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, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-35397
RENEWABLE ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)
   
Delaware
   
26-4785427
(State of other jurisdiction of
incorporation or organization)
   
(I.R.S. Employer
Identification No.)
   
   
416 South Bell Avenue, Ames, Iowa
   
50010
(Address of principal executive offices)
   
(Zip code)
(515) 239-8000
(Registrant’s telephone number, including area code)     
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
   
Large accelerated filer  ¨
   
Accelerated filer  x
   
   
Non-accelerated filer   ¨
   (Do not check if a smaller reporting company)
Smaller reporting company  ¨
 
 
 
 
 
Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO   x
As of July 31, 2018, the registrant had 37,258,737 shares of Common Stock outstanding.




TABLE OF CONTENTS
 
 
Page
PART I
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
 
 
PART II
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
 
 


2



PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL INFORMATION
RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share and per share amounts)
   
June 30,
2018
 
December 31,
2017
ASSETS
   

 
   

CURRENT ASSETS:
   

 
   

Cash and cash equivalents
$
221,775

 
$
77,627

Accounts receivable, net
91,248

 
90,648

Inventories
141,736

 
135,547

Prepaid expenses and other assets
45,294

 
51,880

Total current assets
500,053

 
355,702

Property, plant and equipment, net
591,265

 
587,397

Goodwill
16,080

 
16,080

Intangible assets, net
25,944

 
27,127

Investments
12,153

 
12,250

Other assets
7,275

 
7,040

TOTAL ASSETS
$
1,152,770

 
$
1,005,596

LIABILITIES AND EQUITY
   

 
   

CURRENT LIABILITIES:
   

 
   

Lines of credit
$
7,844

 
$
65,525

Current maturities of long-term debt
176,746

 
13,397

Accounts payable
120,733

 
84,608

Accrued expenses and other liabilities
31,549

 
39,187

Deferred revenue
161

 
2,218

Total current liabilities
337,033

 
204,935

Unfavorable lease obligation
2,823

 
3,388

Deferred income taxes
8,430

 
8,192

Long-term contingent consideration for acquisitions
3,311

 
8,849

Long-term debt (net of debt issuance costs of $4,592 and $6,627, respectively)
31,006

 
208,536

Other liabilities
3,379

 
4,114

Total liabilities
385,982

 
438,014

COMMITMENTS AND CONTINGENCIES


 


EQUITY:
   

 
   

Common stock ($.0001 par value; 300,000,000 shares authorized; 37,258,737 and 38,837,749 shares outstanding, respectively)
5

 
5

Common stock—additional paid-in-capital
495,532

 
515,452

Retained earnings
383,167

 
134,928

Accumulated other comprehensive income
(826
)
 
278

Treasury stock (11,498,350 and 9,363,166 shares outstanding, respectively)
(111,090
)
 
(83,081
)
Total equity
766,788

 
567,582

TOTAL LIABILITIES AND EQUITY
$
1,152,770

 
$
1,005,596

See notes to condensed consolidated financial statements.

1



RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share amounts)
 
Three months ended
 
Six months ended
   
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
REVENUES:
   
 
   
 
   
 
   
Biomass-based diesel sales
$
551,109

 
$
455,928

 
$
825,870

 
$
799,664

Separated RIN sales
26,186

 
67,349

 
73,365

 
124,674

Biomass-based diesel government incentives
915

 
10,821

 
366,200

 
27,762

   
578,210

 
534,098

 
1,265,435

 
952,100

Other revenue
1,940

 
1,005

 
3,967

 
1,896

   
580,150

 
535,103

 
1,269,402

 
953,996

COSTS OF GOODS SOLD:
   
 
   
 
   
 
   
Biomass-based diesel
510,380

 
468,407

 
916,189

 
822,258

Separated RINs
11,011

 
34,218

 
43,748

 
80,847

Other costs of goods sold
1,138

 
1,024

 
2,276

 
2,154

   
522,529

 
503,649

 
962,213

 
905,259

GROSS PROFIT
57,621

 
31,454

 
307,189

 
48,737

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
24,512

 
22,812

 
56,166

 
45,719

RESEARCH AND DEVELOPMENT EXPENSE
2,485

 
3,181

 
9,083

 
6,779

IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT

 
1,341

 

 
1,341

INCOME (LOSS) FROM OPERATIONS
30,624

 
4,120

 
241,940

 
(5,102
)
OTHER INCOME (EXPENSE), NET:
   
 
   
 
   
 
   
Change in fair value of contingent consideration
7,129

 
24

 
8,669

 
(565
)
Change in fair value of convertible debt conversion liability

 
(32,546
)
 

 
(32,718
)
Gain on debt extinguishment
2,337

 

 
2,105

 

Gain on involuntary conversion
454

 

 
4,454

 

Other income (loss), net
2,066

 
32

 
3,279

 
(288
)
Interest expense
(4,925
)
 
(4,479
)
 
(9,576
)
 
(9,015
)
   
7,061

 
(36,969
)
 
8,931

 
(42,586
)
INCOME (LOSS) BEFORE INCOME TAXES
37,685

 
(32,849
)
 
250,871

 
(47,688
)
INCOME TAX EXPENSE
(3,835
)
 
(1,960
)
 
(2,632
)
 
(3,035
)
NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY
33,850

 
(34,809
)
 
248,239

 
(50,723
)
LESS—EFFECT OF PARTICIPATING SHARE-BASED AWARDS
894

 

 
6,256

 

NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY’S COMMON STOCKHOLDERS
$
32,956

 
$
(34,809
)
 
$
241,983

 
$
(50,723
)
NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
   
 
   
 
   
 
   
BASIC
$
0.88

 
$
(0.90
)
 
$
6.35

 
$
(1.31
)
DILUTED
$
0.78

 
$
(0.90
)
 
$
5.94

 
$
(1.31
)
WEIGHTED AVERAGE SHARES USED TO COMPUTE NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
   
 
   
 
   
 
   
BASIC
37,413,387

 
38,679,849

 
38,112,531

 
38,639,672

DILUTED
42,079,944

 
38,679,849

 
40,713,114

 
38,639,672

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, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Net income (loss)
$
33,850

 
$
(34,809
)
 
$
248,239

 
$
(50,723
)
Foreign currency translation adjustments
(1,823
)
 
2,630

 
(1,104
)
 
3,181

Other comprehensive income
(1,823
)
 
2,630

 
(1,104
)
 
3,181

Comprehensive income (loss) attributable to the Company
$
32,027

 
$
(32,179
)
 
$
247,135

 
$
(47,542
)
See notes to condensed consolidated financial statements.


3



RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
(in thousands, except share amounts)
   
Company Stockholders’ Equity
 
 
 
   
   
Common
Stock
Shares
 
Common
Stock
 
Common Stock -
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Treasury
Stock
 
Noncontrolling Interest
 
Total
BALANCE, January 1, 2017
38,553,413

 
$
5

 
$
480,906

 
$
214,007

 
$
(5,751
)
 
$
(81,824
)
 
$
2,831

 
$
610,174

Conversion of restricted stock units to common stock (net of 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

BALANCE, January 1, 2018
38,837,749

 
$
5

 
$
515,452

 
$
134,928

 
$
278

 
$
(83,081
)
 
$

 
$
567,582

Conversion of restricted stock units to common stock (net of 140,646 shares of treasury stock purchased)
276,832

 

 

 

 

 
(2,137
)
 

 
(2,137
)
Settlement of stock appreciation rights in common stock (net of 42,594 shares of treasury stock purchased)
97,012

 

 
(95
)
 

 

 
(657
)
 

 
(752
)
Partial termination of capped call options
(15,012
)
 

 
252

 

 

 
(167
)
 

 
85

Convertible debt extinguishment impact (net of tax impact of $2,335)

 

 
(24,074
)
 

 

 

 

 
(24,074
)
Treasury stock purchases
(1,937,844
)
 

 

 

 

 
(25,048
)
 

 
(25,048
)
Stock compensation expense

 

 
3,997

 

 

 

 

 
3,997

Other comprehensive loss

 

 

 

 
(1,104
)
 

 

 
(1,104
)
Net income

 

 

 
248,239

 

 

 

 
248,239

BALANCE, June 30, 2018
37,258,737

 
$
5

 
$
495,532

 
$
383,167

 
$
(826
)
 
$
(111,090
)
 
$

 
$
766,788

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, 2018
 
June 30, 2017
CASH FLOWS FROM OPERATING ACTIVITIES:
   
 
   
Net income (loss)
$
248,239

 
$
(50,723
)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
   
 
   
Depreciation expense
17,983

 
16,946

Amortization expense of assets and liabilities, net
1,128

 
890

Gain on involuntary conversion
(4,454
)
 

Accretion of convertible note discount
2,651

 
2,685

Change in fair value of contingent consideration
(8,669
)
 
565

Change in fair value of convertible debt conversion liability

 
32,718

Gain on sale of assets
(977
)
 

Gain on debt extinguishment
(2,105
)
 

Provision for doubtful accounts
144

 
202

Impairment of long-lived assets

 
1,341

Stock compensation expense
3,997

 
2,996

Deferred tax expense
2,584

 
2,350

Other operating activities
(360
)
 
54

Changes in assets and liabilities:
   
 
   
Accounts receivable, net
(1,025
)
 
97,978

Inventories
(6,625
)
 
11,638

Prepaid expenses and other assets
7,715

 
(50,926
)
Accounts payable
42,619

 
(24,558
)
Accrued expenses and other liabilities
451

 
(18,798
)
Deferred revenue
(2,058
)
 
