10-Q 1 regi-10q_20130331.htm FORM 10-Q

   

      

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, 2013

OR

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-35397

      

RENEWABLE ENERGY GROUP, INC.

(Exact name of registrant as specified in its charter)

   

 

   

   

DELAWARE

26-4785427

(State of other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

   

   

416 South Bell Avenue Ames, Iowa

50010

(Address of principal executive offices)

(Zip code)

(515) 239-8000

(Registrant’s telephone number, including area code)

      

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

   

 

   

   

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer x

Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NOx

As of April 30, 2013, the registrant had 30,649,061 shares of Common Stock issued and outstanding.

   

      

   

   

   

   

   


   

PART I. FINANCIAL INFORMAITON

 

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL INFORMATION

RENEWABLE ENERGY GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

AS OF MARCH 31, 2013 AND DECEMBER 31, 2012

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

   

   

 

   

March 31,

2013 

   

December 31,

2012 

   

   

   

   

ASSETS

   

   

   

CURRENT ASSETS:

   

   

   

 Cash and cash equivalents

  $ 48,977 

   

  $ 66,785 

 Accounts receivable, net (includes amounts owed by related parties of $554 and $771 as of

   

   

   

   March 31, 2013 and December 31, 2012, respectively)

172,493 

   

18,768 

 Inventories

89,513 

   

45,206 

 Deferred income taxes

2,545 

   

2,512 

 Prepaid expenses and other assets

18,371 

   

15,812 

   

   

   

   

       Total current assets

331,899 

   

149,083 

   

   

   

   

PROPERTY, PLANT AND EQUIPMENT, NET

250,858 

   

242,885 

PROPERTY, PLANT AND EQUIPMENT, NET—VARIABLE INTEREST ENTITY

5,350 

   

5,405 

GOODWILL

84,864 

   

84,864 

DEFERRED INCOME TAXES

—   

   

969 

OTHER ASSETS (includes amounts owed by related parties of $352 and $692 as of March 31,

   

   

   

 2013 and December 31, 2012, respectively)

12,726 

   

12,578 

   

   

   

   

TOTAL ASSETS

  $ 685,697 

   

  $ 495,784 

   

   

   

   

LIABILITIES AND EQUITY

   

   

   

   

   

   

   

CURRENT LIABILITIES:

   

   

   

 Revolving line of credit

  $ 27,437 

   

  $ —   

 Current maturities of notes payable

25,023 

   

4,955 

 Current maturities of notes payable—variable interest entity

290 

   

283 

 Accounts payable (includes amounts owed to related parties of $3,038 and $2,950 as of

   

   

   

   March 31, 2013 and December 31, 2012, respectively)

116,785 

   

28,131 

 Accrued expenses and other liabilities

30,476 

   

6,475 

 Deferred revenue

1,361 

   

—   

   

   

   

   

      Total current liabilities

201,372 

   

39,844 

   

   

   

   

UNFAVORABLE LEASE OBLIGATION

8,752 

   

9,035 

DEFERRED INCOME TAXES

1,603 

—   

NOTES PAYABLE

6,986 

   

27,776 

NOTES PAYABLE—VARIABLE INTEREST ENTITY

3,955 

   

4,030 

OTHER LIABILITIES

7,198 

   

7,292 

   

   

   

   

      Total liabilities

229,866 

   

87,977 

   

   

   

   

COMMITMENTS AND CONTINGENCIES (Note 12)

   

   

   

SERIES B PREFERRED STOCK ($.0001 par value; 3,000,000 shares authorized; 2,993,966

   

   

   

 and 2,995,106 shares outstanding at March 31, 2013 and December 31, 2012, respectively;

   

   

   

 redemption amount $74,849 and $74,878 at March 31, 2013 and December 31, 2012, respectively)

83,011 

   

83,043 

   

   

   

   

EQUITY:

   

   

   

 Company stockholders’ equity:

   

   

   

    Common stock ($.0001 par value; 140,000,000 shares authorized; 30,649,061 and 30,559,935

   

   

   

      shares outstanding at March 31, 2013 and December 31, 2012, respectively)

   

   Common stock—additional paid-in-capital

275,800 

   

273,989 

   Warrants—additional paid-in-capital

147 

   

147 

   Retained earnings

100,226 

   

53,823 

   

   

   

   

      Total paid-in capital and retained earnings

376,176 

   

327,962 

   Treasury stock (484,660 and 462,985 shares outstanding at March 31, 2013 and

   

   

   

     December 31, 2012, respectively)

(3,356)

   

(3,198)

   

   

   

   

      Total stockholders’ equity

   372,820

   

   324,764

   

   

   

   

TOTAL LIABILITIES AND EQUITY

  $ 685,697 

   

  $ 495,784 

   

   

   

   

   

   

See notes to condensed consolidated financial statements.

   

   

   

   

   

   

   

   

 

1  

   


   

RENEWABLE ENERGY GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

   

   

 

   

Three Months

Ended

March 31,

2013 

   

Three Months

Ended

March 31,

2012 

   

   

   

   

REVENUES:

   

   

   

 Biodiesel sales

  $ 189,255 

   

  $ 182,780 

 Biodiesel government incentives

149,987 

   

5,387 

   

   

   

   

   

339,242 

   

188,167  

   

   

   

   

 Services

42 

   

80 

   

   

   

   

   

339,284 

   

188,247 

   

   

   

   

COSTS OF GOODS SOLD:

   

   

   

 Biodiesel

240,799 

   

153,467 

 Biodiesel—related parties

11,730 

   

17,669 

 Services

60 

   

77 

   

   

   

   

   

252,589 

   

171,213 

   

   

   

   

GROSS PROFIT

86,695 

   

17,034 

   

   

   

   

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (includes related party

   

   

   

 amounts of $2 and $149 for the three months ended March 31,  2013 and 2012, respectively)

9,644 

   

12,962 

   

   

   

   

INCOME FROM OPERATIONS

77,051 

   

4,072 

   

   

   

   

OTHER INCOME (EXPENSE), NET:

   

   

   

 Change in fair value of preferred stock conversion embedded derivative

—   

   

11,975 

 Change in fair value of Seneca Holdco liability

—   

   

349 

 Other income

117 

   

37 

 Interest expense (includes related party amounts of $20 and $17 for the three months

   

   

   

   ended March 31, 2013 and 2012, respectively)

(576)

   

(1,053)

   

   

   

   

   

(459)

   

11,308 

   

   

   

   

INCOME BEFORE INCOME TAXES

76,592 

   

15,380 

INCOME TAX EXPENSE

(30,189)

   

(1,363)

   

   

   

   

NET INCOME

46,403 

   

14,017 

   

   

   

   

EFFECTS OF RECAPITALIZATION

—   

   

39,107 

LESS—ACCRETION OF SERIES A PREFERRED STOCK TO REDEMPTION VALUE

—   

   

(1,808)

LESS—CHANGE IN UNDISTRIBUTED DIVIDENDS ALLOCATED TO PREFERRED

   

   

   

 STOCKHOLDERS

(839)

   

(1,451)

LESS—EFFECT OF PARTICIPATING PREFERRED STOCK

(6,510)

   

(7,615)

LESS—EFFECT OF PARTICIPATING SHARE-BASED AWARDS

(619)

   

(2,201)

   

   

   

   

NET INCOME ATTRIBUTABLE TO THE COMPANY’S COMMON STOCKHOLDERS

  $ 38,435 

   

  $ 40,049 

   

   

   

   

NET INCOME PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:

   

   

   

   BASIC

  $ 1.25 

   

  $ 1.60 

   

   

   

   

   DILUTED

  $ 1.25 

   

  $ 0.06 

   

   

   

   

WEIGHTED AVERAGE SHARES USED TO COMPUTE NET INCOME PER SHARE

   

   

   

 ATTRIBUTABLE TO COMMON STOCKHOLDERS:

   

   

   

   BASIC

30,639,284 

   

25,074,194 

   

   

   

   

   DILUTED

36,628,662 

   

30,917,291 

   

   

   

   

   

See notes to condensed consolidated financial statements.

   

   

 

2  

   


   

RENEWABLE ENERGY GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND EQUITY (Unaudited)

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

(IN THOUSANDS EXCEPT SHARE AMOUNTS)

   

   

 

   

   

   

Company Stockholders’ Equity

   

   

   

   

   

   

   

   

Redeemable

Preferred

Stock

Shares

Redeemable

Preferred

Stock

Common

Stock

Shares

Common

Stock

Class A

Common Stock

Shares

Class A

Common

Stock

Common Stock -

Additional

Paid-in

Capital

Warrants - Additional

Paid-in

Capital

Retained Earnings

Cost of

Treasury

Stock

Total

   

   

   

   

   

   

   

   

   

   

   

   

BALANCE, January 1, 2012

13,455,522 

  $ 147,779 

—   

  $ —   

13,962,155 

  $

  $ 80,747 

  $ 3,698 

  $ 36,528 

  $ (398)

  $ 120,576 

Derecognition of Series A Preferred Stock

(13,455,522)

(149,587)

—   

—   

—   

—   

—   

—   

—   

—   

—   

Issuance of Series B Preferred Stock and

   

   

   

   

   

   

   

   

   

   

   

common stock

2,999,493 

83,165 

—   

—   

7,660,612 

111,795 

(3,551)

—   

—   

108,245 

Issuance of common stock in initial

   

   

   

   

   

   

   

   

   

   

   

public offering, net of issue cost of $8,892

—   

—   

7,200,000 

(342,860)

—   

59,918 

—   

—   

—   

59,919 

Issuance of common stock

—   

—   

—   

—   

319,301 

—   

3,958 

—   

—   

—   

3,958 

Stock compensation expense

—   

—   

—   

—   

—   

—   

4,964 

—   

—   

—   

4,964 

Accretion of Series A Preferred Stock to

   

   

   

   

   

   

   

   

   

   

   

redemption value

—   

1,808 

—   

—   

—   

—   

—   

—   

(1,808)

—   

(1,808)

Net income

—   

—   

—   

—   

—   

—   

—   

—   

14,017 

—   

14,017 

   

   

   

   

   

   

   

   

   

   

   

   

BALANCE, March 31, 2012

2,999,493 

  $ 83,165 

7,200,000 

  $

21,599,208 

  $

  $ 261,382 

  $ 147 

  $ 48,737 

  $ (398)

  $ 309,871 

   

   

   

   

   

   

   

   

   

   

   

   

BALANCE, January 1, 2013

2,995,106 

  $ 83,043 

30,559,935 

  $

—   

  $ —   

  $ 273,989 

  $ 147 

  $ 53,823 

  $ (3,198)

  $ 324,764 

Issuance of common stock

—   

—   

58,501 

—   

—   

—   

423 

—   

—   

—   

423 

Conversion of Series B preferred stock to

   

   

   

   

   

   

   

   

   

   

   

common stock

(1,140)

(32)

2,300 

—   

—   

—   

32 

—   

—   

—   

32 

Conversion of restricted stock units to common stock

   

   

   

   

   

   

   

   

   

   

   

(net of 21,675 shares of treasury stock purchased)

—   

—   

28,325 

—   

—   

—   

—   

—   

—   

(158)

(158)

Stock compensation expense

—   

—   

—   

—   

—   

—   

1,356 

—   

—   

—   

1,356 

Net income

—   

—   

—   

—   

—   

—   

—   

—   

46,403 

—   

46,403 

   

   

   

   

   

   

   

   

   

   

   

   

BALANCE, March 31, 2013

2,993,966 

  $ 83,011 

30,649,061 

  $

—   

  $ —   

  $ 275,800 

  $ 147 

  $ 100,226 

  $ (3,356)

  $ 372,820 

   

   

   

   

   

   

   

   

   

   

   

   

   

See notes to condensed consolidated financial statements.

   

   

 

3  

   


   

RENEWABLE ENERGY GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

(IN THOUSANDS)

   

   

 

   

Three Months
Ended
March 31,
2013

   

Three Months
Ended
March 31,
2012

   

   

   

   

CASH FLOWS FROM OPERATING ACTIVITIES:

   

   

   

 Net income

  $ 46,403 

   

  $ 14,017 

 Adjustments to reconcile net income to net cash

   

   

   

 flows from operating activities:

   

   

   

     Depreciation expense

2,080 

   

2,026 

     Amortization expense of assets and liabilities, net

(132)

   

(53)

     Provision (benefit) for doubtful accounts

(304)

   

744 

     Stock compensation expense

1,356 

   

4,964 

     Deferred tax expense

2,539 

   

1,416 

     Change in fair value of preferred stock conversion

   

   

   

       feature embedded derivatives

—   

   

(11,975)

     Change in fair value of Seneca Holdco liability

—   

   

(249)

     Premium paid for Seneca Landlord investment

—   

   

(7,063)

     Expense settled with stock issuance

—   

   

1,898 

 Changes in asset and liabilities, net of effects

   

   

   

 from mergers and acquisitions:

   

   

   

     Accounts receivable, net

(153,421)

   

9,966 

     Inventories

(44,307)

   

(35,532)

     Prepaid expenses and other assets

(2,872)

   

(6,786)

     Accounts payable

88,801 

   

6,451 

     Accrued expenses and other liabilities

24,369 

   

(3,630)

     Deferred revenue

1,361 

   

9,713 

   

   

   

   

            Net cash flows used in operating activities

(34,127)

   

(14,093)

   

   

   

   

CASH FLOWS FROM INVESTING ACTIVITIES:

   

   

   

 Cash paid for purchase of property, plant and equipment

(9,923)

   

(2,606)

 Change in restricted cash

—   

   

(1)

 Cash paid for investments

(58)

   

—   

   

   

   

   

            Net cash flows used in investing activities

(9,981)

   

(2,607)

   

   

   

   

CASH FLOWS FROM FINANCING ACTIVITIES:

   

   

   

 Borrowings on line of credit

228,629 

   

307,582 

 Repayments on line of credit

(201,192)

   

(305,869)

 Cash paid on note payable

(790)

   

(1,063)

 Cash paid for debt issuance costs

(44)

   

(137)

 Repayment of investment in Seneca Landlord

—   

   

(4,000)

 Cash received from initial public offering

—   

   

63,747 

 Cash paid for issuance of common stock and preferred stock

(21)

   

(1,580)

 Cash paid for treasury stock

(282)

   

(398)

   

   

   

   

            Net cash flows provided from financing activities

26,300 

   

58,282 

   

   

   

   

NET CHANGE IN CASH AND CASH EQUIVALENTS

(17,808)

   

41,582 

   

   

   

   

CASH AND CASH EQUIVALENTS, Beginning of period

66,785 

   

33,575 

   

   

   

   

CASH AND CASH EQUIVALENTS, End of period

  $ 48,977 

   

  $ 75,157 

   

   

   

   

   

(continued)

   

 

4  

   


   

RENEWABLE ENERGY GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

(IN THOUSANDS)

   

   

 

   

Three Months

Ended

March 31,

2013 

   

Three Months

Ended

March 31,

2012 

   

   

   

   

   

   

   

   

   

   

   

   

SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:

   

   

   

   

   

   

   

 Cash paid (received) for income taxes

  $ (2,132)

   

  $ 1,166 

   

   

   

   

 Cash paid for interest

  $ 345 

   

  $ 1,033 

   

   

   

   

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

   

   

   

   

   

   

   

 Effects of recapitalization

   

   

  $ 39,107 

   

   

   

   

 Accretion of preferred stock to redemption value

   

   

  $ 1,808 

   

   

   

   

 Amounts included in period-end accounts payable for:

   

   

   

   Purchases of property, plant and equipment

  $ 3,782 

   

  $ 549 

   

   

   

   

   Debt issuance cost

  $

   

   

   

   

   

   

   Equity issuance cost

   

   

  $

   

   

   

   

   Incentive stock liability for raw material supply agreement

  $ 84 

   

  $ 150 

   

   

   

   

 Issuance of common stock for Seneca Landlord put/call option

   

   

  $ 591 

   

   

   

   

   

(concluded)

   

See notes to condensed consolidated financial statements.

   

   

   

   

 

5  

   


   

RENEWABLE ENERGY GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

For The Three Months Ended March 31, 2013 and 2012

(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), without audit, 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. Results for interim periods are not necessarily indicative of those to be expected for the fiscal year.

On January 3, 2012, the Company filed its Second Amended and Restated Certificate of Incorporation which executed a one-for-2.5 reverse stock split of the issued and outstanding shares of its common stock. All numbers of common shares and per share data in the accompanying condensed consolidated financial statements and related notes have been retroactively adjusted. On January 24, 2012, in connection with the IPO, the Series A Preferred Stock was converted into a combination of shares of Series B Preferred Stock and Class A Common Stock. On January 24, 2012, the Company completed an initial public offering (IPO) of shares of Common Stock in which it sold 7,200,000 shares at a price to the public of $10 per share, which included 342,860 shares of Common Stock from selling shareholders. The IPO raised approximately $59,919 net of underwriting fees and offering costs. On January 24, 2012, the Company acquired the Seneca Facility pursuant to the exercise of its option under the Funding, Investor Fee and Put/Call Agreement, by and among the Company, Seneca Landlord, LLC (Seneca Landlord) and certain subsidiaries of the Company. See “Note 3 – Stockholders’ Equity of the Company” for a further description of the IPO.

The Company has been in the biodiesel industry since 1996. The Company owns seven active biodiesel production facilities with aggregate nameplate production capacity of 227 million gallons per year, or mmgy. The Company primarily produces biodiesel from lower cost feedstocks, such as inedible corn oil, used cooking oil and inedible animal fat. A small portion of the Company’s biodiesel is produced using higher cost virgin vegetable oils, such as soybean oil and canola oil. The seven active biodiesel production facilities with nameplate capacities are: a 12 mmgy facility in Ralston, Iowa; a 35 mmgy facility near Houston, Texas; a 45 mmgy facility in Danville, Illinois; a 30 mmgy facility in Newton, Iowa; a 30 mmgy biodiesel production facility in Albert Lea, Minnesota; a 60 mmgy facility in Seneca, Illinois; a 15 mmgy facility in New Boston, Texas, which was idle at the time the Company purchased it and remains idled pending completion of certain repairs expected to be completed in the second quarter 2013. In November 2012, the Company completed the acquisition of BullDog Biodiesel, LLC, a 15 mmgy facility near Atlanta, Georgia, that was idle when purchased and it will remain idled until certain repairs or upgrades are made.

The biodiesel industry and the Company’s business have benefited from certain federal and state incentives. On January 2, 2013, the federal blenders tax credit, which expired on December 31, 2011, was reinstated retroactive to January 1, 2012 through December 31, 2013. Revenues associated with governmental incentive programs are recognized when the amount to be received is determinable, collectability is reasonably assured and the sale of product giving rise to the incentive has been recognized. During the three months ended March 31, 2013 and 2012, the Company earned biodiesel government incentive revenues in the amount of $149,987 and $5,387, respectively. The 2012 federal blenders tax credit portion recognized during the three months ended March 31, 2013, increased accounts receivable in addition to biodiesel government incentive revenues along with cost of goods sold and accounts payable.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company, consolidated with the accounts of all of its subsidiaries and affiliates in which the Company holds a controlling financial interest as of the financial statement date. Normally, a controlling financial interest reflects ownership of a majority of the voting interests. Other factors considered in determining whether a controlling financial interest is held include whether the Company possesses the authority to purchase or sell assets or make other operating decisions that significantly affect the entity’s results of operations and whether the Company is the primary beneficiary of the economic benefits and financial risks of the entity. Intercompany accounts and transactions have been eliminated.

 

6  

   


   

Inventories

Inventories consist of raw materials, work in process and finished goods and are valued at the lower of cost or market. As of March 31, 2013 and December 31, 2012, there were no adjustments to reduce inventory to the lower of cost or market. Cost is determined based on the first-in, first-out method.

In addition to the inventories noted above, Renewable Identification Number (RIN) inventory is valued at the lower of cost or market. RIN market value is based upon pricing as reported by the Oil Price Information Service (OPIS). RIN inventory values were adjusted in the amount of $92 and $21 at March 31, 2013 and December 31, 2012, respectively, to reflect the lower of cost or market. The Company held $4,192 and $99 in RIN inventory as of March 31, 2013 and December 31, 2012, respectively, which is reported in prepaid expenses and other assets on the condensed consolidated balance sheets.

Preferred Stock Accretion

On January 24, 2012, in connection with the IPO, the Series A Preferred Stock was converted into a combination of shares of Series B Preferred Stock and Class A Common Stock. Accretion of the Series A Preferred Stock was terminated at the time of the conversion. The Company recorded the Series B Preferred Stock at fair value, which was a premium over its redemption value; therefore no accretion is recorded for the Series B Preferred Stock (ASC Topic 480-10-S99).

Beginning October 1, 2007, the Company determined that there was a more than remote likelihood that the Series A Preferred Stock would become redeemable; therefore commenced accretion of the carrying value of the Series A Preferred Stock over the period until the earliest redemption date to the Series A Preferred Stock’s redemption value, plus accrued but unpaid dividends using the effective interest method. This determination was based upon the state of the public equity markets at that time which restricted the Company’s ability to execute a qualified public offering, the Company’s historical operating results and the volatility in the biodiesel industry which resulted in lower projected profitability.

Accretion of $0 and $1,808 for the three months ended March 31, 2013 and 2012, respectively, has been recognized as a reduction to income available to common stockholders in accordance with paragraph 15 of ASC Topic 480-10-S99, Classification and Measurement of Redeemable Securities (ASC Topic 480-10-S99).

