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, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-35397
RENEWABLE ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)
   
Delaware
   
26-4785427
(State of other jurisdiction of
incorporation or organization)
   
(I.R.S. Employer
Identification No.)
   
   
416 South Bell Avenue, Ames, Iowa
   
50010
(Address of principal executive offices)
   
(Zip code)
(515) 239-8000
(Registrant’s telephone number, including area code)     
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
   
Large accelerated filer  ¨
   
Accelerated filer  x
   
   
Non-accelerated filer   ¨
   (Do not check if a smaller reporting company)
Smaller reporting company  ¨
 
 
 
 
 
Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO   x
As of July 31, 2017, the registrant had 38,689,478 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,
2017
 
December 31,
2016
ASSETS
   

 
   

CURRENT ASSETS:
   

 
   

Cash and cash equivalents
$
87,591

 
$
116,210

Accounts receivable, net
66,920

 
164,949

Inventories
135,006

 
145,408

Prepaid expenses and other assets
89,156

 
36,272

Total current assets
378,673

 
462,839

Property, plant and equipment, net
614,884

 
599,474

Goodwill
16,080

 
16,080

Intangible assets, net
28,301

 
29,470

Investments
13,020

 
12,110

Other assets
9,557

 
12,630

Restricted cash

 
4,000

TOTAL ASSETS
$
1,060,515

 
$
1,136,603

LIABILITIES AND EQUITY
   

 
   

CURRENT LIABILITIES:
   

 
   

Lines of credit
$
69,247

 
$
52,844

Current maturities of long-term debt
16,674

 
15,402

Accounts payable
74,818

 
99,137

Accrued expenses and other liabilities
37,280

 
38,916

Deferred revenue
402

 
27,246

Total current liabilities
198,421

 
233,545

Unfavorable lease obligation
3,953

 
15,515

Deferred income taxes
23,254

 
20,279

Long-term contingent consideration for acquisitions
16,625

 
28,931

Convertible debt conversion liability
59,818

 
27,100

Long-term debt (net of debt issuance costs of $5,856 and $6,286, respectively)
192,807

 
196,203

Other liabilities
3,749

 
4,856

Total liabilities
498,627

 
526,429

COMMITMENTS AND CONTINGENCIES


 


EQUITY:
   

 
   

Common stock ($.0001 par value; 300,000,000 shares authorized; 38,685,306 and 38,553,413 shares outstanding, respectively)
5

 
5

Common stock—additional paid-in-capital
483,631

 
480,906

Retained earnings
163,284

 
214,007

Accumulated other comprehensive loss
(2,570
)
 
(5,751
)
Treasury stock (9,281,444 and 9,246,002 shares outstanding, respectively)
(82,462
)
 
(81,824
)
Total equity attributable to the Company's shareholders
561,888

 
607,343

Non-controlling interest

 
2,831

Total equity
561,888

 
610,174

TOTAL LIABILITIES AND EQUITY
$
1,060,515

 
$
1,136,603

See notes to condensed consolidated financial statements.

1



RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share amounts)
 
Three months ended
 
Six months ended
   
June 30, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
REVENUES:
   
 
   
 
   
 
   
Biomass-based diesel sales
$
455,928

 
$
399,325

 
$
799,664

 
$
613,001

Separated RIN sales
67,349

 
60,790

 
124,674

 
86,555

Biomass-based diesel government incentives
10,821

 
97,153

 
27,762

 
155,554

   
534,098

 
557,268

 
952,100

 
855,110

Other revenue
1,005

 
1,033

 
1,896

 
1,062

   
535,103

 
558,301

 
953,996

 
856,172

COSTS OF GOODS SOLD:
   
 
   
 
   
 
   
Biomass-based diesel
468,407

 
468,069

 
822,258

 
721,786

Separated RINs
34,218

 
65,370

 
80,847

 
92,139

Other costs of goods sold
1,024

 

 
2,154

 
2

Impairment of long-lived assets
1,341

 

 
1,341

 

   
504,990

 
533,439

 
906,600

 
813,927

GROSS PROFIT
30,113

 
24,862

 
47,396

 
42,245

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
22,812

 
20,850

 
45,719

 
40,626

RESEARCH AND DEVELOPMENT EXPENSE
3,181

 
4,427

 
6,779

 
8,353

INCOME (LOSS) FROM OPERATIONS
4,120

 
(415
)
 
(5,102
)
 
(6,734
)
OTHER INCOME (EXPENSE), NET:
   
 
   
 
   
 
   
Change in fair value of contingent consideration
24

 
(3,571
)
 
(565
)
 
(3,556
)
Change in fair value of convertible debt conversion liability
(32,546
)
 
13,432

 
(32,718
)
 
13,432

Gain on debt extinguishment

 
2,152

 

 
2,152

Gain on involuntary conversion

 
997

 

 
4,540

Other income (loss), net
32

 
153

 
(288
)
 
65

Interest expense
(4,479
)
 
(3,738
)
 
(9,015
)
 
(7,049
)
   
(36,969
)
 
9,425

 
(42,586
)
 
9,584

INCOME (LOSS) BEFORE INCOME TAXES
(32,849
)
 
9,010

 
(47,688
)
 
2,850

INCOME TAX EXPENSE
(1,960
)
 
(1,296
)
 
(3,035
)
 
(2,024
)
NET INCOME (LOSS)
(34,809
)
 
7,714

 
(50,723
)
 
826

LESS—NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST

 
(108
)
 

 
(138
)
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY
(34,809
)
 
7,606

 
(50,723
)
 
688

LESS—EFFECT OF PARTICIPATING SHARE-BASED AWARDS

 
(161
)
 

 
(12
)
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY’S COMMON STOCKHOLDERS
$
(34,809
)
 
$
7,445

 
$
(50,723
)
 
$
676

NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
   
 
   
 
   
 
   
BASIC
$
(0.90
)
 
$
0.18

 
$
(1.31
)
 
$
0.02

DILUTED
$
(0.90
)
 
$
0.18

 
$
(1.31
)
 
$
0.02

WEIGHTED AVERAGE SHARES USED TO COMPUTE NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
   
 
   
 
   
 
   
BASIC
38,679,849

 
42,407,888

 
38,639,672

 
43,153,486

DILUTED
38,679,849

 
42,418,841

 
38,639,672

 
43,158,601

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, 2017
 
June 30, 2016
 
June 30, 2017
 
June 30, 2016
Net income (loss)
$
(34,809
)
 
$
7,714

 
$
(50,723
)
 
$
826

Foreign currency translation adjustments
2,630

 
(1,352
)
 
3,181

 
312

Other comprehensive income (loss)
2,630

 
(1,352
)
 
3,181

 
312

Comprehensive income (loss)
(32,179
)
 
6,362

 
(47,542
)
 
1,138

Less—Comprehensive loss attributable to noncontrolling interest

 
(184
)
 

 
(99
)
Comprehensive income (loss) attributable to the Company
$
(32,179
)
 
$
6,546

 
$
(47,542
)
 
$
1,237

See notes to condensed consolidated financial statements.


3



RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
(in thousands, except share amounts)
   
Company Stockholders’ Equity
 
 
 
   
   
Common
Stock
Shares
 
Common
Stock
 
Common Stock -
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Loss
 
Treasury
Stock
 
Noncontrolling Interest
 
Total
BALANCE, January 1, 2016
43,837,714

 
$
4

 
$
474,367

 
$
169,680

 
$
(4,009
)
 
$
(28,762
)
 
$
2,730

 
$
614,010

Issuance of common stock
33,973

 

 
316

 

 

 

 

 
316

Issuance of common stock in acquisition
500,000

 
1

 
4,049

 

 

 

 

 
4,050

Conversion of restricted stock units to common stock (net of 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

 

 

 
688

 

 

 
138

 
826

BALANCE, June 30, 2016
39,179,201

 
$
5

 
$
477,169

 
$
170,368

 
$
(3,598
)
 
$
(76,219
)
 
$
2,590

 
$
570,315

BALANCE, January 1, 2017
38,553,413

 
$
5

 
$
480,906

 
$
214,007

 
$
(5,751
)
 
$
(81,824
)
 
$
2,831

 
$
610,174

Conversion of restricted stock units to common stock (net of 35,442 shares of treasury stock purchased)
131,893

 

 

 

 

 
(638
)
 

 
(638
)
Acquisition of noncontrolling interest

 

 
(271
)
 

 

 

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

 

 
2,996

 

 

 

 

 
2,996

Other comprehensive income

 

 

 

 
3,181

 

 

 
3,181

Net loss

 

 

 
(50,723
)
 

 

 

 
(50,723
)
BALANCE, June 30, 2017
38,685,306

 
$
5

 
$
483,631

 
$
163,284

 
$
(2,570
)
 
$
(82,462
)
 
$

 
$
561,888

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, 2017
 
June 30, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
   
 
   
Net income (loss)
$
(50,723
)
 
$
826

Adjustments to reconcile net income (loss) to net cash flows from operating activities:
   
 
   
Depreciation expense
16,946

 
15,498

Amortization expense of assets and liabilities, net
890

 
354

Gain on involuntary conversion

 
(4,540
)
Accretion of convertible note discount
2,685

 
2,462

Change in fair value of contingent consideration
565

 
3,556

Change in fair value of convertible debt conversion liability
32,718

 
(13,432
)
Gain on debt extinguishment

 
(2,152
)
Provision for doubtful accounts
202

 
(34
)
Impairment of long-lived assets
1,341

 

Stock compensation expense
2,996

 
1,934

Deferred tax expense
2,350

 
1,969

Other operating activities
54

 
(505
)
Changes in asset and liabilities, net of effects from acquisitions:
   
 
   
Accounts receivable, net
97,978

 
212,823

Inventories
11,638

 
(42,240
)
Prepaid expenses and other assets
(50,926
)
 
(41,158
)
Accounts payable
(24,558
)
 
