally align the Company's external financial reporting segments with its new internal operating segments, which are based on its internal organizational structure, operating decisions and performance assessment. As such, the Company's reportable segments at June 30, 2016 and December 31, 2015 include Biomass-based Diesel, Services, Renewable Chemicals and Corporate and other activities. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. All prior period disclosures below have been recast to present results on a comparable basis.
The Biomass-based Diesel segment processes waste vegetable oils, animal fats, virgin vegetable oils and other feedstocks and methanol into biomass-based diesel. The Biomass-based Diesel segment also includes the Company’s purchases and resale of biomass-based diesel produced by third parties. Revenue is derived from the purchases and sales of biomass-based diesel, RINs and raw material feedstocks acquired from third parties, sales of biomass-based diesel produced under toll manufacturing arrangements with third party facilities, sales of processed biomass-based diesel from Company facilities, related by-products and renewable energy government incentive payments, in the U.S. and internationally.
The Services segment offers services for managing the construction of biomass-based diesel production facilities and managing ongoing operations of third party plants and collects fees related to the services provided. The Company does not allocate items that are of a non-operating nature or corporate expenses to the business segments. Revenues from services provided to other segments are recorded by the Services segment at cost.
The Renewable Chemicals segment consists of research and development activities involving the production of renewable chemicals, additional advanced biofuels and other products from the Company's proprietary microbial fermentation process and the operations of a demonstration scale facility located in Okeechobee, Florida.
The Corporate and Other segment includes trading activities related to petroleum-based heating oil and diesel fuel as well as corporate activities, which consist of corporate office expenses such as compensation, benefits, occupancy and other administrative costs, including management service expenses. Corporate and other also includes income/(expense) not associated with the reportable segments, such as corporate general and administrative expenses, shared service expenses, interest expense and interest income, all reflected on an accrual basis of accounting. In addition, corporate and other includes cash and other assets not associated with the reportable segments, including investments. Intersegment revenues are reported by the Services and Corporate and Other segments.


16



The following table represents the significant items by reportable segment:
   
Three Months 
 Ended 
 June 30, 
 2016
 
Three Months 
 Ended 
 June 30, 
 2015
 
Six Months 
 Ended 
 June 30, 
 2016
 
Six Months 
 Ended 
 June 30, 
 2015
Net revenues:
   
 
   
 
   
 
   
Biomass-based Diesel (includes Petrotec's net sales of $45,748 and $82,667 and $38,081 and $68,074 for the three and six months ended June 30, 2016 and 2015, respectively)
$
539,631

 
$
363,101

 
$
832,393

 
$
587,289

Services
21,396

 
27,923

 
42,133

 
43,394

Renewable Chemicals
1,000

 

 
1,000

 

Corporate and Other
23,643

 
15,220

 
40,631

 
22,562

Intersegment revenues
(27,369
)
 
(32,482
)
 
(52,262
)
 
(48,565
)
   
$
558,301

 
$
373,762

 
$
863,895

 
$
604,680

Income (loss) before income taxes:
   
 
   
 
   
 
   
Biomass-based Diesel (includes Petrotec's income (loss) of $1,183 and $1,616 and ($906) and ($2,008) for the three and six months ended June 30, 2016 and 2015, respectively)
$
(3,591
)
 
$
3,576

 
$
9,269

 
$
(28,100
)
Services
1,261

 
202

 
1,834

 
252

Renewable Chemicals
(3,924
)
 
(4,316
)
 
(8,605
)
 
(8,207
)
Corporate and other
15,265

 
(2,332
)
 
8,077

 
(6,016
)
   
$
9,011

 
$
(2,870
)
 
$
10,575

 
$
(42,071
)
Depreciation and amortization expense, net:
   
 
   
 
   
 
   
Biomass-based Diesel (includes Petrotec's amounts of $594 and $1,445 and $915 and $1,602 for the three and six months ended June 30, 2016 and 2015, respectively)
$
7,140

 
$
5,454

 
$
14,068

 
$
10,425

Services
117

 
76

 
213

 
137

Renewable Chemicals
368

 
319

 
782

 
662

Corporate and other
392

 
385

 
789

 
736

   
$
8,017

 
$
6,234

 
$
15,852

 
$
11,960

Cash paid for purchases of property, plant and equipment:
   
 
   
 
   
 
   
Biomass-based Diesel (includes Petrotec's amounts of $374 and $374 and $659 and $977 for the three and six months ended June 30, 2016 and 2015, respectively)
$
11,895

 
$
14,889

 
$
25,499

 
$
25,092

Services

 
403

 
1,166

 
1,125

Renewable Chemicals
619

 
163

 
619

 
304

Corporate and other
183

 
75

 
183

 
1,186

   
$
12,697

 
$
15,530

 
$
27,467

 
$
27,707



17



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

 
$
16,080

 
 
 
 
Assets:
   
 
   
Biomass-based Diesel (including Petrotec's assets of $52,273 and $45,471, respectively)
$
888,175

 
$
1,048,923

Services
49,913

 
60,308

Renewable Chemicals
24,657

 
23,872

Corporate and other
379,867

 
308,782

Intersegment eliminations
(189,122
)
 
(218,265
)
   
$
1,153,490

 
$
1,223,620



Geographic Information:
The following geographic data include net sales attributed to the countries based on the location of the subsidiary making the sale and long-lived assets based on physical location. Long-lived assets represent the net book value of property, plant and equipment.
   
