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 March 31, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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 every Interactive Data File required to be submitted 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 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
¨
   
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





Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.0001 per share
REGI
NASDAQ Global Market
As of April 30, 2019, the registrant had 37,618,998 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.
 
 


3



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)
   
March 31,
2019
 
December 31,
2018
ASSETS
   

 
   

CURRENT ASSETS:
   

 
   

Cash and cash equivalents
$
123,062

 
$
123,575

Marketable securities
17,482

 
50,932

Accounts receivable (net of allowance for doubtful accounts of $460 and $673, respectively)
104,989

 
74,551

Inventories
220,566

 
168,900

Prepaid expenses and other assets
33,401

 
41,169

Restricted cash
3,000

 
3,000

Current assets held for sale
3,250

 
3,250

Total current assets
505,750

 
465,377

Property, plant and equipment, net
588,471

 
590,723

Right of use assets
42,109

 

Goodwill
16,080

 
16,080

Intangible assets, net
13,312

 
13,646

Other assets
20,677

 
21,270

TOTAL ASSETS
$
1,186,399

 
$
1,107,096

LIABILITIES AND EQUITY
   

 
   

CURRENT LIABILITIES:
   

 
   

Lines of credit
$
102,612

 
$
14,250

Current maturities of long-term debt
150,339

 
149,006

Current maturities of operating lease obligations
17,606

 

Accounts payable
86,893

 
95,866

Accrued expenses and other liabilities
26,440

 
35,256

Deferred revenue
13,315

 
300

Total current liabilities
397,205

 
294,678

Unfavorable lease obligation

 
2,259

Deferred income taxes
7,973

 
8,410

Long-term debt (net of debt issuance costs of $3,217 and $3,390, respectively)
31,505

 
33,421

Long-term operating lease obligations
34,883

 

Other liabilities
1,592

 
3,075

Total liabilities
473,158

 
341,843

COMMITMENTS AND CONTINGENCIES


 


EQUITY:
   

 
   

Common stock ($.0001 par value; 300,000,000 shares authorized; 37,618,131 and 37,318,942 shares outstanding, respectively)
5

 
5

Common stock—additional paid-in-capital
452,646

 
451,427

Retained earnings
377,324

 
427,244

Accumulated other comprehensive income
(2,018
)
 
(1,656
)
Treasury stock (11,673,962 and 11,524,975 shares outstanding, respectively)
(114,716
)
 
(111,767
)
Total equity
713,241

 
765,253

TOTAL LIABILITIES AND EQUITY
$
1,186,399

 
$
1,107,096

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
   
March 31, 2019
 
March 31, 2018
REVENUES:
   
 
   
Biomass-based diesel sales
$
455,206

 
$
274,761

Separated RIN sales
22,463

 
47,179

Biomass-based diesel government incentives
468

 
365,285

   
478,137

 
687,225

Other revenue
72

 
777

   
478,209

 
688,002

COSTS OF GOODS SOLD:
   
 
   
Biomass-based diesel
484,413

 
405,810

Separated RINs
6,585

 
32,737

Other costs of goods sold
3

 

   
491,001

 
438,547

GROSS PROFIT (LOSS)
(12,792
)
 
249,455

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
25,145

 
31,654

RESEARCH AND DEVELOPMENT EXPENSE
209

 
1,034

INCOME (LOSS) FROM OPERATIONS
(38,146
)
 
216,767

OTHER INCOME (EXPENSE), NET:
   
 
   
Change in fair value of contingent consideration
(304
)
 
(458
)
Loss on debt extinguishment
(2
)
 
(232
)
Gain on involuntary conversion

 
4,000

Other income, net
854

 
1,215

Interest expense
(4,219
)
 
(4,651
)
   
(3,671
)
 
(126
)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(41,817
)
 
216,641

INCOME TAX BENEFIT
430

 
1,203

NET INCOME (LOSS) FROM CONTINUING OPERATIONS
(41,387
)
 
217,844

DISCONTINUED OPERATIONS (NOTE 5):
 
 
 
Loss on operations of discontinued operations
(2,017
)
 
(3,455
)
NET LOSS ON DISCONTINUED OPERATIONS
(2,017
)
 
(3,455
)
NET INCOME (LOSS) TO THE COMPANY
$
(43,404
)
 
$
214,389

 
 
 
 
LESS—EFFECT OF PARTICIPATING SHARE-BASED AWARDS ON CONTINUING OPERATIONS

 
5,236

NET INCOME (LOSS) FROM CONTINUING OPERATIONS ATTRIBUTABLE TO THE COMPANY’S COMMON STOCKHOLDERS
$
(41,387
)
 
$
212,608

NET LOSS FROM DISCONTINUED OPERATIONS ATTRIBUTABLE TO THE COMPANY’S COMMON STOCKHOLDERS
$
(2,017
)
 
$
(3,455
)
Basic net income (loss) per share attributable to common stockholders:
   
 
   
Continuing operations
$
(1.11
)
 
$
5.48

Discontinued operations
$
(0.05
)
 
$
(0.09
)
Net income (loss) per share
$
(1.16
)
 
$
5.39

Diluted net income (loss) per share attributable to common stockholders:
 
 
 
Continuing operations
$
(1.11
)
 
$
5.38

Discontinued operations
$
(0.05
)
 
$
(0.09
)
Net income (loss) per share
$
(1.16
)
 
$
5.30

Weighted-average shares used to compute basic net loss per share attributable to common stockholders:
   
 
   
Basic
37,353,352

 
38,819,443

Weighted-average shares used to compute diluted net loss per share attributable to common stockholders:
 
 
 
Continuing operations
37,353,352

 
39,484,087

Discontinued operations
37,353,352

 
38,819,443

Net income (loss)
37,353,352

 
39,484,087

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
 
March 31, 2019
 
March 31, 2018
Net income (loss)
$
(43,404
)
 
$
214,389

Unrealized gains (losses) on marketable securities, net of taxes of $0 and $0, respectively
(1
)
 

Foreign currency translation adjustments
(361
)
 
719

Other comprehensive income (loss)
(362
)
 
719

Comprehensive income (loss) attributable to the Company
$
(43,766
)
 
$
215,108

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
 
Total
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 51,995 shares of treasury stock purchased)
127,470

 

 

 

 

 
(621
)
 
(621
)
Settlement of stock appreciation rights in common stock (net of 14,558 shares of treasury stock purchased)
33,463

 

 

 

 

 
(172
)
 
(172
)
Partial termination of capped call options
(15,012
)
 

 
252

 

 

 
(167
)
 
85

Convertible debt extinguishment impact (net of tax impact of $68)

 

 
(440
)
 

 

 

 
(440
)
Treasury stock purchases
(641,601
)
 

 

 

 

 
(7,828
)
 
(7,828
)
Stock compensation expense

 

 
1,794

 

 

 

 
1,794

Other comprehensive income

 

 

 

 
719

 

 
719

Net income

 

 

 
214,389

 

 

 
214,389

BALANCE, March 31, 2018
38,342,069

 
$
5

 
$
517,058

 
$
349,317

 
$
997

 
$
(91,869
)
 
$
775,508

BALANCE, January 1, 2019
37,318,942

 
$
5

 
$
451,427

 
$
427,244

 
$
(1,656
)
 
$
(111,767
)
 
$
765,253

Conversion of restricted stock units to common stock (net of 138,012 shares of treasury stock purchased)
283,339

 

 

 

 

 
(2,760
)
 
(2,760
)
Settlement of stock appreciation rights in common stock (net of 9,888 shares of treasury stock purchased)
16,937

 

 
(12
)
 

 

 
(159
)
 
(171
)
Partial termination of capped call options
(1,087
)
 

 
30

 

 

 
(30
)
 

Convertible debt extinguishment impact

 

 
(152
)
 

 

 

 
(152
)
Stock compensation expense

 

 
1,353

 

 

 

 
1,353

Other comprehensive loss

 

 

 

 
(362
)
 

 
(362
)
Adoption of ASC Topic 842, Leases

 

 

 
(6,516
)
 

 

 
(6,516
)
Net loss

 

 

 
(43,404
)
 

 

 
(43,404
)
BALANCE, March 31, 2019
37,618,131

 
$
5

 
$
452,646

 
$
377,324

 
$
(2,018
)
 
$
(114,716
)
 
$
713,241


See notes to condensed consolidated financial statements.