(141,972
)
Accrued expenses and other liabilities
(18,798
)
 
(1,686
)
Deferred revenue
(26,844
)
 
1,757

Net cash flows used in operating activities
(1,486
)
 
(6,540
)
CASH FLOWS FROM INVESTING ACTIVITIES:
   
 
   
Cash receipts for involuntary conversion

 
4,540

Cash receipts of restricted cash
4,000

 

Cash paid for purchase of property, plant and equipment
(32,037
)
 
(27,467
)
Cash paid for acquisitions and additional interests, net of cash acquired
(3,518
)
 
(12,720
)
Cash paid for investments
(816
)
 
(3,249
)
Other investing activities

 
376

Net cash flows used in investing activities
(32,371
)
 
(38,520
)
CASH FLOWS FROM FINANCING ACTIVITIES:
   
 
   
Net borrowings on revolving line of credit
16,125

 
21,373

Borrowings on other lines of credit
3,278

 
4,081

Repayments on other lines of credit
(3,000
)
 

Cash received from notes payable

 
163,408

Cash paid on notes payable
(4,038
)
 
(64,530
)
Cash paid for debt issuance costs
(703
)
 
(5,329
)
Cash paid for treasury stock

 
(45,869
)
Cash paid for contingent consideration settlement
(7,678
)
 
(1,390
)
Net cash flows from financing activities
3,984

 
71,744

NET CHANGE IN CASH AND CASH EQUIVALENTS
(29,873
)
 
26,684

CASH AND CASH EQUIVALENTS, Beginning of period
116,210

 
47,081

Effect of exchange rate changes on cash
1,254

 
313

CASH AND CASH EQUIVALENTS, End of period
$
87,591

 
$
74,078

(continued)

5




RENEWABLE ENERGY GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
Six months ended
 
June 30, 2017
 
June 30, 2016
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
   
 
   
Cash paid for income taxes
$
214

 
$
244

Cash paid for interest
$
5,560

 
$
3,976

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
   
 
   
Amounts included in period-end accounts payable for:
   
 
   
Purchases of property, plant and equipment
$
3,166

 
$
4,135

Debt issuance cost
$
94

 
$
34

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
$
1,846

 
$
1,414

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



6



RENEWABLE ENERGY GROUP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For The Three and Six Months Ended June 30, 2017 and 2016
(unaudited)
(in thousands, except share and per share amounts)
NOTE 1 — BASIS OF PRESENTATION AND NATURE OF THE BUSINESS
The condensed consolidated financial statements have been prepared by Renewable Energy Group, Inc. and its subsidiaries (the "Company" or "REG"), pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted as permitted by such rules and regulations. All adjustments, consisting of normal recurring adjustments, have been included. Management believes that the disclosures are adequate to present fairly the financial position, results of operations and cash flows at the dates and for the periods presented. It is suggested that these interim financial statements be read in conjunction with the consolidated financial statements and the notes thereto appearing in the Company’s latest annual report on Form 10-K filed on March 10, 2017. Results for interim periods are not necessarily indicative of those to be expected for the fiscal year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates.
As of June 30, 2017, the Company operates a network of fourteen biorefineries, with twelve locations in North America and two locations in Europe, which includes thirteen operating biomass-based diesel production facilities with aggregate nameplate production capacity of 502 million gallons per year, or mmgy, and a fermentation facility. REG has one feedstock processing facility. The Company's network includes the addition of a 20-million gallon annual nameplate capacity biomass-based diesel refinery located in DeForest, Wisconsin, acquired in March 2016. Ten of these plants are “multi-feedstock capable” which allows them to use a broad range of lower-cost feedstocks, such as inedible corn oil, used cooking oil and inedible animal fats in addition to vegetable oils, such as soybean oil and canola oil.
The biomass-based diesel industry and the Company’s business have benefited from the continuation of certain federal and state incentives. The federal biodiesel mixture excise tax credit (the "BTC") was reinstated for 2015, in effect throughout 2016 and lapsed on January 1, 2017. During the six months ended June 30, 2017, the Company recognized $26,743 as BTC revenue out of the $26,897 deferred BTC revenue that was outstanding as of December 31, 2016. It is uncertain whether the BTC will be reinstated. The expiration or modification of any one or more of those incentives, could adversely affect the financial results of the Company.
During the third quarter 2016 close process, the Company identified errors in its previously reported interim financial statements for the quarter ended March 31, 2016 pertaining to certain biomass-based diesel sales completed in that quarter that contained BTC sharing terms resulting in an overstatement of biomass-based diesel sales and a corresponding understatement of accounts payable, deferred income taxes and income tax expense for the three months ended March 31, 2016 and income tax expense for the three and six months ended June 30, 2016. The correction of the errors is reflected in the comparative figures within this report.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies should be read in conjunction with a summary of the significant accounting policies the Company has disclosed in its Annual Report on Form 10-K for the year ended December 31, 2016.
Accounts Receivable
Accounts receivable are carried at invoiced amount less allowance for doubtful accounts. Management estimates the allowance for doubtful accounts based on existing economic conditions, the financial conditions of customers, and the amount and age of past due accounts. Receivables are considered past due if full payment is not received by the contractual due date. Past due accounts are generally written off against the allowance for doubtful accounts only after reasonable collection attempts have been exhausted. Through June 30, 2017, the Company has received approximately $85,779 of the $89,266 outstanding related to the 2016 biodiesel mixture excise tax credit, which results in $3,487 remaining as outstanding receivables at June 30, 2017.
Renewable Identification Numbers (RINs)
When the Company produces and sells a gallon of biomass-based diesel, 1.5 to 1.7 RINs per gallon are generated. RINs are used to track compliance with Renewable Fuel Standards (RFS2). RFS2 allows the Company to attach between zero and 2.5 RINs to any gallon of biomass-based diesel. As a result, a portion of the selling price for a gallon of biomass-based diesel is

7



generally attributable to RFS2 compliance. However, RINs that the Company generates are a form of government incentive and not a result of the physical attributes of the biomass-based diesel production. Therefore, no cost is allocated to the RIN when it is generated, regardless of whether the RIN is transferred with the biomass-based diesel produced or held by the Company pending attachment to other biomass-based diesel production sales.
In addition, the Company also obtains RINs from third parties who have separated the RINs from gallons of biomass-based diesel. From time to time, the Company holds varying amounts of these separated RINs for resale. RINs obtained from third parties are initially recorded at their cost and are subsequently revalued at the lower of cost or net realizable value as of the last day of each accounting period. The resulting adjustments are reflected in costs of goods sold for the period. The value of these RINs is reflected in “Prepaid expenses and other assets” on the Condensed Consolidated Balance Sheets. The cost of goods sold related to the sale of these RINs is determined using the average cost method, while market prices are determined by RIN values, as reported by the Oil Price Information Service ("OPIS").

California’s Low Carbon Fuel Standard
The Company generates Low Carbon fuel Standard ("LCFS") credits for its low carbon fuels or blendstocks when its qualified low carbon fuels are imported into California. LCFS credits are used to track compliance with California’s LCFS. As a result, a portion of the selling price for a gallon of biomass-based diesel sold into California is also attributable to LCFS compliance. However, LCFS credits that the Company generates are a form of government incentive and not a result of the physical attributes of the biomass-based diesel production. Therefore, no cost is allocated to the LCFS credit when it is generated, regardless of whether the LCFS credit is transferred with the biomass-based diesel produced or held by the Company on other biomass-based diesel sales that do not transfer credits.
In addition, the Company also obtains LCFS credits from third-party trading activities. From time to time, the Company holds varying amounts of these third-party LCFS credits for resale. LCFS credits obtained from third parties are initially recorded at their cost and are subsequently revalued at the lower of cost or net realizable value as of the last day of each accounting period, and the resulting adjustments are reflected in costs of goods sold for the period. The value of LCFS obtained from third parties is reflected in “Prepaid expenses and other assets” on the consolidated balance sheet. The cost of goods sold related to the sale of these LCFS credits is determined using the average cost method, while market prices are determined by LCFS values, as reported by the OPIS.
The Company records assets acquired and liabilities assumed through the exchange of non-monetary assets based on the fair value of the assets and liabilities acquired or the fair value of the consideration exchanged, whichever is more readily determinable.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost less accumulated depreciation. Maintenance and repairs are expensed as incurred. Depreciation expense is computed on a straight-line method based upon estimated useful lives of the assets.
In June 2017, the Company experienced a fire at its Madison facility, resulting in the shutdown of the facility. The Company recorded initial fixed assets with a net book value of approximately $1,846 that were impaired as a result of the fire in June 2017 and is continuing to identify other fixed assets damaged by the 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. The Company's insurer acknowledged the proof of loss due to the fire and subsequent to the quarter end, agreed to issue the Company a payment in the amount of $5,000 to cover initial costs incurred for property losses and business interruption. No impact on earnings was recognized during the three months ended June 30, 2017.
In June 2017, the Company entered into an agreement to terminate the ground lease and purchase the land it had leased for its Geismar, Louisiana biorefinery as well as more than 61 adjacent acres from Lion Copolymer for $20,000. The Company recorded a loss of $3,967 as a result of the lease termination for the three months ended June 30, 2017.
Convertible Debt
In June 2016, the Company issued $152,000 aggregate principal amount of 4% convertible senior notes due 2036 (the "2036 Convertible Notes"). The Company may not elect to issue shares of common stock upon conversion of the 2036 Convertible Notes to the extent such election would result in the issuance of more than 19.99% of the common stock outstanding immediately before the issuance of the 2036 Convertible Notes until the Company receives stockholder approval for such issuance. As a result, the embedded conversion option is accounted for as an embedded derivative liability. This liability is recorded at fair value, and $32,546 and $32,718 fair value adjustments were recorded for the three and six months ended June 30, 2017, respectively. The Company expects to continue marking the embedded conversion option to market