Three Months 
 Ended 
 June 30, 
 2016
 
Three Months 
 Ended 
 June 30, 
 2015
 
Six Months 
 Ended 
 June 30, 
 2016
 
Six Months 
 Ended 
 June 30, 
 2015
Net revenues:
   
 
   
 
   
 
   
United States
$
512,553

 
$
335,681

 
$
781,228

 
$
536,606

Foreign
45,748

 
38,081

 
82,667

 
68,074

 
$
558,301

 
$
373,762

 
$
863,895

 
$
604,680

   
June 30, 2016
 
December 31, 2015
Long-lived assets:
   
 
   
United States
$
582,983

 
$
553,987

Foreign
19,426

 
20,597

 
$
602,409

 
$
574,584

NOTE 13 — COMMITMENTS AND CONTINGENCIES
The Company is involved in legal proceedings in the normal course of business. The Company currently believes that any ultimate liability arising out of such proceedings will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
NOTE 14 — SUBSEQUENT EVENTS

The Company's subsidiary, REG Geismar, LLC, or REG Geismar, is the obligor with respect to $100,000 aggregate principal amount of Gulf Opportunity Zone tax-exempt bonds, or GOZone Bonds, due in October 2033, through a loan agreement with the Louisiana Public Facilities Authority. REG Geismar’s payment obligations on the GOZone Bonds are supported by a letter of credit issued by a financial institution. REG Geismar is party to an agreement to reimburse the financial institution for any draws on the letter of credit and that obligation is secured by a $101,315 certificate of deposit by us

18



and pledged in favor of the financial institution. On July 29, 2016, REG Geismar caused the Louisiana Public Facilities Authority to call for redemption all of the outstanding GOZone Bonds as of September 6, 2016. The redemption will be funded by application of the funds generated by release of the certificate of deposit.
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, 2016. We encourage you to read this Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the accompanying condensed consolidated financial statements and related notes. Forward-looking statements contained in this report present management’s views only as of the date of this report. Except as required under applicable law, we do not intend to issue updates concerning any future revisions of management’s views to reflect events or circumstances occurring after the date of this report.
Overview
Our Company focuses on providing cleaner, lower carbon intensity fuel products and related services while also providing conventional fuel products and related services. We principally generate revenue as a leading North American advanced biofuels producer. We are the largest producer of biomass-based diesel in the United States. We utilize a nationwide production, distribution and logistics system as part of an integrated value chain model to focus on converting natural fats, oils and greases into advanced biofuels. We are also engaged in research and development efforts focused on the conversion of diverse feedstocks into renewable chemicals. We own and operate 12 North American biorefineries, which include 11 biomass-based diesel, or biodiesel and renewable hydrocarbon diesel, production facilities with aggregate nameplate production capacity of 452 million gallons per year, or mmgy, and one demonstration scale fermentation facility.
We are a lower-cost biomass-based diesel producer. We primarily produce our biomass-based diesel from a wide variety of lower cost feedstocks, including inedible corn oil, used cooking oil and inedible animal fat. We also produce biomass-based diesel from virgin vegetable oils, which are more widely available and tend to be higher in price. We believe our ability to process a wide variety of feedstocks provides us with a cost advantage over many biomass-based diesel producers, particularly those that rely primarily on higher cost virgin vegetable oils, such as soybean oil or canola oil.
In 2014, we acquired a development-stage industrial biotechnology business focusing on microbial fermentation to develop and produce renewable chemicals, fuels and other products.
We sell petroleum-based heating oil and diesel fuel, which enables us to offer additional biofuel blends, while expanding our customer base. We sell heating oil and ultra-low sulfur diesel, or ULSD, at terminals throughout the northeastern U.S. as