4



RENEWABLE ENERGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
Three months ended
   
March 31, 2019
 
March 31, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
   
 
   
Net income (loss)
$
(43,404
)
 
$
214,389

Net loss from discontinuing operations
(2,017
)
 
(3,455
)
Net income (loss) from continuing operations
(41,387
)
 
217,844

Adjustments to reconcile net income (loss) to net cash flows from operating activities:
   
 
   
Depreciation expense
9,099

 
8,739

Amortization expense of assets and liabilities, net
4,441

 
368

Gain on involuntary conversion

 
(4,000
)
Accretion of convertible note discount
1,095

 
1,357

Amortization of marketable securities
(129
)
 

Change in fair value of contingent consideration
304

 
458

Gain on sale of assets

 
(990
)
Loss on debt extinguishment
2

 
232

Provision (benefit) for doubtful accounts
(300
)
 
314

Stock compensation expense
1,353

 
1,794

Deferred tax expense
(432
)
 
(1,487
)
Other operating activities
77

 
10

Changes in assets and liabilities:
   
 
   
Accounts receivable, net
(30,516
)
 
(375,715
)
Inventories
(52,009
)
 
(35,891
)
Prepaid expenses and other assets
9,342

 
26,582

Accounts payable
(8,618
)
 
152,833

Accrued expenses and other liabilities
(5,352
)
 
(16,046
)
Operating lease obligations
(3,141
)
 

Deferred revenue
13,016

 
(479
)
Net cash flows used in operating activities - continuing operations
(103,155
)
 
(24,077
)
Net cash flows used in operating activities - discontinuing operations
(2,770
)
 
(4,571
)
Cash used in operating activities
(105,925
)
 
(28,648
)
CASH FLOWS FROM INVESTING ACTIVITIES:
   
 
   
Cash paid for marketable securities
(3,478
)
 

Cash received from maturities of marketable securities
37,084

 

Cash receipts for involuntary conversion

 
4,000

Cash paid for purchase of property, plant and equipment
(8,235
)
 
(16,487
)
Cash receipts for sale of assets

 
1,630

Cash paid for investments
(57
)
 

Net cash flows provided by (used in) investing activities - continuing operations
25,314

 
(10,857
)
Net cash flows used in investing activities - discontinuing operations

 
(336
)
Cash provided by (used in) investing activities
25,314

 
(11,193
)
CASH FLOWS FROM FINANCING ACTIVITIES:
   
 
   
Net borrowings on revolving line of credit
84,754

 
40,514

Borrowings on other lines of credit
15,649

 
12,358

Repayments on other lines of credit
(11,908
)
 
(12,992
)
Cash received from notes payable

 
10,890

Cash paid on notes payable
(2,004
)
 
(8,018
)
Cash paid for debt issuance costs
(45
)
 
(78
)
Cash paid for treasury stock

 
(7,828
)
Cash paid for contingent consideration settlement
(3,316
)
 
(2,813
)
Cash received on partial termination of capped call options

 
85

Cash paid for conversion of restricted stock units and stock appreciation rights
(2,931
)
 
(793
)
Net cash flows provided by financing activities - continuing operations
80,199

 
31,325

Net cash flows used in financing activities - discontinuing operations

 

Cash provided by financing activities
80,199

 
31,325

NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
(412
)
 
(8,516
)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, Beginning of period
126,575

 
77,627

Effect of exchange rate changes on cash
(101
)
 
179

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, End of period
$
126,062

 
$
69,290

(continued)

5




RENEWABLE ENERGY GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
Three months ended
 
March 31, 2019
 
March 31, 2018
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
   
 
   
Cash paid for income taxes
$
204

 
$

Cash paid for interest
$
849

 
$
1,154

Leased assets obtained in exchange for new operating lease liabilities
$
1,562

 
$

 
 
 
 
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
   
 
   
Amounts included in period-end accounts payable for:
   
 
   
Purchases of property, plant and equipment
$
2,165

 
$
7,123

Debt issuance cost
$

 
$
52

 
 
 
 
(concluded)
   
See notes to condensed consolidated financial statements.



6



RENEWABLE ENERGY GROUP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For The three Months Ended March 31, 2019 and 2018
(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 7, 2019. 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 March 31, 2019, the Company owns and 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. 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 has not been reinstated for 2018 or 2019 as of the date of this report. 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, 2018.

Restricted Cash
The Company segregates certain cash balances as restricted cash that represent those funds required to be set aside by a contractual agreement. The Company classifies restricted cash between current and non-current assets based on the length of time of the restricted use.
As of March 31, 2019 and 2018, current restricted cash amounted to $3,000 and $0, respectively, which was held as pledges for letters of credit issued to support our operations. See the table below for reconciliation of "Cash, Cash Equivalents and Restricted Cash" in regards to the Condensed Consolidated Statements of Cash Flows:
 
March 31, 2019
 
March 31, 2018
Cash and cash equivalents
$
123,062

 
$
69,290

Restricted cash
3,000

 

Total cash, cash equivalents and restricted cash in the Condensed Statements of Cash Flows
$
126,062

 
$
69,290


Marketable Securities
The Company’s marketable securities are classified as available-for-sale and are reported at fair value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income (loss). Realized gains or losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are reported in other income, net. The Company evaluates such investments periodically for possible other-than-temporary impairment. A decline of fair value below amortized costs of debt securities is considered an other-than-temporary impairment if the Company has the intent to sell the

7



security or if it is more likely than not that the Company will be required to sell the security before recovery of the entire amortized cost basis. In those instances, an impairment charge equal to the difference between the fair value and the amortized
cost basis is recognized in earnings. Regardless of the Company’s intent or requirement to sell a debt security, an impairment is considered other-than-temporary if the Company does not expect to recover the entire amortized cost basis; in those instances, a credit loss equal to the difference between the present value of the cash flows expected to be collected based on credit risk and the amortized cost basis of the debt security is recognized in earnings. The Company has no current requirement or intent to sell a material portion of marketable securities as of March 31, 2019. The Company expects to recover up to (or beyond) the initial cost of investment for securities held. In computing realized gains and losses on available-for-sale securities, the Company determines cost based on amounts paid, including direct costs such as commissions to acquire the security, using the specific identification method.
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 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.
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 March 31, 2019 and December 31, 2018, 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.