8



unless and until shareholders authorize additional common shares. See "Note 7 - Debt" for a further description of the transaction.
Research and Development
Research and development ("R&D") costs are charged to expense as incurred. In process research and development ("IPR&D") assets acquired in connection with acquisitions are recorded on the Condensed Consolidated Balance Sheets as intangible assets. During October 2016, the Company entered into the first commercial sale agreement to sell certain products made from the IPR&D platform. This triggered the review of the impairment and useful life of the IPR&D assets. The Company performed a final discounted cash flow analysis at October 31, 2016 prior to assigning a useful life to the IPR&D assets. The Company determined the useful life of the IPR&D assets to be 15 years and has utilized a straight line method to amortize these assets over the useful life.
New Accounting Standards
On February 25, 2016, the FASB issued ASU 2016-02, which introduces a lessee model that brings most leases on the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in ASC 606, the FASB’s new revenue recognition standard (e.g., those related to evaluating when profit can be recognized). Furthermore, the ASU addresses other concerns related to the current leases model. The ASU is effective for annual periods beginning after December 15, 2018 and interim periods therein. The Company has started the process to compile and review all of its leases. While the Company is continuing to assess all potential impacts of the standard, the Company currently believes the most significant impact relates to its accounting for office, railcar and terminal operating leases. The Company plans to apply a modified retrospective transition approach to each applicable lease that exists at January 1, 2017 as well as leases entered after this date.
In March 2016, the FASB issued ASU 2016-08, "Revenue from Contracts with Customers (Topic 606): Principal versus Agent Consideration (Reporting Revenue Gross versus Net)" which clarifies how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions. The guidance also re-frames the indicators to focus on evidence that an entity is acting as a principal rather than an agent. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is evaluating the impact of this guidance, but does not expect it to have any material impact on its consolidated financial statements.
In May 2016, the FASB issued ASU 2016-12, which amends certain aspects of the new revenue standard, ASU 2014-09. The amendments address issues such as collectability; presentation of sales tax and other similar taxes collected from customers; noncash consideration; contract modifications and completed contracts at transition; and transition technical correction. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company is evaluating the impact of this guidance, but does not expect it to have any material impact on its consolidated financial statements.
Effective January 1, 2018, the Company will be required to adopt the new guidance of ASC Topic 606, Revenue from Contracts with Customers (Topic 606), which will supersede the revenue recognition requirements in ASC Topic 605, Revenue Recognition. Topic 606 requires the Company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance requires the Company to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation. The Company will be required to adopt Topic 606 either on a full retrospective basis to each prior reporting period presented or on a modified retrospective basis with the cumulative effect of initially applying the new guidance recognized at the date of initial application. The Company will adopt Topic 606 on a modified retrospective basis and will be required to provide additional disclosures of the amount by which each financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect before the change, and an explanation of the reasons for significant changes. The adoption of this new guidance will require expanded disclosures in the Company’s consolidated financial statements. The Company has established a cross-functional implementation team consisting of representatives from all of its business segments. Initial impact assessment also indicates that the majority of the Company's contracts will continue to be recognized at a point in time and that the number of performance obligations and the accounting for variable consideration are not expected to be significantly different from current practice.

9



On May 10, 2017, the FASB issued ASU 2017-09, which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The Company is evaluating the impact of this guidance on its consolidated financial statements.
NOTE 3 — ACQUISITIONS
Sanimax Energy, LLC
On March 15, 2016, the Company acquired fixed assets and inventory from Sanimax Energy, including the 20 mmgy nameplate capacity biomass-based diesel refinery in DeForest, Wisconsin. The Company completed its initial accounting of this business combination as the valuation of the real and personal property was finalized as of December 31, 2016.
The following table summarizes the consideration paid for the acquisition from Sanimax Energy:
 
March 15, 2016
Consideration at fair value for acquisition from Sanimax:
 
Cash
$
12,541

Common stock
4,050

Contingent consideration
4,500

Total
$
21,091

The fair value of the 500,000 shares of Common Stock issued was determined using the closing market price of the Company's common shares at the date of acquisition.
REG Madison may pay contingent consideration of up to $5,000 ("Earnout Payments") over a seven-year period after the acquisition, subject to achievement of certain milestones related to the biomass-based diesel gallons produced and sold by REG Madison. The Earnout Payments are payable in cash and cannot exceed $1,700 in any one year period beginning March 15, 2016 through 2023 and up to $5,000 in aggregate. As of June 30, 2017, the Company has recorded a contingent liability of $2,940, approximately $921 of which has been classified as current on the Condensed Consolidated Balance Sheets.
The following table summarizes the fair values of the assets acquired at the acquisition date.
   
March 15, 2016
Assets acquired from Sanimax Energy:
   
Inventory
$
1,591

Property, plant and equipment
19,500

Net identifiable assets acquired
$
21,091


The following pro forma condensed combined results of operations assume that the acquisition from Sanimax Energy was completed as of January 1, 2016.
 
Three Months 
 Ended 
 June 30, 
 2017
 
Three Months 
 Ended 
 June 30, 
 2016
 
Six Months 
 Ended 
 June 30, 
 2017
 
Six Months 
 Ended 
 June 30, 
 2016
Revenues
$
535,103

 
$
558,301

 
$
953,996

 
$
864,598

Net income (loss)
(34,809
)
 
7,516

 
(50,723
)
 
679

Basic net income (loss) per share
$
(0.89
)
 
$
0.18

 
$
(1.30
)
 
$
0.02


10



NOTE 4 — INVENTORIES
Inventories consist of the following:
   
June 30, 2017
 
December 31, 2016
Raw materials
$
44,935

 
$
34,560

Work in process
3,579

 
3,775

Finished goods
86,492

 
107,073

Total
$
135,006

 
$
145,408

NOTE 5 — OTHER ASSETS
Prepaid expense and other assets consist of the following:
   
June 30, 2017
 
December 31, 2016
Commodity derivatives and related collateral, net
$
3,365

 
$
7,127

Prepaid expenses
12,344

 
10,665

Deposits
4,822

 
2,897

RIN inventory
59,487

 
9,398

Taxes receivable
8,186

 
4,539

Other
952

 
1,646

Total
$
89,156

 
$
36,272

RIN inventory values were adjusted in the amounts of $176 and $612 at June 30, 2017 and December 31, 2016, respectively, to reflect the lower of cost or net realizable value.
Other noncurrent assets consist of the following:
 
June 30, 2017
 
December 31, 2016
Spare parts inventory
$
2,854

 
$
3,532

Catalysts
3,720

 
4,479

Deposits
381

 
2,392

Other
2,602

 
2,227

Total
$
9,557

 
$
12,630

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

 
$
(2,194
)
 
$
4,036

 
8.5 years
Renewable hydrocarbon diesel technology
8,300

 
(1,706
)
 
6,594

 
12.0 years
Ground lease
200

 
(135
)
 
65

 
4.4 years
Acquired customer relationships
2,900

 
(541
)
 
2,359

 
8.1 years
In-process research and development
15,956

 
(709
)
 
15,247

 
14.3 years
Total intangible assets
$
33,586

 
$
(5,285
)
 
$
28,301

 
 

11



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

 
$
(1,987
)
 
$
4,243

 
9.0 years
Renewable hydrocarbon diesel technology
8,300

 
(1,429
)
 
6,871

 
12.5 years
Ground lease
200

 
(127
)
 
73

 
4.9 years
Acquired customer relationships
2,900

 
(396
)
 
2,504

 
8.6 years
In-process research and development
15,956

 
(177
)
 
15,779

 
14.8 years
Total intangible assets
$
33,586

 
$
(4,116
)
 
$
29,470

 
 
The Company recorded intangible amortization expense of $585 and $1,169 for the three and six months ended June 30, 2017, and $323 and $640 for the three and six months ended June 30, 2016, respectively.
The estimated intangible asset amortization expense for the remainder of 2017 through 2023 and thereafter is as follows:
July 1, 2017 through December 31, 2017
$
1,183

2018
2,373

2019
2,379

2020
2,386

2021
2,392

2022
2,385

2023 and thereafter
15,203

Total
$
28,301

NOTE 7 — DEBT
The Company’s debt is as follows:
   
June 30, 2017
 
December 31, 2016
4.00% Convertible Senior Notes, $152,000 face amount, due in June 2036
$
114,842

 
$
113,446

2.75% Convertible Senior Notes, $73,838 face amount, due in June 2019
68,544

 
67,254

REG Danville term loan, secured, variable interest rate of LIBOR plus 4%, due in December 2017
7,100

 
8,163

REG Newton term loan, secured, variable interest rate of LIBOR plus 4%, due in December 2018
10,808

 
13,063

REG Mason City term loan, fixed interest rate of 5%, due in July 2019
1,751

 
2,659

REG Ames term loans, secured, fixed interest rates of 3.5% and 4.25%, due in January 2018 and December 2019, respectively
3,392

 
3,565

REG Grays Harbor term loan, variable interest of minimum of 3.5% or Prime Rate plus 0.25%, due in May 2022
8,467

 
9,273

Other
433

 
468

Total term debt before debt issuance costs
215,337

 
217,891

Less: Current portion of long-term debt
16,674

 
15,402

Less: Debt issuance costs (net of accumulated amortization of $2,846 and $2,396, respectively)
5,856

 
6,286

Total long-term debt
$
192,807

 
$
196,203


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


12



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

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

The Company evaluated the terms of the conversion features under the applicable accounting literature, including Derivatives and Hedging, ASC 815, and determined that a certain feature required separate accounting as a derivative. This derivative was recorded as a long-term liability, "Convertible Debt Conversion Liability", on the Condensed Consolidated Balance Sheets and will be adjusted to reflect fair value each reporting date. The fair value of the convertible debt conversion liability at issuance was $40,145. The fair value of the convertible debt conversion liability at June 30, 2017 was $59,818. The Company recognized a loss of $32,718 and $32,546 for the three and six months ended June 30, 2017, respectively, which is reflected in the "Change in Fair Value of Convertible Debt Conversion Liability" on the Condensed Consolidated Statements of Operations. The debt liability component of 2036 Convertible Notes was determined to be $111,855 at issuance, reflecting a debt discount of $40,145. The debt discount is to be amortized through June 2036. The effective interest rate on the debt liability component was 2.45%.