19



well as BioHeat® blended fuel at one of our existing Northeastern terminal locations. In 2015, we expanded our sales of additional biofuel blends to Midwest terminal locations and look to potentially expand to other areas across North America.
We acquired a 75 mmgy nameplate capacity renewable hydrocarbon diesel biorefinery in Geismar, Louisiana in June 2014. We began production at the Geismar facility in October 2014 after completion of upgrades. The facility was idle from April 2015 to March 2016 while repairs were made related to two separate fires that occurred at the facility in April and September 2015.
We also expanded our business internationally by acquiring a majority interest in Petrotec AG, or Petrotec, in December 2014. During 2015 and the first six months of 2016, we acquired additional shares in Petrotec and at June 30, 2016, we owned approximately 91% of Petrotec's outstanding shares. Petrotec is a fully-integrated company utilizing used cooking oil and other waste feedstocks to produce biodiesel at its two biorefineries in Emden and Oeding, Germany.  Petrotec’s nameplate production capacity is approximately 50 mmgy.
In August 2015, we acquired our Grays Harbor facility, a 100 mmgy nameplate biodiesel plant and terminal at the Port of Grays Harbor, Washington. This acquisition expanded our production fleet to the west coast of the United States. The Grays Harbor location includes 18 million gallons of storage capacity and a terminal that can accommodate feedstock intake and fuel delivery on deep-water PANAMAX class vessels as well as possessing significant rail and truck transport capabilities. To date, the production facility's primary feedstock has been canola oil sourced nearby in the Pacific Northwest. 
In March 2016, we acquired our 20 mmgy nameplate biodiesel refinery located in DeForest, Wisconsin, REG Madison, LLC, produces biodiesel from yellow grease, rendered animal fats, and inedible corn oil, in addition to refined vegetable oils using our patented technology currently in use at our Seneca, Illinois plant.  The facility has both truck and rail capabilities.
During the respective three and six months ended June 30, 2016, we sold 150 and 248 million total gallons, including 16 and 28 million gallons of biomass-based diesel that we purchased from third parties and resold, 12 and 22 million international biomass-based diesel gallons from our majority owned investment in Petrotec and 10 and 22 million petroleum-based diesel gallons. During 2015, we sold a total of 375 million total gallons, including 40 million gallons of biomass-based diesel we purchased from third parties and resold, 40 million international biomass-based diesel gallons and 30 million petroleum-based diesel gallons.
We re-assess our reportable segments on an annual basis. Prior to 2015, our businesses were organized into two reportable segments - the Biomass-based Diesel segment and the Services segment. As a result of the increased activities surrounding our renewable chemicals business, we began reporting in 2015 a new segment - Renewable Chemicals, which was previously included in the Biomass-based Diesel segment.
Biomass-based Diesel Segment
Our Biomass-based Diesel segment, as reported herein, includes:
the operations of the following biomass-based diesel production facilities:
a 12 mmgy nameplate biodiesel production facility located in Ralston, Iowa;
a 35 mmgy nameplate biodiesel production facility located near Houston, Texas;
a 45 mmgy nameplate biodiesel production facility located in Danville, Illinois;
a 30 mmgy nameplate biodiesel production facility located in Newton, Iowa;
a 60 mmgy nameplate biodiesel production facility located in Seneca, Illinois;
a 30 mmgy nameplate biodiesel production facility located near Albert Lea, Minnesota;
a 15 mmgy nameplate biodiesel production facility located in New Boston, Texas;
a 30 mmgy nameplate biodiesel production facility located in Mason City, Iowa;
a 75 mmgy nameplate renewable hydrocarbon diesel production facility located in Geismar, Louisiana;
a 27 mmgy nameplate biodiesel production facility located in Emden, Germany;
a 23 mmgy nameplate biodiesel production facility located in Oeding, Germany;
a 100 mmgy nameplate biodiesel production facility located in Grays Harbor, Washington; and
a 20 mmgy nameplate biodiesel production facility located in DeForest, Wisconsin, since its acquisition in March 2016.
purchases and resales of biomass-based diesel, petroleum-based diesel, Renewable Identification Numbers ("RINs") and Low Carbon Fuel Standard credits, and raw material feedstocks acquired from third parties;
sales of biomass-based diesel produced under toll manufacturing arrangements with third-party facilities using our feedstocks; and

20



incentives received from federal and state programs for renewable fuels.

We derive a small portion of our revenues from the sale of glycerin, free fatty acids and other co-products of the biomass-based diesel production process. In 2015 and for the six months ended June 30, 2016, our revenues from the sale of co-products were less than five percent of our total Biomass-based Diesel segment revenues. For the six months ended June 30, 2016, revenues from the sale of petroleum-based heating oil and diesel fuel acquired from third parties, along with the sale of these items further blended with biodiesel produced at wholly owned facilities or purchased from third parties, were less than five percent of our total revenues.
In accordance with EPA regulations, we generate 1.5 to 1.7 RINs for each gallon of biomass-based diesel we produce. 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.
Services Segment
Our Services segment includes:
biomass-based diesel facility management and operational services, whereby we provide day-to-day management and operational services to biomass-based diesel production facilities; and
construction management services, whereby we act as the construction management and general contractor for the construction of biomass-based diesel production facilities.
During recent years, we have utilized our construction management expertise internally to upgrade our facilities, such as our facilities located in Albert Lea, New Boston, Mason City and Newton. During 2015, we began construction on a planned $31 million upgrade to our Danville facility and spent over $37 million related to repairs and upgrade projects at our Geismar facility, most of which was due to damages from fires in April and September 2015. The Geismar facility came back on line in early March 2016. Demand for our construction management and facility management and operational services 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 provided services to outside parties for new facility construction services since 2009.
Renewable Chemicals Segment
Our Renewable Chemicals segment includes:
research and development activities focusing on microbial fermentation to develop and produce renewable chemicals, additional advanced biofuels and other products;
collaborative research and development and other service activities to continue to build out the technology platform; and
the operations of a demonstration scale fermentation facility located in Okeechobee, Florida since its acquisition in January 2014.
In January 2016, ExxonMobil Research and Engineering Company, a global leader in advanced biofuels research, announced an agreement with our subsidiary, REG Life Sciences, LLC to study the production of biodiesel by fermenting renewable cellulosic sugars from sources such as agricultural waste. This collaboration is focused on our patented technology that uses microbes to convert sugars to biodiesel via fermentation.
Factors Influencing Our Results of Operations
The principal factors affecting our operations are the market prices for biomass-based diesel and the feedstocks used to produce biomass-based diesel, as well as governmental programs designed to create incentives or requirements for the production and use of biomass-based diesel.