Goodwill

The Company accounts for goodwill in accordance with ASC Topic 350, Intangibles – Goodwill and Other. The Company reviews the carrying value of goodwill for impairment annually on July 31 or when impairment indicators exist. Goodwill is allocated and reviewed for impairment by reporting units. The Company’s reporting units consist of its two operating segments, the biodiesel operating segment and services operating segment. The analysis is based on a comparison of the carrying value of the reporting unit to its fair value, determined utilizing a discounted cash flow methodology. Additionally, the Company reviews the carrying value of goodwill whenever events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. Changes in estimates of future cash flows caused by items such as unforeseen events or sustained unfavorable changes in market conditions could negatively affect the fair value of the reporting unit’s goodwill asset and result in an impairment charge. The annual impairment test determined that the fair value of each of the reporting units exceeded its carrying value by approximately 45%. There was no impairment of goodwill recorded in the periods presented.

Stock-Based Compensation

On August 31, 2011, the Company’s Board of Directors (Company Board) approved the Amended and Restated 2009 Stock Incentive Plan, which was then approved by the Company’s shareholders on October 26, 2011. Eligible award recipients are employees, non-employee directors and advisors who provide service to the Company. The Company accounts for stock-based compensation in accordance with ASC Topic 718, Stock Compensation (ASC Topic 718). Compensation expense is measured at the grant-date fair value of the award and recognized as compensation expense over the vesting period. Compensation expense of $1,356 and $4,964 for the three months ended March 31, 2013 and 2012, respectively, was recorded for restricted stock units and stock appreciation rights awarded to employees and non-employee directors in return for services. During January 2013, the Company granted 20,000 shares of stock appreciation rights to an employee for services with a vesting period of four years. During February 2013, the Company granted 50,000 shares of restricted stock units to an employee that vested and converted to common stock immediately based upon meeting certain performance requirements.

Income Taxes

The Company accounts for income taxes during interim periods based on its best estimate of the annual effective tax rate in accordance with ASC Topic 740, Income Taxes (ASC Topic 740), which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred income taxes are recognized for differences between the financial statement and tax bases of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Further, during interim periods certain items are given discrete period treatment and, as a result, the tax effects of such items are reported in full in the relevant interim period.

 

7  

   


   

In addition, ASC Topic 740 requires that deferred tax assets be reduced by a valuation allowance if it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. If it is more-likely-than-not that all or a portion of the Company’s deferred tax assets will not be realized, based on all available evidence, a deferred tax valuation allowance would be established. Consideration is given to positive and negative evidence related to the realization of the deferred tax assets. Significant judgment is required in making this assessment. In evaluating the available evidence, the Company considers, among other factors, historical financial performance, expectation of future earnings, length of statutory carry forward periods, experience with operating loss and tax credit carry forwards not expiring unused, tax planning strategies and timing of reversals of temporary differences. During the three months ended March 31, 2013, the Company estimated that it will incur a tax liability for the annual period ending December 31, 2013 and that its net deferred tax assets will be utilized as a result. As of March 31, 2013 and December 31, 2012, respectively, the Company had net deferred income tax assets of $942 and $3,481, respectively. There was no offsetting valuation allowance recorded as of March 31, 2013 or December 31, 2012. The net deferred income tax asset amount is offset by an accrued liability for unrecognized tax benefits in the amount of $1,900 and $1,900 as of March 31, 2013 and December 31, 2012, respectively.

Uncertain tax positions are evaluated and amounts are recorded when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Judgment is required in evaluating each uncertain tax position to determine whether the more likely than not recognition threshold has been met.

Income tax expense for the three months ended March 31, 2013 was $30,189, compared to $1,363 for the three months ended March 31, 2012. The effective tax rate was approximately 39.42% and 8.88% for the first three months of 2013 and 2012, respectively. The difference between the effective tax rate and the federal statutory rate (35%) for the first three months of 2013 is primarily a result of state income taxes (net of federal income tax effects), the domestic production activities deduction, limitation on the deductibility of certain executive compensation, various disallowed deductions and discrete items that occur during the period. The difference between the effective tax rate and the federal statutory rate (35%) for the first three months of 2012 was primarily a result of state income taxes (net of federal income tax effects), reversal of the valuation allowance offsetting deferred tax assets, income or loss from the change in fair value of the embedded conversion feature of preferred stock, the domestic production activities deduction, tax consequences of Seneca Landlord, various disallowed deductions and discrete items that occur during the period.

The 2013 estimated annual effective tax rate is affected by variances among the estimates of full-year sources of taxable income, the realization of net operating losses and tax credits, full year estimates of permanent differences and the Company’s assessment of its liability for unrecognized tax benefits.

Net Income Per Share

Basic and diluted net income per common share are presented in conformity with the two-class method required for participating securities. The two-class method includes an earnings allocation formula that determines earnings for each class of common stock according to dividends declared and undistributed earnings for the period.

The holders of the Series B Preferred Stock accrue dividends at a rate of $1.125 per share per annum. Dividends are cumulative, accrue on a daily basis from the date of issuance and compound annually from the date of issuance. If dividends on the Series B Preferred Stock have not been paid or declared, the deficiency shall be paid or declared before any dividend is declared for Common Stock. Dividends in arrears do not bear interest. Holders of the Series B Preferred Stock are allowed to participate in the dividends to common stockholders in the event that dividends on Common Stock exceed that of the Series B Preferred Stock as if the Series B Preferred Stock had been converted to Common Stock at the beginning of the year.

The Company calculates the effects of the Series B Preferred Stock on diluted EPS under the “if-converted” method unless the conversion of the convertible preferred stock is anti-dilutive to basic EPS. The effects of Common Stock options, warrants, restricted stock units and stock appreciation rights on diluted EPS are calculated using the treasury stock method unless the effects are anti-dilutive to EPS.

   

 

8  

   


   

   

The following potentially dilutive weighted average securities were excluded from the calculation of diluted net income per share attributable to common stockholders during the periods presented as the effect was anti-dilutive:

 

   

Three Months

Ended

March 31,

2013

   

Three Months

Ended

March 31,

2012

   

   

   

   

Options to purchase common stock

87,026

   

87,026

Restricted stock units

504,666

   

1,398,920

Stock appreciation rights

1,073,385

   

17,582

Warrants to purchase common stock

17,916

   

90,596

   

   

   

   

Total

1,682,993

   

1,594,124

   

   

   

   

The following table presents the calculation of basic and diluted net income per share for the three months ended March 31, 2013 and 2012:

   

 

   

Three Months

Ended

March 31,

2013 

   

Three Months

Ended

March 31,

2012 

   

   

   

   

Net income attributable to the Company’s common stockholders

  $ 38,435 

   

  $ 40,049 

Less: effects of recapitalization

—   

   

(39,107)

Plus: undistributed dividends allocated to preferred stockholders

839 

   

1,451 

Plus: accretion of Series A Preferred Stock to redemption value

—   

   

1,808 

Plus: (gain) loss due to change in fair value of Series A Preferred Stock conversion

   

   

   

 feature embedded derivatives

—   

   

(11,975)

Plus: effect of participating dividends

7,129 

   

9,816 

   

   

   

   

Adjusted net income available to common stockholders

46,403 

   

2,042 

Less: effect of participating share-based awards

(631)

   

(104)

   

   

   

   

Net income attributable to the Company’s common stockholders after dilutive effects

  $ 45,772 

   

  $ 1,938 

   

   

   

   

   

   

   

   

Shares:

   

   

   

Weighted-average shares used to compute basic net income per share

30,639,284 

   

25,074,194 

Adjustment to reflect conversion of preferred stock

5,989,378 

   

5,843,097 

   

   

   

   

Weighted-average shares used to compute diluted net income per share

36,628,662 

   

30,917,291 

   

   

   

   

   

   

   

   

Net income per share attributable to common stockholders

   

   

   

 Diluted

  $ 1.25 

   

  $ 0.06 

   

   

   

   

   

   

Variable Interest Entities

The Company uses both quantitative and qualitative analysis when evaluating its variable interest entities (VIE’s) and determining the primary beneficiary (PB) of a VIE. The Company consolidates a VIE if it has both (a) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

New Accounting Pronouncements

In December 2011, the FASB issued ASU No. 2011-10, Derecognition of in Substance Real Estate – a Scope Clarification a consensus of the FASB Emerging Issues Task Force (Topic 360). The amendments in this update are intended to resolve the diversity in practice about whether the guidance in Subtopic 360-20, Property, Plant, and Equipment—Real Estate Sales, applies to a parent that ceases to have a controlling financial interest (as described in Subtopic 810-10, Consolidation—Overall) in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. This update does not address whether the guidance in Subtopic 360-20 would apply to other circumstances when a parent ceases to have a controlling financial interest in a subsidiary that is in substance real estate. For public entities, the amendments are effective for fiscal years, and interim periods within those years,

9  

   


   

   

beginning on or after June 15, 2012. The Company adopted this statement effective January 1, 2013. The adoption of this guidance did not have a material effect on the Company’s financial statements.

In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities (Topic 210). The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, the standard requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. The amendments are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The disclosures required by the amendments are required to be applied retrospectively for all comparative periods presented. The Company adopted this statement effective January 1, 2013. The adoption of this guidance did not have a material effect on the Company’s financial statements.

NOTE 3 — STOCKHOLDERS’ EQUITY OF THE COMPANY

Common Stock

On January 3, 2012, the Company filed its Second Amended and Restated Certificate of Incorporation which effected a one-for-2.5 reverse stock split on the shares issued and outstanding. The Amended and Restated Certificate of Incorporation authorized capital stock consisting of 450,000,000 shares, all with a par value of $.0001 per share which includes 300,000,000 shares of Common Stock (the class of common stock offered in the IPO), 140,000,000 shares of Class A Common Stock and 10,000,000 shares of preferred stock including 3,000,000 shares of Series B Preferred Stock.

Each holder of Common Stock is entitled to one vote for each share of Common Stock held on all matters submitted to a vote of stockholders. Subject to preferences that may apply to shares of outstanding Series B Preferred Stock as outlined below, the holders of outstanding shares of Common Stock are entitled to receive dividends. After the payment of all preferential amounts required to the holders of Series B Preferred Stock, all of the remaining assets of the Company available for distribution shall be distributed ratably among the holders of Common Stock.

On January 24, 2012, the Company completed an IPO of shares of Common Stock in which it sold 7,200,000 shares at a price to the public of $10 per share, which included 342,860 shares of Class A Common Stock from selling shareholders. The IPO raised approximately $59,919 net of underwriting fees and offering costs. In connection with the Company’s IPO on January 24, 2012, the Company gave effect to the one-time conversion of Series A Preferred Stock and certain common stock warrants into 7,660,612 shares of newly-issued Class A Common Stock and 2,999,493 shares of $74,987 aggregate liquidation preference Series B Preferred Stock with cumulative dividends of 4.50% per annum. On June 30, 2015, each holder of Series B Preferred Stock will have the right to require the Company to redeem its shares at the redemption price of $25.00 per share plus an amount equal to any accumulated and unpaid dividends (Redemption Price). The holder of any shares of Series B Preferred Stock will have the right to convert such shares, together with accumulated and unpaid dividends (whether or not declared) into shares of Common Stock at the conversion rate in effect at such time. If the closing sale price of the Common Stock exceeds certain pricing thresholds, then the Company may, at its option, cause up to all of the then outstanding shares of Series B Preferred Stock (and corresponding accumulated and unpaid dividends) to be converted into shares of the Company’s Common Stock at the then-applicable conversion rate.

Common Stock Issued During 2013

On February 15, 2013, the Company had 50,000 restricted stock units vest into 28,325 shares of Common Stock, net of 21,675 shares of treasury stock.

On March 18, 2013, the Company issued 58,501 shares of Common Stock with respect to the intangible supply agreement in connection with the purchase of substantially all Tellurian Biodiesel, Inc. and American BDF, LLC assets.

During the first quarter 2013, certain Series B Preferred Stockholders converted 1,140 shares of preferred stock into 2,300 shares of Common Stock as per the preferred stock shareholder agreement.

Common Stock Warrants

Under the Company’s outstanding warrants, the holder may purchase the number of shares of Common Stock underlying each warrant held for a purchase price of $11.16 per share. The warrant holder may “net exercise” the warrants and use the common shares received upon exercise of the warrants outstanding as the consideration for payment of the exercise price.

The warrant holders are generally protected from anti-dilution by adjustments for any stock dividends, stock split, combination or other recapitalization.

10  

   


   

   

Stock Issuance Costs

In addition to the warrants, other direct costs of obtaining capital by issuing the common and preferred stock were deducted from related proceeds with the net amount recorded as preferred stock or stockholders’ equity. Direct costs incurred for the three months ended March 31, 2013 and 2012 were $21 and $700, respectively.

NOTE 4 — REDEEMABLE PREFERRED STOCK

The Company’s restated certificate of incorporation filed on February 26, 2010 authorized 60,000,000 shares of preferred stock, including 14,000,000 shares of Series A Preferred Stock, with a par value of $.0001. The Company’s Board of Directors had discretion, subject to the approval of certain shareholders, as to the designation of voting rights, dividend rights, redemption price, liquidation preference and other provisions of each issuance.

On July 15, 2011, holders of the Company’s Series A Preferred Stock approved a second amended and restated certificate of incorporation, to be effective prior to the completion of the Company’s initial public offering, to, among other things, convert and redeem the Company’s outstanding Series A Preferred Stock for a combination of Class A Common Stock and Series B Preferred Stock. This was approved by the Company’s common stockholders during the Company’s annual stockholder meeting on October 26, 2011.

On January 3, 2012, the Company filed its Second Amended and Restated Certificate of Incorporation which affected a one-for-2.5 reverse stock split of the issued and outstanding shares of common stock. The Second Amended and Restated Certificate of Incorporation authorized capital stock consisting of 450,000,000 shares, all with a par value of $.0001 per share which includes 300,000,000 shares of Common Stock (the class of common stock offered in the IPO), 140,000,000 shares of Class A Common Stock and 10,000,000 shares of preferred stock including 3,000,000 shares of Series B Preferred Stock.

In connection with the Company’s IPO on January 24, 2012, the Company gave effect to the one-time conversion of Series A Preferred Stock and certain common stock warrants into 7,660,612 shares of newly-issued Common Stock and 2,999,493 shares of $74,987 aggregate liquidation preference Series B Preferred Stock with cumulative dividends of 4.5% per annum. All Series A Preferred Stock was converted and no Series A Preferred Stock remains outstanding.

The rights, preferences, privileges and restrictions granted to and imposed on the Preferred Stock are set forth below. The holders of Preferred Stock are generally protected from anti-dilution by adjustments for any stock dividends, stock split, combination or other recapitalization.

Series B Preferred Stock

Dividend Provisions

The holders of the Series B Preferred Stock are entitled to receive, when, as and if declared by the board of directors, cumulative dividends on each outstanding share of Series B Preferred Stock at the annual rate of 4.50% of the stated value. Dividends are payable semi-annually in arrears on June 30 and December 30 of each year, beginning on June 30, 2012. The Company may, at its option, defer a regularly scheduled dividend payment and instead pay accumulated and unpaid dividends on the following dividend payment date. The Company can only defer two such dividend payments and may not defer consecutive dividend payments. The Company will pay any dividend in cash, by delivering shares of Common Stock or through any combination of cash and shares of Common Stock.

Liquidation Rights

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company’s affairs, a holder of Series B Preferred Stock will be entitled to be paid, before any distribution or payment may be made to any holders of junior stock, an amount per share of Series B Preferred Stock, referred to as the Liquidation Preference, equal to the sum of the stated value of a share of Series B Preferred Stock of $25.00, referred to as the Stated Value, plus the amount of any accumulated and unpaid dividends, whether or not declared, to, but excluding, the date of payment.

If upon any liquidation or dissolution, the remaining net assets of the Company are insufficient to pay the amount that the Series B Preferred Stock holders are due as indicated above, the holders of Series B Preferred Stock will share ratably in any distribution of the remaining assets of the Company.

Conversion Rights

At any time following the lock-up expiration date, the holder of any shares of Series B Preferred Stock will have the right to convert such shares, together with accumulated and unpaid dividends (whether or not declared) into shares of Common Stock at a

11  

   


   

   

conversion rate in effect at such time. The initial conversion rate for each $25.00 of Liquidation Preference will be equal to $25.00 divided by a price that is 125% of the public offering price in the IPO.

If, at any time following the lock-up expiration date, the closing sale price of the Common Stock exceeds $15.00 for at least 20 trading days in any 30 consecutive trading day period and the average daily trading volume of the Common Stock for at least 20 trading days in such period exceeds 200,000 shares or $2,500, then the Company may, at its option, cause up to 50% of the then-outstanding shares of Series B Preferred Stock, and corresponding accumulated and unpaid dividends, to be converted into shares of Common Stock at the then-applicable conversion rate. If at any time following the lock-up expiration date, the closing sale price of the Common Stock exceeds $16.00 for at least 20 trading days in any 30 consecutive trading day period and the average daily trading volume of the Common Stock for at least 20 trading days in such period exceeds 200,000 shares or $2,500, the Company may, at its option, cause up to all of the then-outstanding shares of Series B Preferred Stock, and corresponding accumulated and unpaid dividends, to be converted into shares of Common Stock at the then-applicable conversion rate.

Voting Rights

Each holder of the Series B Preferred Stock is entitled to vote their share of Series B Preferred Stock on an as-converted basis on any matters presented to holders of Common Stock for their consideration. Except as required by law, holders of Series B Preferred Stock will vote on an as-converted basis together with the holders of Common Stock and with the holders of any other class or series of the Company’s capital stock entitled to vote with the Common Stock, as a single class.

The vote or consent of at least 75% of the shares of the Series B Preferred Stock at the time outstanding, voting as a separate class, shall be necessary to amend, alter or repeal the terms of the Series B Preferred Stock so as to adversely affect the powers, preferences or rights of the Series B Preferred Stock.

Redemption Rights

Except as set forth below, the Company may not redeem the Series B Preferred Stock prior to the date, referred to as the Initial Optional Redemption Date, which is 18 months following the lock-up expiration date. On or after the Initial Optional Redemption Date, the Series B Preferred Stock may be redeemed at the Company’s option, in whole or in part, for cash at a price per share equal to the Stated Value, plus any accumulated and unpaid dividends, which the Company refers to as the Redemption Price. If a change of control transaction occurs any time before the Initial Optional Redemption Date, then the Company may elect to redeem all, but not part, of the outstanding shares of Series B Preferred Stock for cash at the Redemption Price plus a “make-whole” payment for each share of Series B Preferred Stock equal to $2.25 less the amount of any dividends paid on such share since the original issuance date of the Series B Preferred Stock.

If before March 31, 2015, the Company conducts an equity offering or offerings for cash that results in aggregate net proceeds in excess of $20,000, then, subject to the Company having legally available funds, the Company will offer to purchase or redeem the maximum number of shares of Series B Preferred Stock at a price equal to the Stated Value plus the amount of any accumulated and unpaid dividends to, but excluding, the purchase date that may be purchased or redeemed using 25% of those net proceeds. Before the Initial Optional Redemption Date, the Company will use those net proceeds to offer to purchase, in a tender offer, Series B Preferred Stock, and after the Initial Optional Redemption Date, the Company will use those net proceeds to redeem Series B Preferred Stock.

On June 30, 2015, each holder of Series B Preferred Stock will have the right to require the Company to redeem its shares at the Redemption Price, subject to the Company having legally available funds. If at any time dividends on any shares of Series B Preferred Stock are unpaid as of the specific dividend payment date and the non-payment continues for a period of 30 days, then the holders of not less than 25% of the then-outstanding Series B Preferred Stock may require the Company, subject to the Company having legally available funds, to redeem all outstanding shares of Series B Preferred Stock at the Redemption Price.

NOTE 5 — VARIABLE INTEREST ENTITIES

The Company has a 50% ownership in 416 S. Bell, LLC (Bell, LLC), a VIE joint venture that owns and leases to the Company its corporate office building in Ames, Iowa. Commencing January 1, 2011, the Company has the right to execute a call option with the joint venture member, Dayton Park, LLC (Dayton Park), to purchase Bell, LLC and commencing on January 1, 2013, Dayton Park has the right to execute a put option with the Company to sell Bell, LLC. The Company determined it was the primary beneficiary of Bell, LLC and has consolidated Bell, LLC into the Company’s financial statements since January 1, 2011. The Company is the primary beneficiary due to its ownership interest and having an exercisable call option that allows the Company to direct the activities that most significantly impact Bell, LLC’s economic performance and gives the Company the majority of the benefit from the use of Bell, LLC’s assets.  During February 2013, the note was amended to reflect the current interest rate of 3.5% per annum and a maturity date of January 14, 2018. The note is secured by a mortgage interest in the office building.

