S-1/A 1 d200494ds1a.htm AMENDMENT NO. 10 TO FORM S-1 Amendment No. 10 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on January 3, 2012

Registration No. 333-175627

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 10

to

Form S-1

REGISTRATION STATEMENT

Under

THE SECURITIES ACT OF 1933

 

 

RENEWABLE ENERGY GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   2860   26-4785427

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 

 

416 South Bell Avenue

Ames, Iowa 50010

(515) 239-8000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Daniel J. Oh

Chief Executive Officer

416 South Bell Avenue

Ames, Iowa 50010

(515) 239-8000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Blair W. White, Esq.

Heidi E. Mayon, Esq.

Pillsbury Winthrop Shaw Pittman LLP

50 Fremont Street

San Francisco, California 94105

(415) 983-1000

 

Michael J. Zeidel, Esq.

Skadden, Arps, Slate, Meagher & Flom LLP

Four Times Square

New York, New York 10036
(212) 735-2422

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a 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   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

CALCULATION OF REGISTRATION FEE

 

 

 

Title of Each Class

of Securities to Be

Registered

   Amount to Be
Registered(1)
   Proposed Maximum
Aggregate Offering
Price Per  Share
   Proposed Maximum
Aggregate Offering Price(2)
   Amount of
Registration Fee
Common Stock, par value $.0001 per share    8,280,000    $15.00    $124,200,000    $14,383.32(3)

 

           

 

                   

 

 

(1)   Includes 1,080,000 shares which the underwriters have the right to purchase to cover over-allotments.
(2)   Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933.
(3)   A filing fee of $11,610 was previously paid in connection with the initial filing of this Registration Statement on July 18, 2011.

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information contained in this prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

 

PRELIMINARY PROSPECTUS   Subject to Completion   January 3, 2011

 

7,200,000 Shares

LOGO

Common Stock

 

 

This is the initial public offering of our Common Stock. No public market currently exists for our Common Stock. We are offering 6,857,140 shares of our Common Stock and the selling stockholders identified in this prospectus are selling 342,860 shares of our Common Stock offered by this prospectus. We will not receive any of the proceeds from the Common Stock sold by the selling stockholders. We expect the public offering price to be between $13.00 and $15.00 per share.

Following this offering, we will have two classes of authorized common stock, Common Stock and Class A Common Stock. The rights of the Common Stock and Class A Common Stock are identical, including rights with respect to voting and dividends. However, the Class A Common Stock will not be listed for trading on any stock exchange. Shares of Class A Common Stock will automatically convert into shares of Common Stock upon expiration of the underwriter lock-up agreements described herein.

We have applied to list our Common Stock on the Nasdaq Global Market, under the symbol “REGI.”

Investing in our Common Stock involves a high degree of risk. Before buying any shares, you should carefully read the discussion of material risks of investing in our Common Stock in “Risk factors” beginning on page 10 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

      Per Share    Total
Public offering price    $                        $                    
Underwriting discounts and commissions    $                        $                    
Proceeds, before expenses, to Renewable Energy Group, Inc.    $                        $                    
Proceeds, before expenses, to the selling stockholders    $                        $                    

The underwriters may also purchase up to an additional 1,080,000 shares of our Common Stock from us at the public offering price, less underwriting discounts and commissions, to cover over-allotments, if any, within 30 days from the date of this prospectus. If the underwriters exercise this option in full, the total underwriting discounts and commissions will be $1,058,400. Our total proceeds, after underwriting discounts and commissions but before expenses, will be $103,341,562 based on a public offering price of $14.00, the midpoint of the price range set forth above.

The underwriters are offering the Common Stock as set forth under “Underwriting.” Delivery of the shares will be made on or about                     , 2011.

 

UBS Investment Bank    Piper Jaffray

 

 

 

Stifel Nicolaus Weisel    Canaccord Genuity


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You should rely only on the information contained in this prospectus and any free writing prospectus we may specifically authorize to be delivered or made available to you. We, the selling stockholders and the underwriters have not authorized anyone to provide you with additional or different information. The information contained in this prospectus or any free writing prospectus is accurate only as of its date, regardless of its time of delivery or of any sale of shares of our Common Stock. Our business, financial condition, results of operations and prospects may have changed since that date.