21



Governmental programs favoring biomass-based diesel production and use
Biomass-based diesel has historically been more expensive than petroleum-based diesel, excluding biomass-based diesel incentives and credits. The biomass-based diesel industry’s growth has largely been the result of federal and state programs that require or incentivize biomass-based diesel, which allows biomass-based diesel to compete with petroleum-based diesel on price.
On July 1, 2010, RFS2 was implemented, stipulating volume requirements for the amount of biomass-based diesel and other advanced biofuels that must be utilized in the United States each year. Under RFS2, Obligated Parties, including petroleum refiners and fuel importers, must show compliance with these standards. Currently, biodiesel and renewable hydrocarbon diesel RINs meet three categories of an Obligated Party’s annual renewable fuel required volume obligation, or RVO—biomass-based diesel, undifferentiated advanced biofuel and undifferentiated renewable fuel. On November 30, 2015, the EPA issued the final 2014-2016 RVO targets for biomass-based diesel volumes at 1.63 billion gallons, 1.73 billion gallons, and 1.90 billion gallons for 2014, 2015 and 2016, respectively. In addition, for 2017, the EPA set the biomass-based diesel target at 2 billion gallons.  Our sales volumes and revenues have benefited from our increased production capacity, as well as demand from the implementation of RFS2.
Volumes of biomass-based diesel domestically produced or imported into the United States, in general, increased each year from 2010 to 2014. Based upon the RVO targets established by the EPA, volumes for 2015 through 2017 are expected to continue to grow. According to EMTS data, 1.75 billion gallons of biomass-based diesel was produced or imported into the U.S. in 2014. In 2015, according to EMTS data, 1.81 billion gallons of biomass-based diesel was produced or imported into the U.S. During the first half of 2016, according to EMTS data, 1.1 billion gallons of biomass-based diesel was produced or imported into the U.S., compared to 0.80 billion gallons for the same period in 2015.
The federal biodiesel mixture excise tax credit, or the BTC, provides a $1.00 refundable tax credit per gallon to the first blender of biomass-based diesel with petroleum-based diesel fuel. The BTC was established on January 1, 2005 and existed until it was allowed to lapse on January 1, 2010. Thereafter, the BTC was periodically reinstated by Congress both prospectively and retroactively, and then again allowed to lapse. For instance, Congress reinstated the BTC in December 2010, covering 2010 retroactively and 2011 prospectively, and allowed it to lapse at the end of 2011. On January 2, 2013, over a full year following its previous expiration, Congress again reinstated the BTC covering 2012 retroactively and 2013 prospectively. The credit lapsed a third time on January 1, 2014 and was reinstated almost one year later on December 19, 2014, covering only 2014 retroactively. Most recently, the credit was reinstated on December 18, 2015, covering 2015 retroactively and 2016 prospectively. As a result, we recognized the related BTC revenue for 2015 in the fourth quarter of that year. While in general the Company has not historically offered sales incentives to customers, the expected reinstatement of the federal biodiesel tax credit led to the Company and other market participants entering into agreements with both customers and vendors throughout the year to capture the credit if reinstated. The impacts of the agreements with customers were recorded net as adjustments to Biomass-based diesel sales, whereas agreements with vendors were recorded net as adjustments to Biomass-based diesel costs of goods sold on the Consolidated Statements of Operations. As a result of the reinstatement of the BTC, in combination with these agreements, we recognized a net benefit of $95.0 million in 2015. It is uncertain whether the BTC will be extended beyond the end of2016. The lapsing or modification of the BTC or enactment of a different incentive program could adversely affect our future financial results.
Biomass-based diesel and feedstock price fluctuations
Our operating results generally reflect the relationship between the price of biomass-based diesel, including credits and incentives, and the price of feedstocks used to produce biomass-based diesel.
Biomass-based diesel is a low carbon intensity, renewable alternative to petroleum-based diesel fuel and is primarily sold to the end user after it has been blended with petroleum-based diesel fuel. Biomass-based diesel prices have historically been heavily influenced by petroleum-based diesel fuel prices. Accordingly, biomass-based diesel prices have generally been impacted by the same factors that affect petroleum prices, such as crude oil supply and demand balance, worldwide economic conditions, wars and other political events, OPEC production quotas, changes in refining capacity and natural disasters.
Regulatory and legislative factors also influence the price of biomass-based diesel. Biomass-based diesel RIN pricing, a value component that was introduced via RFS2 in July 2010, has had a significant impact on biomass-based diesel pricing. During 2013, the value of RINs, as reported by OPIS, contributed to the average B100 spot price of a gallon of biodiesel, as reported by The Jacobsen, and ranging from a low of $0.35 per gallon, or 9% of the biodiesel price, in October to a high of $2.20 per gallon, or 43% of the biodiesel price in January. During 2014, the value of RINs, as reported by OPIS, contributed to the average B100 spot price of a gallon of biodiesel, as reported by The Jacobsen, ranging from a low of $0.64 per gallon, or 19% of the biodiesel price, in January to a high of $1.15 per gallon, or 34% of the biodiesel price, in December. During 2015, the value of RINs, as reported by OPIS, contributed to the average B100 spot price of a gallon of biodiesel, as reported by The