12  

   


   

   

The carrying values and maximum exposure for all unconsolidated VIE’s are as follows:

   

 

   

March 31, 2013

   

December 31, 2012

   

   

   

   

Investment:

Investments

   

Maximum

Exposure

   

Investments

   

Maximum

Exposure

   

   

   

   

   

   

   

   

Western Iowa Energy LLC

  $ 671

   

  $ 671

   

  $ 613

   

  $ 613

Western Dubuque Biodiesel LLC

2,005

   

2,005

   

2,005

   

2,005

   

   

   

   

   

   

   

   

   

  $ 2,676

   

  $ 2,676

   

  $ 2,618

   

  $ 2,618

   

   

   

   

   

   

   

   

   

NOTE 6 — INVENTORIES

Inventories consist of the following:

   

 

   

March 31,

2013

   

December 31,

2012

   

   

   

   

Raw materials

  $ 19,993

   

  $ 9,835

Work in process

1,346

   

448

Finished goods

68,174

   

34,923

   

   

   

   

Total

  $ 89,513

   

  $ 45,206

   

   

   

   

   

NOTE 7 — BORROWINGS

The Company’s term borrowings are as follows:

   

 

   

March 31,

2013

   

December 31,

2012

   

   

   

   

REG Danville term loan

  $ 9,760

   

  $ 10,060

REG Newton term loan

20,783

   

21,175

Other

1,466

   

1,496

   

   

   

   

Total notes payable

  $ 32,009

   

  $ 32,731

   

   

   

   

Bell, LLC promissory note—variable interest entity

  $ 4,245

   

  $ 4,313

   

   

   

   

   

On November 3, 2011, REG Danville, LLC (REG Danville) entered into an Amended and Restated Loan Agreement with Fifth Third Bank (Fifth Third Loan). The renewed Fifth Third Loan has a three year term with an automatic one year extension upon certain cumulative principal payment thresholds being met. The loan requires monthly principal payments of $150 and interest based on a rate of LIBOR plus 5% per annum. The effective rate is 5.20% at March 31, 2013. The loan is secured by our Danville facility. The loan agreement contains various loan covenants that restrict REG Danville’s ability to take certain actions, including prohibiting it in certain circumstances from making payments to the Company. The Fifth Third Loan requires semi-annual excess cash flow payments beginning on December 31, 2011. REG Danville must pay Fifth Third a principal payment in the amount equal to 50% of its Excess Cash Flow. The Fifth Third Loan agreement defines excess cash flow as REG Danville’s EBITDA plus certain affiliate payments less principal payments, interest expense, taxes and unfunded maintenance capital expenditures. The excess cash flow payment required for the second half of 2012 is $1,458 and was paid April 2013. The Company recorded an estimated excess cash flow payment of $591 for the first half of 2013 which would be paid in the third quarter of 2013.

On March 4, 2013, REG Danville entered into the First Amendment to the Amended and Restated Loan Agreement (First Amendment) with Fifth Third Loan. The First Amendment includes changes to the debt covenants based upon the Company executing a tax sharing agreement with REG Danville. The tax sharing agreement provides that REG Danville will share the liability for income taxes via an allocation based upon a separate-return approach. Although the Company is not directly compensated for the use of carry-forward attributes, the tax sharing agreement allows each affiliate to benefit from net operating losses and tax credits that each generates.

13  

   


   

   

On December 20, 2012, REG Newton and AgStar Financial Services, PCA (AgStar) extended the term of the AgStar Loan.  The maturity date of the AgStar Loan is March 8, 2014.

The Company was in compliance with all restrictive covenants associated with its borrowings as of March 31, 2013.

   

NOTE 8 — RELATED PARTY TRANSACTIONS

Related parties include certain investors as well as entities in which the Company has an equity method investment or an investment combined with a management and operational services agreement (MOSA) or board seat. Investors defined as related parties include (i) the investor having ten percent or more ownership, including convertible preferred stock, in the Company or (ii) the investor holding a board seat on the Company’s Board of Directors. After the IPO, the number of related parties decreased due to the dilution of ownership of prior investors as well as the reduction of the number of board seats on the Company’s board held by related party investors.

The Company will report related party transactions before and after the IPO based on the related party characteristics mentioned above.

   

 

Summary of Related Party Transactions

   

   

   

   

   

   

   

   

   

Three Months

Ended

March 31,

2013 

   

Three Months

Ended

March 31,

2012 

   

   

   

   

   

   

   

   

Cost of goods sold - Biodiesel

  $ 11,730 

(a)

  $ 17,669 

(a)

   

Selling, general, and administrative expenses

  $

(b)

  $ 149 

(b)

   

Interest expense

  $ 20 

(c)

  $ 17 

(c)

   

   

   

   

   

   

(a)

Represents transactions with related parties as follows:

   

   

   

   

   

   

   

   

   

   

   

West Central

  $ 11,730 

   

  $ 13,720 

   

   

Bunge

—   

   

3,949 

   

   

   

   

   

   

   

   

   

  $ 11,730 

   

  $ 17,669 

   

   

   

   

   

   

   

   

   

   

   

   

   

(b)

Represents transactions with related parties as follows:

   

   

   

   

   

   

   

   

   

   

   

West Central

  $

   

  $ 36 

   

   

Bunge

—   

   

113 

   

   

   

   

   

   

   

   

   

   

  $ 149 

   

   

   

   

   

   

   

   

   

   

   

   

   

(c)

Represents transactions with related parties as follows:

   

   

   

   

   

   

   

   

   

   

   

West Central

  $ 20 

   

  $

   

   

Bunge

—   

   

   

   

   

   

   

   

   

   

   

  $ 20 

   

  $ 17 

   

   

   

   

   

   

   

   

14  

   


   

   

   

 

Summary of Related Party Balances

   

   

   

   

   

   

   

   

   

As of

March 31,

2013 

   

As of

December 31,

2012 

   

   

   

   

   

   

   

   

Accounts receivable

  $554 

(a)

  $771 

(a)

   

Other assets

  $352 

(a)

  $692 

(a)

   

Accounts payable

  $3,038 

(a)

  $2,950 

(a)

   

   

   

   

   

   

(a)

Represents balances with West Central

   

   

   

   

   

   

   

   

   

   

   

West Central Cooperative

The Company purchases once-refined soybean oil from West Central Cooperative (West Central) and is required to pay interest for amounts owed on extended trade terms. The Company also had biodiesel and co-product sales.

West Central leases the land under the Company’s production facility at Ralston, Iowa to the Company at an annual cost of one dollar. The Company is responsible for the property taxes, insurance, utilities and repairs for the facility relating to this lease. The lease has an initial term of twenty years and the Company has options to renew the lease for an additional thirty years.

In 2006, the Company executed an asset use agreement with West Central to provide for the use of certain assets, such as office space, maintenance equipment and utilities. The agreement requires the Company to pay West Central its proportionate share of certain costs incurred by West Central. This agreement has the same term as the land lease. During February 2012, the Company renegotiated the asset use agreement. The new agreement provides for the use of certain assets, such as buildings, equipment and utilities, which will be charged to the Company based on fixed and variable components.

Bunge North America

Prior to 2013, the Company purchases feedstocks from Bunge North America, Inc. (Bunge) for the production of biodiesel. The costs associated with the purchased feedstocks are reflected in costs of goods sold – biodiesel when sold to the end customer.  

The Company entered into an agreement for Bunge to provide services related to the procurement of raw materials and the purchase and resale of biodiesel produced by the Company. The Company was required to pay interest for the aggregate outstanding amounts owed to Bunge. Also, as part of the agreement, the Company was required to pay an incentive fee to Bunge for meeting certain hedging goals utilizing Bunge’s advice. On November 8, 2011, the Company gave notice of termination to Bunge in accordance with the agreement. The agreement expired May 2012.

NOTE 9 — DERIVATIVE INSTRUMENTS

The Company has entered into derivatives to hedge its exposure to price risk related to feedstock inventory and biodiesel finished goods inventory. Additionally, the Company has entered into an interest rate swap with the objective of managing risk caused by fluctuations in interest rates associated with the REG Danville note payable. The Company does not enter into derivative transactions for trading purposes.

These derivative contracts are accounted for in accordance with ASC Topic 815, Derivatives and Hedging (ASC Topic 815). ASC Topic 815 requires that an entity recognize and record all derivatives on the balance sheet at fair value. All of the Company’s derivatives are designated as non-hedge derivatives and are utilized to manage cash flow. Although the contracts may be effective economic hedges of specified risks, they are not designated as, nor accounted for, as hedging instruments. Unrealized gains and losses on commodity futures, swaps and options contracts used to hedge feedstock purchases or biodiesel inventory are recognized as a component of biodiesel costs of goods sold reflected in current results of operations. Commodity hedge gains and losses are generally offset by other corresponding changes in gross margin through changes in either biodiesel sales price and/or feedstock price. Unrealized gains and losses on the interest rate swap are recorded in other income (expense), net in the Company’s statements of operations. ASC Topic 815 requires all derivative financial instruments to be recorded on the balance sheet at fair value. The Company’s derivatives are not designated as hedges and are utilized to manage cash flow. The changes in fair value of the derivative instruments are recorded through earnings in the period of change. The changes in fair value of the derivative instruments are recorded currently in earnings. As of March 31, 2013 and December 31, 2012, the Company posted $8,968 and $8,053, respectively, of collateral associated with its commodity-based derivatives with a net asset position of $2,095 and a net liability position of $416, respectively.

15  

   


   

   

As of March 31, 2013, the Company has entered into heating oil and soy oil derivative instruments and an interest rate swap agreement. The Company has entered into heating oil and soy oil commodity-based derivatives in order to protect gross profit margins from potentially adverse effects of price volatility on biodiesel sales where the prices are set at a future date. As of March 31, 2013, the Company had 1,849 open commodity contracts. In addition, the Company manages interest rate risk associated with the REG Danville variable interest rate note payable using a fixed rate swap. The interest rate swap agreement had outstanding notional values of $4,395 and $5,245 as of March 31, 2013 and December 31, 2012, respectively. The agreement effectively fixes the variable component of the interest rate on the Term Loan at 0.92% through July 2015. The fair value of the interest rate swap agreement was $37 and $46 at March 31, 2013 and December 31, 2012, respectively, and is recorded in the other noncurrent liabilities. The interest rate swap was not designated as an accounting hedge under ASC Topic 815 and thus all gains and losses are recorded currently in earnings.

   

16  

   


   

   

The following tables provide details regarding the Company’s derivative financial instruments:

   

   

 

   

As of March 31, 2013

   

   

   

Asset Derivatives

   

Liability Derivatives

   

   

   

   

   

Balance Sheet

Location

   

Fair

Value

   

Balance Sheet

Location

   

Fair

Value

   

   

   

   

   

   

   

   

Interest rate swap

   

   

  $ —  

   

Other liabilities

   

  $ 37

Commodity swaps

Prepaid expenses and other assets

   

2,909

   

Prepaid expenses and other assets

   

814

Commodity options

Prepaid expenses and other assets

   

35

   

Prepaid expenses and other assets

   

35

   

   

   

   

   

   

   

   

Total derivatives

   

   

  $ 2,944

   

   

   

  $ 886

   

   

   

   

   

   

   

   

   

   

 

   

As of December 31, 2012

   

   

   

Asset Derivatives

   

Liability Derivatives

   

   

   

   

   

Balance Sheet

Location

   

Fair

Value

   

Balance Sheet

Location

   

Fair

Value

   

   

   

   

   

   

   

   

Interest rate swap

   

   

  $ —  

   

Other liabilities

   

  $ 46

Commodity swaps

Prepaid expenses and other assets

   

305

   

Prepaid expenses and other assets

   

476

Commodity options

Prepaid expenses and other assets

   

143

   

Prepaid expenses and other assets

   

388

   

   

   

   

   

   

   

   

Total derivatives

   

   

  $ 448

   

   

   

  $ 910

   

   

   

   

   

   

   

   

   

   

 

   

   

   

Three Months

Ended

March 31,

2013 

   

Three Months

Ended

March 31,

2012 

   

   

   

   

   

   

   

Location of Gain (Loss)

Recognized in income

   

Amount of

Gain (Loss)

Recognized

in Income on

Derivatives

   

Amount of

Gain (Loss)

Recognized

in Income on

Derivatives

   

   

   

   

   

   

Embedded derivative

Change in fair value of preferred stock conversion feature embedded derivatives

   

  $ —   

   

  $ 11,975 

Interest rate swap

Other income (loss)

   

   

(10)

Commodity futures

Cost of goods sold - Biodiesel

   

(2)

   

—   

Commodity swaps

Cost of goods sold - Biodiesel

   

1,134 

   

(5,001)

Commodity options

Cost of goods sold - Biodiesel

   

235 

   

53 

   

   

   

   

   

   

Total

   

   

  $ 1,376 

   

  $ 7,017 

   

   

   

   

   

   

17  

   


   

   

The tables below represent the amounts subject to an enforceable master netting arrangement not otherwise disclosed:

   

 

Offsetting of Derivative Assets

As of March 31, 2013

   

Description

   

Gross Amounts Recognized

   

Gross Amounts Offset in the Statement of Financial Position

   

Net Amounts Presented in the Statement of Financial Position

   

Gross Amounts Not Offset in the Statement of Financial Position

   

Net Amount

   

   

   

   

   

   

   

   

   

   

   

Derivatives

   

  $               11,912 

   

           (886)

   

        11,026 

   

         (8,968)

   

  $ 2,058 

   

   

   

   

   

   

   

   

   

   

   

Offsetting of Derivative Liabilities

As of March 31, 2013

   

Description

   

Gross Amounts Recognized

   

Gross Amounts Offset in the Statement of Financial Position

   

Net Amounts Presented in the Statement of Financial Position

   

Gross Amounts Not Offset in the Statement of Financial Position

   

Net Amount

   

   

   

   

   

   

   

   

   

   

   

Derivatives

   

  $                 886 

   

             (886)

   

                  -

   

                  -

   

  $ —   

   

   

   

   

   

   

   

   

   

   

   

Offsetting of Derivative Assets

As of December 31, 2012

   

Description

   

Gross Amounts Recognized

   

Gross Amounts Offset in the Statement of Financial Position

   

Net Amounts Presented in the Statement of Financial Position

   

Gross Amounts Not Offset in the Statement of Financial Position

   

Net Amount

   

   

   

   

   

   

   

   

   

   

   

Derivatives

   

  $              8,501 

   

             (448)

   

          8,053  

   

         (8,053)

   

  $ —   

   

   

   

   

   

   

   

   

   

   

   

Offsetting of Derivative Liabilities

As of December 31, 2012

   

Description

   

Gross Amounts Recognized

   

Gross Amounts Offset in the Statement of Financial Position

   

Net Amounts Presented in the Statement of Financial Position

   

Gross Amounts Not Offset in the Statement of Financial Position

   

Net Amount

   

   

   

   

   

   

   

   

   

   

   

Derivatives

   

  $                 910 

   

             (448)

   

             462 

   

                  -

   

  $ 462 

   

   

NOTE 10 — FAIR VALUE MEASUREMENT

ASC Topic 820, Fair Value Measurement (ASC Topic 820), establishes a framework for measuring fair value in GAAP and expands disclosures about fair market value measurements. ASC Topic 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering assumptions, ASC Topic 820 establishes a three-tier fair value hierarchy, which 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.

18  

   


   

   

In addition, ASC Topic 820 requires disclosures about the use of fair value to measure assets and liabilities to enable the assessment of inputs used to develop fair value measures, and for unobservable inputs, to determine the effects of the measurements on earnings.

A summary of assets (liabilities) measured at fair value is as follows:

   

 

   

As of March 31, 2013

   

   

   

Total

   

Level 1

   

Level 2

   

Level 3

   

   

   

   

   

   

   

   

Interest rate swap

  $ (37)

   

  $ —   

   

  $ (37)

   

  $ —   

Commodity swaps

  $ 2,095 

   

—   

   

2,095 

   

—   

   

   

   

   

   

   

   

   

   

  $ 2,058 

   

  $ —   

   

  $ 2,058 

   

  $ —   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

As of December 31, 2012

   

   

   

Total

   

Level 1

   

Level 2

   

Level 3

   

   

   

   

   

   

   

   

Interest rate swap

  $ (46)

   

  $ —   

   

  $ (46)

   

  $ —   

Commodity swaps

  $ (171)

   

—   

   

(171)

   

—   

Commodity options

  $ (245)

   

—   

   

(245)

   

—   

   

   

   

   

   

   

   

   

   

  $ (462)

   

  $ —   

   

  $ (462)

   

  $ —   

   

   

   

   

   

   

   

   

   

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) during the three months ended March 31, 2012:

   

 

   

   

 Series A

Preferred

Stock

Embedded

Derivatives

   

 Seneca

Holdco

Liability

   

   

   

   

   

Ending balance—January 1, 2012

   

  $ (53,822)

   

  $ (11,903)

Total unrealized gains (losses)

   

11,975 

   

349 

Purchases

   

—   

   

—   

Issuance

   

—   

   

—   

Settlements

   

41,847 

   

11,554 

   

   

   

   

   

Ending balance—March 31, 2012

   

  $ —   

   

  $ —   

   

   

   

   

   

   

The company used the following methods and assumptions to estimate fair value of its financial instruments:

Valuation of Preferred Stock embedded conversion feature derivatives: The estimated fair value of the derivative instruments embedded in the Company’s outstanding preferred stock is determined using the option pricing method to allocate the fair value of the underlying stock to the various components comprising the security, including the embedded derivative. The allocation was performed based on each class of preferred stock’s liquidation preference and relative seniority. Derivative liabilities are adjusted to reflect fair value at each period end. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments.

Interest rate swap: The fair value of the interest rate swap was determined based on a discounted cash flow approach using market observable swap 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. Contracts whose fair value is determined based on quoted prices of similar contracts in over-the-counter markets are reflected in Level 2.

19  

   


   

   

Seneca Holdco liability: The liability represents the combination of the Call Option and the Put Option related to the purchase of the membership interest of Landlord. The fair value of the Seneca Holdco liability is determined using an option pricing model and represents the probability weighted present value of the gain that is realized upon exercise of each option.

Notes payable 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.

The estimated fair values of the Company’s financial instruments, which are not recorded at fair value, are as follows:

   

 

   

   

March 31, 2013

   

December 31, 2012

   

   

   

   

   

   

   

Asset (Liability) Carrying Amount

   

Fair Value

   

Asset (Liability) Carrying Amount

   

Fair Value

   

   

   

   

   

   

   

   

   

Financial Liabilities:

   

   

   

   

   

   

   

   

Notes payable and lines

   

   

   

   

   

   

   

   

   of credit

$(63,691)

   

$(63,630)

   

$(37,044)

   

$(37,000)

   

NOTE 11 — REPORTABLE SEGMENTS

The Company reports its reportable segments based on services provided to customers, which include Biodiesel, 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. The Company has chosen to differentiate the reportable segments based on the products and services each segment offers.

The Biodiesel segment processes waste vegetable oils, animal fats, virgin vegetable oils and other feedstocks and methanol into biodiesel. The Biodiesel segment also includes the Company’s purchases and resale of biodiesel produced by third parties. Revenue is derived from the purchases and sales of biodiesel and raw material feedstocks acquired from third parties, sales of biodiesel produced under toll manufacturing arrangements with third party facilities, sales of processed biodiesel from Company facilities, sales of RINs, related by-products and renewable energy government incentive payments. The Services segment offers services for managing the construction of biodiesel production facilities and managing ongoing operations of internal and third party plants and collects fees related to the services provided. The Company does not allocate items that are of a non-operating nature or corporate expenses to the business segments. Intersegment revenues are reported by the Services segment, which manages the construction and operations of facilities included in the Biodiesel segment. Revenues are recorded by the Services segment at cost. Corporate expenses consist of corporate office expenses including compensation, benefits, occupancy and other administrative costs, including management service expenses.

20  

   


   

   

The following table represents the significant items by reportable segment:

   

 

   

Three Months

Ended

March 31,

2013 

   

Three Months

Ended

March 31,

2012 

   

   

   

   

Net sales:

   

   

   

 Biodiesel

  $ 339,242 

   

  $ 188,167 

 Services

13,897 

   

8,169 

 Intersegment revenues

(13,855)

   

(8,089)

   

   

   

   

   

  $ 339,284 

   

  $ 188,247 

   

   

   

   

   

   

   

   

Income before income taxes:

   

   

   

 Biodiesel

  $ 86,713 

   

  $ 17,031 

 Services

(18)

   

 Corporate and other (a)

(10,103)

   

(1,654)

   

   

   

   

   

  $ 76,592 

   

  $ 15,380 

   

   

   

   

   

   

   

   

Depreciation and amortization expense, net:

   

   

   

 Biodiesel

  $ 1,725 

   

  $ 1,787 

 Services

19 

   

 Corporate and other (a)

204 

   

182 

   

   

   

   

   

  $ 1,948 

   

  $ 1,973 

   

   

   

   

   

   

   

   

Cash paid for purchases of property, plant

   

   

   

 and equipment:

   

   

   

   Biodiesel

  $ 9,724 

   

  $ 2,293 

   Services

99 

   

26 

   Corporate and other (a)

100 

   

287 

   

   

   

   

   

  $ 9,923 

   

  $ 2,606 

   

   

   

   

   

   

   

   

   

   

   

   

   

March 31,

2013 

   

December 31,

2012 

   

   

   

   

Goodwill:

   

   

   

 Biodiesel

  $ 68,784 

   

  $ 68,784 

 Services

16,080 

   

16,080 

   

   

   

   

   

  $ 84,864 

   

  $ 84,864 

   

   

   

   

   

   

   

   

Assets:

   

   

   

 Biodiesel

  $ 413,771 

   

  $ 357,305 

 Services

20,523 

   

20,033 

 Corporate and other (b)

251,403 

   

118,446 

   

   

   

   

   

  $ 685,697 

   

  $ 495,784 

   

   

   

   

   

 

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

 

(b) Corporate and other includes cash and other assets not associated with the reportable segments, including investments.

21  

   


   

   

NOTE 12 — COMMITMENTS AND CONTINGENCIES

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

NOTE 13 — SUBSEQUENT EVENTS

The Company has performed an evaluation of subsequent events through the date the financial statements were issued, and has determined there have been no material subsequent events requiring disclosure.