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

Lines of Credit
 
June 30, 2017
 
December 31, 2016
Amount outstanding under lines of credit
$
69,247

 
$
52,844

Maximum available to be borrowed under lines of credit
$
31,008

 
$
100,237


On March 16, 2016, REG Energy Services, LLC ("REG Energy Services") entered into an operating and revolving line of credit agreement (the "Agreement") with Bankers Trust Company (“Bankers Trust”). Pursuant to the Agreement, Bankers Trust agreed to provide an operating and revolving line of credit (the "Line of Credit") to REG Energy Services in the amount of $30,000. Amounts outstanding under the Agreement bear variable interest as stipulated in the Agreement. The Agreement contains various loan covenants that restrict REG Energy Services’ ability to take certain actions, including prohibiting it in certain circumstances from making payments to the Company. In addition, the Line of Credit is secured by substantially all of REG Energy Services’ accounts receivable and inventory. On March 16, 2017, the Agreement was amended to extend the maturity date to March 18, 2018.

REG Germany has a trade finance facility agreement ("Uncommitted Credit Facility Agreement") with BNP Paribas in Europe, which allows it to borrow up to $25,000 for funding the purchase of goods and services. Amounts outstanding under the Uncommitted Credit Facility Agreement bear variable interest and are payable as stipulated in the agreement. The amount that can be borrowed under the agreement can be amended, cancelled or restricted at BNP Paribas's sole discretion and therefore is not included in the maximum available to be borrowed under lines of credit above. The Uncommitted Credit

13



Facility Agreement contains various loan covenants that require REG Germany to maintain certain financial measures. At June 30, 2017, the nominal interest rates ranged from 2.14% to 2.50% per annum.
NOTE 8 — DERIVATIVE INSTRUMENTS
The Company enters into New York Mercantile Exchange NY Harbor ULSD ("NY Harbor ULSD" or previously referred to as heating oil) and CBOT Soybean Oil (previously referred to as soybean oil) futures, swaps and options ("commodity contract derivatives") to reduce the risk of price volatility related to anticipated purchases of feedstock raw materials and to protect cash margins from potentially adverse effects of price volatility on biomass-based diesel sales where prices are set at a future date. All of the Company’s commodity contract derivatives are designated as non-hedge derivatives and recorded at fair value on the Condensed Consolidated Balance Sheets. Unrealized gains and losses are recognized as a component of biomass-based diesel costs of goods sold reflected in current results of operations. As of June 30, 2017, the net notional volumes of NY Harbor ULSD and CBOT Soybean Oil covered under the open commodity derivative contracts were approximately 73 million gallons and 6 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, 2017
 
December 31, 2016
   
Assets
 
Liabilities
 
Assets
 
Liabilities
Gross amounts of derivatives recognized at fair value
$
2,962

 
$
2,045

 
$
1,272

 
$
3,511

Cash collateral
2,448

 

 
9,366

 

Total gross amount recognized
5,410

 
2,045

 
10,638

 
3,511

Gross amounts offset
(2,045
)
 
(2,045
)
 
(3,511
)
 
(3,511
)
Net amount reported in the condensed consolidated balance sheets
$
3,365

 
$

 
$
7,127

 
$

The following table sets forth the commodity contract derivatives gains and (losses) included in the Condensed Consolidated Statements of Operations:
   
Location of Gain (Loss)
Recognized in income
 
Three Months 
 Ended 
 June 30, 
 2017
 
Three Months 
 Ended 
 June 30, 
 2016
 
Six Months 
 Ended 
 June 30, 
 2017
 
Six Months 
 Ended 
 June 30, 
 2016
Commodity derivatives
Cost of goods sold – Biomass-based diesel
 
$
9,758

 
$
(30,527
)
 
$
18,047

 
$
(34,796
)
NOTE 9 — FAIR VALUE MEASUREMENT
The fair value hierarchy prioritizes the inputs used in measuring fair value as follows:
Level 1 — Quoted prices for identical instruments in active markets.
Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.
Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
A summary of assets (liabilities) measured at fair value is as follows:
   
As of June 30, 2017
   
Total
 
Level 1
 
Level 2
 
Level 3
Commodity contract derivatives
$
917

 
$
(135
)
 
$
1,052

 
$

Convertible debt conversion liability
(59,818
)
 

 
(59,818
)
 

Contingent considerations for acquisitions
(39,455
)
 

 

 
(39,455
)
 
$
(98,356
)
 
$
(135
)
 
$
(58,766
)
 
$
(39,455
)

14



   
As of December 31, 2016
   
Total
 
Level 1
 
Level 2
 
Level 3
Commodity contract derivatives
$
(2,239
)
 
$
(1,297
)
 
$
(942
)
 
$

Convertible debt conversion liability
(27,100
)
 

 
(27,100
)
 

Contingent considerations for acquisitions
(46,568
)
 

 

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

 
$
41,712

Fair value of contingent consideration at measurement date

 
4,500

Change in estimates included in earnings
589

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

 
45,616

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

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

 
$
48,378

The estimated fair values of the Company’s financial instruments, which are not recorded at fair value, are as follows:
   
As of June 30, 2017
 
As of December 31, 2016
   
Asset (Liability)
Carrying
Amount
 
Fair Value
 
Asset (Liability)
Carrying
Amount
 
Fair Value
Financial liabilities:
   
 
   
 
   
 
   
Debt and lines of credit
$
(284,584
)
 
$
(277,500
)
 
$
(270,735
)
 
$
(264,267
)
The carrying amounts reported in the Condensed Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair values. Money market funds are included in cash and cash equivalents on the Condensed Consolidated Balance Sheets.
The Company used the following methods and assumptions to estimate fair value of its financial instruments:
Commodity derivatives: The instruments held by the Company consist primarily of futures contracts, swap agreements, purchased put options and written call options. The fair value of contracts based on quoted prices of identical assets in an active exchange-traded market is reflected in Level 1. Contract fair value that is determined based on quoted prices of similar contracts in over-the-counter markets is reflected in Level 2.
Contingent consideration for acquisitions: The fair value of the contingent consideration regarding REG Life Sciences, LLC ("REG Life Sciences") is determined using an expected present value technique. Expected cash flows are determined using the probability weighted-average of possible outcomes that would occur should achievement of certain milestones related to the development and commercialization of products from REG Life Sciences' technology occur. There is no observable market data available to use in valuing the contingent consideration; therefore, the Company developed its own assumptions related to the expected future delivery of product enhancements to estimate the fair value of these liabilities. An 8.0% discount rate is used to estimate the fair value of the expected payments.
The fair value of all other contingent consideration is determined using an expected present value technique. Expected cash flows are determined using the probability weighted-average of possible outcomes that would occur should the achievement of certain milestones related to the production and/or sale of biomass-based diesel at the specific production facility. A discount rate ranging from 5.8% to 10.0% is used to estimate the fair value of the expected payments.
Convertible debt conversion liability: The fair value of the convertible debt conversion liability is estimated using the Black-Scholes model incorporating the terms and conditions of the 2036 Convertible Notes and considering changes in the prices of the Company's common stock, Company stock price volatility, risk-free rates and changes

15



in market rates. The valuations are, among other things, subject to changes in the Company's credit worthiness as well as change in general market conditions. As the majority of the assumptions used in the calculations are based on market sources, the fair value of the convertible conversion liability is reflected in Level 2.
Debt and lines of credit: The fair value of long-term debt and lines of credit was established using discounted cash flow calculations and current market rates reflecting Level 2 inputs.
NOTE 10 — NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is presented in conformity with the two-class method required for participating securities. Participating securities include restricted stock units ("RSUs").
Under the two-class method, net income is reduced for distributed and undistributed dividends earned in the current period. The remaining earnings are then allocated to Common Stock and the participating securities. The Company calculates the effects of participating securities on diluted earnings per share ("EPS") using both the “if-converted or treasury stock” and "two-class" methods and discloses the method which results in a more dilutive effect. The effects of Common Stock options, warrants, stock appreciation rights and convertible notes on diluted EPS are calculated using the treasury stock method unless the effects are anti-dilutive to EPS.
The following potentially dilutive weighted average securities were excluded from the calculation of diluted net income (loss) per share attributable to common stockholders during the periods presented, as the effect was anti-dilutive:
   
Three Months 
 Ended 
 June 30, 
 2017
 
Three Months 
 Ended 
 June 30, 
 2016
 
Six Months 
 Ended 
 June 30, 
 2017
 
Six Months 
 Ended 
 June 30, 
 2016
Options to purchase common stock

 
87,026

 

 
87,026

Stock appreciation rights
1,297,282

 
2,251,132

 
1,446,618

 
2,422,353

2019 Convertible notes
5,567,112

 
9,302,579

 
5,567,112

 
10,070,399

2036 Convertible notes
14,106,725

 
4,495,550

 
14,106,725

 
2,247,775

Total
20,971,119

 
16,136,287

 
21,120,455

 
14,827,553

The following table presents the calculation of diluted net loss per share:
   
Three Months 
 Ended 
 June 30, 
 2017
 
Three Months 
 Ended 
 June 30, 
 2016
 
Six Months 
 Ended 
 June 30, 
 2017
 
Six Months 
 Ended 
 June 30, 
 2016
Net income (loss) attributable to the Company’s common stockholders - Basic
$
(34,809
)
 
$
7,445

 
$
(50,723
)
 
$
676

Less: effect of participating securities

 

 

 

Net income (loss) attributable to common stockholders - Dilutive
$
(34,809
)
 
$
7,445

 
$
(50,723
)
 