TABLE OF CONTENTS

 

 

 

Prospectus summary

     1   

The offering

     5   

Summary consolidated financial data

     8   

Risk factors

     10   

Information regarding forward-looking statements

     32   

Use of proceeds

     33   

Dividend policy

     34   

Capitalization

     35   

Dilution

     38   

Selected consolidated financial data

     40   

Management’s discussion and analysis of financial condition and results of operations

     42   

Industry overview

     85   

Our business

     96   

Management

     110   

Executive compensation

     119   

Certain relationships and related party transactions

     128   

Principal stockholders and selling stockholders

     134   

Description of capital stock

     137   

Shares eligible for future sale

     146   

Material United States federal income and estate tax considerations to non-United States holders

     149   

Underwriting

     153   

Legal matters

     162   

Experts

     162   

Where you can find additional information

     162   

Index to financial statements

     F-1   

This prospectus is an offer to sell only the shares offered hereby but only under circumstances and in jurisdictions where it is lawful to do so.

 

 

 

 

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Conventions That Apply to this Prospectus

Prior to February 26, 2010, the “Company,” “we,” “us,” “our” and similar references refer to the business, results of operations and cash flows of REG Biofuels, Inc., formerly Renewable Energy Group, Inc., which is considered the accounting predecessor to Renewable Energy Group, Inc., formerly REG Newco, Inc. On or after February 26, 2010, such references refer to the business, results of operations and cash flows of Renewable Energy Group, Inc. and its consolidated subsidiaries.

In this prospectus:

“ASTM” refers to the American Society for Testing and Materials International, an organization that develops and delivers international voluntary consensus standards, including United States standards for fuel.

“ASTM D6751” refers to the ASTM specification for pure biodiesel, or B100, in the United States.

“ASTM D7467” refers to the ASTM specification for biodiesel blends in the United States from 6% to 20% biodiesel.

“ASTM D975” refers to the ASTM specification for diesel fuel in the United States, which includes up to 5% biodiesel.

“B2, B5, B6, B10, B11, B99.9 and B100” each refer to blends of biodiesel with petroleum-based diesel. The number represents the biodiesel percentage of the blend. For instance, a blend of 5% biodiesel and 95% petroleum-based diesel would be represented as B5.

“blender’s tax credit” refers to the federal excise tax credit of $1.00 per gallon of biodiesel that is available to the person who blends biodiesel with petroleum-based diesel.

“BQ-9000” refers to a cooperative and voluntary program for the accreditation of biodiesel producers and marketers. The program combines the ASTM standard for B100, ASTM D6751, and a quality systems program that includes storage, sampling, testing, blending, shipping, distribution and fuel management practices.

“CBOT” refers to the Chicago Board of Trade.

“Distillate fuel”, as defined by the Energy Information Association, involves two products: low-sulfur distillate, which is used as a transportation fuel (diesel) for on-highway vehicles, and high-sulfur distillate, which is used for space heating (heating oil) in the residential and commercial sectors and as a fuel for other stationary (non-transportation) applications in the commercial, industrial, and electricity generation sectors.

“mmgy” refers to million gallons per year.

“nameplate production capacity” refers to the production capacity of a particular facility based on the expected annual throughput in gallons based upon producing at 100% of design capacity for approximately 330 days per year using a particular feedstock.

“NBB” refers to the National Biodiesel Board which is a national trade association representing the biodiesel industry, of which we are one of its largest members.

“Obligated Parties” refers to petroleum refiners and petroleum fuel importers in the 48 contiguous states and Hawaii that have annual renewable fuel volume obligations to use biofuels under RFS2.

“OPIS” refers to the Oil Price Information Service.

 

 

 

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“REG-9000” refers to the brand that we use to market our biodiesel.

“RFS” refers to the renewable fuel standard created under the Energy Policy Act of 2005, which established the first renewable fuel volume requirement in the United States.

“RFS2” refers to the expanded renewable fuel standard that became effective July 1, 2010 requiring for the first time that a specific portion of the diesel fuel consumed in the United States annually be renewable.