* * * * * *

   

22  

   


   

   

   

 

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 or the Company, that involve risks and uncertainties such as anticipated financial performance, business prospects, technological developments, products, possible strategic initiatives and similar matters. In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “predict,” “potential,” “plan,” or the negative of these terms, and similar expressions intended to identify forward-looking statements.

These forward-looking statements include, but are not limited to, statements about facilities currently under development progressing to the construction and operational stages, including planned capital expenditures and our ability to obtain financing for such construction; existing or proposed legislation affecting the biodiesel industry, including governmental incentives and tax credits; our utilization of forward contracting and hedging strategies to minimize feedstock and other input price risk; anticipated future revenue sources from our operational management and facility construction services; the expected effect of current and future environmental laws and regulations on our business and financial condition; our ability to renew existing and expired  contracts at similar or more favorable terms; expected technological advances in biodiesel production methods; our competitive advantage relating to input costs relative to our competitors; the market for biodiesel and potential biodiesel consumers; our ability to further develop our  financial, managerial and other internal controls and reporting systems to accommodate future growth; expectations regarding the realization of deferred tax assets and the establishment and maintenance of tax reserves and anticipated trends; expectations regarding our expenses and sales; anticipated cash needs and estimates regarding capital requirements and needs for additional financing; and challenges in our business and the biodiesel 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 under “Risk Factors” in Part I of our Annual Report on Form 10-K for the twelve months ended December 31, 2012. We encourage you to read this Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the accompanying condensed consolidated financial statements and related notes. Forward-looking statements contained in this report present management’s views only as of the date of this report. Except as required under applicable law, we do not intend to issue updates concerning any future revisions of management’s views to reflect events or circumstances occurring after the date of this report.

Overview

We are the largest producer of biodiesel in the United States. We have been a leader in the biodiesel industry since 1996. We own seven active biodiesel production facilities with aggregate nameplate production capacity of 227 million gallons per year, or mmgy. We produce biodiesel primarily from lower cost feedstocks, such as inedible corn oil, used cooking oil and inedible animal fat. A small portion of our biodiesel is produced using higher cost virgin vegetable oils, such as soybean oil. We own biodiesel production facilities with nameplate capacities consisting of: a 12 mmgy facility in Ralston, Iowa; a 35 mmgy facility near Houston, Texas; a 45 mmgy facility in Danville, Illinois; a 30 mmgy facility in Newton, Iowa; a 30 mmgy biodiesel production facility in Albert Lea, Minnesota; a 60 mmgy facility in Seneca, Illinois; a 15 mmgy facility in New Boston, Texas, which was idled at the time we purchased it and remains idled pending completion of certain repairs expected to be completed in second quarter 2013.  In November 2012, we completed our acquisition of Bulldog Biodiesel, LLC, a 15 mmgy facility near Atlanta, Georgia, that was idled at the time we purchased it and will remain so until certain repairs or upgrades are made.

For the three months ended March 31, 2013, we sold 39 million gallons of biodiesel including 6 million gallons that we purchased from third parties and resold. During 2012, we sold 188 million gallons of biodiesel, including 25 million gallons we purchased from third parties and resold.

We own three partially completed biodiesel production facilities. In 2007, we began construction of two 60 mmgy nameplate production capacity facilities, one near New Orleans, Louisiana and the other in Emporia, Kansas. In February 2008, we halted construction of these facilities as a result of conditions in the biodiesel industry and our inability to obtain financing necessary to complete construction of the facilities. Construction of the New Orleans facility is approximately 45% complete and construction of the Emporia facility is approximately 20% complete. Further, during the third quarter of 2010, we acquired a 15 mmgy nameplate biodiesel production capacity facility in Clovis, New Mexico which is approximately 50% complete. Currently, the Clovis facility is being operated as a terminal to fulfill biodiesel contracts for customers in the Southwest. We expect that the aggregate cost to complete construction and commence operations of these three facilities is in the range of approximately $130 to $140 million,

23  

   


   

   

excluding working capital. We plan to complete construction of these facilities as financing becomes available, subject to market conditions.

On January 24, 2012, we completed an initial public offering, or IPO, of shares of Common Stock in which we sold 7.2 million shares at a price to the public of $10 per share, which included 0.3 million shares sold by selling shareholders. The IPO raised proceeds to us of $59.9 million after underwriting fees and offering costs. In connection with the IPO, we executed a 1-for-2.5 reverse stock-split of our Common Stock and our outstanding Series A Preferred Stock was converted into shares of Common Stock and Series B Preferred Stock.

We derive revenues from two reportable business segments: Biodiesel and Services

Biodiesel Segment

Our Biodiesel segment, as reported herein, includes:

 

•   the operations of the following biodiesel production facilities:

 

•   a 12 mmgy nameplate biodiesel production facility located in Ralston, Iowa;

 

•   a 35 mmgy nameplate biodiesel production facility located near Houston, Texas, since its acquisition in June 2008;

 

•   a 45 mmgy nameplate biodiesel production facility located in Danville, Illinois, since its acquisition in February 2010;

 

•   a 30 mmgy nameplate biodiesel production facility located in Newton, Iowa, since its acquisition in March 2010;

 

•   a 60 mmgy nameplate biodiesel production facility located in Seneca, Illinois, which began production in August 2010, which we operated under a lease beginning in April 2010 and subsequently acquired in January 2012;

 

•   a 30 mmgy nameplate biodiesel production facility located in Albert Lea, Minnesota, since its acquisition in July 2011;

 

•   a 15 mmgy nameplate biodiesel production facility located in New Boston, Texas, since its acquisition in October 2012 that was idle prior to acquisition and remains idled pending completion of certain upgrades we expect to complete in second quarter 2013;

 

•   purchases and resale of biodiesel, Renewable Identification Numbers, or RINs, and raw material feedstocks acquired from third parties;

 

•   our sales of biodiesel produced under toll manufacturing arrangements with third party facilities using our feedstocks; and

 

•   incentives received from federal and state programs for renewable fuels.

We derive a small portion of our revenues from the sale of glycerin, free fatty acids and other co-products of the biodiesel production process. In 2012 and the three months ended March 31, 2013, our revenues from the sale of co-products were less than five percent of our total Biodiesel segment revenues.

We generate 1.5 biomass-based diesel RINs for each gallon of biodiesel we produce. RINs are used to track compliance with RFS2 using the EPA moderated transaction system, or EMTS. RFS2 allows us to attach between zero and 2.5 RINs to any gallon of biodiesel we sell. We generally attach 1.5 RINs when we sell a gallon of biodiesel. As a result, a portion of our selling price for a gallon of biodiesel is generally attributable to RFS2 compliance. RINs may also be separated from the gallons of renewable fuel and, once separated, may be sold. In addition, we may acquire RINs from third parties and hold varying amounts of these RINs for separate sales. The value of these RINs acquired from third parties is reflected in “Prepaid expenses and other assets” on our condensed consolidated balance sheet and at the end of each accounting period, this RIN inventory is valued at the lower of cost or market and resulting adjustments are reflected in our cost of goods sold for the period.  

Services Segment

Our Services segment includes:

 

•   biodiesel facility management and operational services, whereby we provide day-to-day management and operational services to biodiesel production facilities; and

 

•   construction management services, whereby we act as the construction management and general contractor for the construction of biodiesel production facilities.

Historically, we provided facility operations management services to owners of biodiesel production facilities under management and operational services agreements, or MOSAs. During 2010, we ceased providing services to three of these facilities, acquired one and continued to provide limited services to the other facility. The termination of our MOSAs has not had a significant impact on our financial statements. Our Services segment has been focused internally on managing and upgrading our facilities.

We have utilized our construction management expertise internally to upgrade three of our facilities during the last three years and we are currently in the process of a $21 million upgrade to our Albert Lea facility in addition to the repairs of our recently acquired New Boston facility. We anticipate external revenues derived from construction management services will be minimal in

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future periods. Demand for our construction management and facility management and operational services depend on capital spending by potential customers and existing customers, which is directly affected by trends in the biodiesel industry. We have not received any orders or provided services to outside parties for new facility construction services since 2009.

Factors Influencing Our Results of Operations

The principal factors affecting our segments are the market prices for biodiesel and the feedstocks used to produce biodiesel, as well as governmental programs designed to create incentives for the production and use of biodiesel.

Governmental programs favoring biodiesel production and use

Biodiesel has historically been more expensive than petroleum-based diesel, excluding biodiesel incentives and credits. The biodiesel industry’s growth has largely been the result of federal and state programs that require or incentivize biodiesel, which allows biodiesel to compete with petroleum-based diesel on price.

On July 1, 2010, RFS2 was implemented, stipulating volume requirements for the amount of biomass based diesel and other advanced biofuels that must be utilized in the United States each year. Under RFS2, Obligated Parties, including petroleum refiners and fuel importers, must show compliance with these standards. Currently, biodiesel meets three categories of an Obligated Party’s annual renewable fuel required volume obligation, or RVO—biomass-based diesel, undifferentiated advanced biofuel and renewable fuel. The RFS2 program requires the domestic use of one billion gallons of biodiesel in 2012 and 1.28 billion gallons in 2013. Our sales volumes and revenues have benefited from our increased production capacity, as well as an increase in demand relating to the implementation of RFS2.

RFS2 required the use of one billion gallons of biomass-based diesel in 2012. Since Obligated Parties are allowed to satisfy up to 20% of their 2012 RVO with 2011 RINs. The 2011 carry-over could be used to satisfy up to 200 million gallons of the one billion 2012 requirement. According to EMTS data, approximately 1.14 billion gallons of biomass-based diesel was produced during 2012, indicating that between the 2011 carry-over and 2012 year production, there was sufficient biomass-based diesel produced to satisfy the 2012 RVO of one billion gallons and create carryover towards the 2013 RVO. The 2013 RFS2 requirement for biomass-based diesel is 1.28 billion. According to EMTS data, approximately 288.4 million gallons of biomass-based diesel was produced during the first quarter of 2013. As of this filing, the EPA has not proposed or finalized the 2014 biomass-based diesel requirement.

The federal blenders tax credit provides a $1.00 refundable tax credit per gallon of 100% pure biodiesel, or B100, to the first blender of biodiesel with petroleum-based diesel fuel. The blenders tax credit expired on December 31, 2011. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which reinstated the federal biodiesel blenders tax credit for 2013 and retroactively reinstated the credit for 2012. The retroactive credit for 2012 resulted in a net benefit to us of $57.4 million in the first quarter of 2013. The net benefit increases our income before income taxes by a similar amount. We recognized the federal biodiesel blenders tax credit related to eligible 2012 gallons during the first quarter of 2013, which increased accounts receivable in addition to biodiesel government incentive revenues along with cost of goods sold and accounts payable.

Biodiesel and feedstock price fluctuations

Our operating results generally reflect the relationship between the price of biodiesel, including credits and incentives, like RINs and the price of feedstocks used to produce biodiesel.

Biodiesel is a low carbon, renewable alternative to petroleum-based diesel fuel and is primarily sold to the end user after it has been blended with petroleum-based diesel fuel. Biodiesel prices have historically been heavily influenced by petroleum-based diesel fuel prices. Accordingly, biodiesel prices have generally been impacted by the same factors that affect petroleum prices, such as worldwide economic conditions, wars and other political events, OPEC production quotas, changes in petroleum refining capacity and natural disasters.

Regulatory and legislative factors influence the price of biodiesel, in addition to petroleum prices. Biomass-based diesel RIN pricing, a value component that was introduced via RFS2 in July 2010, has had a significant impact on our biodiesel pricing.  For example, the value of RINs, as reported by Oil Price Information Service, or OPIS, has been significant to the price of biodiesel, contributing approximately $1.83, or 38% of the average B100 Upper Midwest spot price of a gallon of biodiesel as reported by The Jacobsen in December 2011. In December 2012, the value of RINs, as reported by OPIS, contributed approximately $0.89, or 22%, of the average B100 Upper Midwest spot price of a gallon of biodiesel as reported by The Jacobsen. During 2012, the value of RINs, as reported by OPIS, contributed to the average B100 spot price of a gallon of biodiesel, as reported by The Jacobsen, and range from a low of $0.63 per gallon, or 24%, in October to a high of $2.39, or 50%, per gallon in January. There was a sharp decline in RIN prices during third quarter 2012 that carried through the end of the year. During the last half of 2012, RIN pricing declined from $1.17 per RIN at June 30, 2012 to the low price of $0.42 per RIN in October, finishing the year at $0.64 per RIN on December 31, 2012, as reported by OPIS, which contributed to the decline in price of biodiesel during 2012. During the first quarter of 2013, the value of

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RINs, as reported by OPIS, contributed approximately $1.25, or 27% of the average B100 Upper Midwest spot price of a gallon of biodiesel, as reported by The Jacobsen.

During 2012, feedstock expense accounted for 86% of our costs of goods sold, while methanol and chemical catalysts expense accounted for 4% and 2% of our costs of goods sold, respectively.

Feedstocks for biodiesel production, such as inedible corn oil, used cooking oil, inedible animal fat and soybean oil are commodities and market prices for them will be affected by a wide range of factors unrelated to the price of biodiesel and petroleum-based diesel fuels. The following table outlines some of the factors influencing supply and price for each feedstock:

   

 

Feedstock

   

Factors Influencing Supply and Price

   

   

   

Inedible Corn Oil

   

Implementation of inedible corn oil separation systems into existing and new ethanol facilities

   

   

Demand for inedible corn oil from other markets

   

   

Ethanol production

   

   

Export demand

   

   

Extraction system yield

Used Cooking Oil

   

Export demand

   

   

Population

   

   

Number of restaurants in the vicinity of collection facilities and terminals which is dependent on population density

   

   

Eating habits, which can be impacted by the economy

Inedible Animal Fat

   

Export demand

   

   

Number of slaughter kills in the United States

   

   

Demand for inedible animal fat from other markets

Soybean Oil

   

Export demand

   

   

Weather conditions

   

   

Soybean meal demand

   

   

Farmer planting decisions

   

   

Government policies and subsidies

   

   

Crop disease

During 2012, 84% of our feedstocks were comprised of inedible corn oil, used cooking oil and inedible animal fats with the remainder coming from refined vegetable oil. We have increased the use of these feedstocks because they are lower cost than refined vegetable oils.

Historically, most biodiesel in the United States has been made from soybean oil. Soybean oil prices have fluctuated greatly, but have generally remained at historically high levels since early 2007 due to higher overall commodity prices. Over the period January 2006 to March 2013, soybean oil prices (based on daily closing nearby futures prices on the CBOT for crude soybean oil) have ranged from $0.21 per pound, or $1.58 per gallon of biodiesel, in January 2006 to $0.70 per pound, or $5.28 per gallon of biodiesel, in March 2008, assuming 7.5 pounds of soybean oil yields one gallon of biodiesel. The average closing price for soybean oil during 2012 was $0.52 per pound, or $3.92 per gallon of biodiesel, compared to $0.55 per pound, or $4.13 per gallon of biodiesel, in 2011.

Over the period from January 2008 to March 2013, the price of choice white grease, an inedible animal fat (based on daily closing nearby futures prices for The Jacobsen reported Missouri River delivery of choice white grease), has ranged from $0.095 per pound, or $0.76 per gallon of biodiesel, in December 2008 to $0.5250 per pound, or $4.20 per gallon of biodiesel, in June 2011, assuming 8.0 pounds of choice white grease yields one gallon of biodiesel. The average closing price for choice white grease during 2012 was $0.4133 per pound, or $3.31 per gallon of biodiesel, compared to $0.4567 per pound, or $3.65 per gallon of biodiesel, in 2011.

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The graph below illustrates the spread between the cost of producing one gallon of biodiesel made from soybean oil to the cost of producing one gallon of biodiesel made from a lower cost feedstock from December 2009 to March 2013. 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.

   

 

•   Soybean oil (crude) prices are based on the monthly average of the daily closing sale price of the nearby soybean oil contract as reported by CBOT (Based on 7.5 pounds per gallons).

 

(1)

Used cooking oil prices are based on the monthly average of the daily low sales price of Missouri River yellow grease as reported by The Jacobsen (Based on 8.5 pounds per gallon).

 

(2)

Inedible corn oil prices are reported as the monthly average of the daily distillers’ corn oil market values delivered to Illinois as reported by The Jacobsen (Based on 8.2 pounds per gallon).

 

(3)

Choice white grease prices are based on the monthly average of the daily low prices of Missouri River choice white grease as reported by The Jacobsen (Based on 8.0 pounds per gallon).

Our results of operations generally will benefit when the spread between biodiesel prices and feedstock prices widens and will be harmed when this spread narrows. The following graph shows feedstock cost data of choice white grease and soybean oil on a per gallon basis compared to the sale price data for biodiesel, and the spread between the two, from December 2009 to March 2013.

   

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(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.

The 2012 drought in the Midwestern United States increased the cost of corn and soybeans and may increase the cost of biodiesel feedstocks in the future. Following the drought, there was a decrease in the price of animal fats, which may have been related to increases in slaughter rates, putting more supply on the market and decreased demand from the biodiesel industry. If the increased slaughter rates or increased cost of corn and soybeans reduces future slaughter rates, the price of animal fats may rise as supply decreases in the future. The impact of the drought on the prices of our feedstocks is uncertain, but the drought may increase the prices of some or all of our feedstocks as the market adjusts to higher commodity prices.

Risk Management

The profitability of the biodiesel production business largely depends on the spread between prices for feedstocks and biodiesel, including RINs, each of which is subject to fluctuations due to market factors. Adverse price movements for these commodities directly affect our operating results. We attempt to protect operating margins by entering into risk management contracts that mitigate price volatility of our feedstocks, such as inedible corn oil, used cooking oil and inedible animal fat and energy prices. We create offsetting positions by using a combination of forward fixed-price physical purchases and sales contracts on feedstock and biodiesel, including risk management futures contracts, swaps and options primarily on heating oil and soybean oil; however, the extent to which we engage in risk management activities varies substantially from time to time, and from feedstock to feedstock, depending on market conditions and other factors. In making risk management decisions, we utilize research conducted by outside firms to provide additional market information.

Inedible corn oil, used cooking oil and inedible animal fat are the primary feedstocks we used to produce biodiesel in 2012 and 2013. We utilize several varieties of inedible animal fat, such as beef tallow and choice white grease derived from pork and poultry fat. There is no established futures market for lower cost feedstocks. The purchase prices for lower cost feedstocks are generally set on a negotiated flat price basis or spread to a prevailing market price reported by the USDA price sheet or The Jacobsen. Our limited efforts to risk manage against changing inedible corn oil, used cooking oil and inedible animal fat prices have involved entering into futures contracts, swaps or options on other commodity products, such as soybean oil or heating oil. However, these products do not always experience the same price movements as lower cost feedstocks, making risk management for these feedstocks challenging. We

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manage feedstock supply risks related to biodiesel production in a number of ways, including, where available, through long-term supply contracts. For example, most of the feedstock requirements for our Ralston facility are supplied under a two-year agreement with West Central that was renewed October 1, 2012 which expires January 31, 2014 and automatically renews for one additional year unless either party provides sufficient notice of cancellation prior to the renewal. The purchase price for soybean oil under these contracts may be indexed to prevailing Chicago Board of Trade, or 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 soybean oil requirements generally for varying periods up to one year.

Our ability to mitigate our risk of falling biodiesel and RIN prices is limited. We have entered into forward contracts to supply biodiesel. However, pricing under these forward sales contracts generally has been indexed to prevailing market prices, as fixed price contracts for long periods on acceptable terms have generally not been available. There is no established market for biodiesel futures in the United States. Our efforts to hedge against falling biodiesel prices generally involve entering into futures contracts, swaps and options on other commodity products, such as diesel fuel and heating oil. However, these products do not always experience the same price movements as biodiesel.

We generate 1.5 biomass-based diesel RINs for each gallon of biodiesel we produce. We frequently acquire RINs from third parties which we hold in inventory for resale. There is no established futures market for RINs, which severely limits the ability to risk manage the price of RINs without the use of futures contracts, swaps and options. We enter into forward contracts to sell RINs and we use risk management position limits to manage RIN inventory.

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 biodiesel or inventories. Gains and losses on derivative financial instruments are recognized each period in operating results while corresponding gains and losses on physical contracts are generally not recognized until quantities are delivered or title transfers. Our results of operations are impacted when there is a period mismatch of recognized gains or losses associated with the change in fair value of derivative instruments used for risk management purposes at the end of the reporting period when the purchase or sale of feedstocks or biodiesel has not yet occurred and thus the offsetting gain or loss will be recognized in a later accounting period.

We incurred risk management gains of $1.4 million from our derivative financial instrument trading activity for the three months ended March 31, 2013 compared to risk management losses of $4.9 million for the three months ended March 31, 2012. Changes in the value of these futures or options instruments are recognized in current income or loss. Over the first three months of 2013, we had risk management gains of approximately $0.03 per gallon sold. Over the last three years, risk management losses have represented an expense of $0.02 per gallon sold.

Seasonality

Our operating results are influenced by seasonal fluctuations in the demand of biodiesel. Our sales tend to decrease during the winter season due to blending concentrations being reduced to compensate for performance during colder weather. Colder seasonal temperatures can cause the higher cloud point biodiesel we make from inedible animal fats to become cloudy and eventually gel at a higher temperature than petroleum-based diesel or lower cloud point biodiesel made from soybean oil, canola oil or inedible corn oil. Such gelling can lead to plugged fuel filters and other fuel handling and performance problems for customers and suppliers. Reduced demand in the winter for our higher cloud point biodiesel can result in excess supply of such higher cloud point biodiesel and lower prices for such higher cloud point biodiesel. In addition, most of our production facilities are located in colder Midwestern states and our costs of shipping increases as more biodiesel is transported to warmer climate states.