22



Jacobsen, ranging from a low of $0.58 per gallon, or 23% of the biodiesel, in September to a high of $1.55 per gallon, or 53% of the biodiesel price, in January. For the first six months of 2016, the value of RINs, as reported by OPIS, as a percentage of the average B100 spot price of a gallon of biodiesel remained fairly stable, from a low of $1.05 per gallon or 38% of the biodiesel price in January to a high of $1.45 per gallon or 45% of the biodiesel price in June.
The changes in the value of RINs acquired from third parties and held in inventory at June 30, 2016 resulted in a $4.4 million write-down to lower of cost or net realizable value for the first half of 2016. See “Note 5 – Prepaid Expenses and Other Assets” to our Condensed Consolidated Financial Statements. We enter into forward contracts to sell RINs and we use risk management position limits to manage RIN exposure. Because of EPA rules limiting the amount of assigned RINs we can hold at any one time, the value of these assigned RINs held in inventory has not had a material effect on margins from period to period.
During 2015, feedstock expense accounted for 78% of our production cost, while methanol and chemical catalysts expense accounted for 5% and 4% of our costs of goods sold, respectively.
Feedstocks for biomass-based diesel production, such as inedible corn oil, used cooking oil, inedible animal fat, canola oil and soybean oil are commodities and market prices for them will be affected by a wide range of factors unrelated to the price of biomass-based diesel and petroleum-based diesel fuels. The following table outlines some of the factors influencing supply and price for each feedstock:


23



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
 
 
Implementation of co-located biodiesel/renewable diesel plants with ethanol facilities
 
 
Feed demand
 
 
New or expected biodiesel capacity
 
 
Weather conditions
Used Cooking Oil
      
Biomass-based diesel demand
 
 
Feed 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
 
Feed demand
 
      
Export demand
   
      
Number of slaughter kills in the United States
   
      
Demand for inedible animal fat from other markets
Canola Oil
 
Export demand
 
 
Demand for canola oil for food use
 
 
Canola crush margin
 
 
Weather conditions
 
 
Biomass-based diesel demand
 
 
Canola meal demand
 
 
Crop disease
 
 
Palm oil supply
Soybean Oil
      
Export demand
   
      
Weather conditions
   
      
Soybean meal demand
 
 
South American crop production
 
 
Palm oil supply
   
      
Farmer planting decisions
   
      
Government policies and subsidies
   
      
Crop disease
 
 
Biomass-based diesel demand
During 2015, 85% of our feedstocks were comprised of inedible corn oil, used cooking oil and inedible animal fats with the remainder coming from refined vegetable oil.
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, 2016. The results were derived using assumed conversion factors for the yield of each feedstock and subtracting the cost of producing one gallon of biodiesel made from each respective lower cost feedstock from the cost of producing one gallon of biodiesel made from soybean oil.

24



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

25



  
(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.
In the first half of 2016, NYMEX NY Harbor ULSD prices increased from $1.13 per gallon in January to $1.58 per gallon in June. Feedstock prices trended higher in the first six months of 2016, led by the tightness in the palm oil market and strong biodiesel demand for fats and inedible corn oil, although prices for soybean oil and choice white grease dipped at the end of the period. US cattle slaughter numbers continued at a historically low rate as a result of heifers being held back for breeding rather than sent to market. Hog slaughter was consistent with the 2015's number, staying at a historically high level.
Risk Management
The profitability of producing biomass-based diesel largely depends on the spread between prices for feedstocks and biomass-based diesel, including incentives, each of which is subject to fluctuations due to market factors and each of which is not significantly correlated. Adverse price movements for these commodities directly affect our operating results. We attempt to protect cash margins for our own production and our third-party trading activity by entering into risk management contracts that mitigate the impact on our margins from price volatility in feedstocks and biomass-based diesel. We create offsetting positions by using a combination of forward fixed-price physical purchases and sales contracts on feedstock and biomass-based diesel, including risk management futures contracts, swaps and options primarily on New York Mercantile Exchange NY Harbor ULSD and CBOT Soybean Oil; however, the extent to which we engage in risk management activities varies substantially from time to time, and from feedstock to feedstock, depending on market conditions and other factors. In making risk management decisions, we utilize research conducted by outside firms to provide additional market information in addition to our internal research and reviews.
Inedible corn oil, used cooking oil, inedible animal fat, canola oil and soybean oil are the primary feedstocks we used to produce biomass-based diesel in 2015 and the first six months of 2016. 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