(26,844
)
Net cash flows provided by (used in) operating activities
301,238

 
(1,486
)
CASH FLOWS FROM INVESTING ACTIVITIES:
   
 
   
Cash receipts for involuntary conversion
4,454

 

Cash receipts of restricted cash

 
4,000

Cash paid for purchase of property, plant and equipment
(29,180
)
 
(32,037
)
Cash receipts for sale of assets
1,599

 

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

 
(3,518
)
Cash paid for investments

 
(816
)
Net cash flows used in investing activities
(23,127
)
 
(32,371
)
CASH FLOWS FROM FINANCING ACTIVITIES:
   
 
   
Net borrowings (repayments) on revolving line of credit
(57,288
)
 
16,125

Borrowings on other lines of credit
28,477

 
3,278

Repayments on other lines of credit
(28,712
)
 
(3,000
)
Cash received from notes payable
10,933

 

Cash paid on notes payable
(53,313
)
 
(4,038
)
Cash paid for debt issuance costs
(249
)
 
(703
)
Cash paid for treasury stock
(25,048
)
 

Cash paid for contingent consideration settlement
(5,659
)
 
(7,678
)
Cash received on partial termination of capped call options
85

 

Cash paid for conversion of restricted stock units and stock appreciation rights
(2,889
)
 

Net cash flows provided by (used in) financing activities
(133,663
)
 
3,984

NET CHANGE IN CASH AND CASH EQUIVALENTS
144,448

 
(29,873
)
CASH AND CASH EQUIVALENTS, Beginning of period
77,627

 
116,210

Effect of exchange rate changes on cash
(300
)
 
1,254

CASH AND CASH EQUIVALENTS, End of period
$
221,775

 
$
87,591

(continued)

5




RENEWABLE ENERGY GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
Six months ended
 
June 30, 2018
 
June 30, 2017
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
   
 
   
Cash paid for income taxes
$
613

 
$
214

Cash paid for interest
$
6,694

 
$
5,560

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
   
 
   
Amounts included in period-end accounts payable for:
   
 
   
Purchases of property, plant and equipment
$
1,511

 
$
3,166

Debt issuance cost
$

 
$
94

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

 
$
1,846

 
 
 
 
(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, 2018 and 2017
(unaudited)
(in thousands, except share and per share amounts)
NOTE 1 — BASIS OF PRESENTATION AND NATURE OF THE BUSINESS
The condensed consolidated financial statements have been prepared by Renewable Energy Group, Inc. and its subsidiaries (the "Company" or "REG"), pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted as permitted by such rules and regulations. All adjustments, consisting of normal recurring adjustments, have been included. Management believes that the disclosures are adequate to present fairly the financial position, results of operations and cash flows at the dates and for the periods presented. It is suggested that these interim financial statements be read in conjunction with the consolidated financial statements and the notes thereto appearing in the Company’s latest annual report on Form 10-K filed on March 9, 2018. Results for interim periods are not necessarily indicative of those to be expected for the fiscal year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates.
As of June 30, 2018, the Company operates a network of fourteen biorefineries, with twelve locations in North America and two locations in Europe, which includes thirteen operating biomass-based diesel production facilities with aggregate nameplate production capacity of 520 million gallons per year ("mmgy") and one fermentation facility. REG also has one feedstock processing facility. Ten of these plants are “multi-feedstock capable” which allows them to use a broad range of lower-cost feedstocks, such as inedible corn oil, used cooking oil and inedible animal fats in addition to vegetable oils, such as soybean oil and canola oil.
The biomass-based diesel industry and the Company’s business have benefited from certain federal and state incentives. The federal biodiesel mixture excise tax credit (the "BTC") was retroactively reinstated on February 9, 2018 for the fiscal year 2017, but was not reinstated for 2018 and accordingly we are currently operating without the benefit of the BTC. It is uncertain whether the BTC will be reinstated to apply to 2018. The expiration or modification of any one or more of those incentives, could adversely affect the financial results of the Company.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following accounting policies should be read in conjunction with a summary of the significant accounting policies the Company has disclosed in its Annual Report on Form 10-K for the year ended December 31, 2017.
Accounts Receivable
Accounts receivable are carried at invoiced amount less allowance for doubtful accounts. Management estimates the allowance for doubtful accounts based on existing economic conditions, the financial conditions of customers, and the amount and age of past due accounts. Receivables are considered past due if full payment is not received by the contractual due date. Past due accounts are generally written off against the allowance for doubtful accounts only after reasonable collection attempts have been exhausted. For the six months ended June 30, 2018, the Company has recognized receivables of $365,155 from the federal government and of $16,688 from customers related to the 2017 biodiesel mixture excise tax credit. Through June 30, 2018, the Company has received approximately $364,927 of the $365,155 receivable from the federal government and $12,062 from customers related to the 2017 biodiesel mixture excise tax credit.
Renewable Identification Numbers ("RINs")
When the Company produces and sells a gallon of biomass-based diesel, 1.5 to 1.7 RINs per gallon are generated. RINs are used to track compliance with the Renewable Fuel Standard ("RFS2"). RFS2 allows the Company to attach between zero and 2.5 RINs to any gallon of biomass-based diesel. As a result, a portion of the selling price for a gallon of biomass-based diesel is generally attributable to RFS2 compliance. However, RINs that the Company generates are a form of government incentive and not a result of the physical attributes of the biomass-based diesel production. Therefore, no cost is allocated to the RIN when it is generated, regardless of whether the RIN is transferred with the biomass-based diesel produced or held by the Company pending attachment to other biomass-based diesel production sales.
In addition, the Company also obtains RINs from third parties who have separated the RINs from gallons of biomass-based diesel. From time to time, the Company holds varying amounts of these separated RINs for resale. RINs obtained from third parties are initially recorded at their cost and are subsequently revalued at the lower of cost or net realizable value as of

7



the last day of each accounting period. The resulting adjustments are reflected in costs of goods sold for the period. The value of these RINs is reflected in “Prepaid expenses and other assets” on the Condensed Consolidated Balance Sheets. The cost of goods sold related to the sale of these RINs is determined using the average cost method, while market prices are determined by RIN values, as reported by the Oil Price Information Service ("OPIS").

Low Carbon Fuel Standard
The Company generates Low Carbon Fuel Standard ("LCFS") credits for its low carbon fuels or blendstocks when its qualified low carbon fuels are transported into an LCFS market. LCFS credits are used to track compliance with the LCFS. As a result, a portion of the selling price for a gallon of biomass-based diesel sold into an LCFS market is also attributable to LCFS compliance. However, LCFS credits that the Company generates are a form of government incentive and not a result of the physical attributes of the biomass-based diesel production. Therefore, no cost is allocated to the LCFS credit when it is generated, regardless of whether the LCFS credit is transferred with the biomass-based diesel produced or held by the Company pending attachment to other biomass-based diesel sales that do not transfer credits.
In addition, the Company also obtains LCFS credits from third-party trading activities. From time to time, the Company holds varying amounts of these third-party LCFS credits for resale. LCFS credits obtained from third parties are initially recorded at their cost and are subsequently revalued at the lower of cost or net realizable value as of the last day of each accounting period, and the resulting adjustments are reflected in costs of goods sold for the period. The value of LCFS credits obtained from third parties is reflected in “Prepaid expenses and other assets” on the Condensed Consolidated Balance Sheet. The cost of goods sold related to the sale of these LCFS credits is determined using the average cost method, while market prices are determined by LCFS values, as reported by the OPIS. At June 30, 2018 and December 31, 2017, the Company held no LCFS credits purchased from third parties.
The Company records assets acquired and liabilities assumed through the exchange of non-monetary assets based on the fair value of the assets and liabilities acquired or the fair value of the consideration exchanged, whichever is more readily determinable.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost less accumulated depreciation. Maintenance and repairs are expensed as incurred. Depreciation expense is computed on a straight-line method based upon estimated useful lives of the assets.
In June 2017, the Company experienced a fire at its Madison facility, resulting in the shutdown of the facility. In 2017, the Company impaired fixed assets with a total net book value of approximately $2,671 as a result of the fire in June 2017. To date, the Company received payments in the amounts of $12,454 and $9,484 to cover costs incurred for property losses and business interruption, respectively.
Convertible Debt
In June 2016, the Company issued $152,000 aggregate principal amount of 4% convertible senior notes due in 2036 (the "2036 Convertible Senior Notes"). The embedded conversion option was initially accounted for as an embedded derivative liability as the Company could not elect to issue shares of common stock upon conversion of the 2036 Convertible Senior 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 Senior Notes unless the Company received stockholder approval for such issuance. On December 8, 2017, at the special meeting of stockholders, the Company obtained approval from its stockholders to remove the common stock issuance restrictions in connection with conversions of the 2036 Convertible Senior Notes. Accordingly, the embedded conversion option, valued at $45,933 and net of tax of $18,025, was reclassified into Additional Paid-in Capital at December 8, 2017. See "Note 7 - Debt" for a further description of the 2036 Convertible Senior Notes. During the three months ended June 30, 2018, the Company used $41,763 to repurchase $24,500 principal amount of the 2036 Convertible Senior Notes. See " Security Repurchase Programs" below.
Capped Call Transaction
In connection with the issuance of the 2019 Convertible Senior Notes, the Company entered into capped call transactions. The purchased capped call transactions were recorded as a reduction to common stock-additional paid-in-capital. Because this was considered to be an equity transaction and qualifies for the derivative scope exception, no future changes in the fair value of the capped call will be recorded by the Company. During 2016, in connection with the issuance of the 2036 Convertible Senior Notes, certain call options covered by the original capped call transaction were rebalanced and reset to cover 100% of the total number of shares of the Company's Common Stock underlying the remaining principal of the 2019 Convertible Senior Notes. The impact of these transactions, net of tax, was reflected as an addition/reduction to Additional Paid-in Capital as presented in the Consolidated Statements of Stockholders' Equity.