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"). See "Note 8 - Debt" for a further description of the 2036 Convertible Senior Notes. During the three months ended March 31, 2019 and 2018, the Company made no repurchases of the 2036 Convertible Senior Notes.
In June 2014, the Company issued $143,800 aggregate principal amount of 2.75% convertible senior notes due in 2019 (the "2019 Convertible Senior Notes"). During the three months ended March 31, 2018, the Company used $6,689 under the 2017 Program (defined below in "Security Repurchase Programs") to repurchase $6,311 principal amount of the 2019 Convertible Senior Notes. During the three months ended March 31, 2019, the Company made no repurchases of the 2019 Convertible Senior Notes. See "Security Repurchase Programs" below.

8



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 Condensed Consolidated Statements of Stockholders' Equity.
Security Repurchase Programs
In December 2017, June 2018 and January 2019, the Company's Board of Directors approved a repurchase program, each of up to $75,000 of the Company's convertible notes and/or shares of common stock (the "2017 Program","2018 Program", and "2019 Program", respectively). Under these programs, 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 under each program 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 three months ended March 31, 2018, the Company repurchased 641,601 shares of Common Stock for $7,828 under the 2017 Program. In that same period, the Company used approximately $6,689 under the 2017 Program to repurchase $6,311 principal amount of the 2019 Convertible Senior Notes. There were no share or note repurchases made under the 2017, 2018 or 2019 Programs during the quarter ended March 31, 2019.
Revenue Recognition
The Company generally has 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 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 and acquired from third parties, including RINs and LCFS credits;
resale of petroleum acquired from third parties, along with the sale of petroleum-based products further blended with biodiesel produced at our wholly owned facilities;
sales of raw materials, glycerin, and other co-products of the biomass-based diesel production process;
other revenue, including biomass-based diesel facility management and operational services; and
incentive payments from federal and state governments, including the BTC, and from the USDA Advanced Biofuel Program.

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:

9



 
Reportable Segments
Three months ended March 31, 2019
Biomass-based
Diesel
 
Services
 
Corporate
and other
 
Intersegment
Revenues
 
Consolidated
Total
Biomass-based diesel sales, net of BTC related amount due to customers of $0
$
399,632

 
$

 
$

 
$
(85,520
)
 
$
314,112

Petroleum diesel sales

 

 
83,903

 

 
83,903

Other biomass-based diesel revenue
57,191

 

 

 

 
57,191

Separated RIN sales
22,463

 

 

 

 
22,463

Other revenues

 
19,583

 

 
(19,511
)
 
72

Total revenues from contracts with customers
$
479,286

 
$
19,583

 
$
83,903

 
$
(105,031
)
 
$
477,741

Biomass-based diesel government incentives
468

 

 

 

 
468

Total revenues
$
479,754

 
$
19,583

 
$
83,903

 
$
(105,031
)
 
$
478,209

 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2018
Biomass-based Diesel
 
Services
 
Corporate and other
 
Intersegment Revenues
 
Consolidated Total
Biomass-based diesel sales, net of BTC related amount due to customers of $144,944
$
166,191

 
$

 
$
3,579

 
$
(17,683
)
 
$
152,087

Petroleum diesel sales

 

 
70,964

 

 
70,964

Other biomass-based diesel revenue
51,710

 

 

 

 
51,710

Separated RIN sales
47,179

 

 

 

 
47,179

Other revenues

 
35,215

 

 
(34,438
)
 
777

Total revenues from contracts with customers
$
265,080

 
$
35,215

 
$
74,543

 
$
(52,121
)
 
$
322,717

Biomass-based diesel government incentives
365,285

 

 

 

 
365,285

Total revenues
$
630,365

 
$
35,215

 
$
74,543

 
$
(52,121
)
 
$
688,002


Contract balances:

The following table provides information about receivables and contract liabilities from contracts with customers:
 
March 31, 2019
 
December 31, 2018
Accounts receivable
$
104,989

 
$
74,551

Short-term contract liabilities (deferred revenue)
$
(13,315
)
 
$
(300
)

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. Significant changes to the contract liabilities during the three months ended March 31, 2019 and 2018 are as follows:
 
January 1, 2019
 
Cash receipts
(Payments)
 
Less: Impact on
Revenue
 
Other
 
March 31, 2019
Deferred revenue
$
300

 
$
28,658

 
$
15,643

 
$

 
$
13,315

 
 
 
 
 
 
 
 
 
 
 
January 1, 2018
 
Cash receipts
(Payments)
 
Less: Impact on
Revenue
 
Other
 
March 31, 2018
Deferred revenue
$
2,218

 
$
10,507

 
$
10,985

 
$

 
$
1,740

Payables to customers related to BTC

 

 
(144,944
)
 
5,832

 
150,776

 
$
2,218

 
$
10,507

 
$
(133,959
)
 
$
5,832

 
$
152,516

Discontinued Operations

10



Loss from discontinued operations mainly relates to the research and development activities of REG Life Sciences, the Company's industrial biotechnology business, which has been classified as assets held for sale following our decision to pursue a sale of this business in the fourth quarter of 2018. See "Note 5 - Discontinued Operations" for further details.
New Accounting Standards
On February 25, 2016, the FASB issued Accounting Standard Update ("ASU") 2016-02, Topic 842, Leases, 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.
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. 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 Company adopted all of the ASU's related to ASC 842 effective January 1, 2019. The Company applied a modified retrospective transition approach. The Company did not elect the practical expedient (1) to reassess the lease classification for any expired or existing leases; (2) to reassess whether any expired or existing contracts are or contain leases and (3) to reassess initial direct costs. The Company elected the hindsight practical expedient to determine the reasonably certain lease term for existing leases and to assess the impairment of its right-of-use assets. While lease classification remained unchanged, hindsight resulted in generally shorter accounting lease terms and useful lives of the corresponding right of use assets. The hindsight analysis also resulted in an approximate negative impact on beginning retained earnings of $7,000, related to the impairment of a right-of-use asset at the Company's New Orleans facility. The Company elected the transitional practical expedient for existing or expired land easements, allowing the Company to elect not to assess whether those land easements are, or contain, leases in accordance with ASC 842. The Company also elected the practical expedient to adjust the carrying amount of the right-of-use assets for the unfavorable lease liability previously recognized on the balance sheet. Additionally, the Company made an accounting policy election that keeps leases with an initial term of 12 months or less off of the balance sheet and resulted in recognizing those lease payments in the Condensed Consolidated Statements of Operations on a straight-line basis over the lease term. Refer to "Note 9 - Leases" for further detail.
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. For public business entities, the amendments in ASU 2017-12 are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company believes that the ASU 2017-12 will allow more of its derivative contracts to qualify for hedge accounting elections. The Company adopted ASU 2017-12 effective January 1, 2019, and changes in fair value of derivatives continue to be recognized in current period earnings for the three months ended March 31, 2019.
On November 7, 2018, the FASB issued ASU 2018-16, which permits entities to use the Overnight Index Swap ("OIS") Rate based on Secured Overnight Financing Rate ("SOFR") as an eligible benchmark interest rate during the early stages of the transition from LIBOR to SOFR. For public business entities, the amendments in ASU 2018-16 are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company's adoption of ASU 2018-16 did not have a material impact on its consolidated financial statements.
On June 16, 2016, the FASB issued ASU 2016-13, which amends the Board's guidance on the impairment of financial instruments. The ASU 2016-13 adds to U.S. GAAP an impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under this new guidance, an entity recognizes as an allowance its estimate of expected credit losses. For public companies, the ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is evaluating the impact of this guidance, but does not expect it to have any material impact on its consolidated financial statements.
On August 28, 2018, the FASB issued ASU 2018-13, which changes the fair value measurement disclosure requirements of ASC 820. ASU 2018-13 eliminates or modifies certain disclosure requirements of ASC 820 and requires new disclosures relating to changes in unrealized gains or losses included in other comprehensive income for recurring Level 3 fair value