$
676

Shares:

 
 
 

 

Weighted-average shares used to compute basic net income per share
38,679,849

 
42,407,888

 
38,639,672

 
43,153,486

Adjustment to reflect stock appreciation right conversions

 
10,953

 

 
5,115

Weighted-average shares used to compute diluted net income per share
38,679,849

 
42,418,841

 
38,639,672

 
43,158,601

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

 
 
 

 

Diluted
$
(0.90
)
 
$
0.18

 
$
(1.31
)
 
$
0.02

NOTE 11 — REPORTABLE SEGMENTS AND GEOGRAPHIC INFORMATION
The Company reports its reportable segments based on products and services provided to customers. The Company re-assesses its reportable segments on an annual basis. The Company has three reportable segments, which generally align the Company's external financial reporting segments with its internal operating segments, which are based on its internal organizational structure, operating decisions and performance assessment. The Company's reportable segments at June 30, 2017 and for the year ended December 31, 2016 are composed of Biomass-based Diesel, Services, Renewable Chemicals and

16



Corporate and other activities. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
The Biomass-based Diesel segment processes waste vegetable oils, animal fats, virgin vegetable oils and other feedstocks and methanol into biomass-based diesel. The Biomass-based Diesel segment also includes the Company’s purchases and resale of biomass-based diesel produced by third parties. Revenue is derived from the purchases and sales of biomass-based diesel, RINs and raw material feedstocks acquired from third parties, sales of biomass-based diesel produced under toll manufacturing arrangements with third party facilities, sales of processed biomass-based diesel from Company facilities, related by-products and renewable energy government incentive payments, in the U.S. and internationally.
The Services segment offers services for managing the construction of biomass-based diesel production facilities and managing ongoing operations of third-party plants and collects fees related to the services provided. The Company does not allocate items that are of a non-operating nature or corporate expenses to the business segments. Revenues from services provided to other segments are recorded by the Services segment at cost.
The Renewable Chemicals segment consists of research and development activities involving the production of renewable chemicals, additional advanced biofuels and other products from the Company's proprietary microbial fermentation process and the operations of a demonstration scale facility located in Okeechobee, Florida.
The Corporate and Other segment includes trading activities related to petroleum-based heating oil and diesel fuel as well as corporate activities, which consist of corporate office expenses such as compensation, benefits, occupancy and other administrative costs, including management service expenses. Corporate and Other also includes income/(expense) not associated with the reportable segments, such as corporate general and administrative expenses, shared service expenses, interest expense and interest income, all reflected on an accrual basis of accounting. In addition, Corporate and Other includes cash and other assets not associated with the reportable segments, including investments. Intersegment revenues are reported by the Services and Corporate and Other segments.


17



The following table represents the significant items by reportable segment:
   
Three Months 
 Ended 
 June 30, 
 2017
 
Three Months 
 Ended 
 June 30, 
 2016
 
Six Months 
 Ended 
 June 30, 
 2017
 
Six Months 
 Ended 
 June 30, 
 2016
Net revenues:
   
 
   
 
   
 
   
Biomass-based Diesel (includes REG Germany's net sales of $41,473 and $95,025 for the three and six months ended June 30, 2017, respectively, and $45,748 and $82,667 for the three and six months ended June 30, 2016, respectively)
$
532,527

 
$
539,631

 
$
922,632

 
$
824,669

Services
20,922

 
21,396

 
43,755

 
42,133

Renewable Chemicals
1,002

 
1,000

 
1,830

 
1,000

Corporate and Other
39,366

 
23,643

 
77,138

 
40,632

Intersegment revenues
(58,714
)
 
(27,369
)
 
(91,359
)
 
(52,262
)
   
$
535,103

 
$
558,301

 
$
953,996

 
$
856,172

Income (loss) before income taxes:
   
 
   
 
   
 
   
Biomass-based Diesel (includes REG Germany's income (loss) of ($2,092) and ($1,332) for the three and six months ended June 30, 2017, respectively and $1,183 and $1,616 for the three and six months ended June 30, 2016, respectively)
$
4,323

 
$
(3,591
)
 
$
(6,392
)
 
$
1,546

Services
(267
)
 
1,261

 
(377
)
 
1,834

Renewable Chemicals
(4,828
)
 
(3,924
)
 
(9,835
)
 
(8,605
)
Corporate and Other
(32,077
)
 
15,264

 
(31,084
)
 
8,075

   
$
(32,849
)
 
$
9,010

 
$
(47,688
)
 
$
2,850

Depreciation and amortization expense, net:
   
 
   
 
   
 
   
Biomass-based Diesel (includes REG Germany's amounts of $788 and $1,474 for the three and six months ended June 30, 2017, respectively and $594 and $1,445 for the three and six months ended June 30, 2016, respectively)
$
7,830

 
$
7,140

 
$
15,570

 
$
14,068

Services
251

 
117

 
482

 
213

Renewable Chemicals
384

 
368

 
769

 
782

Corporate and Other
508

 
392

 
1,015

 
789

   
$
8,973

 
$
8,017

 
$
17,836

 
$
15,852

Cash paid for purchases of property, plant and equipment:
   
 
   
 
   
 
   
Biomass-based Diesel (includes REG Germany's amounts of $1,227 and $2,395 for the three and six months ended June 30, 2017, respectively, and $374 and $374 for the three and six months ended June 30, 2016, respectively)
$
13,517

 
$
11,895

 
$
29,398

 
$
25,499

Services
938

 

 
1,520

 
1,166

Renewable Chemicals

 
619

 
7

 
619

Corporate and Other
946

 
183

 
1,112

 
183

   
$
15,401

 
$
12,697

 
$
32,037

 
$
27,467



18



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

 
$
16,080

 
 
 
 
Assets:
   
 
   
Biomass-based Diesel (including REG Germany's assets of $58,039 and $54,646, respectively)
$
964,373

 
$
1,026,349

Services
49,941

 
53,823

Renewable Chemicals
22,330

 
22,883

Corporate and Other
309,764

 
299,825

Intersegment eliminations
(285,893
)
 
(266,277
)
   
$
1,060,515

 
$
1,136,603


Geographic Information:
The following geographic data include net sales attributed to the countries based on the location of the subsidiary making the sale and long-lived assets based on physical location. Long-lived assets represent the net book value of property, plant and equipment.
   
Three Months 
 Ended 
 June 30, 
 2017
 
Three Months 
 Ended 
 June 30, 
 2016
 
Six Months 
 Ended 
 June 30, 
 2017
 
Six Months 
 Ended 
 June 30, 
 2016
Net revenues:
   
 
   
 
   
 
   
United States
$
477,769

 
$
512,553

 
$
843,110

 
$
773,505

Germany
41,473

 
45,748

 
$
95,025

 
82,667

Other Foreign
15,861

 

 
15,861

 

Non-United States
57,334

 
45,748

 
110,886

 
82,667

 
$
535,103

 
$
558,301

 
$
953,996

 
$
856,172

   
June 30, 2017
 
December 31, 2016
Long-lived assets:
   
 
   
United States
$
593,247

 
$
580,868

Foreign
21,637

 
18,606

 
$
614,884

 
$
599,474

NOTE 12 — COMMITMENTS AND CONTINGENCIES
The Company is involved in legal proceedings in the normal course of business. The Company currently believes that any ultimate liability arising out of such proceedings will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
NOTE 13 — SUBSEQUENT EVENTS
On July 3, 2017, Daniel J. Oh resigned as President, Chief Executive Officer and as a member of the Board of Directors of the Company. The Company and Mr. Oh are parties to an employment agreement, which provides that Mr. Oh will be entitled to a combination of cash and stock payments as severance benefits.
In July 2017, the Company reached an agreement with its insurance carriers on a final payment for business interruption insurance related to the fires at its Geismar facility of $7,636, which has all been received as of the date of this report.
On July 28, 2017, REG Danville, LLC ("REG Danville") entered into an amended loan agreement ("Loan Agreement") with Fifth Third Bank. The Loan Agreement allows REG Danville to borrow $12,500 with a maturity date of July 28, 2022.

19



The loan requires monthly principal payments and bears LIBOR-based variable interest rates. The loan agreement contains various loan covenants.
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 the expected capabilities of these facilities, planned capital expenditures and our ability to obtain financing for such construction; existing or proposed legislation affecting the biomass-based diesel industry, including governmental incentives and tax credits; the investigation by the U.S. International Trade Commission regarding trade practices by Argentine and Indonesian companies; our utilization of forward contracting and hedging strategies to minimize feedstock and other input price risk; our operational management and facility construction services; the expected effect of current and future environmental laws and regulations on our business and financial condition; our ability to renew existing and expired contracts at similar or more favorable terms; expected technological advances in biomass-based diesel production methods; our ability to develop and market renewable chemicals; anticipated future revenue from products from our life sciences business, which have not been fully developed or commercialized; our competitive advantage relating to input costs relative to our competitors; the market for biomass-based diesel, including the factors that affect such market and our operating results and seasonal fluctuations in demand, and potential biomass-based diesel consumers; our ability to further develop our financial, managerial and other internal controls and reporting systems to accommodate future growth; our ability to improve our internal control over financial reporting; expectations regarding the realization of deferred tax assets and the establishment and maintenance of tax reserves and anticipated trends; the ability of insurance to protect against liabilities, including any liability resulting from the fires at our Geismar and Madison facilities; expectations regarding our expenses and sales; our credit worthiness and anticipated general market conditions; anticipated cash needs and estimates regarding capital requirements and needs for additional financing; and challenges in our business and the biomass-based diesel market.
These forward-looking statements are based on management’s current expectations, estimates, assumptions and projections, which are subject to risks and uncertainties. These risks and uncertainties could cause actual results to differ materially from those expected. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Risks and uncertainties include, but are not limited to, those risks discussed in Item 1A Part II in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017. We encourage you to read this Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the accompanying condensed consolidated financial statements and related notes. Forward-looking statements contained in this report present management’s views only as of the date of this report. Except as required under applicable law, we do not intend to issue updates concerning any future revisions of management’s views to reflect events or circumstances occurring after the date of this report.
Overview
Our Company focuses on providing cleaner, lower carbon products and services. We utilize a nationwide production, distribution and logistics system as part of an integrated value chain model to focus on converting natural fats, oils and greases into advanced biofuels. We own and operate 14 biorefineries with 12 locations in North America and two locations in Germany, which consist of 13 biomass-based diesel plants (biodiesel and renewable hydrocarbon diesel), with aggregate nameplate production capacity of 502 gallons per year ("mmgy"), and one demonstration scale fermentation facility. We also have one feedstock processing facility in Germany. We are also engaged in research and development efforts focused on the conversion of diverse feedstocks into renewable chemicals and biobased products.
We are a lower-cost biomass-based diesel producer. We primarily produce our biomass-based diesel from a wide variety of lower-cost feedstocks, including inedible corn oil, used cooking oil and inedible animal fat. We also produce biomass-based diesel from virgin vegetable oils, which are more widely available and tend to be higher in price. We believe our ability to process a wide variety of feedstocks provides us with a cost advantage over many biomass-based diesel producers, particularly those that rely primarily on higher cost virgin vegetable oils, such as soybean oil or canola oil.
We expanded our business internationally by acquiring a majority interest in what is now known as REG Germany, GmbH, or REG Germany, in December 2014. We continued to acquire additional shares throughout 2015 and 2016, and in January 2017, we acquired full equity ownership of REG Germany. REG Germany is a fully-integrated company that utilizes