8



Security Repurchase Programs
In December 2017, the Company's board of directors approved a repurchase program of up to $75,000 of the Company's convertible notes and/or shares of common stock. Under the program, the Company may repurchase convertible notes or shares from time to time in open market transactions, privately negotiated transactions or by other means. The timing and amount of repurchase transactions are determined by the Company's management based on its evaluation of market conditions, share price, bond price, legal requirements and other factors. During the six months ended June 30, 2018, the Company repurchased 1,937,844 shares of Common Stock for $25,048 under this program. In addition, the Company used $41,763 to repurchase $24,500 principal amount of the 2036 Convertible Senior Notes and $6,689 to repurchase $6,311 principal amount of the 2019 Convertible Senior Notes.
In June 2018, the Company's board of directors approved another repurchase program of up to $75,000 of the Company's convertible notes and/or shares of common stock. Under the program, the Company may repurchase convertible notes or shares from time to time in open market transactions, privately negotiated transactions or by other means. The timing and amount of repurchase transactions are determined by the Company's management based on its evaluation of market conditions, share price, bond price, legal requirements and other factors. No repurchases were made under this program during the second quarter of 2018.
Research and Development
Research and development ("R&D") costs are charged to expense as incurred. In process research and development ("IPR&D") assets acquired in connection with acquisitions are recorded on the Condensed Consolidated Balance Sheets as intangible assets.
Revenue Recognition
In the first quarter of 2018, the Company adopted Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606). Under the ASU, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company applied the five-step method outlined in the ASU to all contracts with customers and elected the modified retrospective implementation method. The Company has generally a single performance obligation in its arrangements with customers. The Company believes for most of its contracts with customers, control is transferred at a point in time, typically upon delivery to the customers. When the Company performs shipping and handling activities after the transfer of control to the customers (e.g., when control transfers prior to delivery), they are considered as fulfillment activities, and accordingly, the costs are accrued for when the related revenue is recognized. Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenues. The Company generally expenses sales commissions when incurred because the amortization period would have been less than one year. The Company records these costs within selling, general and administrative expenses. The implementation of the new standard did not have any material impact on the measurement or recognition of revenue of prior periods, however additional disclosures have been added in accordance with the ASU.
The following is a description of principal activities from which we generate revenue. Revenues from contracts with customers are recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services.
sales of biodiesel and renewable diesel produced at our facilities, including RINs and LCFS credits;
resale of finished biomass-based diesel, RINs and LCFS credits acquired from third parties, and raw material feedstocks acquired from others;
revenues from our sale of petroleum-based heating oil and ultra-low sulfur diesel, or ULSD, acquired from third parties, along with the sale of these petroleum-based products further blended with biodiesel produced at our wholly owned facilities;
sales of glycerin, other co-products of the biomass-based diesel production process;
incentive payments from federal and state governments, including the BTC, and from the USDA Advanced Biofuel Program; and
other revenue:
collaborative research and development and other service revenue for research and development activities to continue to build out the technology platform; and
sales of renewable chemical products.


9



Disaggregation of revenue:
All revenue recognized in the income statement, except for Biomass-based diesel Government Incentives, is considered to be revenue from contracts with customers. The following table depicts the disaggregation of revenue according to product line and segment:
 
Reportable Segment
Three months ended June 30, 2018
Biomass-based
Diesel
 
Services
 
Renewable
Chemicals
 
Corporate
and other
 
Intersegment
Revenues
 
Consolidated
Total
Biomass-based diesel sales, net of BTC related amount due to customers of $0
$
484,150

 
$

 
$

 
$
6,103

 
$
(16,737
)
 
$
473,516

Petroleum diesel sales

 

 

 
47,070

 

 
47,070

Other biomass-based diesel revenue
30,523

 

 

 

 

 
30,523

Separated RIN sales
26,186

 

 

 

 

 
26,186

Other revenues

 
17,523

 
1,063

 

 
(16,646
)
 
1,940

Total revenues from contracts with customers
$
540,859

 
$
17,523

 
$
1,063

 
$
53,173

 
$
(33,383
)
 
$
579,235

Biomass-based diesel government incentives
915

 

 

 

 

 
915

Total revenues
$
541,774

 
$
17,523

 
$
1,063

 
$
53,173

 
$
(33,383
)
 
$
580,150


 
Reportable Segment
Six months ended June 30, 2018
Biomass-based
Diesel
 
Services
 
Renewable
Chemicals
 
Corporate
and other
 
Intersegment
Revenues
 
Consolidated
Total
Biomass-based diesel sales, net of BTC related amount due to customers of $144,944
$
648,369

 
$

 
$

 
$
9,682

 
$
(32,448
)
 
$
625,603

Petroleum diesel sales

 

 

 
118,034

 

 
118,034

Other biomass-based diesel revenue
82,233

 

 

 

 

 
82,233

Separated RIN sales
73,365

 

 

 

 

 
73,365

Other revenues

 
52,738

 
2,923

 

 
(51,694
)
 
3,967

Total revenues from contracts with customers
$
803,967

 
$
52,738

 
$
2,923

 
$
127,716

 
$
(84,142
)
 
$
903,202

Biomass-based diesel government incentives
366,200

 

 

 

 

 
366,200

Total revenues
$
1,170,167

 
$
52,738

 
$
2,923

 
$
127,716

 
$
(84,142
)
 
$
1,269,402



Contract balances:

The following table provides information about receivables and contract liabilities from contracts with customers:
 
June 30,
2018
Accounts receivable
$
91,020

Short-term contract liabilities (deferred revenue)
$
(161
)
Short-term contract liabilities (accounts payable)
$
(40,935
)

The Company receives payments from customers based upon contractual billing schedules; accounts receivable are recorded when the right to consideration becomes unconditional. Contract liabilities include payments received in advance of performance under the contract, and are realized with the associated revenue recognized under the contract. While in general the Company has not historically offered sales incentives to customers, the uncertainty around the reinstatement of the federal biodiesel tax credit led to the Company and other market participants acting as if the federal biodiesel tax credit would be reinstated throughout the year and entering into agreements with both customers and vendors throughout the year to capture the credit when or if reinstated. The impacts of the agreements with customers are recorded as contract liabilities in accounts payable and as adjustments to Biomass-based diesel sales, whereas agreements with vendors are recorded net as adjustments to

10



Biomass-based diesel costs of goods sold on the Condensed Consolidated Statements of Operations. Significant changes to the contract liabilities during the three and six months ended June 30, 2018 are as follows:
 
April 1, 2018
 
Cash receipts
(Payments)
 
Less: Impact on
Revenue
 
Other
 
June 30, 2018
Deferred revenue
$
1,740

 
$
3,296

 
$
4,872

 
$
(3
)
 
$
161

Payables to customers related to BTC
150,776

 
(109,841
)
 

 

 
40,935

 
$
152,516

 
$
(106,545
)
 
$
4,872

 
$
(3
)
 
$
41,096


 
January 1, 2018
 
Cash receipts
(Payments)
 
Less: Impact on
Revenue
 
Other
 
June 30, 2018
Deferred revenue
$
2,218

 
$
13,803

 
$
15,857

 
$
(3
)
 
$
161

Payables to customers related to BTC

 
(109,841
)
 
(144,944
)
 
5,832

 
40,935

 
$
2,218

 
$
(96,038
)
 
$
(129,087
)
 
$
5,829

 
$
41,096


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 is finalizing its lease population as of January 1, 2017 and continuing to assess all potential impacts of the standard. The Company plans to apply a modified retrospective transition approach to each applicable lease that exists at January 1, 2017 as well as leases entered after this date.
On January 25, 2018, the FASB issued ASU 2018-01, which amends the Board’s new leasing standard, ASU 2016-02 (codified in ASC 842), to provide a transition practical expedient for existing or expired land easements (i.e., rights to access, cross, or otherwise use someone else’s land for a specified purpose) that were not previously accounted for in accordance with ASC 840. The practical expedient would allow entities to elect not to assess whether those land easements are, or contain, leases in accordance with ASC 842 when transitioning to the new leasing standard. However, the ASU clarifies that land easements entered into (or existing land easements modified) on or after the effective date of the new leasing standard must be assessed under ASC 842. The Company is evaluating the impact of this guidance on its consolidated financial statements as part of the lease standard adoption project, but does not expect the impact to be significant.
On July 19, 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which addresses certain aspects of the new leases standard, including the rate implicit in the lease, impairment of the net investment in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments, among other things. The amendments have the same effective date and transition requirements as the ASU 2016-02. The Company is evaluating the impact of this guidance on its consolidated financial statements.
On July 31, 2018, the FASB issued ASU 2018-11, Codification Improvements to Topic 842, Leases, which provides entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The amendments have the same effective date and transition requirements as the ASU 2016-02. The Company is evaluating the impact of this guidance on its consolidated financial statements, but anticipates that it will adopt this new transition method.
On August 28, 2017, the FASB issued ASU 2017-12, which amends the hedge accounting recognition and presentation requirements in ASC 815 to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. The Company is still evaluating the impact on its consolidated financial statements.