Our RINs also have an element of seasonality to them. As mentioned above, we generate 1.5 biomass-based diesel RINs for each gallon of biodiesel we produce. The RIN is dated for the calendar year in which it is generated. These RINs are used by Obligated Parties to satisfy their annual RVOs under the RFS2 program. Since only 20% of an Obligated Party’s annual RVO can be satisfied by prior year RINs, most RINs must come from biofuel produced or imported during the RVO year. As a result, one would expect RIN prices 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. In 2011, which had an RVO for biomass-based diesel of 800 million gallons, biomass-based diesel RIN prices, as reported by OPIS, began to decrease in October when biomass-based diesel RIN generation neared the equivalent of 800 million gallons of biomass-based diesel, as reported by EMTS. In 2012, which had a RVO for biomass-based diesel of one billion gallons, biomass-based diesel RIN prices, as reported by OPIS, began to decrease in September when biomass-based diesel RIN generation neared the equivalent of 900 million gallons, as reported by EMTS. For the first three months of 2013, the most recent data available from EMTS, approximately 288 million gallons of biomass-based diesel have been produced toward the 2013 biomass-based diesel RVO of 1.28 billion gallons, or 23% of the 2013 biomass-based diesel 2013 RVO. This compares to approximately 142 million and 249 million for the same three months in 2011 and 2012, respectively, or 18% and 25% of the 2011 and 2012 biomass-based diesel RVOs, respectively.

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Industry capacity and production

Our operating results are influenced by our industry’s capacity and production, including in relation to RFS2 production requirements. According to EMTS data, approximately 1.1 billion gallons of biomass-based diesel was produced in the United States in 2011. Such production was in excess of the 800 million gallon RFS2 requirement for 2011. During 2012, according to EMTS data, approximately 1.1 billion gallons of biomass-based diesel was produced, which also was above RFS2 required volumes of 1 billion gallons of biomass-based diesel for 2012. Due to carryover impacts from 2011 and 2012 production levels exceeding the RFS2 biomass-based diesel requirements, the demand for biodiesel in 2013 could be less than 2013 RFS2 required volumes of 1.28 billion gallons of biomass-based diesel. As of this filing, the EPA has not proposed or finalized the 2014 biomass-based diesel requirement. Under RFS2, Obligated Parties are entitled to satisfy up to 20% of their annual requirement for 2013 with gallons used in 2012, meaning that 2012 gallons could potentially be used to satisfy 256 million gallons of the 1.28 billion gallon requirement for 2013. According to EMTS data, approximately 288.4 million gallons of biomass-based diesel was produced during the first quarter of 2013.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, equities, revenues and expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for judgments we make about the carrying values of assets and liabilities that are not readily apparent from other sources. Because these estimates can vary depending on the situation, actual results may differ from the estimates.

We believe the following critical accounting policies affect our more significant judgments used in the preparation of our consolidated financial statements:

Goodwill asset valuation. While goodwill is not amortized, it is subject to periodic reviews for impairment. As required by ASC Topic 350, “Intangibles—Goodwill and Other,” we review the carrying value of goodwill for impairment annually on July 31 or when we believe impairment indicators exist. Goodwill is allocated and reviewed for impairment by reporting units. The Company’s reporting units consist of its two operating segments, the biodiesel operating segment and services operating segments. The analysis is based on a comparison of the carrying value of the reporting unit to its fair value, determined utilizing a discounted cash flow, or DCF, methodology and consideration of a market approach. Additionally, we review the carrying value of goodwill whenever events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. Changes in estimates of future cash flows caused by items such as unforeseen events or sustained unfavorable changes in market conditions could negatively affect the fair value of the reporting unit’s goodwill asset and result in an impairment charge.

We engaged an independent external valuation specialist to provide assistance in measuring the fair value of our biodiesel and services reporting units using an income approach. The income approach uses a discounted cash flow, or DCF, analysis based on cash flow estimates prepared by us in addition to comparing other selected public guideline company information. The selected DCF method is an invested capital method. In performing the services reporting unit goodwill impairment analysis, cash flows generated from services provided to third parties and to the biodiesel segment were used to determine the reporting unit’s fair value.

The annual impairment tests as of July 31, 2012 determined that the fair value at each of the reporting units exceeded its value by over 45% margins. No impairment of goodwill was recorded at March 31, 2013 or during the years 2012, 2011 and 2010. There can be no assurances that future circumstances and/or conditions will not change, which could result in an impairment of goodwill. Such circumstances and/or conditions could include, but are not limited to, further decline in the price of our common stock, deterioration in our financial condition or results of operations, and/or adverse changes in the fair value of our assets and liabilities. Management continues to monitor circumstances and conditions for events that could result in an impairment of our goodwill.

The Company’s declines in income before income taxes for the services reporting unit are primarily a result of construction revenues being derived from company-owned facilities during this period and the termination of four third party MOSAs, which occurred in early 2010. Income before income taxes, as it appears in the segment footnote disclosure, presents only the income from third parties after the elimination of intersegment revenues and associated costs. Two of these MOSAs ceased because the facilities to which services were being provided were acquired in a business combinations. During the periods presented in the annual financial statements the amount of service revenues earned from third parties declined, but the amount of service revenues earned from the biodiesel segment increased. After incorporating intersegment revenues, presented in the segment footnote, increased from 2010 to 2011 and again from 2011 to 2012. In addition, income before income taxes increased from 2010 to 2011 and remained positive from 2011 to 2012. The operating results for the services segment were significantly impacted by the improvement in the biodiesel industry induced by the volume requirements set forth in RFS2. Since services revenue from facility management and operations is principally earned on a per gallon basis, improvements in industry production volumes generally yield similar improvements in the services

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reporting unit operating income, cash flows and estimated fair value. Therefore, we do not believe the recent operational results of the services segment represent an indicator of impairment for the reporting unit.

Income taxes. We evaluate our deferred tax assets to determine if valuation allowances are required or should be adjusted. A valuation allowance is established against our deferred tax assets based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard. This assessment considers, among other matters, the nature, frequency and severity of recent losses, forecasts of future profitability, the duration of statutory carry-forward periods, our experience with tax attributes expiring unused and tax planning alternatives. In making such judgments, significant weight is given to evidence that can be objectively verified. Due to the losses incurred prior to fiscal 2011, we were in a cumulative loss position for the preceding three years which is considered significant negative evidence that is difficult to overcome on a “more likely than not” standard through objectively verifiable data. While our long-term financial outlook remained positive, we concluded that our ability to rely on our long-term outlook and forecasts as to future taxable income was limited due to uncertainty created by the weight of the negative evidence. As a result, we previously recorded a valuation allowance offsetting our deferred tax assets. In fiscal 2011, due to the significant increase in profitability, we were able to utilize net operating loss carry-forwards to significantly offset taxable income, resulting in a significant reduction of the valuation allowances. Due to our positive earnings through fiscal 2012, and the absence of any significant negative evidence to the contrary, we concluded that we can rely on our positive long-term outlook and forecasts as to future taxable income in evaluating our ability to realize our deferred tax assets. Accordingly, the reserve against our deferred tax assets was removed in fiscal 2012, resulting in a credit to income of $7.3 million and a remaining valuation allowance of $0 million. We did not have a valuation allowance as of March 31, 2013.

We believe there is a reasonable basis in the tax law for all of the positions we take on the various federal and state tax returns we file. However, in recognition of the fact that various taxing authorities may not agree with our position on certain issues, we expect to establish and maintain tax reserves.

   

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Results of Operations

Three months ended March 31, 2013 and 2012

Set forth below is a summary of certain financial information (in thousands) for the periods indicated:

   

 

   

Three Months Ended

   

March 31,

   

   

   

2013 

   

2012 

   

   

   

   

Revenues

   

   

   

Biodiesel

  $ 189,255 

   

  $ 182,780 

Biodiesel government incentives

149,987 

   

5,387 

   

   

   

   

Total biodiesel

339,242 

   

188,167 

Services

42 

   

80 

   

   

   

   

Total

339,284 

   

188,247 

Costs of goods sold

   

   

   

Biodiesel

252,529 

   

171,136 

Services

60 

   

77 

   

   

   

   

Total

252,589 

   

171,213 

   

   

   

   

Gross profit

86,695 

   

17,034 

Selling, general and administrative expenses

9,644 

   

12,962 

   

   

   

   

Income from operations

77,051 

   

4,072 

Other income (expense), net

(459)

   

11,308 

Income tax expense

(30,189)

   

(1,363)

   

   

   

   

Net income attributable to REG

46,403 

   

14,017 

Effects of recapitalization

—   

   

39,107 

Accretion of preferred stock to redemption value

—   

   

(1,808)

Change in undistributed dividends allocated to preferred stockholders

(839)

   

(1,451)

Effects of participating preferred stock

(6,510)

   

(7,615)

Effects of participating share-based awards

(619)

   

(2,201)

   

   

   

   

Net income attributable to the Company’s common stockholders

  $ 38,435 

   

  $ 40,049 

   

   

   

   

Revenues. Our total revenues increased $151.1 million, or 80%, to $339.3 million for the three months ended March 31, 2013, from $188.2 million for the three months ended March 31, 2012. This increase was primarily due to an increase in gallons sold and the reinstatement of the blenders tax credit that was signed into law on January 2, 2013 as follows:

Biodiesel. Biodiesel revenues including government incentives increased $151.0 million, or 80%, to $339.2 million for the three months ended March 31, 2013, from $188.2 million for the three months ended March 31, 2012. This increase in biodiesel revenues consisted primarily of a $144.6 million increase in biodiesel government incentives for the three months ended March 31, 2013, compared to the prior year period, $127.9 of which reflects the retroactive application of the blenders tax credit for 2012 and recognized in first quarter 2013, with approximately $0.3 million remaining in deferred revenues at March 31, 2013. Once the full revenues are realized of approximately $128.2 million, approximately $70.5 million will be passed to customers for amounts owed for a net benefit to us of $57.7 million. To a lesser extent, the increase in biodiesel revenues sold also reflects an increase in gallons sold, excluding tolled gallons, of 4.8 million, or 14%, to 38.9 million for the three months ended March 31, 2013, compared to 34.1 million for the three months ended March 31, 2012, which was partially offset by lower biodiesel prices. The increase in gallons sold reflects increased throughput across our production facilities. Our average B100 sales price per gallon decreased $0.39, or 8%, to $4.44 for the three months ended March 31, 2013, compared to $4.83 for the three months ended March 31, 2012, due to lower RIN and energy prices in the first quarter of 2013 compared to the prior year period. The decrease in average sales price contributed to a $13.3 million revenue decrease when applied to the number of gallons sold during the first quarter of 2012. The increase in gallons sold for the three months ended March 31, 2013 accounted for a revenue increase of $21.3 million using pricing for the first three months of 2013.  

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Services. Services revenues remained unchanged from the prior year. Service revenues were less than $0.1 million for the three months ended March 31, 2013 and 2012. This was due to our decision to cancel our remaining MOSAs during 2010.

Costs of goods sold. Our costs of goods sold increased $81.4 million, or 48%, to $252.6 million for the three months ended March 31, 2013, from $171.2 million for the three months ended March 31, 2012. This increase was primarily due to costs associated with the increase in gallons sold in the first quarter of 2013 period and amounts owed to customers regarding the blenders tax credit as follows:

Biodiesel. Biodiesel costs of goods sold increased $81.4 million, or 48%, to $252.5 for the three months ended March 31, 2013, compared to $171.1 million for the three months ended March 31, 2012. The increase in biodiesel costs of goods sold is primarily the result of $70.5 million owed to customers relating to the retroactive application of the blenders tax credit for 2012 that was recognized in first quarter 2013, as described above. To a lesser extent, cost of goods sold increased from additional gallons sold in first quarter 2013 and was partially offset by slightly lower feedstock prices in 2013 as compared to 2012. Average lower cost feedstocks prices for the three months ended March 31, 2013 was $0.39 per pound, compared to $0.44 per pound for the three months ended March 31, 2012. Soybean oil costs for the three months ended March 31, 2013 was $0.52 per pound, compared to $0.55 per pound for the three months ended March 31, 2012. We had gains of $1.4 million from risk management trading activity for the three months ended March 31, 2013, compared to losses of $4.9 million from risk management trading for the three months ended March 31, 2012, respectively.

Services. Costs of services remained unchanged from the prior year. Services expenses were less than $0.1 million for the three months ended March 31, 2013 and 2012, respectively.

Selling, general and administrative expenses. Our selling, general and administrative, or SG&A, expenses were $9.6 million for the three months ended March 31, 2013, compared to $13.0 million for the three months ended March 31, 2012. SG&A expenses decreased $3.4 million, or 26%, for the three months ended March 31, 2013. The decrease was primarily related to the decrease of non-cash stock compensation expense of $1.4 million for the three months ended March 31, 2013, compared to $5.0 million for the three months ended March 31, 2012. We also incurred a $0.5 million decrease in professional fee expense and a $1.0 million decrease in the provision for bad debt expense. This decrease was offset by an increase of $0.9 million in wages and benefits, excluding non-cash stock compensation expense and a $0.7 million increase in the meeting and travel expense.

Other income (expense), net. Other expense was $0.5 million for the three months ended March 31, 2013 compared to other income of $11.3 million for the three months ended March 31, 2012. Other income is primarily comprised of the changes in fair value of the Series A Preferred Stock conversion feature embedded derivative, changes in fair value of Seneca Holdco liability, interest expense, interest income and the other non-operating items. The change in fair value of the Series A Preferred Stock conversion feature embedded derivative resulted in $0 million of expense for the three months ended March 31, 2013 and $12.0 million of income for the three months ended March 31, 2012. The change in fair value of the Seneca Holdco liability was $0 million of expense for the three months ended March 31, 2013 and was $0.3 million of income for the three months ended March 31, 2012. Interest expense decreased $0.5 million to $0.6 million for the three months ended March 31, 2013, from $1.1 million for the three months ended March 31, 2012.  

Income tax expense. There was income tax expense recorded during the three months ended March 31, 2013 of $30.2 million, compared to an income tax expense of $1.4 million for the three months ended March 31, 2012.

Effects of Recapitalization. In January 2012, we completed an initial public offering of our common stock. Due to the IPO, we recorded the effects from recapitalization of $39.1 million for the three months ended March 31, 2012. To account for the exchange of Series A Preferred Stock for the newly issued Series B Preferred Stock and common stock, we compared the fair value of the Series B Preferred Stock and common shares issued to the carrying amount of the Series A preferred shares that were redeemed. The excess of the carrying amount of Series A Preferred Stock that were redeemed over the fair value of the Series B Preferred Stock and common shares that were issued was recorded as an increase to additional paid-in capital and was added to net earnings available to common shareholders.

Preferred stock accretion. Preferred stock accretion was $0 million for the three months ended March 31, 2013, compared to $1.8 million for the three months ended March 31, 2012 associated with the Series A Preferred Stock that was terminated upon completion of the IPO. During January 2012, as part of our IPO and the conversion of the Series A Preferred Stock to Series B Preferred Stock, the accretion of the Series A Preferred Stock was terminated and we determined that no accretion was deemed necessary on the newly issued Series B Preferred Stock. See “Note 4 – Redeemable Preferred Stock” in our condensed consolidated financial statements for a description of the transaction.

Change in undistributed dividends. Undistributed preferred stock dividends were $0.8 million and $1.5 million for the three months ended March 31, 2013 and 2012, respectively. During January 2012, the Series A Preferred Stock converted to Series B Preferred Stock as part of our IPO.  All previous undistributed dividends were cancelled as part of the conversion. The new Series B Preferred Stock agreement requires us to pay dividends on a semi-annual basis.

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Effects of participating preferred stock. Effects of participating preferred stock was $6.5 and $7.6 million for the three months ended March 31, 2013 and 2012, respectively.

Effects of participating share-based awards. Effects of participating restricted stock units was $0.6 and $2.2 million for the three months ended March 31, 2013 and 2012, respectively.

Liquidity and Capital Resources

Sources of liquidity. Since inception, a significant portion of our operations have been financed through the sale of our capital stock. From August 1, 2006 through March 31, 2013, we received cash proceeds of $201.0 million from sales of preferred stock and sales of common stock. At March 31, 2013 and December 31, 2012, we had cash and cash equivalents of $49.0 million and $66.8 million, respectively. At March 31, 2013, we had total assets of $685.7 million, compared to total assets of $495.8 million at December 31, 2012. At March 31, 2013, we had term debt of $36.3 million, compared to term debt of $37.0 million at December 31, 2012.

Our borrowings (in millions) are as follows:

   

 

   

March 31,

   

December 31,

   

2013

   

2012

   

   

   

   

REG Danville term loan

  $ 9.8

   

  $ 10.1

REG Newton term loan

20.8

   

21.2

Other

1.5

   

1.4

   

   

   

   

Total notes payable

  $ 32.1

   

  $ 32.7

   

   

   

   

   

   

   

   

Bell, LLC promissory note

  $ 4.2

   

  $ 4.3

   

   

   

   

Our revolving borrowings (in millions) are as follows:

   

 

   

March 31,

   

December 31,

   

2013

   

2012

   

   

   

   

Revolving lines of credit

  $ 27.4

   

  $ —  

   

   

   

   

We have disclosed under the heading “Liquidity and Capital Resources” in our December 31, 2012 Annual Report on Form 10-K the capital resources which materially affect our financial statements. There have been no material changes from the capital resources previous disclosed other than those noted below. You should carefully consider the liquidity and capital resources set forth in our Annual Report on Form 10-K along with the information described below.

On November 3, 2011, REG Danville, LLC entered into an Amended and Restated Loan Agreement with Fifth Third Bank (Fifth Third Loan). The renewed Fifth Third Loan has a three year term with an automatic one year extension upon certain cumulative principal payment thresholds being met. The loan requires monthly principal payments of $150,000 and interest to be charged using LIBOR plus 5% per annum.  The Fifth Third Loan is secured by our Danville facility. The loan agreement contains various loan covenants that restrict REG Danville’s ability to take certain actions, including prohibiting it in certain circumstances from making payments to the Company. Beginning on December 31, 2011, we are required to make semi-annual principal payments in an amount equal to 50% of its Excess Cash Flow. The Fifth Third Loan agreement defines Excess Cash Flow as REG Danville’s EBITDA plus certain affiliate payments less principal payments, interest expense, taxes and unfunded maintenance capital expenditures. The Excess Cash Flow payment for December 31, 2012 was $1.5 million and will be paid in the second quarter of 2013. We recorded an estimated excess cash flow payment of $0.6 for calendar year 2013 which would be paid in the third quarter of 2013. As of March 31, 2013, there was $9.8 million outstanding under the Fifth Third Loan.

On March 4, 2013, REG Danville entered into the First Amendment to the Amended and Restated Loan Agreement (First Amendment) with Fifth Third Loan. The First Amendment includes changes to the debt covenants based upon us executing a tax sharing agreement with REG Danville. The tax sharing agreement provides that REG Danville will share the liability for income taxes via an allocation based upon a separate-return approach. Although we are not directly compensated for the use of carry-forward attributes, the Tax Sharing Agreement allows each affiliate to benefit from net operating losses and tax credits that each generates.

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On December 20, 2012, REG Newton and AgStar Financial Services, PCA (AgStar) extended the term of the AgStar Loan. The maturity date of the AgStar Loan is March 8, 2014. We have initiated discussions to extend the loan.

We and our subsidiaries were in compliance with all restrictive financial covenants associated with the borrowings.  

Cash flow. The following table presents information regarding our cash flows and cash and cash equivalents for the three months ended March 31, 2013 and 2012 (in thousands):

   

 

   

   

Three Months Ended

   

   

March 31,

   

   

   

   

   

2013 

   

2012 

   

   

   

   

   

Net cash flows used in operating activities

   

  $ (34,127)

   

  $ (14,093)

Net cash flows used in investing activities

   

(9,981)

   

(2,607)

Net cash flows provided from financing activities

   

26,300 

   

58,282 

Net change in cash and cash equivalents

   

(17,808)

   

41,582 

Cash and cash equivalents, end of period

   

  $ 48,977 

   

  $ 75,157 

Operating activities. Net cash used in operating activities was $34.1 million for the three months ended March 31, 2013. For the first quarter of 2013, net income was $46.4 million, which includes depreciation and amortization expense of $1.9 million, stock compensation expense of $1.4 million and an expense for deferred taxes of $2.5 million. We also used $86.1 million to fund net working capital requirements, consisting of a $44.3 million increase in inventory, $153.4 million increase in accounts receivable, of which $127.9 of the accounts receivable increase relates to the retroactive 2012 blenders tax credit passed into law on January 2, 2013, and a $2.9 million increase in prepaid expenses, which was offset by a $113.1 million increase in accounts payable and accruals and an increase in deferred revenues of $1.4 million.

Net cash used from operating activities was $14.1 million for the three months ended March 31, 2012. For the first quarter of 2012, net income was $14.0 million, which includes depreciation and amortization expense of $2.0 million, non-cash stock compensation expense of $5.0 million, a decrease in the non-cash change in the preferred stock embedded derivative liability of $12.0 million, a decrease in the non-cash change in the Seneca Holdco, LLC liability of $0.2 million, a decrease of $7.1 million for the premium paid to Seneca Landlord on the original investment and an increase in a deferred tax expense of $1.4 million. We also used $19.8 million to fund net working capital requirements, consisting of a $35.5 million increase in inventory due to increased production and sales volume, $10.0 million decrease in accounts receivable, a $6.8 million increase in prepaid expenses, an increase in deferred revenues of $9.7 million and a $2.8 million increase in accounts payable and accruals.