26



to a prevailing market price reported by the USDA price sheet or The Jacobsen. Our efforts to risk manage against changing prices for inedible corn oil, used cooking oil and inedible animal fat have involved entering into futures contracts, swaps or options on other commodity products, such as CBOT Soybean Oil and New York Mercantile Exchange NY Harbor ULSD. However, these products do not always experience the same price movements as lower cost feedstocks, making risk management for these feedstocks challenging. We manage feedstock supply risks related to biomass-based diesel production in a number of ways, including, where available, through long-term supply contracts. The purchase price for soybean oil under these contracts may be indexed to prevailing CBOT soybean oil market prices with a negotiated market basis. We utilize futures contracts, swaps and options to risk manage, or lock in, the cost of portions of our future feedstock requirements generally for varying periods up to one year.
Our ability to mitigate our risk of falling biomass-based diesel prices is limited. We have entered into forward contracts to supply biomass-based diesel. However, pricing under these forward sales contracts generally has been indexed to prevailing market prices, as fixed price contracts for long periods on acceptable terms have generally not been available. There is no established market for biomass-based diesel futures in the United States. Our efforts to hedge against falling biomass-based diesel prices generally involve entering into futures contracts, swaps and options on other commodity products, such as diesel fuel and New York Mercantile Exchange NY Harbor ULSD. However, price movements on these products are not highly correlated to price movements of biomass-based diesel.
We generate 1.5 to 1.7 biomass-based diesel RINs for each gallon of biomass-based diesel we produce and sell. We also obtain RINs from third party transactions which we hold for resale. There is no established futures market for RINs, which severely limits the ability to risk manage the price of RINs. We enter into forward contracts to sell RINs and we use risk management position limits to manage RIN exposure.
As a result of our strategy, we frequently have gains or losses on derivative financial instruments that are conversely offset by losses or gains on forward fixed-price physical contracts on feedstocks and biomass-based diesel or inventories. Gains and losses on derivative financial instruments are recognized each period in operating results while corresponding gains and losses on physical contracts are generally not recognized until quantities are delivered or title transfers. Our results of operations are impacted when there is a period mismatch of recognized gains or losses associated with the change in fair value of derivative instruments used for risk management purposes at the end of the reporting period but the purchase or sale of feedstocks or biomass-based diesel has not yet occurred resulting in the offsetting gain or loss that will be recognized in a later accounting period.
We recorded risk management losses of $30.5 million and $34.8 million from our derivative financial instrument activity for the three and six months ended June 30, 2016, respectively, compared to losses of $3.6 million and $4.0 million for the three and six months ended June 30, 2015. Changes in the value of these futures, swaps or options instruments are recognized in current income or loss.
Seasonality
Our operating results are influenced by seasonal fluctuations in the demand for biodiesel. Our biodiesel sales tend to decrease during the winter season due to blending concentrations being reduced to adjust for performance during colder weather. Colder seasonal temperatures can cause the higher cloud point biodiesel we make from inedible animal fats to become cloudy and eventually gel at a higher temperature than petroleum-based diesel or lower cloud point biodiesel made from soybean oil, canola oil or inedible corn oil. Such gelling can lead to plugged fuel filters and other fuel handling and performance problems for customers and suppliers. Reduced demand in the winter for our higher cloud point biodiesel can result in excess supply of such higher cloud point biodiesel and lower prices for such biodiesel. In addition, most of our production facilities are located in colder Midwestern states in proximity to feedstock origination and our costs of shipping increases as more biodiesel is transported to warmer climate states during winter.
RIN prices may also be subject to seasonal fluctuations. The RIN is dated for the calendar year in which it is generated, commonly referred to as the RIN vintage. Since 20% of an Obligated Party's annual RVO can be satisfied by prior year RINs, most RINs must come from biofuel produced or imported during the RVO year. As a result, RIN prices can be expected to decrease as the calendar year progresses if the RIN market is oversupplied compared to that year's RVO and increase if it is undersupplied. Similar to prior years, during 2013, biomass-based diesel RIN generation was 1.78 billion gallons when the RVO for biomass-based diesel was 1.28 billion gallons and RIN prices declined during the third and fourth quarters as production rates exceeded the RVO. For 2014, biomass-based diesel RIN generation was 1.75 billion gallons while the RVO was finalized at 1.63 billion for 2014. In 2015, biomass-based diesel RIN generation was 1.81 billion gallons versus a finalized RVO set at 1.73 billion.