11



On December 22, 2017, President Donald Trump signed into law “H.R. 1”, formerly known as the “Tax Cuts and Jobs Act” (the “Tax Legislation”). The Tax Legislation, which became effective on January 1, 2018, significantly revises the U.S. tax code by, among other things, lowering the corporate income tax rate from 35% to 21%, limiting deductibility of interest expense, implementing a hybrid-territorial tax system imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries (the “transition tax”), and enacted additional international tax provisions, including a minimum tax on global intangible low-taxed income (“GILTI”) and a new base erosion anti-abuse tax (“BEAT”). The Company recorded a provisional non-cash tax benefit of $13,712 in the fourth quarter of 2017. The Company finalized its accounting for the transition tax during the quarter ended March 31, 2018, and has incorporated the impact of the other Tax Legislation provisions effective for 2018 and beyond within the financial statements.
On February 28, 2018, the FASB issued ASU 2018-03, which makes technical corrections to certain aspects of ASU 2016-16 (on recognition of financial assets and financial liabilities), including equity securities without a readily determinable fair value (discontinuation and adjustments); forward contracts and purchased options; presentation requirements for certain fair value option liabilities; fair value option liabilities denominated in a foreign currency and transition guidance for equity securities without a readily determinable fair value. For public business entities, the amendments in ASU 2018-03 are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt the amendments until the interim period beginning after June 15, 2018. The Company is still evaluating the impact of this guidance on its consolidated financial statements, but does not expect the impact to be significant.
NOTE 3 — ACQUISITIONS
Sanimax Energy, LLC
On March 15, 2016, the Company acquired fixed assets and inventory from Sanimax Energy, including the 20 mmgy nameplate capacity biomass-based diesel refinery in DeForest, Wisconsin. The Company completed its initial accounting of this business combination as the valuation of the real and personal property was finalized as of September 30, 2016.
The following table summarizes the consideration paid for the acquisition from Sanimax Energy:
 
March 15, 2016
Consideration at fair value for acquisition from Sanimax:
 
Cash
$
12,541

Common stock
4,050

Contingent consideration
4,500

Total
$
21,091

The fair value of the 500,000 shares of Common Stock issued was determined using the closing market price of the Company's common shares at the date of acquisition.
REG Madison may pay contingent consideration of up to $5,000 ("Earnout Payments") over a seven-year period after the acquisition, subject to achievement of certain milestones related to the biomass-based diesel gallons produced and sold by REG Madison. The Earnout Payments are payable in cash and cannot exceed $1,700 in any one year period beginning March 15, 2016 through 2023 and up to $5,000 in aggregate. As of June 30, 2018, the Company has recorded a contingent liability of $2,527, approximately $1,663 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

NOTE 4 — INVENTORIES
Inventories consist of the following:

12



   
June 30, 2018
 
December 31, 2017
Raw materials
$
54,604

 
$
39,975

Work in process
3,950

 
3,523

Finished goods
83,182

 
92,049

Total
$
141,736

 
$
135,547

NOTE 5 — OTHER ASSETS
Prepaid expense and other assets consist of the following:
   
June 30, 2018
 
December 31, 2017
Commodity derivatives and related collateral, net
$
4,674

 
$
1,610

Prepaid expenses
21,414

 
11,733

Deposits
1,915

 
2,899

RIN inventory
10,195

 
27,028

Taxes receivable
5,103

 
6,356

Other
1,993

 
2,254

Total
$
45,294

 
$
51,880

RIN inventory values were adjusted in the amounts of $2,317 and $2,629 at June 30, 2018 and December 31, 2017, respectively, to reflect the lower of cost or net realizable value.
Other noncurrent assets consist of the following:
 
June 30, 2018
 
December 31, 2017
Spare parts inventory
$
2,700

 
$
2,764

Catalysts
2,410

 
2,962

Deposits
381

 
381

Other
1,784

 
933

Total
$
7,275

 
$
7,040


13



NOTE 6— INTANGIBLE ASSETS
Intangible assets consist of the following:
 
June 30, 2018
 
Cost
 
Accumulated Amortization
 
Net
 
Weighted Average Remaining Life
Raw material supply agreement
$
6,230

 
$
(2,630
)
 
$
3,600

 
7.5 years
Renewable diesel technology
8,300

 
(2,259
)
 
6,041

 
11.0 years
Ground lease
200

 
(149
)
 
51

 
3.4 years
Acquired customer relationships
2,900

 
(831
)
 
2,069

 
7.1 years
In-process research and development
15,956

 
(1,773
)
 
14,183

 
13.3 years
Total intangible assets
$
33,586

 
$
(7,642
)
 
$
25,944

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

 
$
(2,408
)
 
$
3,822

 
8.0 years
Renewable diesel technology
8,300

 
(1,983
)
 
6,317

 
11.5 years
Ground lease
200

 
(141
)
 
59

 
3.9 years
Acquired customer relationships
2,900

 
(686
)
 
2,214

 
7.6 years
In-process research and development
15,956

 
(1,241
)
 
14,715

 
13.8 years
Total intangible assets
$
33,586

 
$
(6,459
)
 
$
27,127

 
 
The Company recorded intangible amortization expense of $593 and $1,183 for the three and six months ended June 30, 2018 and $585 and $1,169 for the three and six months ended June 30, 2017, respectively.
The estimated intangible asset amortization expense for the remainder of 2018 through 2023 and thereafter is as follows:
July 1, 2018 through December 31, 2018
$
1,187

2019
2,382

2020
2,389

2021
2,395

2022
2,388

2023
2,395

2024 and thereafter
12,808

Total
$
25,944


14



NOTE 7 — DEBT
The following table shows the Company’s term debt:
   
June 30, 2018
 
December 31, 2017
4.00% Convertible Senior Notes, $127,500 face amount, due in June 2036
$
98,716

 
$
116,255

2.75% Convertible Senior Notes, $67,527 face amount, due in June 2019
65,113

 
69,859

REG Danville term loan, secured, variable interest rate of LIBOR plus 4%, due in July 2022
10,212

 
11,460

REG Newton term loan, secured, variable interest rate of LIBOR plus 4%, due in December 2018
6,613

 
8,189

REG Ralston term loan, variable interest rate of Prime Rate plus 0.5%, due in July 2025
17,116

 
6,183

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

 
1,153

REG Grays Harbor term loan, variable interest of minimum of 3.5% or Prime Rate plus 0.25%, due in May 2022
7,162

 
7,882

REG Capital term loan, fixed interest rate of 3.99%, due in January 2028
7,307

 
7,400

Other
105

 
179

Total term debt before debt issuance costs
212,344

 
228,560

Less: Current portion of long-term debt
176,746

 
13,397

Less: Debt issuance costs (net of accumulated amortization of $3,633 and $3,510, respectively)
4,592

 
6,627

Total long-term debt
$
31,006

 
$
208,536


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

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

In addition, the 2036 Convertible Senior Notes will become convertible in the subsequent quarter if the closing price of the Company’s common stock exceeds $14.01, 130% of the Convertible Senior Notes’ initial conversion price, for at least 20 trading days during the 30 consecutive trading days prior to each quarter-end date. If the 2036 Convertible Senior Notes become convertible and should the holders elect to convert, the Company’s current intent and policy is to settle the principal amount the 2036 Convertible Senior Notes in cash, with the remaining value satisfied at the Company’s option in cash, stock or a combination of cash and stock. As of June 30, 2018, the early conversion event was met based on the Company's stock price and as a result, the 2036 Convertible Senior Notes have been classified as a current liability on the Company's Condensed Consolidated Balance Sheets at June 30, 2018.

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


15



The Company evaluated the terms of the conversion features under the applicable accounting literature, including Derivatives and Hedging, ASC 815, and determined that a certain feature required separate accounting as a derivative. This derivative was initially recorded as a long-term liability, "Convertible Debt Conversion Liability", on the Condensed Consolidated Balance Sheets and was adjusted to reflect fair value each reporting date. The fair value of the convertible debt conversion liability at issuance was $40,145. On December 8, 2017, at the Company's Special Meeting of Stockholders, the Company obtained the approval from its stockholders to remove the common stock issuance restrictions in connection with conversions of the 2036 Convertible Senior Notes. Accordingly, on December 8, 2017, the Convertible Debt Conversion Liability was remeasured at fair value at $45,933 and was then reclassified into equity. The debt liability component of 2036 Convertible Senior Notes was determined to be $111,855 at issuance, reflecting a debt discount of $40,145. The debt discount is to be amortized through June 2036. The effective interest rate on the debt liability component was 2.45%.

REG Ralston

In April 2017, REG Ralston, LLC ("REG Ralston") entered into a construction loan agreement ("Construction Loan Agreement") with First Midwest Bank. The Construction Loan Agreement allows REG Ralston to borrow up to $20.0 million during the construction period at REG Ralston and convert it into an amortizing term debt thereafter. The loan has a maturity date of July 15, 2025. The loan requires monthly principal payments and interest to be charged using prime rate plus 0.5% per annum. The loan agreement contains various loan covenants. At June 30, 2018, the effective interest rate on the amount borrowed under this Construction Loan Agreement was 5.50% per annum.

REG Danville

In July 2017, REG Danville, LLC ("REG Danville") entered into an amended loan agreement ("Loan Agreement") with Fifth Third Bank. The Loan Agreement allowed REG Danville to borrow $12,500 maturing in July 2022. The loan requires monthly principal payments and bears LIBOR-based variable interest rates. The loan agreement contains various loan covenants. At June 30, 2018, the effective interest rate on the amount borrowed under this Loan Agreement was 6.00% per annum.