11



measurements held at the end of the applicable reporting period. ASU 2018-13 also explicitly requires entities to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for all entities for fiscal years beginning after December 15, 2019, including interim periods therein. The Company is evaluating the impact of this guidance on its consolidated financial statements, but does not expect the impact to be significant.
NOTE 3 — MARKETABLE SECURITIES
The Company's investments in marketable securities are stated at fair value and are available-for-sale. The following table summarizes the Company's investments in marketable securities:
 
March 31, 2019
 
Maturity
 
Gross Amortized Cost
 
Total Unrealized Gains
 
Total Unrealized Losses
 
Fair Value
Commercial paper
Within one year
 
$
8,485

 
$

 
$
(1
)
 
$
8,484

Corporate bonds
Within one year
 
8,998

 

 

 
8,998

Total
 
 
$
17,483

 
$

 
$
(1
)
 
$
17,482

 
December 31, 2018
 
Maturity
 
Gross Amortized Cost
 
Total Unrealized Gains
 
Total Unrealized Losses
 
Fair Value
Commercial paper
Within one year
 
$
22,886

 
$

 
$
(14
)
 
$
22,872

Corporate bonds
Within one year
 
28,074

 

 
(14
)
 
28,060

Total
 
 
$
50,960

 
$

 
$
(28
)
 
$
50,932


NOTE 4 — INVENTORIES
Inventories consist of the following:
   
March 31, 2019
 
December 31, 2018
Raw materials
$
62,319

 
$
40,348

Work in process
3,967

 
3,840

Finished goods
154,280

 
124,712

Total
$
220,566

 
$
168,900

NOTE 5 — DISCONTINUED OPERATIONS
In the fourth quarter of 2018, concluding a comprehensive strategic assessment of the Company's development-stage industrial biotechnology business, REG Life Sciences, the Company's Board of Directors authorized it to pursue a plan to sell the REG Life Sciences core assets and business. The Company recorded an impairment loss, net of tax, of $11,226 on classifying the REG Life Sciences assets as held for sale reflecting the fair value of the estimated proceeds from the sale, net of costs to sell for the year ended December 31, 2018. This valuation technique is considered as Level 3 pricing category.
REG Life Sciences' results for all periods and for the three months ended March 31, 2019 are classified as discontinued operations. There was no income tax impact from discontinued operations for all periods.


12



Loss on Discontinued Operations:

 
For the three months ended March 31,
 
2019
 
2018
Other revenues
$
1,786

 
$
1,250

Other costs of goods sold
(2,200
)
 
(1,138
)
Research and development expense
(1,598
)
 
(5,564
)
Other income (expense), net
(5
)
 
1,997

Pre-tax loss from discontinued operations
(2,017
)
 
(3,455
)
Income tax expense

 

Loss on discontinued operations
$
(2,017
)
 
$
(3,455
)

Reconciliation of the Carrying Amounts of Major Classes of Assets and Liabilities Included in Assets and Liabilities Held for Sale:

 
March 31, 2019
 
December 31, 2018
Machinery and equipment, net
$
824

 
$
824

In-process research and development
13,652

 
13,652

Impairment recognized on assets classified as held for sale
(11,226
)
 
(11,226
)
Total assets classified as held for sale
$
3,250

 
$
3,250


NOTE 6 — OTHER ASSETS
Prepaid expense and other assets consist of the following:
   
March 31, 2019
 
December 31, 2018
Commodity derivatives and related collateral, net
$
7,367

 
$
13,799

Prepaid expenses
15,264

 
17,187

Deposits
1,963

 
2,123

RIN inventory
3,061

 
2,000

Taxes receivable
2,365

 
2,991

Other
3,381

 
3,069

Total
$
33,401

 
$
41,169

RIN inventory values were adjusted in the amounts of $0 and $630 at March 31, 2019 and December 31, 2018, respectively, to reflect the lower of cost or net realizable value.
Other noncurrent assets consist of the following:
 
March 31, 2019
 
December 31, 2018
Investments
$
13,199

 
$
13,053

Spare parts inventory
2,680

 
2,680
Catalysts
1,810

 
1,989

Deposits
381

 
381

Other
2,607

 
3,167

Total
$
20,677

 
$
21,270


13



NOTE 7— INTANGIBLE ASSETS
Intangible assets consist of the following:
 
March 31, 2019
 
Cost
 
Accumulated Amortization
 
Net
Raw material supply agreement
$
6,230

 
$
(2,986
)
 
$
3,244

Renewable diesel technology
8,300

 
(2,674
)
 
5,626

Ground lease
200

 
(160
)
 
40

Acquired customer relationships
4,747

 
(1,049
)
 
3,698

Trademarks
704

 

 
704

Total intangible assets
$
20,181

 
$
(6,869
)
 
$
13,312

 
December 31, 2018
 
Cost
 
Accumulated Amortization
 
Net
Raw material supply agreement
$
6,230

 
$
(2,866
)
 
$
3,364

Renewable diesel technology
8,300

 
(2,536
)
 
5,764

Ground lease
200

 
(157
)
 
43

Acquired customer relationships
4,747

 
(976
)
 
3,771

Trademarks
704

 

 
704

Total intangible assets
$
20,181

 
$
(6,535
)
 
$
13,646

The Company recorded intangible amortization expense of $334 and $324 for the three months ended March 31, 2019, and 2018, respectively.
The estimated intangible asset amortization expense for the remainder of 2019 through 2024 and thereafter is as follows:
April 1, 2019 through December 31, 2019
$
1,451

2020
1,672

2021
1,678

2022
1,671

2023
1,678

2024
1,685

2025 and thereafter
3,477

Total
$
13,312


14



NOTE 8 — DEBT
The following table shows the Company’s term debt:
   
March 31, 2019
 
December 31, 2018
4.00% Convertible Senior Notes, $96,300 face amount, due in June 2036
$
75,940

 
$
75,477

2.75% Convertible Senior Notes, $67,380 face amount, due in June 2019
66,849

 
66,361

REG Danville term loan, secured, variable interest rate of LIBOR plus 4%, due in July 2022
8,548

 
8,964

REG Ralston term loan, variable interest rate of Prime Rate plus 2.25%, due in October 2025
18,035

 
18,948

REG Grays Harbor term loan, variable interest of minimum of 3.5% or Prime Rate plus 0.25%, due in May 2022
8,521

 
8,828

REG Capital term loan, fixed interest rate of 3.99%, due in January 2028
7,121

 
7,185

Other
47

 
54

Total term debt before debt issuance costs
185,061

 
185,817

Less: Current portion of long-term debt
150,339

 
149,006

Less: Debt issuance costs (net of accumulated amortization of $4,047 and $3,813, respectively)
3,217

 
3,390

Total long-term debt
$
31,505

 
$
33,421


2019 Convertible Senior Notes
In June 2014, the Company issued $143,800 in convertible senior notes (the "2019 Convertible Senior Notes") with a maturity date of June 15, 2019, unless earlier converted or repurchased. The 2019 Convertible Senior Notes bear interest at a rate of 2.75% per annum, payable semi-annually in arrears, beginning December 15, 2014. The initial conversion rate is 75.3963 shares of Common Stock per $1,000 principal amount of 2019 Convertible Senior Notes, which represents an initial conversion price of approximately $13.26 per share.