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Industry capacity, production and imports
Our operating results are influenced by our industry’s capacity and production, including in relation to RFS2 production requirements. Under RFS2, Obligated Parties are entitled to satisfy up to 20% of their annual requirement with prior year RINs. According to EMTS data, approximately 1.1 billion gallons of biomass-based diesel was produced and/or imported 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. During 2012, according to EMTS data, approximately 1.1 billion gallons of biomass-based diesel was produced and/or imported, which also was above RFS2 required volumes of 1 billion gallons of biomass-based diesel for 2012. Production and/or imports in 2011, 2012 and 2013 was in excess of continued expanding RFS2 volume requirements. As reported by EMTS, the biomass-based diesel RIN generation was 1.78 billion gallons in 2013 when the RVO for biomass-based diesel was 1.28 billion. Biomass-based diesel production and/or imports, as reported by EMTS was 1.81 billion gallons for 2015, 600 million gallons higher than 2014. In the first six months of 2016, according to EMTS data, 1.07 billion gallons of biomass-based diesel was produced and/or imported into the U.S., compared to the equivalent 0.80 billion gallons in the first half of 2015.
During 2014 and 2015, the amount of imported biodiesel gallons qualifying under RFS2 increased from 192.2 million gallons in 2014 to approximately 334.2 million gallons in 2015, based on the information from the EIA. 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 D4 biomass-based diesel RINs generation.
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, 2015 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.
Valuation of certain assets and liabilities related to acquisition of the De Forest, Wisconsin facility.
The significant estimates related to our acquisition of the De Forest, Wisconsin facility from Sanimax Energy include the valuation of contingent consideration. We engaged an independent external valuation specialist to provide assistance in measuring the fair values of the liability related to the acquisition.
We may pay contingent consideration to the previous owners of our REG Madison, LLC facility over a seven year period after the acquisition if, and when, we achieve certain production volume. The fair value of the contingent consideration was estimated based on an income approach. Two production scenarios were considered in each period of the earnout period. The no-upgrade case of production was based on historical actual capacity while the base case factors in efficiency improvements following the acquisition. The base case was estimated to have a 75% probability, and the no-upgrade case was estimated to have 25% probability. The probability-weighted earnout payments were calculated based on the production levels in each period. These aggregate probability-weighted payments were then discounted to present value at the industry-adjusted cost of equity, calculated as the risk-free rate plus the equity risk premium multiplied by the selected beta. The industry-adjusted cost of equity was used as the earn-out payments were considered to be more risky than our cost of debt, but less risky than our cost of equity, given the application of probability-weighting to multiple scenarios. The fair value of the contingent consideration is estimated at the end of each reporting period with changes in fair value running through current period earnings.
Accounting for 2036 Convertible Notes
In June 2016, we issued $152.0 million aggregate principal amount of 4.00% Convertible Senior Notes due 2036 (the “2036 Convertible Notes”).
The convertible debt conversion liability is accounted for as a derivative that is adjusted for based on its fair value at reporting dates. The fair value of the convertible debt conversion liability is estimated using the Black-Scholes model

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incorporating the terms and conditions of the 2036 Convertible Notes and considering, for example, changes in the prices of our common stock, our stock price volatility, risk-free rates and changes in market rates.
The valuations are, among other things, subject to changes in our credit worthiness as well as changes in general market conditions. As such, the change in any given period may be material.
Results of Operations
Three and six months ended June 30, 2016 and 2015
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,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Gallons sold
150.1

 
96.1

 
248.0

 
155.9

Average B100 price per gallon
$
3.27

 
$
3.19

 
$
3.13

 
$
3.18

 
 
 
 
 
 
 
 
Revenues
$
558,301

 
$
373,762

 
$
863,895

 
$
604,680

Cost of goods sold
533,439

 
357,855

 
813,927

 
604,968

Gross profit (loss)
24,862

 
15,907

 
49,968

 
(288
)
Selling, general and administrative expenses
20,850

 
15,359

 
40,626

 
32,034

Research and development expense
4,427

 
4,390

 
8,353

 
8,250

Gain on involuntary conversion
(997
)
 

 
(4,540
)
 

Income (loss) from operations
582

 
(3,842
)
 
5,529

 
(40,572
)
Other income (expenses), net
8,429

 
972

 
5,046

 
(1,499
)
Income tax (expense) benefit
(1,887
)
 
707

 
(1,765
)
 
1,604

Net income (loss)
7,124

 
(2,163
)
 
8,810

 
(40,467
)
Less: Net income (loss) attributable to noncontrolling interest
108

 
(162
)
 
138

 
(359
)
Net income (loss) attributable to the Company
7,016

 
(2,001
)
 
8,672

 
(40,108
)
Effect of participating share-based awards
(149
)
 

 
(155
)
 

Net income (loss) attributable to the Company's common stockholders
$
6,867

 
$
(2,001
)
 
$
8,517

 
$
(40,108
)