Investing activities. Net cash used in investing activities for the three months ended March 31, 2013 was $10.0 million, consisting of net cash used to pay for facility construction of $9.9 million for upgrades at REG Albert Lea, REG New Boston and REG Seneca and $0.1 million used to pay for investments.

Net cash used for investing activities for the three months ended March 31, 2012 was $2.6 million, consisting of net cash used to pay for facility construction of $2.6 million

Financing activities. Net cash provided from financing activities for the three months ended March 31, 2013 was $26.3 million. We paid $0.3 million for the purchase of treasury stock. We drew down a net amount of $27.4 million on our line of credit and paid down $0.8 million of term debt.

Net cash provided for financing activities for the three months ended March 31, 2012 was $58.3 million. We received $63.7 million from the completion of our IPO. We paid down $1.1 million on our term notes, had a net increase of $1.7 million borrowed on our Wells Fargo revolving line and repaid $4.0 million for the investment in Seneca Landlord. We also paid $1.6 million for the issuance of common stock and preferred stock, $0.4 million for the repurchase of common stock and $0.1 million for debt issuance cost.

Capital expenditures. We have three partially constructed plants, one near New Orleans, Louisiana, one in Emporia, Kansas and one in Clovis, New Mexico. We expect it will require additional investments of approximately $130 to $140 million in the aggregate, excluding working capital requirements, before these plants would be able to commence production. We also acquired a biodiesel facility near Atlanta, Georgia, on November 16, 2012 that had been idled prior to our acquisition and will remain so until certain repairs or upgrades are made. These facilities would add an expected 150 mmgy to our nameplate production capacity. Our Clovis

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plant is currently being operated as a terminal facility to fulfill biodiesel contracts for customers in the Southwest. We plan to make significant capital expenditures when debt or equity financing becomes available to complete construction of three facilities, our New Orleans facility, our Emporia facility and our Clovis facility. We are upgrading our Albert Lea facility and our New Boston facility and expect our capital expenditures related to these facility upgrades to be approximately $21 million and $3 million, respectively. We have spent approximately $16 million and $2 million, respectively on these projects through March 31, 2013. We also plan to undertake various facility upgrades to further expand processing capabilities at our existing facilities. We may enter into additional tolling arrangements with third parties from time to time where third parties will produce biodiesel on our behalf using our feedstocks. Such arrangements may require investments of additional working capital during the tolling periods.

We continue to be in discussions with lenders in an effort to enter into equity and debt financing arrangements to meet our projected financial needs for facilities under construction and capital improvement projects for our operating facilities. Since these discussions are ongoing, we are uncertain when or if financing will be available. The financing may consist of common or preferred stock, debt, project financing or a combination of these financing techniques. Additional debt would likely increase our leverage and interest costs and would likely be secured by certain of our assets. Additional equity or equity-linked financings would likely have a dilutive effect on our existing and future stockholders. It is likely that the terms of any project financing would include customary financial and other covenants on our project subsidiaries, including restrictions on the ability to make distributions, to guarantee indebtedness and to incur liens on the plants of such subsidiaries.

Adjusted EBITDA

We use earnings before interest, taxes, depreciation and amortization, adjusted for certain additional items, identified in the table below, or Adjusted EBITDA, as a supplemental performance measure.  We present Adjusted EBITDA because we believe it assists investors in analyzing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance.  In addition, we use Adjusted EBITDA to evaluate, assess and benchmark our financial performance on a consistent and a comparable basis and as a factor in determining incentive compensation for our executives.

The following table provides our Adjusted EBITDA for the periods presented, as well as a reconciliation to net income:

   

 

   

Three Months

   

Three Months

   

Ended

   

Ended

   

March 31,

   

March 31,

(In thousands)

2013 

   

2012 

   

   

   

   

Net income

  $ 46,403 

   

  $ 14,017 

   

   

   

   

Adjustments:

   

   

   

Income tax expense

30,189 

   

1,363 

Interest expense

576 

   

1,053 

Other income (expense), net

(117)

   

(37)

Change in fair value of Seneca Holdco liability

—   

   

(349)

Change in fair value of preferred stock conversion

   

   

   

feature embedded derivatives

—   

   

(11,975)

Stock issued for glycerin agreement termination

—   

   

1,898 

Straight-line lease expense

(159)

   

(102)

Depreciation

2,080 

   

2,026 

Amortization

(199)

   

(139)

Non-recurring business interruption

(863)

   

—   

Blenders tax credit

(57,372)

   

10,448 

Cash-in-lieu board of director stock compensation

88 

   

—   

Non-cash stock compensation

1,356 

   

4,964 

   

   

   

   

Adjusted EBITDA

  $ 21,982 

   

  $ 23,167 

   

   

   

   

   

Adjusted EBITDA is a supplemental performance measure that is not required by, or presented in accordance with, generally accepted accounting principles, or GAAP. Adjusted EBITDA should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP, or as alternatives to cash flows from operating activities or a measure of our

   

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liquidity or profitability. Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for any of our results as reported under GAAP. Some of these limitations are:

 

Adjusted EBITDA does not reflect our cash expenditures for capital assets or the impact of certain cash clauses that we consider not to be an indication of our ongoing operations;

 

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital requirements;

 

Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;

 

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect cash requirements for such replacements;

 

on January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which reinstated a set of tax extender items including the reinstatement of the federal biodiesel blenders tax credit for 2013 and retroactively reinstated credit for 2012. The retroactive credit for 2012 results in an estimated net benefit to us that was recognized in first quarter 2013 which relates to the operating performance and results of 2012 and is excluded from 2013 adjusted EBITDA when evaluating our operating performance as if the credit were in effect for 2012. Excluding the $10.4 million federal biodiesel blenders tax credit from first quarter 2012 would have depicted adjusted EBITDA of $12.7 million;

 

non-recurring business interruption charge at one of our production facilities in November 2012; we reflected the gain contingency in our operating performance of 2012 having received the corresponding insurance proceeds in February 2013, thus excluding it from first quarter 2013 adjusted EBTIDA;  

 

non-cash stock compensation expense and cash-in-lieu board  of director stock compensation are important elements of our long term incentive compensation program, although we have excluded it as an expense when evaluating our operating performance; and

 

other companies, including other companies in our industry, may calculate these measures differently than we do, limiting their usefulness as a comparative measure.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Recent Accounting Pronouncements

For a discussion of new accounting pronouncements affecting the Company, refer to “Note 2 – Summary of Significant Accounting Policies” to our condensed consolidated financial statements.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary objectives of our investment activity are to preserve principal, provide liquidity and maximize income without significantly increasing risk. Some of the securities we invest in are subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we maintain a portfolio of cash equivalents in short-term investments in money market funds.

Commodity Price Risk

Over the period from January 2007 through March 2013, average diesel prices based on Platts reported pricing for Group 3 (Midwest) have ranged from a high of approximately $4.10 per gallon reported in July 2008 to a low of approximately $1.03 per gallon in March 2009, with prices averaging $2.52 per gallon during this period. Over the period from January 2006 through March 2013, soybean oil prices (based on closing sales prices on the CBOT nearby futures, for crude soybean oil) have ranged from a high of $0.7040 per pound in March 2008 to a low of $0.2108 per pound in January 2006, with closing sales prices averaging $0.4290 per pound during this period. Over the period from January 2008 through March 2013, animal fat prices (based on prices from The Jacobsen Missouri River, for choice white grease) have ranged from a high of $0.5250 per pound in June 2011 to a low of $0.0950 per pound in December 2008, with sales prices averaging $0.3479 per pound during this period. Over the period from July 2010 through March 2013, RIN prices (based on prices from OPIS) have ranged from a high of $1.99 in September 2011 to a low of $0.42 in October 2012, with sales prices averaging $1.04 during this period.

Higher feedstock prices or lower biodiesel prices result in lower profit margins and, therefore, represent unfavorable market conditions. Traditionally, we have not been able to pass along increased feedstock prices to our biodiesel customers. The availability

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and price of feedstocks are subject to wide fluctuations due to unpredictable factors such as weather conditions during the growing season, rendering volumes, carry-over from the previous crop year and current crop year yield, governmental policies with respect to agriculture and supply and demand.

We have prepared a sensitivity analysis to estimate our exposure to market risk with respect to our sales contracts, lower cost feedstock requirements, soybean oil requirements and the related exchange-traded contracts for 2012. Market risk is estimated as the potential loss in fair value, resulting from a hypothetical 10% adverse change in the fair value of our lower cost feedstock and soybean oil requirements and biodiesel sales. The results of this analysis, which may differ from actual results, are as follows:

 

   

2012
Volume
(in millions)

   

Units

   

Hypothetical
Adverse
Change in
Price

   

Change in Annual
Gross
Profit
(in millions)

   

Percentage
Change in
Gross
Profit

   

   

   

   

   

   

   

   

   

   

Biodiesel

188.4   

   

gallons

   

10%

   

  $ 100.6   

   

171.4%

Lower Cost Feedstocks

1,184.6   

   

pounds

   

10%

   

  $ 50.9   

   

86.7%

Soybean Oil

225.5   

   

pounds

   

10%

   

  $ 12.3   

   

21.0%

We attempt to protect operating margins by entering into risk management contracts that mitigate price volatility of our feedstocks, such as inedible animal fat and inedible corn oil and energy prices. We create offsetting positions by using a combination of forward physical purchases and sales contracts on feedstock and biodiesel, including risk management futures contracts, swaps and options primarily on heating oil and soybean oil; however, the extent to which we engage in risk management activities varies substantially from time to time, and from feedstock to feedstock, depending on market conditions and other factors. A 10 percent adverse change in the prices of heating oil would have a negative effect on the fair value of these instruments of $8.5 million. A 10 percent adverse change in the price of soybean oil would have a negative effect on the fair value of these instruments of $2.1 million.

Interest Rate Risk

We are subject to interest rate risk in connection with our $1.4 million loan from the proceeds of Variable Rate Demand Industrial Development Revenue Bonds, or IFA Bonds, issued by the Iowa Finance Authority to finance our Ralston facility. The IFA Bonds bear interest at a variable rate determined by the remarketing agent from time to time as the rate necessary to produce a bid for the purchase of all of the Bonds at a price equal to the principal amount thereof plus any accrued interest at the time of determination, but not in excess of 10% per annum. The interest rate on the bonds was 0.17% for the last week of March 2013. A hypothetical increase in interest rate of 10% would not have a material effect on our annual interest expense.

We are subject to interest rate risk relating to REG Danville’s assumed $24.6 million term debt financing which was renewed on November 3, 2011 according to the Amended and Restated Loan Agreement with Fifth Third Bank. The renewed term loan has a three year term with an automatic one year extension upon certain cumulative principal payment thresholds being met. The term loan bears interest at a fluctuating rate based on LIBOR. Interest will accrue on the outstanding balance of the term loan at LIBOR plus 500 basis points. Interest accrued on the outstanding balance of the loan at March 31, 2013 at 5.20%.

REG Danville entered into an interest rate swap agreement in connection with the aforementioned term loan in December 23, 2011 to be effective January 1, 2012. The swap agreement effectively fixes the variable component of the interest rate at 0.92% on a notional amount of approximately $4.4 million of REG Danville’s term loan through July 2015. The fair value of the interest rate swap agreement was $0.1 million and $0.1 million at March 31, 2013 and December 31, 2012, respectively, and is recorded in the other noncurrent liabilities. The interest rate swap agreement is not designated as a cash flow or fair value hedge. Gains and losses based on the fair value change in the interest rate swap agreement are recognized in the statement of operations as a change in the fair value of interest rate swap agreement. A hypothetical increase in interest rate of 10% would not have a material effect on our annual interest.

REG Newton is subject to interest rate risk relating to its assumed $23.6 million term debt financing from AgStar. Interest will accrue on the outstanding balance of the term loan at 30-day LIBOR or 2.00%, whichever is higher, plus 300 basis points (effective rate at March 31, 2013 of 5.00%). A hypothetical increase in interest rate of 10% would not have a material effect on our annual interest expense.

We are subject to interest rate risk under our Wells Fargo Revolver entered into on December 23, 2011 under which we had $27.4 million borrowed and outstanding at March 31, 2013. Amounts borrowed under the Wells Fargo Revolver bear interest, in the case of LIBOR rate loans, at a per annum rate equal to the LIBOR rate plus the LIBOR Rate Margin (as defined in the Wells Fargo

38  

   


   

   

Revolver), which may range from 2.50 to 3.25 percent, based on the Quantity Average Excess Availability Amount (as defined in the Wells Fargo Revolver). All other amounts borrowed that are not LIBOR rate loans bear interest at a rate equal to the greatest of (i) (A) 1.75% per annum, (B) the Federal Funds Rate plus 0.5%, (C) the LIBOR Rate (which rate shall be calculated based upon an interest period of three months and will be determined on a daily basis), plus 1.5% points, and (D) the rate of interest announced, from time to time, within Wells Fargo Bank, National Association at its principal office in San Francisco as its “prime rate,” plus (ii) the Base Rate Margin (as defined in the Wells Fargo Revolver), which may range from 1.00 to 1.75 percent, based on the Quantity Average Excess Availability Amount. The Base Rate Margin is subject to reduction or increase depending on the amount available for borrowing under the Wells Fargo Revolver. The loan was a base rate loan as of March 31, 2013 (effective rate at March 31, 2013 of 4.75%). A hypothetical increase in interest rate of 10% would not have a material effect on our annual interest expense.

Inflation

To date, inflation has not significantly affected our operating results, though costs for petroleum-based diesel fuel, feedstocks, construction, labor, taxes, repairs, maintenance and insurance are all subject to inflationary pressures. Inflationary pressure in the future could affect our ability to sell the biodiesel we produce, maintain our production facilities adequately, build new biodiesel production facilities and expand our existing facilities as well as the demand for our facility construction management and operations management services.

 

ITEM 4.

CONTROLS AND PROCEDURES

We maintain a system of disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of March 31, 2013. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2013.

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) that occurred during the three months ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

We may from time to time be involved in claims, proceedings and litigation arising from our business and property ownership. We believe, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on our financial position, operations or liquidity.

 

ITEM 1A.

RISK FACTORS

Our business, financial condition, results of operations and liquidity are subject to various risks and uncertainties, including those described below, and as a result, the trading price of our common stock could decline.

Risk Associated With Our Business

Loss or reductions of governmental requirements for the use of biofuels could have a material adverse effect on our revenues and operating margins.

The biodiesel industry relies substantially on federal requirements and state policies for use of biofuels. Since biodiesel has been more expensive to produce than petroleum-based diesel fuel over the past few years, the biodiesel industry depends on governmental programs that support a market for biodiesel that might not otherwise exist.

The most important of these government programs in the United States is RFS2, which requires that a certain volume of biomass-based diesel fuel, which includes biodiesel, be consumed. RFS2 became effective on July 1, 2010 and applies through 2022.

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We believe that the increase in demand for our biodiesel in 2011 and 2012 is directly attributable to the implementation of RFS2. In addition, we believe that biodiesel prices in 2011 and 2012 benefited significantly from RFS2.

There can be no assurance that Congress will not repeal, curtail or otherwise change, or that the EPA will not curtail or otherwise change the RFS2 program in a manner adverse to us. The petroleum industry is generally opposed to RFS2 and can be expected to continue to press for changes that eliminate or reduce its impact. Any repeal or reduction in the RFS2 requirements or reinterpretation of RFS2 resulting in our biodiesel failing to qualify as a required fuel would materially decrease the demand for and price of our biodiesel, which would materially and adversely harm our revenues and cash flows.

If Congress decides to repeal or curtail RFS2, or if the EPA is not able or willing to enforce RFS2 requirements, the demand for our biodiesel based on this program and any increases in demand that we expect due to RFS2 would be significantly reduced or eliminated and our revenues and operating margins would be materially harmed. In addition, although we believe that state requirements for the use of biofuels increase demand for our biodiesel within such states, they generally may not increase overall demand in excess of RFS2 requirements. Rather, existing demand for our biofuel from petroleum refiners and petroleum fuel importers in the 48 contiguous states or Hawaii, which are defined as “Obligated Parties” in the RFS2 regulations, in connection with federal requirements, may shift to states that have use requirements or tax incentive programs.

The EPA is required to determine the volume of biomass-based diesel that will be required each year beginning in 2013 based on the EPA’s consideration of a variety of factors, including biomass-based diesel production, consumption, and infrastructure issues, the likely impact of biomass-based diesel production and use in a variety of areas, including climate change, energy security, the agricultural sector, air quality, transportation fuel costs, job creation, and water quality, and other factors. RFS2 requires that the biomass-based diesel annual volume requirement be at least 1 billion gallons in each of those years. The biomass-based diesel volume requirement for 2013 is 1.28 billion gallons. As of the filing of this report, EPA has not proposed the 2014 requirement for biomass-based diesel. Once proposed by EPA, the Office of Management and Budget, or OMB, has to approve EPA’s proposal, based on the same factors outlined above. Extended delay in the proposal and/or final determination or a determination that the biomass-based diesel requirement would be equal to or less than the 1.28 billion gallons required for 2013 may reduce the demand for and price of our biodiesel, which would adversely harm our revenues and cash flows.

Our gross margins are dependent on the spread between biodiesel prices and feedstock costs.

Our gross margins depend on the spread between biodiesel prices and feedstock costs. Historically, the spread between biodiesel prices and feedstock costs has varied significantly. Although actual yields vary depending on the feedstock quality, the average monthly spread between the price per gallon of 100% pure biodiesel, or B100, as reported by The Jacobsen Publishing Company, or The Jacobsen, and the price per gallon for the amount of choice white grease, a common inedible animal fat used by us to make biodiesel, was $1.83 in 2008, $1.25 in 2009, $1.06 in 2010, $1.32 in 2011 and $1.26 in 2012 assuming 8.0 pounds of choice white grease yields one gallon of biodiesel. The average monthly spread for the amount of crude soybean oil required to produce one gallon of biodiesel, based on the nearby futures contract as reported on the Chicago Board of Trade, or CBOT, was $0.61 per gallon in 2008, $0.39 in 2009, $0.25 per gallon in 2010, $0.89 in 2011 and $0.65 in 2012 assuming 7.5 pounds of soybean oil yields one gallon of biodiesel. For 2011 and 2012, approximately 83% and 84%, respectively, of our total feedstock usage was inedible animal fat, used cooking oil or inedible corn oil and 17% and 16%, respectively, was soybean oil, compared to approximately 91% for inedible animal fat, used cooking or inedible corn oil and 9% for soybean oil in 2010. We expect to see lower feedstock availability in 2013 as a result of recent drought conditions in the Midwest, which is expected to put upward pricing pressure on feedstock prices in the period described.

Biodiesel has traditionally been marketed primarily as an additive or alternative to petroleum-based diesel fuel and as a result biodiesel prices have been influenced by the price of petroleum-based diesel fuel, adjusted for government incentives supporting renewable fuels, rather than biodiesel production costs. A lack of close correlation between production costs and biodiesel prices means that we may be unable to pass increased production costs on to our customers in the form of higher prices. Any decrease in the spread between biodiesel prices and feedstock costs, whether as a result of an increase in feedstock prices or a reduction in biodiesel prices, including, but not limited to, a reduction in the value of RINs, such as the decrease that occurred in the last few months of 2012, would adversely affect our gross margins, cash flow and results of operations. For a detailed description of RINs, see “Business—Government Programs Favoring Biodiesel Production and Use—Renewable Identification Numbers.”

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The costs of raw materials that we use as feedstocks are volatile and our results of operations could fluctuate substantially as a result.

The cost of feedstocks is a significant uncertainty for our business. The success of our operations is dependent on the price of feedstocks and certain other raw materials that we use to produce biodiesel. A decrease in the availability or an increase in the price of feedstocks may have a material adverse effect on our financial condition and operating results. At elevated price levels, these feedstocks may be uneconomical to use, as we may be unable to pass feedstock cost increases on to our customers.

The price and availability of feedstocks and other raw materials may be influenced by general economic, market and regulatory factors. These factors include weather conditions, farming decisions, government policies and subsidies with respect to agriculture and international trade, and global supply and demand. The significance and relative impact of these factors on the price of feedstocks is difficult to predict, especially without knowing what types of feedstock materials will be optimal for use in the future, particularly at new facilities that we may construct or acquire.

Since 2009, we have principally used inedible animal fats, used cooking oil and inedible corn oil as our feedstocks for the production of biodiesel. Our decision to shift to these feedstocks resulted from the reduction in profit caused by a significant increase in soybean oil prices, which rose from $0.1435 per pound in February 2001 to $0.7040 per pound in March 2008, and soybean oil having generally remained at high levels since that time. While prices for these alternative feedstocks can experience price volatility similar to soybean oil, their prices can also vary significantly from soybean oil based on market conditions. Since January 1, 2008, the cost per pound of choice white grease, an inedible animal fat commonly used by us in the production of biodiesel, has traded in a range of $0.0950 to $0.5250 based on the closing nearby futures prices on the CBOT. The recent drought conditions experienced in the Midwest are expected to increase the cost of corn and other feedstocks, including animal fat. Historically, the price of animal fat has been affected by the amount of rendering volumes in the United States, as well as demand from other markets. As the cost of animal feed rises as a result of the drought in the Midwest, the price of animal products may also rise, thereby reducing demand and rendering volumes. If biodiesel production continues to increase in response to RFS2, we expect that more biodiesel producers will seek to use lower cost feedstocks, potentially increasing our costs of production. In addition, because the market for animal fat is less developed than markets for vegetable oils such as soybean oil, we generally are unable to enter into forward contracts at fixed prices. Further, the markets for used cooking oil and inedible corn oil are in their nascent stages.