20



used cooking oil and other waste feedstocks to produce biomass-based diesel at its two biorefineries in Germany. The combined nameplate production capacity is approximately 50 mmgy.
We sell petroleum-based heating oil and diesel fuel, which enables us to offer additional biofuel blends, while expanding our customer base. We sell heating oil and ultra-low sulfur diesel ("ULSD") at terminals throughout the northeastern U.S. as well as BioHeat® blended heating fuel at one of our existing Northeast terminal locations. In 2015, we expanded our sales of additional biofuel blends to Midwest terminal locations and look to potentially expand in other areas across North America.
In January 2014, we acquired a development-stage industrial biotechnology business focusing on microbial fermentation to develop and produce renewable chemicals, fuels and other products.
We acquired a 75 mmgy nameplate capacity renewable hydrocarbon diesel ("RHD") biorefinery located in Geismar, Louisiana in June 2014. Our Geismar facility had been idled by its previous owner, began operating again by us in October 2014 and was shut down between April 2015 and early March 2016 due to two separate fires that occurred in April and September 2015. Our Geismar facility has been running at high utilization rates since early October 2016.
In August 2015, we acquired our Grays Harbor facility, a 100 mmgy nameplate biodiesel plant and terminal at the Port of Grays Harbor, Washington. This acquisition expanded our production fleet to the west coast of the United States. The Grays Harbor location includes 18 million gallons of storage capacity and a terminal that can accommodate feedstock intake and fuel delivery on deep-water PANAMAX class vessels. It also possesses significant rail and truck transport capabilities. To date, the production facility's primary feedstock has been canola oil.
In March 2016, we acquired our 20 mmgy nameplate biodiesel refinery located in DeForest, Wisconsin, or REG Madison, which produces biodiesel from yellow grease, rendered animal fats, and inedible corn oil, and also produces refined vegetable oils using our patented technology currently in use at our Seneca, Illinois plant. The facility has both truck and rail capabilities. In June 2017, we experienced a fire at our Madison facility, resulting in the shutdown of the facility.
During the three and six months ended June 30, 2017, we sold 160 million and 282 million total gallons of fuel, including 16 million and 30 million gallons of biomass-based diesel that we purchased from third parties and resold, 10 million and 21 million biomass-based diesel gallons produced by REG Germany and 18 million and 40 million petroleum-based diesel gallons, respectively. During 2016, we sold 567 million total gallons, including 77 million biomass-based gallons we purchased from third parties and resold, 45 million biomass-based diesel gallons produced by REG Germany and 54 million petroleum-based diesel gallons.
Our businesses are organized into three reportable segments – the Biomass-based Diesel segment, the Services segment and the Renewable Chemicals segment.
Biomass-based Diesel Segment
Our Biomass-based Diesel segment includes:
the operations of the following biomass-based diesel production facilities:
a 12 mmgy nameplate biodiesel production facility located in Ralston, Iowa;
a 35 mmgy nameplate biodiesel production facility located near Houston, Texas;
a 45 mmgy nameplate biodiesel production facility located in Danville, Illinois;
a 30 mmgy nameplate biodiesel production facility located in Newton, Iowa;
a 60 mmgy nameplate biodiesel production facility located in Seneca, Illinois;
a 30 mmgy nameplate biodiesel production facility located near Albert Lea, Minnesota;
a 15 mmgy nameplate biodiesel production facility located in New Boston, Texas;
a 30 mmgy nameplate biodiesel production facility located in Mason City, Iowa;
a 75 mmgy nameplate RHD production facility located in Geismar, Louisiana;
a 27 mmgy nameplate biodiesel production facility located in Emden, Germany;
a 23 mmgy nameplate biodiesel production facility located in Oeding, Germany;
a 100 mmgy nameplate biodiesel production facility located in Grays Harbor, Washington; and
a 20 mmgy nameplate biodiesel production facility located in DeForest, Wisconsin.
purchases and resales of biomass-based diesel, petroleum-based diesel, Renewable Identification Numbers ("RINs") and Low Carbon Fuel Standard credits, or LCFS credits, and raw material feedstocks acquired from third parties;
sales of biomass-based diesel produced under toll manufacturing arrangements with third-party facilities using our feedstocks; and

21



incentives received from federal and state programs for renewable fuels.

We derive a small portion of our revenues from the sale of glycerin, free fatty acids and other co-products of the biomass-based diesel production process. In 2016 and for the three and six months ended June 30, 2017, our revenues from the sale of co-products were less than five percent of our total Biomass-based Diesel segment revenues. For the three and six months ended June 30, 2017, revenues from the sale of petroleum-based heating oil and diesel fuel acquired from third parties, along with the sale of these items further blended with biodiesel produced at wholly owned facilities or purchased from third parties, were approximately five percent and seven percent, respectively, of our total revenues.
In accordance with EPA regulations, we generate 1.5 to 1.7 RINs for each gallon of biomass-based diesel we produce. RINs are used to track compliance with Renewable Fuel Standard 2, or RFS2, using the EPA moderated transaction system, or EMTS. RFS2 allows us to attach between zero and 2.5 RINs to any gallon of biomass-based diesel we sell. When we attach 1.5 to 2.5 RINs to a sale of biomass-based diesel gallons, a portion of our selling price for a gallon of biomass-based diesel is generally attributable to RFS2 compliance; however no cost is allocated to the RINs generated by our biomass-based diesel production as RINs are a form of government incentive and not a result of the physical attributes of the biomass-based diesel production. In addition, RINs, once obtained through the production and sales of gallons of biomass-based diesel, may be separated by the acquirer and sold separately. We regularly obtain RINs from third parties for resale, and the value of these RINs is reflected in “Prepaid expenses and other assets” on our Condensed Consolidated Balance Sheets. At each balance sheet date, this RIN inventory is valued at the lower of cost or net realizable value and any resulting adjustments are reflected in our cost of goods sold for the period. The cost of RINs obtained from third parties is determined using the average cost method. Because we do not allocate costs to RINs generated by our biomass-based diesel production, fluctuations in the value of our RIN inventory represent fluctuations in the value of RINs we have obtained from third parties. At June 30, 2017, we had approximately 60.0 million biomass-based diesel RINs and 1.4 million advanced biofuel RINs available to be sold, as compared to 16.8 million biomass-based diesel RINs and 0.2 million advanced biofuel RINs held for sale at December 31, 2016, respectively. According to the Oil Pricing Information System ("OPIS"), the median closing price at June 30, 2017 was $1.11 and $1.09 per biomass-based diesel RIN and advanced biofuel RIN, respectively compared to $1.055 and $1.055 at December 31, 2016, respectively, per biomass-based diesel RIN and advanced biofuel RIN, respectively.
We generate Low Carbon fuel Standard ("LCFS") credits for our low carbon fuels or blendstocks when our qualified low carbon fuels are imported into California. LCFS credits are used to track compliance with California’s LCFS. As a result, a portion of the selling price for a gallon of biomass-based diesel sold into California is also attributable to LCFS compliance. Like RINs, LCFS credits that we generate are a form of government incentive and not a result of the physical attributes of the biomass-based diesel production. Therefore, no cost is allocated to the LCFS credit when it is generated, regardless of whether the LCFS credit is transferred with the biomass-based diesel produced or held by us. At June 30, 2017, we held for sale approximately 13,000 LCFS credits, increasing from 5,000 credits at December 31, 2016. According to OPIS, the median closing price at June 30, 2017 and December 31, 2016 was $78.00 and $93.00, respectively, per LCFS credit.
Services Segment
Our Services segment includes:
biomass-based diesel facility management and operational services, whereby we provide day-to-day management and operational services to biomass-based diesel production facilities; and
construction management services, whereby we act as the construction management and general contractor for the construction of biomass-based diesel production facilities.
During recent years, we have utilized our construction management expertise internally to upgrade our facilities, such as our facilities located in Albert Lea, New Boston, Mason City and Newton. In October 2016, we completed a $34.5 million upgrade to our Danville facility. In November 2016, we started a $24 million expansion project at our Ralston facility. In June 2017, we completed the $20 million acquisition of approximately 82 acres of land at and in close proximity to our Geismar, Louisiana biorefinery from Lion Copolymer. The purchase includes the termination of a ground lease and acquires the land we previously leased for our Geismar operations, and approximately 61 additional acres in parcels adjacent to and near the facility.  We plan to improve and utilize the new acreage to support existing production capacity and future expansion opportunities using the Services segment.
Renewable Chemicals Segment
Our Renewable Chemicals segment includes:
research and development activities focusing on microbial fermentation to develop and produce renewable chemicals, additional advanced biofuels and other biobased products;