Revenues. Our revenues increased $184.5 million and $259.2 million, or 49% and 43%, to $558.3 million and $863.9 million, respectively, for the three and six months ended June 30, 2016 from $373.8 million and $604.7 million for the three and six months ended June 30, 2015, respectively. This increase was primarily due to the increase in government incentives revenue as the 2016 BTC was in effect since the beginning of 2016 while the 2015 BTC was not reinstated until December 2015. In addition, the increase in the gallons sold and improving average selling price during the second quarter also contributed to the growth in total revenues.
Biomass-based diesel revenues including government incentives increased approximately $183.5 million and $258.3 million, or 49% and 43% to $557.3 million and $862.8 million for the three and six months ended June 30, 2016, respectively, from $373.7 million and $604.5 million for the three and six months ended June 30, 2015, respectively. The BTC was in effect since the beginning of 2016 and contributed approximately $89.9 million and $138.5 million to the increase in biomass-based diesel revenue for the three and six months ended June 30, 2016, respectively. Gallons sold increased by 54.0 million and 92.1 million, or 56% and 59%, to 150.1 million and 248.0 million gallons for the three and six months ended June 30, 2016, respectively, compared to 96.1 million and 155.9 million gallons for the three and six months ended June 30, 2015, respectively. Our average B100 sales price per gallon increased $0.08, or 3%, to $3.27, but decreased $0.05, or 2% to $3.13 for the three and six months ended June 30, 2016, respectively, compared to $3.19 and $3.18 for the three and six months ended June 30, 2015, respectively. The fluctuations in average sales price contributed to a $7.7 million increase in revenues for the three months ended June 30, 2016 and a $7.8 million decrease in revenues for the six months ended June 30, 2016,

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respectively, when applied to the number of gallons sold during the same periods of 2015. The increase in gallons sold for the three and six months ended June 30, 2016 accounted for a revenues increase of approximately $176.6 million and $288.3 million for the three and six months ended June 30, 2016, respectively, using pricing for the same periods of 2016. Sales of separated RIN inventory were $60.8 million and $86.6 million for the three and six months ended June 30, 2016, respectively, as compared to $48.0 million and $80.6 million for the three and six months ended June 30, 2015, respectively.
Costs of goods sold. Our costs of goods sold increased approximately $175.6 million and $209.0 million, or 49% and 35%, to $533.4 million and $813.9 million for the three and six months ended June 30, 2016, respectively, from $357.9 million and $605.0 million for the three and six months ended June 30, 2015, respectively. Costs of goods sold as a percentage of revenues were 96% and 94% for the three and six months ended June 30, 2016, respectively and 96% and 100% for the three and six months ended June 30, 2015, respectively. The decrease in cost of goods sold as a percentage of revenues during the three and six months ended June 30, 2016 was primarily due to the increase in the revenues from having the BTC in place to start 2016, mitigated slightly from an increase in feedstock prices, which were influenced from an increase in palm oil prices and strong biodiesel demand.
Biomass-based diesel costs of goods sold increased in the three and six months ended June 30, 2016 due to a 56% and 59% increase, respectively, in gallons sold. Average lower cost feedstocks prices were approximately $0.30 and $0.27 per pound for the three and six months ended June 30, 2016, respectively, as compared to $0.28 per pound for both three and six months ended June 30, 2015. Soybean oil costs were $0.33 per pound for both three and six months ended June 30, 2016, and $0.33 per pound for both three and six months ended June 30, 2015. We recorded risk management losses of $30.5 million and $34.8 million from our derivative financial instrument activity for the three and six months ended June 30, 2016, respectively, compared to risk management losses of $3.6 million and $4.0 million for the three and six months ended June 30, 2015, respectively. This fluctuation in risk management gains and losses is mainly attributable to the increase in New York Mercantile Exchange NY Harbor ULSD index during the three months ended June 30, 2016 resulting in changes in market value of various hedging instruments used to protect cash margins in the current and future periods. The majority of the risk management losses for the three months ended June 30, 2016 are associated with improved margins that will be recognized in the third and fourth quarters. Costs of goods sold for separated RIN inventory sales including lower of cost or net realizable value writedown were $61.2 million and $87.7 million for the three and six months ended June 30, 2016, respectively and $49.5 million and $87.0 million for the three and six months ended June 30, 2015, respectively.
Selling, general and administrative expenses. Our selling, general and administrative, or SG&A, expenses were $20.9 million and $40.6 million, or 4% and 5% of total revenue, for the three and six months ended June 30, 2016, respectively and $15.4 million and $32.0 million, or 4% and 5% of total revenue, for the three and six months ended June 30, 2015, respectively. The increase of approximately $5.5 million and $8.6 million, or 36% and 27%, for the three and six months ended June 30, 2016, respectively was primarily due to $2.1 and $3.2 million increases in employee related expenses as headcount increased from prior year acquisitions supporting growth and $2.0 million and $2.5 million increases in legal and professional expenses, largely associated with international expansion and to support our growth.
Research and development expense. Our research and development expenses were $4.4 million and $8.4 million for the three and six months ended June 30, 2016, respectively compared to $4.4 million and