During 2018, the Company bought back $6,311 of principal of the 2019 Convertible Senior Notes. Such notes can be converted at any time on or after December 15, 2018 until such notes mature on June 15, 2019. In accordance with the indenture governing the 2019 Convertible Senior Notes, we have elected to settle all conversions of each $1,000 principal amount of such notes being converted on or after October 23, 2018, with $1,000 in cash and any conversion value in excess of that amount in shares of the Company's common stock.

2036 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

15



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 March 31, 2019 and December 31, 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 March 31, 2019 and December 31, 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. The debt discount is to be amortized through June 2036. The effective interest rate on the debt liability component was 2.45%.
Lines of Credit
The following table shows the Company's lines of credit:
 
March 31, 2019
 
December 31, 2018
Amount outstanding under lines of credit
$
102,612

 
$
14,250

Maximum available to be borrowed under lines of credit
$
58,348

 
$
114,889

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 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 1.0 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, REG Geismar, LLC, and REG Seneca, LLC (collectively, the "Plant Loan Parties") subject to a $40,000 limitation with respect to each of the Plant Loan Parties.
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 March 31, 2019, the nominal interest rates ranged from 1.50% to 4.39% per annum.
NOTE 9 — LEASES
The Company leases land, property and equipment under certain operating leases. The Company's leases consist primarily of access to distribution terminals, biomass-based diesel and feedstock storage tanks, railcars and vehicles. The Company determines at the inception of a lease whether an arrangement that provides the Company control over the use of an asset is a lease. The Company recognizes at lease commencement a right-of-use ("ROU") asset and lease liability based on the present value of the future lease payments over the lease term. As discussed in Note 2, the Company has elected not to recognize a ROU asset and lease liability for leases with terms of 12 months or less. At the end of the lease term the Company, generally, has the option to (a) return the leased equipment to the lessor, (b) purchase the property at its then fair value or (c)

16



renew its lease at the fair rental value on a year-to-year basis or for an agreed upon term. When it is reasonably certain that the Company will exercise the option, the impact of the option is included in the lease term for purposes of determining total future lease payments. As most of its lease agreements do not explicitly state the discount rate implicit in the lease, the Company uses its incremental borrowing rate on the commencement date to calculate the present value of future payments.
The Company's leases commonly include payments that are based on the Consumer Price Index ("CPI") or other similar indices. If the indices are known at inception of the leases, they are included in the calculation of the ROU asset and lease liability. Other variable lease payments, such as usage-based amounts or when the indices are not known at inception, are excluded from the ROU asset and lease liability, and are expensed as incurred.
In addition to the base rent, office equipment leases typically contain provisions for maintenance services, which are considered non-lease components for accounting purposes. For these leases, nonlease components are excluded from our ROU assets and lease liabilities and expensed as incurred. For all other types of leases, we apply a practical expedient to include these non-lease components in calculating the ROU asset and lease liability.
The following table summarizes information about the Company's lease expense for the three months ended March 31, 2019:
 
2019
Lease expense:
 
Operating lease expense
$
5,473

Variable lease expenses
1,764

Short-term and other lease expenses
426

Total lease expense
$
7,663

The weighted-average remaining lease term for the Company's operating leases is 5.81 years at March 31, 2019. The weighted-average discount rate for the Company's operating leases is 4.85% as of March 31, 2019.
For each of the next five calendar years and thereafter, future minimum lease payments and scheduled maturities under operating leases that have initial or remaining noncancelable lease terms in excess of one year are as follows:
 
Total payments
 
Less: Discount
 
Operating lease obligation
April 1, 2019 through December 31, 2019
$
14,830

 
$
1,667

 
$
13,163

2020
15,107

 
1,565

 
13,542

2021
11,362

 
1,003

 
10,359

2022
3,525

 
675

 
2,850

2023
2,759

 
552

 
2,207

2024
1,713

 
472

 
1,241

2025 and thereafter
11,510

 
2,383

 
9,127

Total
$
60,806

 
$
8,317

 
$
52,489


As the Company has not restated prior-year information for its adoption of ASC Topic 842, the following presents the Company's future minimum lease payments for operating leases under ASC Topic 840 at December 31, 2018:

17



 
Total Payments
2019
$
20,326

2020
14,063

2021
10,643

2022
3,162

2023
2,406

Thereafter
13,736

Total minimum payments
$
64,336


NOTE 10 — DERIVATIVE INSTRUMENTS
The Company enters into New York Mercantile Exchange NY Harbor ULSD ("NY Harbor ULSD" or previously referred to as heating oil), CBOT Soybean Oil (previously referred to as soybean oil) and New York Mercantile Exchange Natural Gas 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 March 31, 2019, the net notional volumes of NY Harbor ULSD, CBOT Soybean Oil and NYMEX Natural Gas covered under the open commodity derivative contracts were approximately 92 million gallons, 76 million pounds and 2 million million British thermal units, 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:
   
March 31, 2019
 
December 31, 2018
   
Assets
 
Liabilities
 
Assets
 
Liabilities
Gross amounts of derivatives recognized at fair value
$
3,899

 
$
1,019

 
$
11,843

 
$
1,799

Cash collateral
4,487

 

 
3,755

 

Total gross amount recognized
8,386

 
1,019

 
15,598

 
1,799

Gross amounts offset
(1,019
)
 
(1,019
)
 
(1,799
)
 
(1,799
)
Net amount reported in the condensed consolidated balance sheets
$
7,367

 
$

 
$
13,799

 
$

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 
 March 31, 
 2019
 
Three Months 
 Ended 
 March 31, 
 2018
Commodity derivatives
Cost of goods sold – Biomass-based diesel
 
$
(22,739
)
 
$
(2,438
)

18



NOTE 11 — 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 March 31, 2019
   
Total
 
Level 1
 
Level 2
 
Level 3
Commercial paper
$
8,484

 
$

 
$
8,484

 
$

Corporate bonds
$
8,998

 

 
8,998

 

Commodity contract derivatives
$
2,880

 
508

 
2,372

 

Contingent considerations for acquisitions
$
(6,849
)
 

 

 
(6,849
)
 
$
13,513

 
$
508

 
$
19,854

 
$
(6,849
)
   
As of December 31, 2018
   
Total
 
Level 1
 
Level 2
 
Level 3
Commercial paper
$
22,872

 
$

 
$
22,872

 
$

Corporate bonds
$
28,060

 

 
28,060

 

Commodity contract derivatives
$
10,044

 
499

 
9,545

 

Contingent considerations for acquisitions
$
(9,861
)
 

 

 
(9,861
)
   
$
51,115

 
$
499

 
$
60,477

 
$
(9,861
)
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
 
2019
 
2018
Balance at beginning of period, January 1
$
9,861

 
$
20,485

Change in estimates included in earnings
304

 
459

Settlements
(3,316
)
 
(2,813
)
Balance at end of period, March 31
$
6,849

 
$
18,131

The estimated fair values of the Company’s financial instruments, which are not recorded at fair value, are as follows:
   
As of March 31, 2019
 
As of December 31, 2018
   
Asset (Liability)
Carrying
Amount
 
Fair Value
 
Asset (Liability)
Carrying
Amount
 
Fair Value
Financial liabilities:
   
 
   
 
   
 
   
Debt and lines of credit
$
(287,673
)
 
$
(450,946
)
 
$
(200,067
)
 