REG Capital

In December 2017, REG Capital, LLC ("REG Capital") entered into a mortgage refinancing loan agreement ("Mortgage
Refinancing Loan Agreement") with First National Bank to refinance existing mortgages on our office buildings in Ames, IA.
The outstanding principal under the Mortgage Refinancing Loan Agreement is $7,307 with a maturity date of January 3,
2028. The loan requires monthly principal payments and bears a fixed interest rate of 3.99% per annum.

Lines of Credit
The following table shows the Company's lines of credit:
 
June 30, 2018
 
December 31, 2017
Amount outstanding under lines of credit
$
7,844

 
$
65,525

Maximum available to be borrowed under lines of credit
$
113,895

 
$
60,839

The Company's wholly-owned subsidiaries, REG Services Group, LLC and REG Marketing & Logistics Group, LLC, are borrowers under a Credit Agreement dated December 23, 2011 with the lenders party thereto (“Lenders”) and Wells Fargo Capital Finance, LLC, as the agent, (as amended, the “M&L and Services Revolver”). The maximum commitment of the Lenders under the M&L and Services Revolver to make revolving loans is $150,000, subject to an accordion feature, which allows the borrowers to request commitments for additional revolving loans in an aggregate amount not to exceed to $50,000, the making of which is subject to customary conditions, including the consent of Lenders providing such additional commitments.
The maturity date of the M&L and Services Revolver is September 30, 2021. Loans advanced under the M&L and Services Revolver bear interest based on a one-month LIBOR rate (which shall not be less than zero), plus a margin based on Quarterly Average Excess Availability (as defined in the Revolving Credit Agreement), which may range from 1.75% per annum to 2.25% per annum.
The M&L and Services Revolver contains various loan covenants that restrict each subsidiary borrower’s ability to take certain actions, including restrictions on incurrence of indebtedness, creation of liens, mergers or consolidations, dispositions of

16



assets, repurchase or redemption of capital stock, making certain investments, making distributions to the Company unless certain conditions are satisfied, entering into certain transactions with affiliates or changing the nature of the subsidiary’s business. In addition, the subsidiary borrowers are required to maintain a fixed charge coverage ratio of at least 1.0 to 1.5 if excess availability under the M&L and Services Revolver is less than 10% of the total $150,000 of current revolving loan commitments, or $15,000 currently. The M&L and Services Revolver is secured by the subsidiary borrowers’ membership interests and substantially all of their assets. In addition, the M&L and Services Revolver is secured by the accounts receivable and inventory of REG Albert Lea, LLC, REG Houston, LLC, REG New Boston, LLC, and REG Geismar, LLC (collectively, the "Plant Loan Parties") subject to a $40,000 limitation with respect to each of the Plant Loan Parties.

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

REG Germany has a trade finance facility agreement ("Uncommitted Credit Facility Agreement") with BNP Paribas, which allows it to borrow up to $25,000 for funding the purchase of goods and services. Amounts outstanding under the Uncommitted Credit Facility Agreement bear variable interest and are payable as stipulated in the agreement. The amount that can be borrowed under the agreement can be amended, cancelled or restricted at BNP Paribas's sole discretion and therefore is not included in the maximum available to be borrowed under lines of credit above. The Uncommitted Credit Facility Agreement contains various loan covenants that require REG Germany to maintain certain financial measures. At June 30, 2018, the nominal interest rates ranged from 1.50% to 4.24% 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, 2018, the net notional volumes of NY Harbor ULSD and CBOT Soybean Oil covered under the open commodity derivative contracts were approximately 100 million gallons and 202 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, 2018
 
December 31, 2017
   
Assets
 
Liabilities
 
Assets
 
Liabilities
Gross amounts of derivatives recognized at fair value
$
4,664

 
$
3,162

 
$
812

 
$
8,001

Cash collateral
3,172

 

 
8,799

 

Total gross amount recognized
7,836

 
3,162

 
9,611

 
8,001

Gross amounts offset
(3,162
)
 
(3,162
)
 
(8,001
)
 
(8,001
)
Net amount reported in the condensed consolidated balance sheets
$
4,674

 
$

 
$
1,610

 
$


17



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, 
 2018
 
Three Months 
 Ended 
 June 30, 
 2017
 
Six Months 
 Ended 
 June 30, 
 2018
 
Six Months 
 Ended 
 June 30, 
 2017
Commodity derivatives
Cost of goods sold – Biomass-based diesel
 
$
(12,909
)
 
$
9,758

 
$
(15,347
)
 
$
18,047

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, 2018
   
Total
 
Level 1
 
Level 2
 
Level 3
Commodity contract derivatives
$
1,502

 
$
10

 
$
1,492

 
$

Contingent considerations for acquisitions
(20,065
)
 

 

 
(20,065
)
 
$
(18,563
)
 
$
10

 
$
1,492

 
$
(20,065
)
   
As of December 31, 2017
   
Total
 
Level 1
 
Level 2
 
Level 3
Commodity contract derivatives
$
(7,189
)
 
$
(3,742
)
 
$
(3,447
)
 
$

Contingent considerations for acquisitions
(34,393
)
 

 

 
(34,393
)
   
$
(41,582
)
 
$
(3,742
)
 
$
(3,447
)
 
$
(34,393
)
The following is a reconciliation of the beginning and ending balances for liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
 
Contingent Consideration for Acquisitions
 
2018
 
2017
Balance at beginning of period, January 1
$
34,393

 
$
46,568

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

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

 
43,177

Change in estimates included in earnings
(7,129
)
 
(24
)
Settlements
(2,846
)
 
(3,698
)
Balance at end of period, June 30
$
20,065

 
$
39,455

The estimated fair values of the Company’s financial instruments, which are not recorded at fair value, are as follows:
   
As of June 30, 2018
 
As of December 31, 2017
   
Asset (Liability)
Carrying
Amount
 
Fair Value
 
Asset (Liability)
Carrying
Amount
 
Fair Value
Financial liabilities:
   
 
   
 
   
 
   
Debt and lines of credit
$
(220,188
)
 
$
(412,214
)
 
$
(294,085
)
 
$
(273,983
)

18



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. During November 2016, the Company's Board of Directors authorized a review of strategic alternatives for the Life Sciences business. The course of action chosen as a result of this strategic review might affect the timeline and assumptions used to estimate the fair value of REG Life Sciences contingent consideration.
The fair value of all other contingent consideration is determined using an expected present value technique. Expected cash flows are determined using the probability weighted-average of possible outcomes that would occur should the achievement of certain milestones related to the production and/or sale of biomass-based diesel at the specific production facility. A discount rate ranging from 5.8% to 10.0% is used to estimate the fair value of the expected payments.
Convertible debt conversion liability: The fair value of the convertible debt conversion liability is estimated using the Black-Scholes model incorporating the terms and conditions of the 2036 Convertible Senior Notes and considering changes in the prices of the Company's common stock, Company stock price volatility, risk-free rates and changes in market rates. The valuations are, among other things, subject to changes in the Company's credit worthiness as well as change in general market conditions. As the majority of the assumptions used in the calculations are based on market sources, the fair value of the convertible conversion liability is reflected in Level 2.
Debt and lines of credit: The fair value of long-term debt and lines of credit was established using discounted cash flow calculations and current market rates reflecting Level 2 inputs.
NOTE 10 — NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is presented in conformity with the two-class method required for participating securities. Participating securities include restricted stock units ("RSUs").
Under the two-class method, net income is reduced for distributed and undistributed dividends earned in the current period. The remaining earnings are then allocated to Common Stock and the participating securities. The Company calculates the effects of participating securities on diluted earnings per share ("EPS") using both the “if-converted or treasury stock” and "two-class" methods and discloses the method which results in a more dilutive effect. The effects of Common Stock options, warrants, stock appreciation rights and convertible notes on diluted EPS are calculated using the treasury stock method unless the effects are anti-dilutive to EPS.
For the convertible senior notes, the Company’s current intent and policy is to settle conversions using cash for the principal amount of convertible senior notes converted, with the remaining value satisfied at the Company’s option in cash, stock or a combination of cash and stock. Therefore, the dilutive effect of the convertible senior notes is limited to the conversion premium.
The following potentially dilutive weighted average securities were excluded from the calculation of diluted net income (loss) per share attributable to common stockholders during the periods presented, as the effect was anti-dilutive:

19



   
Three Months 
 Ended 
 June 30, 
 2018
 
Three Months 
 Ended 
 June 30, 
 2017
 
Six Months 
 Ended 
 June 30, 
 2018
 
Six Months 
 Ended 
 June 30, 
 2017
Stock appreciation rights
347

 
1,297,282

 
240,303

 
1,446,618

2019 Convertible Senior Notes
4,358,629

 
5,567,112

 
5,178,146

 
5,567,112

2036 Convertible Senior Notes
10,087,669

 
14,106,725

 
11,574,051

 
14,106,725

Total
14,446,645

 
20,971,119

 
16,992,500

 
21,120,455

The following table presents the calculation of diluted net income (loss) per share:
   
Three Months 
 Ended 
 June 30, 
 2018
 
Three Months 
 Ended 
 June 30, 
 2017
 
Six Months 
 Ended 
 June 30, 
 2018
 
Six Months 
 Ended 
 June 30, 
 2017
Net income (loss) attributable to the Company’s common stockholders - Basic
$
32,956

 
$
(34,809
)
 