22



collaborative research and development and other service activities to continue to build out the technology platform; and
the operations of a demonstration scale fermentation facility located in Okeechobee, Florida.
In January 2016, ExxonMobil Research and Engineering Company entered into an agreement with our subsidiary, REG Life Sciences, LLC ("REG Life Sciences"), to develop technology for the production of biodiesel by fermenting renewable cellulosic sugars from sources such as agricultural waste. In October 2016, REG Life Sciences sold and delivered its first commercial product, a specialty fatty acid. REG Life Sciences developed, produced, sold and delivered approximately one metric ton of the renewable, multi-functional chemical to Aroma Chemical Services International. Fatty acids is one of three product areas REG Life Sciences has focused on, along with esters and alcohols. In November 2016, the Company's Board of Directors authorized a review of strategic alternatives for REG Life Sciences. There can be no assurance that this ongoing strategic review will result in any specific action or transaction or that any action taken or transaction we may enter into will prove to be beneficial to stockholders.
Factors Influencing Our Results of Operations
The principal factors affecting our operations are the market prices for biomass-based diesel and the feedstocks used to produce biomass-based diesel, as well as governmental programs designed to create incentives or requirements for the production and use of biomass-based diesel.
Governmental programs favoring biomass-based diesel production and use
Biomass-based diesel has historically been more expensive than petroleum-based diesel, when excluding the value of biomass-based diesel incentives and credits. The biomass-based diesel industry’s growth has largely been the result of federal and state programs that require or incentivize biomass-based diesel, which allows biomass-based diesel to compete with petroleum-based diesel on price.
On July 1, 2010, RFS2 was implemented, stipulating volume requirements for the amount of biomass-based diesel and other advanced biofuels that must be utilized in the United States each year. Under RFS2, Obligated Parties, including petroleum refiners and fuel importers, must show compliance with these standards. Currently, biodiesel and renewable 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. The final RVO targets for the biomass-based diesel volumes for the years 2015 to 2018 and proposal for 2019 as set by the EPA are as follows:
 
2015
2016
2017
2018
2019 (proposed)
Biomass-based diesel
1.73 billion gallons
1.90 billion gallons
2.00 billion gallons
2.1 billion gallons
2.1 billion gallons
Actual production or imports continue to grow as illustrated by the EMTS data notes below:
 
2014
2015
2016
Q2 2017 (YTD)
Biomass-based diesel produced and imported
1.75 billion gallons
1.81 billion gallons
2.60 billion gallons
1.13 billion gallons
The federal biodiesel mixture excise tax credit, or the BTC, has historically provided a $1.00 refundable tax credit per gallon to the first blender of biomass-based diesel with petroleum-based diesel fuel. The BTC became effective January 1, 2005, but since January 1, 2010 it has lapsed and been reinstated a number of times. For example, the BTC lapsed on January 1, 2014 and was retroactively reinstated for 2014 on December 19, 2014 and lapsed again on January 1, 2015. On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 was signed into law, which reinstated and extended a set of tax provisions, including the retroactive reinstatement for 2015 and extension for 2016 of the BTC. The BTC again lapsed on January 1, 2017 and has not been reinstated as of the date of this report. During the six months ended June 30, 2017, the Company recognized $26.7 million as BTC revenue out of the $26.9 million deferred BTC revenue that was outstanding as of December 31, 2016.
When the BTC has lapsed in the past, it has been reinstated by Congress. As a result of this history of retroactive reinstatement of the BTC, we and many other biomass-based diesel industry producers have adopted contractual arrangements with customers and vendors specifying the allocation and sharing of any retroactively reinstated incentive. As of June 30, 2017, we estimate that if the BTC is reinstated on the same terms as in 2016, our net income and Adjusted EBITDA for the quarter and year to date ended June 30, 2017 will increase by approximately $58 million and $98 million, respectively. It is

23



uncertain whether the BTC will be reinstated and if reinstated, whether it would be reinstated retroactively or on the same terms. The modification or failure to reinstate the BTC would adversely affect our 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, renewable alternative to petroleum-based diesel fuel and is primarily sold to the end user after it has been blended with petroleum-based diesel fuel. Biomass-based diesel prices have historically been heavily influenced by petroleum-based diesel fuel prices. Accordingly, biomass-based diesel prices have generally been impacted by the same factors that affect petroleum prices, such as crude oil supply and demand balance, worldwide economic conditions, wars and other political events, OPEC production quotas, changes in refining capacity and natural disasters.
Regulatory and legislative factors also influence the price of biomass-based diesel. Biomass-based diesel RIN pricing, a value component that was introduced via RFS2 in July 2010, has had a significant impact on biomass-based diesel pricing. The following table shows for 2014, 2015, 2016 and the first half of 2017 the high and low average monthly contributory value of RINs, as reported by OPIS to the average B100 spot price of a gallon of biodiesel, as reported by The Jacobsen in terms of dollars per gallon.
rinpricevsb100pricecharta15.jpg
Value of RINs acquired from third parties and held in inventory remained fairly stable in the first half of 2017 and resulted in a $0.4 million write-down to lower of cost or net realizable value for the first six months of 2017. At June 30, 2017, the write-down to lower of cost or net realizable value of RINs was $0.2 million. See “Note 5 – Other Assets” to our Condensed Consolidated Financial Statements. We enter into forward contracts to sell RINs and we use risk management position limits to manage RIN exposure.
During 2016, feedstock expense accounted for 78% of our production cost, while methanol and chemical catalysts expense accounted for 5% and 3% of our costs of goods sold, respectively.
Feedstocks for biomass-based diesel production, such as inedible corn oil, used cooking oil, inedible animal fat, canola oil and soybean oil are commodities and market prices for them will be affected by a wide range of factors unrelated to the price of biomass-based diesel and petroleum-based diesel fuels. The following table outlines some of the factors influencing supply and price for each feedstock:


24



 
 
Feedstock
Factors Influencing Supply and Price
 
Inedible Corn Oil
Used Cooking Oil
Inedible Animal Fat
Canola Oil
Soybean Oil
Demand for inedible corn oil from renewable fuel and other markets
 
þ
 
 
 
 
Ethanol production
 
þ
 
 
 
 
Export demand
 
þ
þ
þ
þ
þ
Extraction system yield
 
þ
 
 
 
 
Implementation of inedible corn oil separation systems into existing and new ethanol facilities
 
þ
 
 
 
 
Implementation of co-located biodiesel/renewable diesel plants with ethanol facilities
 
þ
 
 
 
 
Feed demand
 
þ
þ
þ
 
 
New or expected biodiesel capacity
 
þ
þ
þ
þ
þ
Weather conditions
 
þ
 
þ
þ
þ
Biomass-based diesel demand
 
þ
þ
þ
þ
þ
Population
 
 
þ
 
 
 
Number of restaurants in the vicinity of collection facilities and terminals which is dependent on population density
 
 
þ
þ
 
 
Cooking methods and eating habits, which can be impacted by the economy
 
 
þ
þ
 
 
Number of slaughter kills in the United States
 
 
 
þ
 
 
Demand for inedible animal fat from other markets
 
 
 
þ
 
 
Demand for canola oil for food use
 
 
 
 
þ
 
Canola crush margin
 
 
 
 
þ
 
Canola meal demand
 
 
 
 
þ
 
Crop disease
 
 
 
 
þ
þ
Palm oil supply
 
 
 
 
þ
þ
Soybean meal demand
 
 
 
 
 
þ
South American crop production
 
 
 
 
 
þ
Farmer planting decisions
 
 
 
 
þ
þ
Government policies and subsidies
 
þ
þ
þ
þ
þ
During 2016, 72% of our feedstocks were comprised of inedible corn oil, used cooking oil and inedible animal fats with the remainder coming from refined vegetable oils.
The graph below illustrates the spread between the cost of producing one gallon of biodiesel made from soybean oil to the cost of producing one gallon of biodiesel made from a lower-cost feedstock from January 2013 to June 30, 2017. The results were derived using assumed conversion factors for the yield of each feedstock and subtracting the cost of producing one gallon of biodiesel made from each respective lower-cost feedstock from the cost of producing one gallon of biodiesel made from soybean oil.

25



 graphsbospreada28.jpg
(1)
Used cooking oil prices are based on the monthly average of the daily low sales price of Missouri River yellow grease as reported by The Jacobsen (based on 8.5 pounds per gallon).
(2)
Inedible corn oil prices are reported as the monthly average of the daily distillers’ corn oil market values delivered to Illinois as reported by The Jacobsen (based on 8.2 pounds per gallon).
(3)
Choice white grease prices are based on the monthly average of the daily low prices of Missouri River choice white grease as reported by The Jacobsen (based on 8.0 pounds per gallon).
(4)
Soybean oil (crude) prices are based on the monthly average of the daily closing sale price of the nearby soybean oil contract as reported by CBOT (based on 7.5 pounds per gallon).  
Historically, our results of operations generally benefit when the spread between biomass-based diesel prices and feedstock prices widens and will be harmed when this spread narrows. The following graph shows feedstock cost data for choice white grease and soybean oil on a per gallon basis compared to the per gallon sale price data for biodiesel, and the spread between biodiesel and each of soybean oil and choice white grease, from January 2013 to June 30, 2017.
graphspreadpricinga27.jpg  
(1)
Biodiesel prices are based on the monthly average of the midpoint of the high and low prices of B100 (Upper Midwest) as reported by The Jacobsen.