The market and supply for used cooking oil as a feedstock for biodiesel is growing. The commercial supply of inedible corn oil is growing as more ethanol producers are installing corn oil extraction technology in their ethanol plants. It is not generally available in quantities sufficient to cover all of our operations. Approximately half of U.S. ethanol plants have the equipment necessary to extract inedible corn oil that can be used in biodiesel production. There are a number of additional ethanol producers who have announced plans to install corn oil extraction equipment in their ethanol plants. If more ethanol plants do not acquire and utilize corn oil extraction equipment or if ethanol plants are idled, we may not be able to obtain additional amounts of inedible corn oil for use in our production of biodiesel and may be forced to utilize higher cost feedstocks to meet increased demand, which may not be economical.

Loss of or reductions in tax incentives for biodiesel production or consumption would have a material adverse effect on our revenues and operating margins.

The biodiesel industry is also substantially aided by federal and state tax incentives. Prior to RFS2, the biodiesel industry relied principally on these tax incentives to bring the price of biodiesel more in line with the price of petroleum-based diesel fuel to the end user. The most significant tax incentive program was the federal blenders tax credit. The blenders tax credit provided a $1.00 refundable tax credit per gallon of pure biodiesel, or B100, to the first blender of biodiesel with petroleum-based diesel fuel. The blenders tax credit expired on December 31, 2009 and was re-enacted in December 2010, retroactively for all of 2010 and prospectively for 2011. The blenders tax credit expired again on December 31, 2011 and was again re-enacted on January 2, 2013, retroactively for all of 2012 and prospectively for 2013. There is no assurance that it will be reinstated when it expires at the end of 2013. Unlike RFS2, the blenders tax credit has a direct effect on federal government spending and could be changed or eliminated as a result of changes in the federal budget policy. The absence of and uncertainty around the blenders tax credit during 2012 materially curtailed demand for biodiesel and reduced margins. Although the blenders tax credit was reinstated for all of 2012, it was restated in January of 2013 and thus is reflected in our 2013 earnings. It is uncertain what action, if any, Congress may take with respect to extending the blenders tax credit beyond 2013 or when such action might be effective. If Congress does not reinstate the credit, demand for our biodiesel and the price we are able to charge for our product may be significantly reduced, harming revenues and profitability. With the blenders tax credit expiring on December 31, 2011, we believe that we experienced an industry-wide acceleration of gallons sold in the fourth quarter of 2011, which was further influenced by the ability of Obligated Parties to satisfy up to 20% of their renewable volume obligation, or RVO, for 2012 through RINs obtained in 2011. We believe the resulting buildup of

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biodiesel inventories reduced gallons sold in the first quarter of 2012. We may experience something similar with the blenders tax credit scheduled to expire again on December 31, 2013.

In addition, several states have enacted tax incentives for the use of biodiesel. For example, Illinois offers an exemption from the generally applicable 6.25% sales tax for biodiesel blends that incentivizes blending at 11% biodiesel, or B11. Like the federal blenders tax credit, the Illinois tax incentive program and the tax incentive programs of other state could be changed as a result of state budget considerations or otherwise. Reduction or elimination of such incentives could materially and adversely harm our revenues and profitability.

Risk management transactions could significantly increase our operating costs and working capital requirements and may not be effective.

In an attempt to partially offset the effects of volatile feedstock costs and biodiesel fuel prices, we may enter into contracts that establish market positions in feedstocks, such as inedible corn oil, used cooking oil, inedible animal fats and soybean oil, and related commodities, such as heating oil and ultra-low sulfur diesel, or ULSD. The financial impact of such market positions will depend on commodity prices at the time that we are required to perform our obligations under these contracts. Risk management arrangements will also expose us to the risk of financial loss in situations where the counterparty defaults on its contract or, in the case of exchange-traded or over-the-counter futures or options contracts, where there is a change in the expected differential between the underlying price in the contract and the actual prices paid or received by us. Risk management activities can themselves result in losses when a position is purchased in a declining market or a position is sold in a rising market. Changes in the value of these futures instruments are recognized in current income and may result in margin calls. We may also vary the amount of risk management strategies we undertake, or we may choose not to engage in risk management transactions at all. Further, our ability to reduce the risk of falling biodiesel prices and rising feedstock costs will be limited as currently there is no established futures market for biodiesel or the vast majority of our feedstocks, nor are fixed-price long-term contracts generally available. As a result, our results of operations and financial position may be adversely affected by increases in the price of feedstocks or decreases in the price of biodiesel that are not managed effectively. For example, we had losses of $4.6 million from risk management trading activity for the year ended December 31, 2012, compared to gains of $3.0 million from risk management trading for the year ended December 31, 2011, respectively. Our increased losses were largely due to a decrease in soybean oil prices in September 2012 and an increase in heating oil prices during the third quarter of 2012 which resulted in reduced market value of our derivative financial instruments related to fourth quarter biodiesel sales.

Our success depends on our ability to manage our growing and changing operations.

Since our formation, our business has grown significantly in size and complexity. This growth has placed, and is expected to continue to place, significant demands on our management, systems, internal controls and financial and physical resources. In addition, we expect that we will need to further develop our financial and managerial controls and reporting systems to accommodate future growth. This will require us to incur expenses related to hiring additional qualified personnel, retaining professionals to assist in developing the appropriate control systems and expanding our information technology infrastructure. Our inability to manage growth effectively could have a material adverse effect on our results of operations, financial position and cash flows.

One customer accounted for a meaningful percentage of revenues and a loss of this customer could have an adverse impact on our total revenues.

One customer, Pilot Travel Centers LLC, or Pilot, accounted for 36% and 23% of our total revenues in 2012 and 2011, respectively. Our agreements with Pilot have typically had a one-year term and our current agreement with Pilot expires December 31, 2013. In the event we lose Pilot as a customer or Pilot significantly reduces the volume of biodiesel it buys from us, it could be difficult to replace the lost revenues in the short term and potentially over an extended period, and our profitability and cash flow could be materially harmed.  Recent news reports indicate that Pilot is the subject of a federal criminal investigation involving alleged fraud related to customer diesel fuel rebates. We cannot determine what effect, if any, this may have on our future business relationship with Pilot.

Our business is primarily dependent upon one product. As a consequence, we may not be able to adapt to changing market conditions or endure any decline in the biodiesel industry.

Our business is currently focused almost entirely on the production and sale of biodiesel, with glycerin and fatty acid sales and the operations of our Services segment representing only a small portion of revenues. Our reliance on biodiesel means that we may not be able to adapt to changing market conditions or to withstand any significant decline in the size or profitability of the biodiesel industry. For example, in 2009, the beginning of 2010, we were required to periodically idle our plants due to insufficient demand at

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profitable price points which materially affected our revenues. If we are required to idle our plants in the future or are unable to adapt to changing market conditions, our revenues and results of operations may be materially harmed.

Technological advances and changes in production methods in the biodiesel industry could render our plants obsolete and adversely affect our ability to compete.

It is expected that technological advances in biodiesel production methods will continue to occur and new technologies for biodiesel production may develop. Advances in the process of converting oils and fats into biodiesel could allow our competitors to produce biodiesel faster and more efficiently and at a substantially lower cost. If we are unable to adapt or incorporate technological advances into our operations, our production facilities could become less competitive or obsolete. Further, it may be necessary for us to make significant expenditures to acquire any new technology and retrofit our plants in order to incorporate new technologies and remain competitive. There is no assurance that third-party licenses for any proprietary technologies that we would need access to in order to remain competitive for either existing processes or new technology will be available to us on commercially reasonable terms or that any new technologies could be incorporated into our plants. In order to execute our strategy to expand into the production of renewable chemicals, additional advanced biofuels, next generation feedstocks and related renewable products, we may need to acquire licenses or other rights to technology from third parties. We can provide no assurance that we will be able to obtain such licenses or rights on favorable terms. If we are unable to obtain, implement or finance new technologies, our production facilities could be less efficient than our competitors, we may not be able to successfully execute our strategy and our results of operations could be substantially harmed.

If we are unable to respond to changes in ASTM or customer standards, our ability to sell biodiesel may be harmed.

We currently produce biodiesel to conform to or exceed standards established by ASTM. ASTM standards for biodiesel and biodiesel blends may be modified in response to new observations from the industries involved with diesel fuel. New tests or more stringent standards may require us to make additional capital investments in, or modify, plant operations to meet these standards. In addition, some biodiesel customers have developed their own biodiesel standards which are stricter than the ASTM standards. If we are unable to meet new ASTM standards or our biodiesel customers’ standards cost effectively or at all, our production technology may become obsolete, and our ability to sell biodiesel may be harmed, negatively impacting our revenues and profitability.

Increases in our transportation costs or disruptions in our transportation services could have a material adverse effect on our business.

Our business depends on transportation services to deliver our products to our customers and to deliver raw materials to us. The costs of these transportation services are affected by the volatility in fuel prices, such as those caused by recent geopolitical and economic events. For example, in 2012, the market rates of leasing new rail cars nearly doubled as a result of increased demand to move domestically drilled crude oil from new supply fields in the upper Midwest to various refineries. We have not been able in the past, and may not be able in the future, to pass along part or all of any of these increases to customers. If we continue to be unable to increase our prices as a result of increased fuel costs charged to us by transportation providers, our gross margins may be materially adversely affected.

If any transportation providers fail to deliver raw materials to us in a timely manner, we may be unable to manufacture products on a timely basis. Shipments of products and raw materials may be delayed due to weather conditions, strikes or other events. Any failure of a third-party transportation provider to deliver raw materials or products in a timely manner could harm our reputation, negatively affect our customer relationships and have a material adverse effect on our business, financial condition and results of operations.

We are dependent upon our key management personnel and the loss of any of these persons could adversely affect our results of operations.

We are highly dependent upon key members of our management team for the execution of our business plan. We believe that our future success is highly dependent on the contributions of these key employees. There can be no assurance that any individual will continue in his or her capacity for any particular period of time. The loss of any of these key employees could delay or prevent the achievement of our business objectives and have a material adverse effect upon our results of operations and financial position.

We and certain subsidiaries have indebtedness, which subjects us to potential defaults, could adversely affect our ability to raise additional capital to fund our operations and limits our ability to react to changes in the economy or the biodiesel industry.

At December 31, 2012, our total long-term debt was $31.8 million. This includes consolidated long-term debt owed by our Variable Interest Entities, or VIEs, including 416 South Bell, LLC, or Bell, LLC. In December 2011, certain of our subsidiaries

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entered into a new revolving credit agreement with a bank group and Wells Fargo Capital Finance, LLC, which we refer to as the Wells Fargo Revolver. At December 31, 2012, there was no balance outstanding under our lines of credit, all of which we guarantee.

All of the agreements for our indebtedness contain financial covenants the breach of which would result in an event of default by us or our subsidiary obligor. For a discussion of the financial covenants related to our debt agreements, see “Management’s discussion and analysis of financial condition and results of operations—Liquidity.”

Our subsidiaries are required annually to pay a certain portion of our excess cash flow at our Danville and Newton facilities to their respective lenders, which reduces the cash flow that we receive from these facilities.

Our indebtedness could:

   

 

require us to dedicate a substantial portion of our cash flow from operations to payments of principal, interest on, and other fees related to such indebtedness, thereby reducing the availability of our cash flow to fund working capital and capital expenditures, and for other general corporate purposes;

   

 

increase our vulnerability to general adverse economic and biodiesel industry conditions;

   

 

limit our flexibility in planning for, or reacting to, changes in our business and the biodiesel industry, which may place us at a competitive disadvantage compared to our competitors that have less debt; and

   

 

limit among other things, our ability to borrow additional funds.

Despite our current debt levels, we and our subsidiaries may incur substantially more debt. This could exacerbate the risks associated with our substantial indebtedness.

We and our subsidiaries may incur substantial additional debt in the future, including secured debt. We and certain of our subsidiaries are not currently prohibited under the terms of our debt from incurring additional debt, pledging assets, refinancing our debt or taking a number of other actions that could diminish our ability to make payments thereunder. If new indebtedness is added to our current debt levels, the related risks that we and our subsidiaries now face could intensify.

We have partially constructed or non-operational plants and planned plant upgrades that require capital that we may not be able to raise and an impairment could negatively impact our financial position, results of operations and future cash flows.

We have three partially constructed plants, one near New Orleans, Louisiana, one in Emporia, Kansas and one in Clovis, New Mexico. We expect it will require additional investments of approximately $130 to $140 million in the aggregate, excluding working capital requirements, before these plants would be able to commence production. Our Clovis plant is currently being operated as a terminal facility to fulfill biodiesel contracts for customers in the Southwest. In order to complete construction or upgrade these facilities as planned, we will require additional capital. In November 2012, we acquired a biodiesel facility near Atlanta, Georgia that had been idled prior to our acquisition and will remain so until certain repairs or upgrades are made. We also have various upgrades planned for our operating facilities, including the upgrades we are currently completing at our Albert Lea, Minnesota and New Boston, Texas facility. While we intend to finance certain upgrades to our existing facilities from our cash flow from operations, we will need to raise significant capital to complete construction of the three partially constructed facilities and to fund related working capital requirements. It is uncertain when or if financing will be available. It is also likely that the terms of any project financing would include customary financial and other covenants restricting our project subsidiaries, including restrictions on the ability to make distributions, to guarantee indebtedness and to incur liens on the plants of such subsidiaries. We also may engage in acquisitions of assets or facilities in the future that require significant investment to complete or operate. If we are unable to obtain such capital on satisfactory terms, or if such capital is otherwise unavailable, or if we encounter cost overruns on these projects such that we have insufficient capital, we may have to postpone completion of these projects indefinitely, which may adversely affect our ability to implement our strategy and our future revenues and future cash flows.

We may not successfully identify and complete acquisitions and other strategic relationships on favorable terms or achieve anticipated synergies relating to any such transactions, and integration of acquisitions may disrupt our business and management.

We regularly review domestic and international acquisitions of biodiesel production facilities and have acquired most of our facilities from third parties. However, we may be unable to identify suitable acquisition candidates in the future. Even if we identify

   

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appropriate acquisition candidates, we may be unable to complete such acquisitions on favorable terms, if at all. In addition, we may not realize the anticipated benefits of any or all of our past or future transactions and each transaction has numerous risks. These risks include:

   

 

difficulty in integrating the operations and personnel of the acquired company;

   

 

difficulty in effectively integrating the acquired technologies, products or services with our current technologies, products or services;

   

 

disruption of our ongoing business and distraction of our management and employees from other opportunities and challenges;

   

 

inability to achieve the financial and strategic goals for the acquired and combined businesses;

   

 

incurring acquisition-related costs or amortization costs for acquired intangible assets that could impact our operating results;

   

 

the need to fund significant working capital requirements of any acquired production facilities;

   

 

potential failure of the due diligence processes to identify significant problems, liabilities or other shortcomings or challenges of an acquired company or technology, including but not limited to, issues with the acquired company’s intellectual property, product quality, environmental liabilities, data back-up and security, revenue recognition or other accounting practices, employee, customer or partner issues or legal and financial contingencies;

   

 

exposure to litigation or other claims in connection with, or inheritance of claims or litigation risk as a result of, an acquisition, including but not limited to, claims from terminated employees, customers, former stockholders or other third parties; and

   

 

incurring significant exit charges if products or services acquired in business combinations are unsuccessful.

In addition, one of our strategic goals is to expand our biodiesel production capabilities into international markets. In the event we expand our operations into international markets through acquisitions or otherwise, we may be exposed to additional risks, including unexpected changes in foreign laws and regulations, political and economic instability, challenges in managing foreign operations, increased costs to adapt our systems and practices to those used in foreign countries, export duties, currency fluctuations and restrictions, tariffs and other trade barriers, and the burdens of complying with a wide variety of foreign laws, each of which could have a material adverse effect on our business, financial condition, results of operations and liquidity.

We intend to pursue strategic initiatives to diversify our business that will require significant funding and management attention and these initiatives may not be successful.

We are seeking opportunities to diversify our product lines, as a commercialization partner for companies engaged in the development of new advanced biofuels, by using our biorefinery platform to produce renewable chemicals from bio-mass feedstocks and by entering entirely new industries through acquisitions or otherwise. There is no assurance that new technologies capable of economically producing advanced biofuels will be developed, that the developers of these technologies will select us as their commercialization partner or that the terms of any such collaborative arrangement will be favorable to us. Further, the renewable chemicals market is underdeveloped. Any chemicals that we produce from renewable sources may not prove to be as effective as chemicals produced from petroleum or other sources and, regardless of their effectiveness, renewable chemicals may not be accepted in the chemical marketplace. Furthermore, we may not be able to acquire companies in different industries at attractive valuations or at all. These strategic initiatives will require significant funding and management attention, and if we are not successful in implementing them, our financial condition and results of operations may be harmed.

We may be obligated to redeem our Series B preferred stock beginning in 2015.

On June 30, 2015, each holder of the then-outstanding shares of Series B preferred stock may require that up to all of such holder’s shares of Series B preferred stock be redeemed by us out of funds lawfully available at a price per share equal to $25 per share plus any accumulated and unpaid dividends. As of the date of this filing, the amount of this potential obligation would be approximately $74.9 million. In order to satisfy any redemption request, we may need to use limited cash resources on hand, be required to borrow money, issue equity securities or sell assets to meet this obligation, which could impair our working capital, reduce the funds necessary to operate and grow our business, involve significant dilution to holders of our Common Stock or require the disposition of our key assets. If we are subject to a redemption request, it could have a material adverse effect on our financial condition, results of operations and cash flows, and cause the price of our Common Stock to decline.

Our business is subject to seasonal fluctuations, which are likely to cause our revenues and operating results to fluctuate.

Our operating results are influenced by seasonal fluctuations in the price of and demand for biodiesel. Our sales tend to decrease during the winter season due to perceptions that biodiesel will not perform adequately in colder weather. Colder seasonal temperatures

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can cause the higher cloud point biodiesel we make from inedible animal fats to become cloudy and eventually gel at a higher temperature than petroleum-based diesel or lower cloud point biodiesel made from soybean, canola, used cooking 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 may result in excess supply of such higher cloud point biodiesel and lower prices for such higher cloud point biodiesel. In addition, most of our production facilities are located in colder Midwestern states and our costs of shipping biodiesel to warmer climates generally increase in cold weather months.

In addition, our RINs also have an element of seasonality to them. Since only 20% of an Obligated Party’s annual RVO can be satisfied by prior year RINs, most RINs must come from biofuel produced or imported during the RVO year. As a result, one would expect RIN prices 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. For example, in 2012, which had a RVO for biomass-based diesel of one billion gallons, biomass-based diesel RIN prices, as reported by OPIS, began to decrease in September when biomass-based diesel RIN generation neared the equivalent of 900 million gallons, as reported by EMTS. As a result of these seasonal fluctuations, comparisons of operating measures between consecutive quarters may not be as meaningful as comparisons between longer reporting periods.

Failure to comply with governmental regulations, including EPA requirements relating to RFS2, could result in the imposition of penalties, fines, or restrictions on our operations and remedial liabilities.

The biodiesel industry is subject to extensive federal, state and local laws and regulations related to the general population’s health and safety and compliance and permitting obligations, including those related to the use, storage, handling, discharge, emission and disposal of municipal solid waste and other waste, pollutants or hazardous substances, discharges, air and other emissions, as well as land use and development. Existing laws also impose obligations to clean up contaminated properties or to pay for the cost of such remediation, often upon parties that did not actually cause the contamination. Compliance with these laws, regulations and obligations could require substantial capital expenditures. Failure to comply could result in the imposition of penalties, fines or restrictions on operations and remedial liabilities. These costs and liabilities could adversely affect our operations.

Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent or costly waste handling, storage, transport, disposal or cleanup requirements could require us to make significant expenditures to attain and maintain compliance and may otherwise have a material adverse effect on our business in general and on our results of operations, competitive position or financial condition. We are unable to predict the effect of additional environmental laws and regulations which may be adopted in the future, including whether any such laws or regulations would significantly increase our cost of doing business or affect our operations in any area.

Under certain environmental laws and regulations, we could be held strictly liable for the removal or remediation of previously released materials or property contamination regardless of whether we were responsible for the release or contamination, or if current or prior operations were conducted consistent with accepted standards of practice. Such liabilities can be significant and, if imposed, could have a material adverse effect on our financial condition or results of operations.

In addition to the regulations mentioned above, we are subject to various laws and regulations related to RFS2, most significantly regulations related to the generation and dissemination of RINs. These regulations are highly complex and evolving, requiring us to periodically update our compliance systems. For example, in 2008, we unintentionally generated duplicate RINs as a result of a change to the software we use to manage RIN generation. We voluntarily reported this violation to the EPA and followed EPA guidance in correcting the issue promptly. In 2011, we entered into an administrative settlement agreement with the EPA regarding this violation and paid a fine for this inadvertent violation. Any violation of these regulations by us, inadvertently or otherwise, could result in significant fines and harm our customers’ confidence in the RINs we issue, either of which could have a material adverse effect on our business. For a detailed description of RINs, see “Business—Government Programs Favoring Biodiesel Production and Use—Renewable Identification Numbers.”