$
241,983

 
$
(50,723
)
Less: effect of participating securities

 

 

 

Net income (loss) attributable to common stockholders - Dilutive
$
32,956

 
$
(34,809
)
 
$
241,983

 
$
(50,723
)
Shares:

 
 
 

 

Weighted-average shares used to compute basic net income per share
37,413,387

 
38,679,849

 
38,112,531

 
38,639,672

Adjustment to reflect conversion of convertible notes
4,333,570

 

 
2,377,998

 

Adjustment to reflect stock appreciation right conversions
332,987

 

 
222,585

 

Weighted-average shares used to compute diluted net income per share
42,079,944

 
38,679,849

 
40,713,114

 
38,639,672

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

 
 
 

 

Diluted
$
0.78

 
$
(0.90
)
 
$
5.94

 
$
(1.31
)
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, 2018 and for the year ended December 31, 2017 are composed of Biomass-based Diesel, Services, Renewable Chemicals and Corporate and other activities. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
The Biomass-based Diesel segment processes waste vegetable oils, animal fats, virgin vegetable oils and other feedstocks and methanol into biomass-based diesel. The Biomass-based Diesel segment also includes the Company’s purchases and resale of biomass-based diesel produced by third parties. Revenue is derived from the purchases and sales of biomass-based diesel, RINs and raw material feedstocks acquired from third parties, sales of biomass-based diesel produced under toll manufacturing arrangements with third party facilities, sales of processed biomass-based diesel from Company facilities, related by-products and renewable energy government incentive payments, in the U.S. and internationally.
The Services segment offers services for managing the construction of biomass-based diesel production facilities and managing ongoing operations of third-party plants and collects fees related to the services provided. The Company does not allocate items that are of a non-operating nature or corporate expenses to the business segments. Revenues from services provided to other segments are recorded by the Services segment at cost.
The Renewable Chemicals segment consists of research and development activities involving the production of renewable chemicals, additional advanced biofuels and other products from the Company's proprietary microbial fermentation process and the operations of a demonstration scale facility located in Okeechobee, Florida.

20



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.
The following table represents the significant items by reportable segment:
   
Three Months 
 Ended 
 June 30, 
 2018
 
Three Months 
 Ended 
 June 30, 
 2017
 
Six Months 
 Ended 
 June 30, 
 2018
 
Six Months 
 Ended 
 June 30, 
 2017
Net revenues:
   
 
   
 
   
 
   
Biomass-based Diesel (includes REG Germany's net sales of $43,369 and $89,725 and $41,473 and $95,025 for the three and six months ended June 30, 2018 and 2017, respectively)
$
541,774

 
$
532,527

 
$
1,170,167

 
$
922,632

Services
17,523

 
20,922

 
52,738

 
43,755

Renewable Chemicals
1,063

 
1,002

 
2,923

 
1,830

Corporate and Other
53,173

 
39,366

 
127,716

 
77,138

Intersegment revenues
(33,383
)
 
(58,714
)
 
(84,142
)
 
(91,359
)
   
$
580,150

 
$
535,103

 
$
1,269,402

 
$
953,996

Income (loss) before income taxes:
   
 
   
 
   
 
   
Biomass-based Diesel (includes REG Germany's loss of ($1,078) and ($5,689) and ($2,092) and ($1,332) for the three and six months ended June 30, 2018 and 2017, respectively)
$
32,394

 
$
4,323

 
$
247,964

 
$
(6,392
)
Services
(267
)
 
(267
)
 
4,757

 
(377
)
Renewable Chemicals
(6,291
)
 
(4,828
)
 
(13,775
)
 
(9,835
)
Corporate and Other
11,849

 
(32,077
)
 
11,925

 
(31,084
)
   
$
37,685

 
$
(32,849
)
 
$
250,871

 
$
(47,688
)
Depreciation and amortization expense, net:
   
 
   
 
   
 
   
Biomass-based Diesel (includes REG Germany's amounts of $570 and $1,367 and $788 and $1,474, for the three and six months ended June 30, 2018, respectively)
$
8,427

 
$
7,830

 
$
16,731

 
$
15,570

Services
357

 
251

 
685

 
482

Renewable Chemicals
394

 
384

 
789

 
769

Corporate and Other
440

 
508

 
906

 
1,015

   
$
9,618

 
$
8,973

 
$
19,111

 
$
17,836

Cash paid for purchases of property, plant and equipment:
   
 
   
 
   
 
   
Biomass-based Diesel (includes REG Germany's amounts of $288 and $701 and $1,227 and $2,395, for the three and six months ended June 30, 2018 and 2017 respectively)
$
11,447

 
$
13,517

 
$
27,049

 
$
29,398

Services
911

 
938

 
1,763

 
1,520

Renewable Chemicals

 

 
335

 
7

Corporate and Other

 
946

 
33

 
1,112

   
$
12,358

 
$
15,401

 
$
29,180

 
$
32,037



21



   
June 30, 2018
 
December 31, 2017
Goodwill:
   
 
   
Services
$
16,080

 
$
16,080

 
 
 
 
Assets:
   
 
   
Biomass-based Diesel (including REG Germany's assets of $53,768 and $55,761, respectively)
$
955,055

 
$
898,180

Services
61,040

 
55,581

Renewable Chemicals
19,501

 
21,168

Corporate and Other
389,652

 
386,590

Intersegment eliminations
(272,478
)
 
(355,923
)
   
$
1,152,770

 
$
1,005,596


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, 
 2018
 
Three Months 
 Ended 
 June 30, 
 2017
 
Six Months 
 Ended 
 June 30, 
 2018
 
Six Months 
 Ended 
 June 30, 
 2017
Net revenues:
   
 
   
 
   
 
   
United States
$
534,110

 
$
477,769

 
$
1,175,034

 
$
843,110

Germany
43,369

 
41,473

 
89,725

 
95,025

Other Foreign
2,671

 
15,861

 
4,643

 
15,861

Non-United States
46,040

 
57,334

 
94,368

 
110,886

 
$
580,150

 
$
535,103

 
$
1,269,402

 
$
953,996

   
June 30, 2018
 
December 31, 2017
Long-lived assets:
   
 
   
United States
$
570,921

 
$
566,028

Germany
19,734

 
20,689

Other Foreign
610

 
680

 
$
591,265

 
$
587,397

NOTE 12 — COMMITMENTS AND CONTINGENCIES
The Company is involved in legal proceedings in the normal course of business. The Company currently believes that any ultimate liability arising out of such proceedings will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements regarding Renewable Energy Group, Inc., or “we,” “our” or “the Company,” that involve risks and uncertainties such as anticipated financial performance, business prospects, technological developments, products, possible strategic initiatives and similar matters. In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “predict,” “potential,” “plan,” or the negative of these terms, and similar expressions intended to identify forward-looking statements.  

22



These forward-looking statements include, but are not limited to statements about planned capital expenditures and our ability to maintain financing for such construction; existing or proposed legislation affecting the biomass-based diesel industry, including governmental incentives and tax credits; any impact of the results from the investigation and subsequent determination by the U.S. International Trade Commission regarding trade practices by Argentinean and Indonesian companies; our utilization of forward contracting and hedging strategies to minimize feedstock and other input price risk; our operational management and facility construction services; our ability to renew existing and expired contracts at similar or more favorable terms; expected technological advances in biomass-based diesel production methods; our ability to develop and market renewable chemicals; results in respect of the strategic review of our life sciences business; statements about using acquired land to improve existing production capacity and future expansion opportunities at our Geismar facility; the market for biomass-based diesel, including the factors that affect such market and our operating results and seasonal fluctuations in demand, and potential biomass-based diesel consumers; our ability to further develop our financial, managerial and other internal controls and reporting systems to accommodate future growth; the potential impact following the establishment of applicable accounting standards; the impact of recent U.S. tax legislation on our financial condition and results of operations; expectations regarding the realization of deferred tax assets and the establishment and maintenance of tax reserves and anticipated trends; expectations regarding our expenses and sales; anticipated general market conditions; anticipated cash 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, 2018. We encourage you to read this Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the accompanying condensed consolidated financial statements and related notes. Forward-looking statements contained in this report present management’s views only as of the date of this report. Except as required under applicable law, we do not intend to issue updates concerning any future revisions of management’s views to reflect events or circumstances occurring after the date of this report.
Overview
We focus on providing cleaner, lower carbon products and services. We are North America's largest producer of advanced biofuels. We utilize a nationwide production, distribution and logistics system as part of an integrated value chain model designed to convert natural fats, oils and greases into advanced biofuels. We are also engaged in research and development efforts focused on the conversion of diverse feedstocks into various renewable chemicals, advanced biofuels and other products. We believe our fully integrated approach, which includes acquiring feedstock, managing biorefinery facility construction and upgrades, operating biorefineries, and distributing fuel through a network of terminals, positions us to serve the market for biomass-based diesel, other advanced biofuels and other products and services.
We own and operate a network of 14 biorefineries. Twelve biorefineries are located in the United States and two in Germany. Twelve biorefineries produce traditional biodiesel, one produces renewable diesel (“RD”), and one is a microbial fermentation facility used in connection with our development of renewable chemicals. Our thirteen operational biomass-based diesel production facilities have an aggregate nameplate production capacity of 520 million gallons per year ("mmgy").
We are a lower-cost biomass-based diesel producer. We primarily produce our biomass-based diesel from a wide variety of lower cost feedstocks, including inedible corn oil, used cooking oil and inedible animal fat. We also produce biomass-based diesel from virgin vegetable oils, such as soybean oil or canola oil, which are more widely available, but tend to be higher in price. We believe our ability to process a wide variety of feedstocks provides us with a cost advantage over many biomass-based diesel producers, particularly those that rely primarily on higher cost virgin vegetable oils.
We also sell petroleum-based heating oil and diesel fuel, which enables us to offer additional biofuel blends, while expanding our customer base. We sell heating oil and ultra-low sulfur diesel, or ULSD, at terminals throughout the northeastern U.S., as well as BioHeat® blended heating fuel at one of these terminal locations. In 2015, we expanded our sales of biofuel blends to Midwest terminal locations and look to potentially expand in other areas across North America.
Our development-stage industrial biotechnology business, which we refer to as REG Life Sciences, is developing proprietary microbial fermentation processes to produce renewable chemicals, advanced biofuels and other products. Fatty acids are one of three product areas that we are focused on, along with esters and alcohols.