“RIN” refers to a renewable identification number, which is generated in connection with the production or importation of renewable fuel and is assigned to a gallon of renewable fuel. RINs are primarily used by Obligated Parties to demonstrate compliance with the use of the specific volumes of renewable fuels mandated by RFS2. For a more detailed discussion of RINs, see the section entitled “Industry overview—Government Programs Favoring Biodiesel Production and Use—Renewable Identification Numbers.”

“RVO” refers to a renewable volume obligation, the annual renewable fuel volume requirement for an Obligated Party under RFS2.

“Tolling arrangements” refer to agreements under which a biodiesel facility produces biodiesel for a third party using such third party’s feedstock.

“ULSD” refers to ultra low sulfur diesel, which is diesel fuel containing 15 parts per million or less of sulfur, which is the current United States standard for on-road diesel fuel.

 

 

 

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Prospectus summary

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider before investing in our Common Stock. You should read this entire prospectus carefully, including our consolidated financial statements and the related notes and the information set forth under the headings “Risk factors” and “Management’s discussion and analysis of financial condition and results of operations,” in each case included elsewhere in this prospectus.

OUR BUSINESS

We are the largest producer of biodiesel in the United States based on gallons produced. We have played a leading role in developing the United States biodiesel industry since our inception in 1996. We market and distribute our biodiesel throughout the country to all segments of the petroleum-based distillate fuel supply chain. In 2010, we sold nearly 68 million gallons of biodiesel, representing approximately 22% of United States biodiesel production, and in 2011 we estimate that we sold between 146 and 148 million gallons of biodiesel, representing approximately a 116% increase over 2010 at the midpoint of our estimated gallons sold in 2011. Our strategy is to optimize and grow our core biodiesel business, to diversify into renewable chemicals and additional advanced biofuels, and to expand internationally.

We believe we have completed more acquisitions in the biodiesel industry than any of our competitors since 2006. We operate six biodiesel plants, with an aggregate nameplate production capacity of 212 million gallons per year, or mmgy, consisting of five wholly-owned facilities and one leased facility. We have acquired four of our six facilities since February 2010. Our scale allows us to quickly transfer best practices at one of our facilities to the others to maximize production volumes and cost efficiencies. We believe our fully integrated approach, which includes acquiring feedstock, managing biorefinery facility construction and upgrades, operating biorefineries and marketing renewable products, strongly positions us to capitalize on growing demand for biodiesel, renewable chemicals and other advanced biofuels.

We are a low-cost biodiesel producer. We primarily produce our biodiesel from a wide variety of lower cost feedstocks, including inedible animal fat, used cooking oil and inedible corn oil. We believe our ability to process these feedstocks provides us with a cost advantage over many biodiesel producers, particularly those that rely on higher cost virgin vegetable oils, such as soybean oil. In addition, we believe our size, reputation, large and diverse feedstock supplier base and processing capabilities give us a competitive advantage over other biodiesel producers.

Biodiesel addresses a large existing market. According to the United States Energy Information Administration, or EIA, the market for distillate fuel, which includes biodiesel, in 2009 in the United States was 52.7 billion gallons, the latest year for which data is available.

On July 1, 2010, the expanded renewable fuel standard, or RFS2, became effective, requiring for the first time that a portion of the diesel fuel consumed in the United States be renewable. RFS2 requires that Obligated Parties use 800 million gallons of biomass-based diesel in 2011, one billion gallons in 2012 and at least one billion gallons each year thereafter through 2022. Recently, the United States Environmental Protection Agency, or EPA, proposed a requirement that 1.28 billion gallons of biomass-based diesel be used in 2013. According to the National Biodiesel Board, or NBB, biodiesel is currently the only commercially significant RFS2-compliant biomass-based diesel fuel produced in the United States. As a result, demand for biodiesel has increased significantly. In the first seven months of 2011, according to the EIA, 377 million gallons of biodiesel were produced in the United States, compared to 309 million gallons in all of 2010.

 

 

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OUR COMPETITIVE STRENGTHS

 

Ø  

Largest United States Biodiesel Producer.    We believe the scale of our operations allows us to enjoy several advantages over many of our competitors. First, we offer lower cost feedstock producers consistent access to the renewable fuel industry on a scale that we believe our competitors generally cannot match. Second, our size allows us to provide our customers with larger volumes of biodiesel than our smaller competitors. Third, our larger size also generally allows us to reduce our overhead costs per gallon compared to our smaller competitors. Fourth, we are able to transfer best practices among our six operating facilities to maximize production volumes and reduce operating costs, in a manner that our competitors who do not operate multiple facilities cannot.