$
(410,564
)
The carrying amounts reported in the Condensed Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair values. Money market funds are included in cash and cash equivalents on the Condensed Consolidated Balance Sheets.
The Company used the following methods and assumptions to estimate fair value of its financial instruments:
Marketable securities: The fair value of marketable securities, which include commercial papers and corporate notes/bonds is obtained using quoted prices for similar assets or liabilities in active markets; quoted prices for

19



identical or similar assets in markets that are not active and inputs other than quoted prices, e.g., interest rates and yield curves.
Commodity derivatives: The instruments held by the Company consist primarily of futures contracts, swap agreements, purchased put options and written call options. The fair value of contracts based on quoted prices of identical assets in an active exchange-traded market is reflected in Level 1. 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 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 12.5% is used to estimate the fair value of the expected payments.
Debt and lines of credit: The fair value of long-term debt and lines of credit was established using discounted cash flow calculations and current market rates reflecting Level 2 inputs.
NOTE 12 — 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 2036 Convertible Senior Notes, the Company’s current intent 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. For the 2019 Convertible Senior Notes, the Company has elected to settle the principal amount of convertible notes converted with cash and any conversion value in excess of that amount in shares of the Company's common 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:
   
Three Months 
 Ended 
 March 31, 
 2019
 
Three Months 
 Ended 
 March 31, 
 2018
Stock appreciation rights
1,012,097

 
1,006,849

2019 Convertible Senior Notes
2,624,215

 
5,377,690

2036 Convertible Senior Notes
3,737,641

 
13,545,060

Total
7,373,953

 
19,929,599


20



The following table presents the calculation of diluted net income (loss) per share attributable to common stockholders:
   
Three Months 
 Ended 
 March 31, 
 2019
 
Three Months 
 Ended 
 March 31, 
 2018
Net income (loss) from continuing operations attributable to the Company’s common stockholders - Basic
$
(41,387
)
 
$
212,608

Plus (less): effect of participating securities

 
5,236

Net income (loss) attributable to common stockholders
(41,387
)
 
217,844

Less: effect of participating securities

 
(5,236
)
Net income (loss) from continuing operations attributable to the Company's common stockholders - Diluted
$
(41,387
)
 
$
212,608

 
 
 
 
Net loss from discontinued operations attributable to the Company's common stockholders - Basic and Diluted
$
(2,017
)
 
$
(3,455
)
 
 
 
 
Net income (loss) attributable to the Company's common stockholders - Basic
$
(43,404
)
 
$
209,238

Plus (less): effect of participating securities

 
5,151

Net income (loss) attributable to common stockholders
(43,404
)
 
214,389

Less: effect of participating securities

 
(5,151
)
Net income (loss) attributable to the Company's common stockholders - Diluted
$
(43,404
)
 
$
209,238

 
 
 
 
Shares:

 
 
Weighted-average shares used to compute basic net income (loss) per share
37,353,352

 
38,819,443

Adjustment to reflect conversion of convertible notes

 
561,665

Adjustment to reflect stock appreciation right conversions

 
102,979

Weighted-average shares used to compute diluted net income (loss) per share
37,353,352

 
39,484,087

 
 
 
 
Net income (loss) per share attributable to common stockholders - Diluted

 
 
Continuing operations
$
(1.11
)
 
$
5.38

Discontinued operations
$
(0.05
)
 
$
(0.09
)
Diluted net income (loss)
$
(1.16
)
 
$
5.30


NOTE 13 — 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's reportable segments 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. In the fourth quarter of 2018, concluding a comprehensive strategic assessment of the Company's Life Sciences business, which primarily represented the Renewable Chemicals reportable segment, the Company's Board of Directors authorized it to pursue a plan to sell REG Life Sciences. As a result of this authorization, the Company's reportable segments at March 31, 2019 and for the year ended December 31, 2018 are composed of Biomass-based Diesel, Services and Corporate and other activities. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. All prior period disclosures below have been recast to present results on a comparable basis.
The Biomass-based Diesel segment processes waste vegetable oils, animal fats, virgin vegetable oils and other feedstocks 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

21



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 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 
 March 31, 
 2019
 
Three Months 
 Ended 
 March 31, 
 2018
Net sales from continuing operations:
   
 
   
Biomass-based Diesel
$
479,754

 
$
630,365

Services
19,583

 
35,215

Corporate and Other
83,903

 
74,543

Intersegment revenues
(105,031
)
 
(52,121
)
   
$
478,209

 
$
688,002

Income (loss) from continuing operations before income taxes:
   
 
   
Biomass-based Diesel
$
(40,278
)
 
$
215,529

Services
(869
)
 
5,024

Corporate and Other
(670
)
 
(3,914
)
   
$
(41,817
)
 
$
216,639

Depreciation and amortization expense, net:
   
 
   
Biomass-based Diesel
$
12,024

 
$
8,037

Services
630

 
329

Corporate and Other
886

 
741

   
$
13,540

 
$
9,107

Cash paid for purchases of property, plant and equipment:
   
 
   
Biomass-based Diesel
$
7,688

 
$
15,603

Services
547

 
851

Corporate and Other

 
33

   
$
8,235

 
$
16,487



22



   
March 31, 2019
 
December 31, 2018
Goodwill:
   
 
   
Services
$
16,080

 
$
16,080

 
 
 
 
Assets:
   
 
   
Biomass-based Diesel
$
1,026,539

 
$
914,843

Services
55,926

 
63,720

Corporate and Other
407,564

 
379,658

Intersegment eliminations
(306,880
)
 
(254,375
)
Assets held for sale
3,250

 
3,250

   
$
1,186,399

 
$
1,107,096


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 
 March 31, 
 2019
 
Three Months 
 Ended 
 March 31, 
 2018
Net revenues:
   
 
   
United States
$
438,605

 
$
639,674

Germany
39,468

 
46,356

Other Foreign
136

 
1,972

Non-United States
39,604

 
48,328

 
$
478,209

 
$
688,002

   
March 31, 2019
 
December 31, 2018
Long-lived assets:
   
 
   
United States
$
569,474

 
$
571,045

Germany
18,331

 
18,972

Other Foreign
666

 
706

 
$
588,471

 
$
590,723

NOTE 14 — 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.  
These forward-looking statements include, but are not limited to statements about planned capital expenditures; existing or proposed legislation affecting the biomass-based diesel industry, including governmental incentives and tax credits; the

23



possible joint development of a renewable diesel plant with Phillips 66; our utilization of forward contracting and hedging strategies to minimize feedstock and other input price risk; our ability to renew existing and expired contracts at similar or more favorable terms; expected technological advances in biomass-based diesel production methods; the potential sale 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 March 31, 2019. 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 transportation fuels. 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 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 growing market for cleaner transportation fuels. In 2018, we launched REG Ultra CleanTM Diesel, which is among the lowest emission diesel fuels on the market today.
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 fermentation facility. Our thirteen biomass-based diesel production facilities have an aggregate nameplate production capacity of 520 million gallons per year ("mmgy").
We are a lower-cost, lower carbon biomass-based diesel producer. We primarily produce our biomass-based diesel from a wide variety of lower-cost, lower carbon 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 tend to be higher in price. We believe our ability to process a wide variety of feedstocks at most of our facilities 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 diesel fuel and heating oil, which enables us to offer a variety of fuel products to a broader 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 2018, we expanded our sales of biofuel blends to Midwest and West Coast terminal locations and look to potentially expand in other areas across North America and internationally.
Since October 2018, we have been collaborating with Phillip 66 on the possible construction of a large-scale renewable diesel plant in Washington state. The plant would utilize our propriety BioSynfining® technology for the production of renewable diesel. We have not reached a definitive agreement with Phillips 66 with respect to this potential joint development project and there is no assurance that an agreement will be reached.
In the fourth quarter of 2018, concluding a comprehensive strategic assessment of our development-stage industrial biotechnology business, our Board of Directors authorized us to pursue a plan to sell the core assets of REG Life Sciences, which comprised our Renewable Chemicals segment. As a result, the former Renewable Chemicals segment has been valued at the estimated proceeds from the sale less costs to sell, and the operations of the Renewable Chemicals segment have been classified as discontinued operations.