23



During the three and six months ended June 30, 2018, we sold 172 million and 307 million total gallons of fuel, including 13 million and 21 million gallons of biomass-based diesel that we purchased from third parties and resold, 12 million and 24 million biomass-based diesel gallons produced by REG Germany and 22 million and 58 million petroleum-based diesel gallons. During 2017, we sold 587 million gallons of fuel, which included 52 million biomass-based gallons we purchased from third parties, 38 million biomass-based diesel gallons produced by REG Germany and 83 million petroleum-based diesel gallons.
Our businesses are organized into three reportable segments – the Biomass-based Diesel segment, the Services segment and the Renewable Chemicals segment.
Biomass-based Diesel Segment
Our Biomass-based Diesel segment includes:
the operations of the following biomass-based diesel production facilities:
a 30 mmgy nameplate biodiesel production facility located in Ralston, Iowa;
a 35 mmgy nameplate biodiesel production facility located near Houston, Texas;
a 45 mmgy nameplate biodiesel production facility located in Danville, Illinois;
a 30 mmgy nameplate biodiesel production facility located in Newton, Iowa;
a 60 mmgy nameplate biodiesel production facility located in Seneca, Illinois;
a 30 mmgy nameplate biodiesel production facility located near Albert Lea, Minnesota;
a 15 mmgy nameplate biodiesel production facility located in New Boston, Texas;
a 30 mmgy nameplate biodiesel production facility located in Mason City, Iowa;
a 75 mmgy nameplate renewable diesel production facility located in Geismar, Louisiana;
a 27 mmgy nameplate biodiesel production facility located in Emden, Germany;
a 23 mmgy nameplate biodiesel production facility located in Oeding, Germany;
a 100 mmgy nameplate biodiesel production facility located in Grays Harbor, Washington; and
a 20 mmgy nameplate biodiesel production facility located in DeForest, Wisconsin.
purchases and resales of biomass-based diesel, petroleum-based diesel, RINs and LCFS credits, and raw material feedstocks acquired from third parties;
sales of biomass-based diesel produced under toll manufacturing arrangements with third-party facilities using our feedstocks; and
incentives received from federal and state programs for renewable fuels.

We derive a small portion of our revenues from the sale of glycerin, free fatty acids and other co-products of the biomass-based diesel production process. In 2017 and for the six months ended June 30, 2018, our revenues from the sale of co-products were approximately five percent of our total Biomass-based Diesel segment revenues. For the three and six months ended June 30, 2018, revenues from the sale of petroleum-based heating oil and diesel fuel acquired from third parties, along with the sale of these items further blended with biodiesel produced at wholly owned facilities or purchased from third parties, were less than ten percent of our total revenues.
In accordance with EPA regulations, we generate 1.5 to 1.7 RINs for each gallon of biomass-based diesel we produce. RINs are used to track compliance with Renewable Fuel Standard 2, or RFS2, using the EPA moderated transaction system, or EMTS. RFS2 allows us to attach between zero and 2.5 RINs to any gallon of biomass-based diesel we sell. When we attach RINs to a sale of biomass-based diesel gallons, a portion of our selling price for a gallon of biomass-based diesel is generally attributable to RFS2 compliance; but no cost is allocated to the RINs generated by our biomass-based diesel production because RINs are a form of government incentive and not a result of the physical attributes of the biomass-based diesel production. In addition, RINs, once obtained through the production and sale of gallons of biomass-based diesel, may be separated by the acquirer and sold separately. We regularly obtain RINs from third parties for resale, and the value of these RINs is reflected in “Prepaid expenses and other assets” on our Condensed Consolidated Balance Sheets. At each balance sheet date, this RIN inventory is valued at the lower of cost or net realizable value and any resulting adjustments are reflected in our cost of goods sold for the period. The cost of RINs obtained from third parties is determined using the average cost method. Because we do not allocate costs to RINs generated by our biomass-based diesel production, fluctuations in the value of our RIN inventory represent fluctuations in the value of RINs we have obtained from third parties. At June 30, 2018, we had approximately 25.3 million biomass-based diesel RINs and 2.2 million advanced biofuel RINs available to be sold, as compared to 37.8 million biomass-based diesel RINs and 1.2 million advanced biofuel RINs held for sale at December 31, 2017. According to the Oil Pricing Information System ("OPIS"), the median closing price at June 30, 2018 was $0.45 and

24



$0.43 per biomass-based diesel RIN and advanced biofuel RIN, respectively, compared to $0.79 and $0.78 at December 31, 2017, respectively, per biomass-based diesel RIN and advanced biofuel RIN. We believe that the decrease in RIN value during the second quarter of 2018 was influenced by record levels of Smaller Refiner Exemptions from RIN compliance requirements for 2016 and 2017.
We generate Low Carbon Fuel Standard credits for our low carbon fuels or blendstocks when our qualified low carbon fuels are imported into states that have adopted an LCFS program. LCFS credits are used to track compliance with states' LCFS. As a result, a portion of the selling price for a gallon of biomass-based diesel sold into an LCFS market is also attributable to LCFS compliance. Like RINs, LCFS credits that we generate are a form of government incentive and not a result of the physical attributes of the biomass-based diesel production. Therefore, no cost is allocated to the LCFS credit when it is generated, regardless of whether the LCFS credit is transferred with the biomass-based diesel produced or held by us. At June 30, 2018, we held for sale approximately 50,900 LCFS credits, compared to 5,700 credits at December 31, 2017. According to OPIS, the median closing price at June 30, 2018 and December 31, 2017 was $185.00 and $113.00, respectively, per California LCFS credit. The increase in LCFS prices was largely attributable to growing demand for LCFS credits.
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 Ralston, Albert Lea, New Boston, Mason City and Newton. In March 2018, we completed the expansion project at our Ralston facility. In June 2017, we completed the acquisition of approximately 82 acres of land at and in close proximity to our Geismar, Louisiana biorefinery. The purchase included the acquisition of land we previously leased for our Geismar operations and approximately 61 additional acres in parcels adjacent to and near the facility.  We plan to improve and utilize the new acreage to support existing production capacity and future expansion opportunities using the Services segment.
Renewable Chemicals Segment
Our Renewable Chemicals segment includes:
research and development activities focusing on microbial fermentation to develop and produce renewable chemicals, additional advanced biofuels and other biomass-based products;
collaborative research and development and other service activities to continue to build out the technology platform; and
the operations of a demonstration scale fermentation facility located in Okeechobee, Florida.
In January 2016, ExxonMobil Research and Engineering Company entered into an agreement with REG Life Sciences to develop technology for the production of biodiesel by fermenting renewable cellulosic sugars from sources such as agricultural waste. In September 2017, we signed a phase II joint development collaboration with ExxonMobil Research and Engineering to continue to develop technology to produce biodiesel fermenting renewable cellulosic sugars from sources such as agricultural waste. In October 2016, REG Life Sciences sold and delivered its first commercial product, a specialty fatty acid. REG Life Sciences developed, produced, sold and delivered approximately one metric ton of the renewable, multi-functional chemical to Aroma Chemical Services International. Fatty acids is one of three product areas REG Life Sciences has focused on, along with esters and alcohols.
In November 2016, our Board of Directors authorized a review of strategic alternatives for REG Life Sciences. We pursued a range of activities as part of our strategic review and have determined that we will focus our efforts on finalizing joint development agreements on the most attractive projects.
Factors Influencing Our Results of Operations
The principal factors affecting our results of operations and financial condition are the market prices for biomass-based diesel and the feedstocks used to produce biomass-based diesel, as well as governmental programs designed to create incentives or requirements for the production and use of biomass-based diesel.
Governmental programs favoring biomass-based diesel production and use

25



Biomass-based diesel has historically been more expensive to produce than petroleum-based diesel, when excluding the value of biomass-based diesel incentives and credits. The biomass-based diesel industry’s growth has largely been the result of federal and state programs that require or incentivize production and use of biomass-based diesel, which allows biomass-based diesel to be price competitive with petroleum-based diesel.
On July 1, 2010, RFS2 was implemented, stipulating volume requirements for the amount of biomass-based diesel and other advanced biofuels that must be utilized in the United States each year. Under RFS2, Obligated Parties, including petroleum refiners and fuel importers, must show compliance with these standards. Currently, biodiesel and renewable diesel production meets three categories of an Obligated Party’s annual renewable fuel required volume obligation, or RVO—biomass-based diesel, undifferentiated advanced biofuel and undifferentiated renewable fuel. The final RVO targets for the biomass-based diesel and advanced biofuels volumes for the years 2015 to 2020 as set or proposed by the EPA are as follows:
 