26



(2)
Soybean oil (crude) prices are based on the monthly average of the daily closing sale price of the nearby soybean oil contract as reported by CBOT (based on 7.5 pounds per gallon).
(3)
Choice white grease prices are based on the monthly average of the daily low price of Missouri River choice white grease as reported by The Jacobsen (based on 8.0 pounds per gallon).
(4)
Spread between biodiesel price and choice white grease price.
(5)
Spread between biodiesel price and soybean oil (crude) price.
During the second quarter of 2017, NY Harbor ULSD prices ranged from a high of $1.6506 per gallon in April to a low of $1.3648 per gallon in June with the average price for the quarter of $1.5062 per gallon. Energy prices were range bound throughout second quarter 2017. European UCOME prices remained relatively flat for second quarter 2017 as demand was impacted by biodiesel imports from China and Southeast Asia. Feedstock supplies were larger than prior year, which were offset by strong demand that drove pricing higher. More recent soybean oil prices have been trending higher due to declines in soybean crop conditions caused from hot and dry weather patterns across major growing regions in the Midwest. The soybean oil price increase has been limited by a larger current inventory of soybeans and increasing palm oil production in Southeast Asia. Relatively low priced feed cost along with continued strong demand for pork and beef has continued to lead to expansions in the US hog and cattle industries. Both hog and cattle slaughter numbers in the second quarter of 2017 were again higher than the prior year.
In March 2017, the National Biodiesel Fair Trade Coalition ("Coalition") filed an antidumping and countervailing duty petition with the U.S. Department of Commerce and the U.S. International Trade Commission ("ITC"), arguing that Argentine and Indonesian companies were violating trade laws by flooding the U.S. market with dumped and subsidized biodiesel. The Coalition is made up of the National Biodiesel Board and U.S. biodiesel producers. On May 5, 2017, the ITC agreed to proceed with an investigation regarding this matter. In relation to this antidumping and countervailing duty petition, the Coalition filed a new allegation in July 2017 that "critical circumstances" exist with respects to imports of biodiesel from Argentina. The critical circumstance provision in antidumping and countervailing duties laws allows for the imposition of duties on imports that enter the U.S. prior to preliminary determinations of subsidization and dumping. The Coalition found that imports of biodiesel from Argentina jumped 144.5 percent since the March 2017 petition was filed.
Risk Management
The profitability of producing biomass-based diesel largely depends on the spread between prices for feedstocks and biomass-based diesel, including incentives, each of which is subject to fluctuations due to market factors and each of which is not significantly correlated. Adverse price movements for these commodities directly affect our operating results. We attempt to protect cash margins for our own production and our third-party trading activity by entering into risk management contracts that mitigate the impact on our margins from price volatility in feedstocks and biomass-based diesel. We create offsetting positions by using a combination of forward fixed-price physical purchases and sales contracts on feedstock and biomass-based diesel, including risk management futures contracts, swaps and options primarily on the New York Mercantile Exchange NY Harbor ULSD and CBOT Soybean Oil; however, the extent to which we engage in risk management activities varies substantially from time to time, and from feedstock to feedstock, depending on market conditions and other factors. In making risk management decisions, we utilize research conducted by outside firms to provide additional market information in addition to our internal research and analysis.
Inedible corn oil, used cooking oil, inedible animal fat, canola oil and soybean oil were the primary feedstocks we used to produce biomass-based diesel in 2016 and the first six months of 2017. We utilize several varieties of inedible animal fat, such as beef tallow, choice white grease and poultry fat derived from livestock. There is no established futures market for these lower-cost feedstocks. The purchase prices for lower-cost feedstocks are generally set on a negotiated flat price basis or spread to a prevailing market price reported by the USDA price sheet or The Jacobsen. Our efforts to risk manage against changing prices for inedible corn oil, used cooking oil and inedible animal fat have involved entering into futures contracts, swaps or options on other commodity products, such as CBOT Soybean Oil and New York Mercantile Exchange NY Harbor ULSD. However, these products do not always experience the same price movements as lower-cost feedstocks, making risk 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

27



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 gains of $9.8 million and $18.0 million from our derivative financial instrument activity for the three and six months ended June 30, 2017, respectively, compared to losses of $30.5 million and $34.8 million for the three and six months ended June 30, 2016, respectively. Changes in the value of these futures, swaps or options instruments are recognized in current income or loss.
Seasonality
Our operating results are influenced by seasonal fluctuations in the demand for biodiesel. Our biodiesel sales tend to decrease during the winter season due to blending concentrations being reduced to adjust for performance during colder weather. Colder seasonal temperatures can cause the higher cloud point biodiesel we make from inedible animal fats to become cloudy and eventually gel at a higher temperature than petroleum-based diesel or lower cloud point biodiesel made from soybean oil, canola oil or inedible corn oil. Such gelling can lead to plugged fuel filters and other fuel handling and performance problems for customers and suppliers. Reduced demand in the winter for our higher cloud point biodiesel can result in excess supply of such higher cloud point biodiesel and lower prices for such biodiesel. In addition, most of our production facilities are located in colder Midwestern states in proximity to feedstock origination, and our costs of shipping can increase as more biodiesel is transported to warmer climate states during winter. To mitigate some of these seasonal fluctuations, we have upgraded our Newton and Danville biorefineries to produce distilled biodiesel from low-cost feedstocks, thus allowing the product to have improved cold-weather performance.
RIN prices may also be subject to seasonal fluctuations. The RIN is dated for the calendar year in which it is generated, commonly referred to as the RIN vintage. Since 20% of an Obligated Party's annual RVO can be satisfied by prior year RINs, most RINs must come from biofuel produced or imported during the RVO year. As a result, RIN prices can be expected to decrease as the calendar year progresses if the RIN market is oversupplied compared to that year's RVO and increase if it is undersupplied. See chart below for comparison between actual RIN generation and RVO level for biomass-based diesel as set by the EPA.
Year
 
RIN Generation (D4 Biomass-based Diesel)
 
Finalized RVO level for D4 Biomass-based Diesel
2014
 
1.75 billion gallons
 
1.63 billion gallons
2015
 
1.81 billion gallons
 
1.73 billion gallons
2016
 
2.60 billion gallons
 
1.90 billion gallons
Industry capacity, production and imports
Our operating results are influenced by our industry’s capacity and production, including in relation to RFS2 production requirements. Under RFS2, Obligated Parties are entitled to satisfy up to 20% of their annual requirement with prior year RINs. Biomass-based diesel production and/or imports, as reported by EMTS, was 2.60 billion gallons for 2016, 790 million gallons higher than 2015. In the first half of 2017, according to EMTS data, 1.13 billion gallons of biomass-based diesel were produced and/or imported into the U.S., compared to the equivalent 1.07 billion gallons over the same period in 2016.
During 2016 and 2015, the amount of imported biodiesel gallons qualifying under RFS2 in the D4 biomass-based diesel category increased from 334.2 million gallons in 2015 to approximately 692.9 million gallons in 2016, according to the information from the EIA.

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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, 2016 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.
Accounting for 2036 Convertible Senior 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 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.
Revenue recognition
Effective January 1, 2018, we will be required to adopt the new guidance of ASC Topic 606, Revenue from Contracts with Customers (Topic 606), which will supersede the revenue recognition requirements in ASC Topic 605, Revenue Recognition. Topic 606 requires us to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance requires us to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, we satisfy a performance obligation. We will be required to adopt Topic 606 either on a full retrospective basis to each prior reporting period presented or on a modified retrospective basis with the cumulative effect of initially applying the new guidance recognized at the date of initial application. We will adopt Topic 606 on a modified retrospective basis and will be required to provide additional disclosures of the amount by which each financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect before the change, and an explanation of the reasons for significant changes. The adoption of this new guidance will require expanded disclosures in our consolidated financial statements. We have established a cross-functional implementation team consisting of representatives from all of its business segments. Initial impact assessment also indicates that the majority of our contracts will continue to be recognized at a point in time and that the number of performance obligations and the accounting for variable consideration are not expected to be significantly different from current practice.
Results of Operations
Three and six months ended June 30, 2017 and 2016
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,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Gallons sold
160.2

 
150.1

 
282.3

 
248.0

Average B100 price per gallon
$
2.86

 
$
3.27

 
$
2.90

 
$
3.11

 
 
 
 
 
 
 
 
Revenues
$
535,103

 
$
558,301

 
$
953,996

 
$
856,172

Cost of goods sold
504,990

 
533,439

 
906,600

 
813,927

Gross profit
30,113

 
24,862

 
47,396

 
42,245

Selling, general and administrative expenses
22,812

 
20,850

 
45,719

 
40,626

Research and development expense
3,181

 
4,427

 
6,779

 
8,353

Income (loss) from operations
4,120

 
(415
)
 
(5,102
)
 
(6,734
)
Other income (expenses), net
(36,969
)
 
9,425

 
(42,586
)
 
9,584

Income tax expense
(1,960
)
 
(1,296
)
 
(3,035
)
 
(2,024
)
Net income (loss)
(34,809
)
 
7,714

 
(50,723
)
 
826

Less: Net income attributable to noncontrolling interest

 
108

 

 
138

Net income (loss) attributable to the Company
(34,809
)
 
7,606

 
(50,723
)
 
688

Effect of participating share-based awards

 
(161
)
 

 
(12
)
Net income (loss) attributable to the Company's common stockholders
$
(34,809
)
 
$
7,445

 
$
(50,723
)
 
$
676


Revenues. Our revenues decreased $23.2 million, or 4%, in the three months ended June 30, 2017, but increased $97.8 million, or 11%, for the six months ended June 30, 2017 as compared to the three and six months ended June 30, 2016. The decrease in revenues for the second quarter was primarily due to lower average selling price, coupled with the impact of the lapse of the BTC on January 1, 2017 and higher imported gallons compared to the second quarter of 2016. The absence of the BTC revenues resulted in a decrease of $86.3 million and $127.8 million, or 89% and 82%, respectively, in government incentive revenues in the three and six months ended June 30, 2017 c