24



During the three months ended March 31, 2019, we sold 162 million total gallons of fuel, including 17 million gallons of biomass-based diesel that we purchased from third parties and resold, 11 million biomass-based diesel gallons produced by our facilities in Germany and 44 million petroleum-based diesel gallons. During 2018, we sold 649 million gallons of fuel, which included 45 million biomass-based gallons we purchased from third parties, 45 million biomass-based diesel gallons produced by our facilities in Germany and 119 million petroleum-based diesel gallons.
Our businesses are organized into two reportable segments – the Biomass-based Diesel segment and the Services segment.
Biomass-based Diesel Segment
Our Biomass-based Diesel segment includes:
the operations of the following biomass-based diesel production refineries:
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 co-products of the biomass-based diesel production process. For the three months ended March 31, 2019 and for 2018, our revenues from the sale of co-products were less than five percent of our total Biomass-based diesel segment revenues. For the three months ended March 31, 2019 and 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 by our facilities or purchased from third parties, were approximately 18% and 10% of our total revenues, respectively.
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. RINs significantly decreased in value during the first quarter of 2019, which we believe has been influenced by spreads and record levels of Small Refiner Exemptions from RIN compliance requirements for 2016 and 2017.

25



The table below summarizes our RINs balances available to be sold and the median closing price per RIN at March 31, 2019 and December 31, 2018 according to the Oil Pricing Information System ("OPIS"):
 
Quantity
 
OPIS Median Closing Price per RIN
 
March 31, 2019
 
December 31, 2018
 
March 31, 2019
 
December 31, 2018
Biomass-based diesel RINs
16,570,967

 
12,561,167

 
$
0.38

 
$
0.55

Advanced biofuels RINs
6,087,245

 
3,907,803

 
$
0.33

 
$
0.51

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. 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. LCFS prices increased in the first quarter of 2019, which we believe was largely attributable to growing demand for LCFS credits.
The below table summarizes approximate amounts of our LCFS credits available to be sold and the median closing price per LCFS credit at March 31, 2019 and December 31, 2018 according to OPIS:
 
Quantity
 
OPIS Median Closing Price per LCFS Credit
 
March 31, 2019
 
December 31, 2018
 
March 31, 2019
 
December 31, 2018
California LCFS
12,000

 
29,800

 
$
191.00

 
$
195.00

Oregon LCFS
19,000

 
25,900

 
$
155.00

 
$
137.50

When California extended its LCFS program in 2018, it revised the process for generating credits under the LCFS program to improve reporting and reduce the number of entities required to undergo an audit under the new verification program.  This revised process effectively pushed LCFS credit generation from three month deferral to four month deferral.  The law took effect at the beginning of 2019 and we believe this will have a negative impact on our second quarter profitability because LCFS credits earned in the first quarter of 2019 will not be received and available for sale until the third quarter of 2019.  
Services Segment
Our Services segment, which primarily provides services to our Biomass-based Diesel 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. We plan to improve and utilize the new acreage to support existing production capacity and future expansion opportunities using the Services segment.
Factors Influencing Our Results of Operations
The principal factors affecting our results of operations and financial conditions 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 cleaner renewable fuels.
Governmental programs favoring biomass-based diesel production and use
Biomass-based diesel has historically been more expensive to produce than petroleum-based diesel. 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 priced competitively with petroleum-based diesel.
RFS2 was implemented in 2010, 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 satisfy three

26



categories of an Obligated Party’s annual renewable fuel required volume obligation, or RVO—biomass-based diesel, advanced biofuel and 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
 
2.10 billion gallons
 
2.10 billion gallons
 
2.43 billion gallons
Total Advanced biofuels
2.88 billion RINs*
 
3.61 billion RINs*
 
4.28 billion RINs*
 
4.29 billion RINs*
 
4.92 billion RINs*
 
**
*Ethanol equivalent gallons
**To be established by EPA in a rule making later in 2019
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 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 has not been retroactively reinstated for 2018 and is not currently in effect for 2019.
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 net income for the year ended December 31, 2018 and 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 or later years 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. As of March 31, 2019 and 2018, we estimate that if the BTC is reinstated on the same terms as in 2017, our Adjusted EBITDA for business conducted in the periods would increase by approximately $55 million and $43 million for the quarters ending March 31, 2019 and March 31, 2018, respectively.
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 cleaner low carbon, renewable alternative to petroleum-based diesel fuel and is primarily sold to the end user after it has been blended with petroleum-based diesel fuel. Biomass-based diesel prices have historically been heavily influenced by petroleum-based diesel fuel prices. Accordingly, biomass-based diesel prices have generally been impacted by the same factors that affect petroleum prices, such as crude oil supply and demand balance, worldwide economic conditions, wars and other political events, OPEC production quotas, changes in refining capacity and natural disasters.
Regulatory and legislative factors also influence the price of biomass-based diesel. Biomass-based diesel RIN pricing, a value component that was introduced via RFS2 in July 2010, has had a significant impact on biomass-based diesel pricing. The following table shows for 2017, 2018 and the first three months of 2019 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.

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rinvaluechartq12019a01.jpg
At the beginning of 2019, the value of RINs, as reported by OPIS, to the average B100 spot price of a gallon of biodiesel was $0.86 per gallon. The value of RINs to the average B100 spot price of a gallon of biodiesel dropped to $0.57 per gallon at the end of March 2019. It reached a high of $0.87 per gallon of biodiesel in January 2019 and a low of $0.53 per gallon in March 2019. 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 first quarter of 2019 and during 2018 was also heavily influenced by record levels of Small Refiner Exemptions from RIN compliance requirements for 2016 and 2017. We enter into forward contracts to sell RINs and we use risk management position limits to manage RIN exposure.
During 2018, feedstock expense accounted for 78% of our production cost, while methanol and chemical catalysts expense accounted for 5% and 3% of our costs of goods sold, respectively.
Feedstocks for biomass-based diesel production, such as inedible oil, used cooking oil, inedible animal fat, canola oil and soybean oil are commodities and market prices for them will be affected by a wide range of factors unrelated to the price of biomass-based diesel and petroleum-based diesel. There are a number of factors that influence the supply and price of our feedstocks, such as the following: biomass-based diesel demand; export demand; government policies and subsidies; weather conditions; ethanol production; cooking habits and eating habits; number of restaurants near collection facilities; hog/beef/poultry supply and demand; palm oil supply; soybean meal demand and/or production, and crop production both in the U.S. and South America.
During 2018, 77% of the feedstocks used in our operations comprised 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 the specified lower-cost feedstock for the period January 2017 to March 31, 2019. The results were derived using assumed conversion factors for the yield of each feedstock and subtracting the cost of producing one gallon of biodiesel made from each respective lower-cost feedstock from the cost of producing one gallon of biodiesel made from soybean oil.