2015
 
2016
 
2017
 
2018
 
2019
 
2020
Biomass-based diesel
1.73 billion gallons
 
1.90 billion gallons
 
2.00 billion gallons
 
2.1 billion gallons
 
2.1 billion gallons
 
2.43 billion gallons (proposed)
Total Advanced biofuels
2.88 billion RINs*
 
3.61 billion RINs*
 
4.28 billion RINs*
 
4.29 billion RINs*
 
4.88 billion RINs* (proposed)
 
N/A
(*ethanol equivalent gallons)
U.S. production and imports increased significantly in 2016 and in 2017 imports decreased modestly due to the trade case, lapsing of the BTC, and uncertainty on the level of RVO volumes to be set by the EPA. Domestic production is trending higher for the first half of 2018 while imports have decreased. This decrease is a result of zero imported gallons from Argentina due to the U.S. International Trade Commission's imposition of countervailing duties on biodiesel produced in that country. Volumes listed below show domestic and imported net generation as illustrated by the EMTS data noted below:
 
2015
 
2016
 
2017
 
1H 2018
Biomass-based diesel produced and imported
1.81 billion gallons
 
2.60 billion gallons
 
2.50 billion gallons
 
1.14 billion gallons
Total Advanced biofuels*
3.08 billion RINs
 
4.29 billion RINs
 
4.23 billion RINs
 
1.91 billion RINs
(*includes cellulosic, biomass-based diesel, and other advanced biofuels)
The federal biodiesel mixture excise tax credit, or the BTC, has historically provided a $1.00 refundable tax credit per gallon to the first blender of biomass-based diesel with petroleum-based diesel fuel. The BTC became effective January 1, 2005, but since January 1, 2010 it has been allowed to lapse and then been reinstated a number of times. For example, the BTC lapsed on January 1, 2014, was retroactively reinstated for 2014 on December 19, 2014 and then lapsed again on January 1, 2015. On December 18, 2015, the BTC was retrospectively reinstated for 2015 and extended for 2016. The BTC again lapsed on January 1, 2017 and was reinstated on a retroactive basis for 2017 on February 9, 2018. It is not currently in effect for 2018.
As a result of this history of retroactive reinstatement of the BTC, we and many other biomass-based diesel industry producers have adopted contractual arrangements with customers and vendors specifying the allocation and sharing of any retroactively reinstated incentive. The reinstatement of the 2017 BTC resulted in a $205 million net benefit to our Adjusted EBITDA for the year ended December 31, 2017, with another $11 million related to products delivered and sales recognized in the first quarter of 2018. It is uncertain whether the BTC will be reinstated for 2018 and beyond and if reinstated, whether it would be reinstated retroactively or on the same terms. The modification or failure to reinstate the BTC could have a material adverse effect on our financial results.
Biomass-based diesel and feedstock price fluctuations
Our operating results generally reflect the relationship between the price of biomass-based diesel, including credits and incentives, and the price of feedstocks used to produce biomass-based diesel.
Biomass-based diesel is a low carbon, renewable alternative to petroleum-based diesel fuel and is primarily sold to the end user after it has been blended with petroleum-based diesel fuel. Biomass-based diesel prices have historically been heavily influenced by petroleum-based diesel fuel prices. Accordingly, biomass-based diesel prices have generally been impacted by the same factors that affect petroleum prices, such as crude oil supply and demand balance, worldwide economic conditions, wars and other political events, OPEC production quotas, changes in refining capacity and natural disasters.

26



Regulatory and legislative factors also influence the price of biomass-based diesel. Biomass-based diesel RIN pricing, a value component that was introduced via RFS2 in July 2010, has had a significant impact on biomass-based diesel pricing. The following table shows for 2015, 2016, 2017 and the first half of 2018 the high and low average monthly contributory value of RINs, as reported by OPIS, to the average B100 spot price of a gallon of biodiesel, as reported by The Jacobsen, in terms of dollars per gallon.
rinpricevsb100pricecharta40.jpg
At the beginning of 2018, the value of RINs, as reported by OPIS, to the average B100 spot price of a gallon of biodiesel was $1.22 per gallon. The value of RINs to the average B100 spot price of a gallon of biodiesel was $0.68 per gallon at the end of June 2018. It reached a high of $1.36 per gallon of biodiesel in February 2018 and a low of $0.67 per gallon in June 2018. The RIN market was largely operating as expected as lower feedstock prices increased the spread between feedstocks and fuels and RINs came down in value. We believe that the decrease in RIN value during the second quarter of 2018 was influenced by record levels of Smaller Refiner Exemptions from RIN compliance requirements for 2016 and 2017. The decrease in the value of RINs held in inventory resulted in a $6.5 million million write-down to lower of cost or net realizable value for the first half of 2018. We enter into forward contracts to sell RINs and we use risk management position limits to manage RIN exposure.
During 2017, feedstock expense accounted for 80% of our production cost, while methanol and chemical catalysts expense accounted for 3% and 4% of our costs of goods sold, respectively.
Feedstocks for biomass-based diesel production, such as inedible oil, used cooking oil, animal fat and soybean oil are commodities and market prices for them will be affected by a wide range of factors unrelated to the price of biomass-based diesel and petroleum-based diesel fuels. There are a number of factors that influence the supply and price our feedstocks, such as the following: biomass-based diesel demand; export demand; government policies and incentives; weather conditions; ethanol production; cooking habits and eating habits; number of restaurants near collection facilities; hog/beef/poultry slaughter kills; palm oil supply; soybean meal demand and/or production, and crop production in the U.S. and South America, among others.
During 2017, 73% of our feedstocks were comprised of inedible corn oil, used cooking oil and inedible animal fats with the remainder coming from virgin vegetable oil.
The graph below illustrates the spread between the cost of producing one gallon of biodiesel made from soybean oil to the cost of producing one gallon of biodiesel made from a lower-cost feedstock for the period January 2016 to June 30, 2018. The results were derived using assumed conversion factors for the yield of each feedstock and subtracting the cost of producing one gallon of biodiesel made from each respective lower-cost feedstock from the cost of producing one gallon of biodiesel made from soybean oil.

27



graphsbospreada47.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).  

28



Our results of operations generally will benefit when the spread between biomass-based diesel prices and feedstock prices widens and will be harmed when this spread narrows. The following graph shows feedstock cost data for choice white grease and soybean oil on a per gallon basis compared to the per gallon sale price data for biodiesel, and the spread between biodiesel and each of soybean oil and choice white grease, from January 2016 to June 30, 2018.
graphspreadpricinga48.jpg  
(1)
Biodiesel prices are based on the monthly average of the midpoint of the high and low prices of B100 (Upper Midwest) as reported by The Jacobsen.
(2)
Soybean oil (crude) prices are based on the monthly average of the daily closing sale price of the nearby soybean oil contract as reported by CBOT (based on 7.5 pounds per gallon).
(3)
Choice white grease prices are based on the monthly average of the daily low price of Missouri River choice white grease as reported by The Jacobsen (based on 8.0 pounds per gallon).
(4)
Spread between biodiesel price and choice white grease price.
(5)
Spread between biodiesel price and soybean oil (crude) price.
During the first half of 2018, NY Harbor ULSD prices ranged from low of $1.8369 per gallon in February to a high of $2.2896 per gallon in May with the average price for the second quarter of $2.1459 per gallon. Energy prices increased in April and May, and were steady in June.  Strong global demand for refined fuels and OPEC’s continued compliance with crude oil production cuts helped to offset the material production gains from U.S. shale producers. U.S. biodiesel prices slightly declined during the second quarter with OPIS Chicago B100 prices ranging $2.91 to $3.15 per gallon.  European used cooking oil methyl ester prices increased during the second quarter of 2018, as methyl ester spreads to gasoil improved during the summer blending season.
Animal fat and vegetable oil production have both increased year over year, which contributed to lower feedstock prices during the quarter. Soybean oil prices ranged from a high of $0.3234 per pound in April 2018 to a low of $0.2885 per pound in June 2018 with an average price for the quarter of $0.3073 per pound. Soybean oil prices trended lower due to higher soybean crush rates, falling palm oil prices and China's impending tariffs on soybean imports. Strong consumer demand for meats and increasing industry capacity has continued to lead to expansions in the U.S. hog and cattle markets. Both hog and cattle slaughter numbers in the first half of 2018 were higher year over 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 ("USITC"), arguing that

29



Argentinean and Indonesian companies were violating trade laws by flooding the U.S. market with dumped and subsidized biodiesel. The Coalition comprises of the National Biodiesel Board and U.S. biodiesel producers. In May 2017, the USITC agreed to proceed with an investigation regarding this matter. In relation to this antidumping and countervailing duty petition, the Coalition filed a new allegation in July 2017 that "critical circumstances" exist with respect to imports of biodiesel from Argentina, which would allow for the imposition of duties on imports that enter the U.S. prior to preliminary determinations of subsidization and dumping. The Coalition found that imports of biodiesel from Argentina had jumped 144.5% since the March 2017 petition was filed. In December 2017, the USITC voted 4-0 affirming countervailing duty rates of 34% to 72%. The Department of Commerce issued a determination effective March 1, 2018 affirming the agency’s earlier preliminary determination that Argentina and Indonesia had dumped biodiesel imports into the U.S. Final anti-dumping rates were set at 60% to 267%. In April 2018, the USITC voted 4-0 affirming the Coalition's assertions that the industry has suffered as a result of unfairly dumped imports. The Department of Commerce issued final orders in April 2018.
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 tim