In response to certain cases of RIN fraud whereby biodiesel producers were selling biomass-based diesel RINs without having produced the required renewable fuel, the EPA has recently instituted a quality assurance program for RIN compliance. Compliance with these or any new regulations or Obligated Party verification procedures could require significant expenditures to attain and maintain compliance. Failure to comply could result in the imposition of penalties, fines, restrictions on operations, loss of customers and remedial liabilities. These costs and liabilities may have a material adverse effect on our business in general and on our results of operations, competitive position or financial condition. We are unable to predict the effect of any additional regulatory or customer requirements which may be adopted in the future, including whether any such regulations or verification procedures would significantly increase our cost of doing business or affect our operations in any area.

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We are a holding company and there are limitations on our ability to receive dividends and distributions from our subsidiaries.

All of our principal assets, including our biodiesel production facilities, are owned by subsidiaries and some of these subsidiaries are subject to loan covenants that generally restrict them from paying dividends, making distributions or making loans to us or to any other subsidiary. These limitations will restrict our ability to repay indebtedness, finance capital projects or pay dividends to stockholders from our subsidiaries’ cash flows from operations.

Our business may suffer if we are unable to attract or retain talented personnel.

Our success depends on the abilities, expertise, judgment, discretion, integrity, and good faith of our management and employees to manage the business and respond to economic, market and other conditions. We have a relatively small management team and employee base, and the inability to attract suitably qualified replacements or additional staff could adversely affect our business. No assurance can be given that our management team or employee base will continue their employment, or that replacement personnel with comparable skills could be found. If we are unable to attract and retain key personnel and additional employees, our business may be adversely affected.

If we fail to maintain effective internal control over financial reporting, we might not be able to report our financial results accurately or prevent fraud; in that case, our stockholders could lose confidence in our financial reporting, which would harm our business and could negatively impact the value of our stock.

Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. The process of maintaining our internal controls may be expensive and time consuming and may require significant attention from management. Although we have concluded as of December 31, 2012 that our internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our results of operations or cause us to fail to meet our reporting obligations. If we or our independent registered public accounting firm discover a material weakness, the disclosure of that fact could harm the value of our stock and our business.

A natural disaster, leak, fire or explosion at any of our production plants or customer’s facilities could increase our costs and liabilities.

Because biodiesel and some of its inputs and outputs are combustible and flammable, a leak, fire or explosion may occur at a plant or customer’s facility which could result in damage to the plant and nearby properties, injury to employees and others, and interruption of operations. In addition, our Houston facility, due to its coastal location, is vulnerable to hurricanes, which may cause plant damage, injury to employees and others and interruption of operations and all of our plants could incur damage from other natural disasters. A majority of our facilities are also located in the Midwest, which is subject to tornado activity. If any of the foregoing events occur, we may incur significant additional costs including, among other things, loss of profits due to unplanned temporary or permanent shutdowns of our facilities, clean-up costs, liability for damages or injuries, legal expenses, and reconstruction expenses, which would seriously harm our results of operations and financial condition.

Our insurance may not protect us against our business and operating risks.

We maintain insurance for some, but not all, of the potential risks and liabilities associated with our business. For some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance policies may become unavailable or available only for reduced amounts of coverage. As a result, we may not be able to renew our existing insurance policies or procure other desirable insurance on commercially reasonable terms, if at all. Although we intend to maintain insurance at levels we believe are appropriate for our business and consistent with industry practice, we will not be fully insured against all risks. In addition, pollution, environmental risks and the risk of natural disasters generally are not fully insurable. Losses and liabilities from uninsured and underinsured events and delay in the payment of insurance proceeds could have a material adverse effect on our financial condition and results of operations.

Confidentiality agreements with employees and others may not adequately prevent disclosures of confidential information, trade secrets and other proprietary information.

We rely in part on trade secret protection to protect our confidential and proprietary information and processes. However, trade secrets are difficult to protect. We have taken measures to protect our trade secrets and proprietary information, but these measures

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may not be effective. For example, we require new employees and consultants to execute confidentiality agreements upon the commencement of their employment or consulting arrangement with us. These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. These agreements also generally provide that knowhow and inventions conceived by the individual in the course of rendering services to us are our exclusive property. Nevertheless, these agreements may be breached, or may not be enforceable, and our proprietary information may be disclosed. Further, despite the existence of these agreements, third parties may independently develop substantially equivalent proprietary information and techniques. Accordingly, it may be difficult for us to protect our trade secrets. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

Moreover, we cannot assure you that our technology does not infringe upon any valid claims of patents that other parties own. In the future, if we are found to be infringing on a patent owned by a third party, we might have to seek a license from such third party to use the patented technology. We cannot assure you that, if required, we would be able to obtain such a license on terms acceptable to us, if at all. If a third party brought a legal action against us or our licensors, we could incur substantial costs in defending ourselves, and we cannot assure you that such an action would be resolved in our favor. If such a dispute were to be resolved against us, we could be subject to significant damages.

Insiders have substantial control over us and will continue to be able to exercise influence over corporate matters.

As of February 28, 2013, our five largest stockholders beneficially owned, in the aggregate, sufficient shares of our voting stock to exercise control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. In addition, subject to certain exceptions, two of our largest stockholders, USRG Holdco V, LLC, which together with its affiliates we refer to as USRG, and NGP Energy Technology Partners, L.P., will hold rights to each designate a member of our board of directors for the next two years. This concentration of ownership and contractual power over the appointment of directors could limit other stockholders’ ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.

In the event we enter into new construction contracts, we may be exposed to a variety of risks that could affect our ability to realize profit.

While our construction services management business has had only limited external operations over the last three years, we intend to continue to pursue opportunities to provide these services. Substantially all of our revenues from our new facility construction services business have been derived from fixed unit price contracts. Fixed unit price contracts require us to perform the contract for a fixed unit price irrespective of our actual costs. As a result, we realize a profit on these contracts only if we and our subcontractors successfully estimate our costs and then successfully control actual costs and avoid cost overruns. Further, we have historically subcontracted substantially all of our construction work to Todd & Sargent, Inc. and TSW, LLC on a time and materials, rather than fixed, basis. As a result, we have less control over the largest component of our plant construction costs and the risk of cost overruns generally falls on us rather than our subcontractors. If we or our subcontractors do not perform a contract within cost estimates, then cost overruns may cause us to incur losses or cause the contract not to be as profitable as we initially expected. This, in turn, could negatively affect our cash flow, earnings and financial position. As we have acquired assets and begun consolidating the industry, our construction services management business has almost exclusively been focused on internal intercompany projects.

If we or our subcontractors perform extra or change order work that is not approved by the customer in advance we may have a dispute with the customer over whether the work performed is beyond the scope of the work included in the original project plans and specifications or, if the customer agrees that the work performed qualifies as extra work, the price that the customer is willing to pay for the extra work. These disputes may result in us not receiving payment for all or a significant portion of work that we or our subcontractors have performed. Even where the customer agrees to pay for the extra work, we may be required to fund the cost of that work for a lengthy period of time until the change order is approved and paid by the customer. To the extent actual recoveries with respect to change orders or amounts subject to contract disputes or claims are less than the estimates used in our financial statements, the amount of any shortfall will reduce our revenues and profits, and this could have a material adverse effect on our working capital and results of operations.

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Risks Related to the Biodiesel Industry

The market price of biodiesel is influenced by the price of petroleum-based distillate fuels, such as ultra-low sulfur diesel, and decreases in the price of petroleum-based distillate fuels or RIN values would very likely decrease the price we can charge for our biodiesel, which could harm our revenues and profitability.

Historically, biodiesel prices have been strongly correlated to petroleum-based diesel prices and in particular ULSD, regardless of the cost of producing biodiesel itself. We market our biofuel as an alternative to petroleum-based fuels. Therefore, if the price of petroleum-based diesel falls, the price of biodiesel could decline, and we may be unable to produce products that are an economically viable alternative to petroleum-based fuels. Petroleum prices are volatile due to global factors, such as the impact of wars, political uprisings, OPEC production quotas, worldwide economic conditions, changes in refining capacity and natural disasters. Additionally, demand for liquid transportation fuels, including biodiesel, is impacted by economic conditions.

Just as a small reduction in the real or anticipated supply of crude oil can have a significant upward impact on the price of petroleum-based fuels, a perceived reduction of such threats can result in a significant reduction in petroleum-based fuel prices. A reduction in petroleum-based fuel prices may have a material adverse effect on our revenues and profits if such price decrease reduces the price we are able to charge for our biodiesel.

There was a sharp decline in RIN prices during third quarter 2012 that carried through the end of 2012. During this period, RIN pricing declined from $1.17 per RIN at June 30, 2012 to $0.64 per RIN at December 31, 2012, as reported by OPIS, which contributed to the decline in price of biodiesel. A reduction in RIN values, such as those experienced in the second half of 2012, may have a material adverse effect on our revenues and profits as such price decrease reduce the price we are able to charge for our biodiesel.

We operate in a highly competitive industry and competition in our industry would increase if new participants enter the biodiesel business.

We operate in a very competitive environment. The biodiesel industry is primarily comprised of smaller entities that engage exclusively in biodiesel production, large integrated agribusiness companies that produce biodiesel along with their soybean crush businesses and increasingly, integrated petroleum companies. We face competition for capital, labor, feedstocks and other resources from these companies. In the United States, we compete with soybean processors and refiners, including Archer-Daniels-Midland Company, LLC, Cargill, Inc. and Louis Dreyfus Commodities. In addition, petroleum refiners are increasingly entering into biodiesel and renewable diesel production. These and other competitors that are divisions of larger enterprises may have greater financial resources than we do. We also have many smaller competitors. If our competitors consolidate or otherwise grow and we are unable to similarly increase our scale, our business and prospects may be significantly and adversely affected.

In addition, petroleum companies and diesel retailers form the primary distribution networks for marketing biodiesel through blended petroleum-based diesel. If these companies increase their direct or indirect biodiesel and renewable diesel production, there will be less of a need to purchase biodiesel from independent biodiesel producers like us. Such a shift in the market would materially harm our operations, cash flows and financial position.

The development of alternative fuels and energy sources may reduce the demand for biodiesel, resulting in a reduction in our revenues and profitability.

The development of alternative fuels, including a variety of energy alternatives to biodiesel has attracted significant attention and investment. Neste Oil operates four renewable diesel plants: a 240 million gallon per year plant in Singapore, a 240 million gallon per year plant in Rotterdam, Netherlands, and two 60 million gallon per year plants in Porvoo, Finland. Dynamic Fuels, LLC, has recently announced that their 75 million gallon per year renewable diesel plant in Geismar, Louisiana was producing near its reported capacity. Diamond Green Diesel, LLC has announced that it expects to complete construction of its 137 million gallon per year renewable diesel plant in Norco, Louisiana in 2013. Under RFS2, renewable diesel made from biomass meets the definition of biomass-based diesel and thus is eligible, along with biodiesel, to satisfy the RFS2 biomass-based diesel requirement described in “Business—Government Programs Favoring Biodiesel Production and Use.” Furthermore, under RFS2, renewable diesel may receive up to 1.7 RINs per gallon, whereas biodiesel currently receives 1.5 RINs per gallon. For a detailed description of RINs and RIN values, see “Business—Government Programs Favoring Biodiesel Production and Use—Renewable Identification Numbers.” As the value of RINs increases, this 0.2 RIN advantage may make renewable diesel more cost-effective, both as a petroleum-based diesel substitute and for meeting RFS2 requirements. If renewable diesel proves to be more cost-effective than biodiesel, our revenues and results of operations would be adversely impacted.

In addition, the EPA may allow other fuels to satisfy the RFS2 requirements and allow RINs to be attached to these fuels. The EPA recently proposed regulations to amend the definition of “Home Heating Oil” under RFS2, which may expand the scope of fuels

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eligible to generate RINs. If the proposed rule is finalized, this could increase competition within heating oil markets by introducing fuels that could generate more RINs (i.e., cellulosic diesel) and or be more cost competitive than biodiesel utilized as heating oil.

The biodiesel industry will also face increased competition resulting from the advancement of technology by automotive, industrial and power generation manufacturers which are developing more efficient engines, hybrid engines and alternative clean power systems. Improved engines and alternative clean power systems offer a technological solution to address increasing worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns. If and when these clean power systems are able to offer significant efficiency and environmental benefits and become widely available, the biodiesel industry may not be able to compete effectively with these technologies and government requirements for the use of biodiesel may not continue.

The development of alternative fuels and renewable chemicals also puts pressure on feedstock supply and availability to the biodiesel industry. If these emerging technologies compete with biodiesel for feedstocks, are more profitable or have greater governmental support than biodiesel does, then the biodiesel industry may have difficulty in procuring the feedstocks necessary to be successful.

Increased industry-wide production of biodiesel could have a negative effect on our margins and there remains excess production capacity in the biodiesel industry.

According to EPA EMTS data, approximately 1.1 billion gallons of biomass-based diesel was produced in the United States in 2011, and 1.14 billion was produced in 2012, primarily reflecting the recommencement of, or increase in, operations at underutilized facilities in response to RFS2 requirements. Such production was in excess of the 800 million gallon RFS2 requirement for 2011 and one billion gallon requirement for 2012. Should biodiesel production continue to remain above RFS2 required volumes, which is 1.28 billion for 2013, the resulting supply could put downward pressure on our margins for biodiesel, negatively affecting our profitability. In addition, because the level of production in 2011 and 2012 exceeded the 2011 and 2012 RFS2 requirements, respectively, the demand for biodiesel in 2013 could be less than 2013 RFS2 required volumes. Under RFS2, Obligated Parties are entitled to satisfy up to 20% of their annual volume requirement for any given year with gallons used in the previous year so long as they are in compliance with the RFS2. The carry-over of gallons from 2012 may have some adverse effect on biodiesel demand in 2013.

Many biodiesel plants in the United States do not currently operate, and of those that do, many do not operate at full capacity. According to the NBB, as of September 12, 2012, 2.7 billion gallons per year of biodiesel production capacity in the United States were registered under the RFS2 program by NBB members. In addition to this amount, several hundred more gallons of U.S. based biomass-based diesel production capacity was registered by non-NBB members and another 1.2 billion gallons of biomass-based diesel production was registered by foreign producers. Furthermore, plants under construction and expansion in the United States as of December 31 2011, if completed, could add an additional several hundred million gallons of annual biodiesel production capacity. The annual production capacity of existing plants and plants under construction far exceeds both historic consumption of biodiesel in the United States and required consumption under RFS2. If this excess production capacity was fully utilized for the U.S. market, it would increase competition for our feedstocks, increase the volume of biomass-based diesel on the market and may reduce biodiesel gross margins, harming our revenues and profitability.

The European Commission has imposed anti-dumping and countervailing duties on biodiesel blends imported into Europe, which have effectively eliminated our ability to sell those biodiesel blends in Europe.

In March 2009, as a response to the federal blenders tax credit, the European Commission imposed anti-dumping and anti-subsidy tariffs on biodiesel produced in the United States. These tariffs have effectively eliminated European demand for 20% biodiesel blends, or B20, or higher imported from the United States. The European Commission has extended these tariffs through 2014. In May 2011, the European Commission imposed similar anti-dumping and countervailing duties on biodiesel blends below B20. These duties significantly increase the price at which we and other United States biodiesel producers will be able to sell such biodiesel blends in European markets, making it difficult or impossible to compete in the European biodiesel market. These anti-dumping and countervailing duties therefore decrease the demand for biodiesel produced in the United States and increase the supply of biodiesel available in the United States market. Such market dynamics may negatively impact our revenues and profitability.

If automobile manufacturers and other industry groups express reservations regarding the use of biodiesel, our ability to sell biodiesel will be negatively impacted.

Because it is a relatively new product, research on biodiesel use in automobiles is ongoing. Some industry groups have recommended that blends of no more than 5% biodiesel be used for automobile fuel due to concerns about fuel quality, engine performance problems and possible detrimental effects of biodiesel on rubber components and other engine parts. Although some manufacturers have encouraged use of biodiesel fuel in their vehicles, cautionary pronouncements by other manufacturers or industry groups may impact our ability to market our biodiesel.

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Perception about “food vs. fuel” could impact public policy which could impair our ability to operate at a profit and substantially harm our revenues and operating margins.

Some people believe that biodiesel may increase the cost of food, as some feedstocks such as soybean oil used to make biodiesel can also be used for food products. This debate is often referred to as “food vs. fuel.” This is a concern to the biodiesel industry because biodiesel demand is heavily influenced by government policy and if public opinion were to erode, it is possible that these policies would lose political support. These views could also negatively impact public perception of biodiesel. Such claims have led some, including members of Congress, to urge the modification of current government policies which affect the production and sale of biofuels in the United States.

Concerns regarding the environmental impact of biodiesel production could affect public policy which could impair our ability to operate at a profit and substantially harm our revenues and operating margins.

Because biodiesel is a relatively new product, the environmental impacts associated with biodiesel production and uses have not yet been fully analyzed. Under the 2007 Energy Independence and Security Act, the EPA is required to produce a study every three years of the environmental impacts associated with current and future biofuel production and use, including effects on air and water quality, soil quality and conservation, water availability, energy recovery from secondary materials, ecosystem health and biodiversity, invasive species and international impacts. The first such triennial report was released in February 2012. The 2012 report concludes that (1) the extent of negative impacts to date are limited in magnitude and are primarily associated with the intensification of corn production; (2) whether future impacts are positive or negative will be determined by the choice of feedstock, land use change, cultivation and conservation practices; and (3) realizing potential benefits will require implementation and monitoring of conservation and best management practices, improvements in production efficiency, and implementation of innovative technologies at commercial scales. Should future EPA triennial studies, or other analyses find that biodiesel production and use has resulted in, or could in the future result in, adverse environmental impacts, such findings could also negatively impact public perception of biodiesel and acceptance of biodiesel as an alternative fuel, which also could result in the loss of political support.

To the extent that state or federal laws are modified or public perception turns against biodiesel, use requirements such as RFS2 and state tax incentives may not continue, which could materially harm our ability to operate profitably.

Problems with product performance, in cold weather or otherwise, could cause consumers to lose confidence in the reliability of biodiesel which, in turn, would have an adverse impact on our ability to successfully market and sell biodiesel.

Concerns about the performance of biodiesel could result in a decrease in customers and revenues and an unexpected increase in expenses. Biodiesel typically has a higher cloud point than petroleum-based diesel. The cloud point is the temperature below which a fuel exhibits a noticeable cloudiness and is the conventional indicator of a fuel’s potential for cold weather problems. The lower the cloud point, the better the fuel should perform in cold weather. According to an article published by Iowa State University Extension, the cloud point of biodiesel is typically between 30 °F and 60 °F, while the cloud point of the most common form of pure petroleum-based diesel fuel is typically less than 20 °F. It is our experience that when biodiesel is mixed with pure petroleum-based diesel to make a two percent biodiesel blend, the cloud point of the blended fuel can be 2 °F to 6 °F higher than petroleum-based diesel and the cloud point of a twenty percent biodiesel blend can be 15 °F to 35 °F higher than petroleum based diesel, depending on the individual cloud points of the biodiesel and petroleum-based diesel. Cold temperatures can therefore cause biodiesel blended fuel to become cloudy and eventually to gel when pure petroleum-based diesel would not, and this can lead to plugged fuel filters and other fuel handling and performance problems for customers and suppliers. The consequences of these higher cloud points may cause demand for biodiesel in northern and eastern United States markets to diminish during the colder months, which are the primary markets in which we currently operate.

The tendency of biodiesel to gel in colder weather may also result in long-term storage problems. In cold climates, fuel may need to be stored in a heated building or heated storage tanks, which result in higher storage costs. This and other performance problems, including the possibility of particulate formation above the cloud point of a blend of biodiesel and petroleum-based diesel, may also result in increased expenses as we try to remedy these performance problems, including the costs of extra cold weather treatment additives. Remedying these performance problems may result in decreased yields, lower process throughput or both, as well as substantial capital costs. Any reduction in the demand for our biodiesel product, or the production capacity of our facilities will reduce our revenues and have an adverse effect on our cash flows and results of operations.

Growth in the sale and distribution of biodiesel is dependent on the expansion of related infrastructure which may not occur on a timely basis, if at all, and our operations could be adversely affected by infrastructure limitations or disruptions.

Growth in the biodiesel industry depends on substantial development of infrastructure for the distribution of biodiesel. Substantial investment required for these infrastructure changes and expansions may not be made on a timely basis or at all. The scope

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and timing of any infrastructure expansion are generally beyond our control. Also, we compete with other biofuel companies for access to some of the key infrastructure components such as pipeline and terminal capacity. As a result, increased production of biodiesel or other biofuels will increase the demand and competition for necessary infrastructure. Any delay or failure in expanding distribution infrastructure could hurt the demand for or prices of biodiesel, impede delivery of our biodiesel, and impose additional costs, each of which would have a material adverse effect on our results of operations and financial condition. Our business will be dependent on the continuing availability of infrastructure for the distribution of increasing volumes of biodiesel and any infrastructure disruptions could materially harm our business.

We may face competition from imported biodiesel and renewable diesel, which may reduce demand for biodiesel produced by us and cause our revenues to decline.

Biodiesel and renewable diesel produced in Canada, South America, Europe, Eastern Asia, the Pacific Rim, or other regions may be imported into the United States market to compete with United States produced biodiesel. These regions may benefit from production incentives or other financial incentives in their home countries that offset some of their production costs and enable them to profitably sell biodiesel or renewable diesel in the United States at lower prices than United States-based biodiesel producers. Under RFS2, imported biodiesel and renewable diesel may be eligible and, therefore, may compete to meet the volumetric requirements for biomass-based diesel. This could make it more challenging for us to market or sell biodiesel in the United States, which would have a material adverse effect on our revenues.

Nitrogen oxide emissions from biodiesel may harm its appeal as a renewable fuel and increase costs.