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graphsbospreadq12019v2.jpg
(1)
Used cooking oil ("UCO") 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 ("ICO") 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 ("CWG") 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) ("SBO") 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).  
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 2017 to March 2019.

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graphspreadpricingq12019v2.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 three months of 2019, NY Harbor ULSD prices ranged from a low of $1.70 per gallon in January to a high of $2.04 per gallon in February with the average price for the first quarter of $1.94 per gallon, down $0.13 from the fourth quarter of 2018 average of $2.07 per gallon. Energy prices sharply increased in early January, stabilized through mid-February and increased again in late February before settling into a trading range for the remainder of the quarter. The primary drivers of the increase in energy prices were high compliance rates for OPEC production cuts along with optimism over trade talks between the United States and China. U.S. biodiesel prices traded in a narrow range during the first quarter with Jacobsen Upper Midwest B100 prices reaching a high of $2.89 in February after reaching a low of $2.74 in January.
Soybean oil prices ranged from a high of $0.31 per pound in February 2019 to a low of $0.28 per pound in January 2019 with an average price for the quarter of $0.29 per pound. Soybean oil prices remained within a relatively narrow range due to high soybean crush rates and limited export demand from China. Strong consumer demand for meats, unusually high export demand for hogs from China due to African swine flu, 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 U.S. in the first three months of 2019 were higher year over year.

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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 and risk management futures contracts, swaps and options primarily on the New York Mercantile Exchange NY Harbor ULSD and CBOT Soybean Oil; however, the extent to which we engage in risk management activities varies substantially from time to time, and from feedstock to feedstock, depending on market conditions and other factors. In making risk management decisions, we utilize research conducted by outside firms to provide additional market information in addition to our internal research and analysis.
Inedible corn oil, used cooking oil, inedible animal fat, canola oil and soybean oil were the primary feedstocks we used to produce biomass-based diesel in 2018 and the first three months of 2019. We utilize several varieties of inedible animal fat, such as beef tallow, choice white grease and poultry fat derived from livestock. There is no established futures market for these lower-cost feedstocks. The purchase prices for lower-cost feedstocks are generally set on a negotiated flat price basis or spread to a prevailing market price reported by the USDA price sheet or The Jacobsen. Our efforts to risk manage against changing prices for inedible corn oil, used cooking oil and inedible animal fat have involved entering into futures contracts, swaps or options on other commodity products, such as CBOT soybean oil and New York Mercantile Exchange NY Harbor ULSD. However, these products do not always experience the same price movements as lower-cost feedstocks, making risk management for these feedstocks challenging. We manage feedstock supply risks related to biomass-based diesel production in a number of ways, including, where available, through long-term supply contracts. The purchase price for soybean oil under these contracts may be indexed to prevailing CBOT soybean oil market prices with a negotiated market basis. We utilize futures contracts, swaps and options to risk manage, or lock in, the cost of portions of our future feedstock requirements generally for varying periods up to one year.
Our ability to mitigate our risk of falling biomass-based diesel prices is limited. We have entered into forward contracts to supply biomass-based diesel. However, pricing under these forward sales contracts generally has been indexed to prevailing market prices, as fixed price contracts for long periods on acceptable terms have generally not been available. There is no established derivative market for biomass-based diesel in the United States. Our efforts to hedge against falling biomass-based diesel prices generally involve entering into futures contracts, swaps and options on other commodity products, such as diesel fuel and New York Mercantile Exchange NY Harbor ULSD. However, price movements on these products are not highly correlated to price movements of all of the contract components in aggregate of biomass-based diesel.
We generate 1.5 to 1.7 biomass-based diesel RINs for each gallon of biomass-based diesel we produce and sell. We also obtain RINs from third-party transactions which we hold for resale. There is no established futures market for biomass-based diesel RINs, which severely limits the ability to risk manage the price of RINs. We enter into forward contracts to sell RINs, and we use risk management position limits to manage RIN exposure, however, pricing under those forward contracts generally has been indexed to prevailing market prices as fixed price contracts for long periods have generally not been available.
As a result of our strategy, we frequently have gains or losses on derivative financial instruments that are conversely offset by losses or gains on forward fixed-price physical contracts on feedstocks and biomass-based diesel or inventories. Gains and losses on derivative financial instruments are recognized each period in operating results while corresponding gains and losses on physical contracts are generally not recognized until quantities are delivered or title transfers which may be in the same or later periods. Our results of operations are impacted when there is a period mismatch of recognized gains or losses associated with the change in fair value of derivative instruments used for risk management purposes at the end of the reporting period but the purchase or sale of feedstocks or biomass-based diesel has not yet occurred resulting in the offsetting gain or loss that will be recognized in a later accounting period.
We recorded risk management losses of $22.7 million from our derivative financial instrument activity for the three months ended March 31, 2019, compared to losses of $2.4 million for the three months ended March 31, 2018. Changes in the value of these futures, swaps or options instruments are recognized in current income or loss.

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Increasing importance of renewable diesel
Renewable diesel has become an increasingly significant part of our business. Renewable diesel carries a premium price to biodiesel as a result of a variety of factors including the ability to blend it with petroleum diesel seamlessly, better cold weather performance, and because it generates more RINs on a per gallon basis. We estimate that our renewable diesel production facility in Geismar, Louisiana generated more than half of our adjusted EBITDA in 2019. We experienced two fires at this facility in 2015 that each resulted in the plant being shut down for a lengthy period. If production at this facility were interrupted again due to a fire or for any other reason, it would have a disproportionately significant and material adverse impact on our results of operations and financial condition.
Seasonality
Our operating results are influenced by seasonal fluctuations in the demand for biodiesel. Our biodiesel sales tend to decrease during the winter season due to reduced blending concentrations to adjust for performance during colder weather. Colder seasonal temperatures can cause the higher cloud point biodiesel we make from inedible animal fats to become cloudy and eventually gel at a higher temperature than petroleum-based diesel, renewable diesel, or lower cloud point biodiesel made from soybean oil, canola oil or inedible corn oil. Such gelling can lead to plugged fuel filters and other fuel handling and performance problems for customers and suppliers. Reduced demand in the winter for our higher cloud point biodiesel can result in excess supply of such higher cloud point biodiesel and lower prices for such biodiesel. In addition, most of our biodiesel production facilities are located in colder Midwestern states in proximity to feedstock origination, and our costs of shipping can increase as more biodiesel is transported to warmer climate geographies during winter. To mitigate some of these seasonal fluctuations, we have upgraded our Newton and Danville biorefineries to produce distilled biodiesel from low-cost feedstocks, which has improved cold-weather performance.
RIN prices may also be subject to seasonal fluctuations. The RIN is dated for the calendar year in which it is generated, commonly referred to as the RIN vintage. Since 20% of the annual RVO of an Obligated Party (as defined under the RFS2) can be satisfied by prior year RINs, most RINs must come from biofuel produced or imported during the RVO year. As a result, RIN prices can be expected to decrease as the calendar year progresses if the RIN market is oversupplied compared to that year's RVO and increase if it is undersupplied. We believe that the record levels of Small Refiner Exemptions ("SREs") from RIN compliance requirements for 2016 and 2017 have also significantly impacted RIN prices. See chart below for comparison between actual RIN generation and RVO level for Advanced Biofuel as set by the EPA and the impact of the SREs.
Year
 
RIN Generation (Advanced