 

Ø  

Multi-Feedstock Expertise.    We utilize our proprietary technology and knowhow to efficiently convert a wide variety of lower cost feedstocks into high quality biodiesel. We believe our ability to process lower cost feedstocks at scale enables us to be a low cost producer and provides a distinct advantage against many of our competitors. Several of our competitors’ facilities are only able to process higher cost virgin vegetable oil feedstocks. Our competitors that are able to process lower cost feedstocks generally operate at a smaller scale, making it more difficult for them to reliably procure and efficiently process lower cost feedstocks.

 

Ø  

Effective Acquisitions.    We believe we have completed more acquisitions in the biodiesel industry than any of our competitors since 2006, acquiring six biodiesel plants and two additional biodiesel businesses since our inception. We have developed an ability to target and acquire strategic assets and quickly add value to them through upgrades and integration onto our biorefinery platform. We believe our in-house expertise will allow us to continue to acquire and effectively integrate new production facilities as we grow and complete additional acquisitions in the biodiesel industry.

 

Ø  

Strategic relationships with other industry participants.    We have established strategic relationships with other industry participants, particularly Bunge North America, Inc., or Bunge, ED&F Man Holdings Limited and its subsidiaries, or ED&F Man, and West Central Cooperative, or West Central, with whom we trade feedstock and biodiesel, and each of whom is also a principal stockholder. These relationships enable us to more effectively address market opportunities and provide us with an advantage over our competitors that have not been able to establish such strategic relationships.

 

Ø  

Sales and Marketing Leadership.    We are a leading marketer of biodiesel in the United States, marketing both biodiesel we produce as well as biodiesel produced by others. The scale of our operations, combined with our logistics capabilities, allows us to satisfy local and national customer needs in a manner that we believe most other biodiesel producers and marketers cannot match. In addition, the customer support provided by our large sales and technical teams provides us with further competitive advantages.

 

Ø  

Premium Product Quality.    Our REG-9000® biodiesel exceeds the ASTM D6751 biodiesel quality specification. In addition, all of our operating facilities are either certified as BQ-9000 producers or follow BQ-9000 protocols and are in the process of obtaining certification. Some larger customers require specifications stricter than ASTM D6751. The ability of our REG-9000® biodiesel to meet stricter specifications than the industry standards and our BQ-9000 accreditation enables us to sell to a broader customer base than our competitors who cannot meet these customer requirements.

 

Ø  

Experienced Management Team with Significant Risk Management Expertise.    Our management team has extensive experience in the biodiesel and related oleochemical and agricultural industries, with an average of 19 years of relevant experience. Our management team has enabled our company to evolve from a single biodiesel production facility in 1996 into a nationally recognized fully integrated biodiesel company. Our team also has extensive experience in managing risk related to commodity pricing, which is an essential component of effective biorefinery management.

 

 

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OUR STRATEGY

Our strategy is to optimize and grow our core biodiesel business, to diversify our biorefinery assets to produce renewable chemicals, additional advanced biofuels and next generation feedstocks, and to expand internationally.

 

Ø  

Optimize and expand our fully integrated biodiesel offering.    We intend to enhance the capabilities and increase the production capacity of our existing plants by investing in high-value processing upgrades to further improve yields and optimize the range of usable lower cost feedstocks at our production facilities. We also plan to continue to consolidate the biodiesel industry and expand our existing biorefinery platform by continuing to strategically acquire biodiesel plants.

 

Ø  

Diversify into the production of renewable chemicals, additional advanced biofuels and related products.    Our track record of successfully commercializing new biorefinery technologies positions us well to diversify into the production of renewable chemicals and additional advanced biofuels, such as renewable diesel and jet fuel. We also plan to vertically integrate by producing next generation feedstocks, such as algae oil.

 

Ø  

Grow our business internationally.    We intend to expand into select international markets, which may include Europe, South America and Asia, where we believe we can leverage our existing fully integrated biorefinery platform or leverage our existing strategic relationships with industry participants operating in such markets. In addition, we plan to acquire or invest in biodiesel, renewable chemicals or other advanced biofuel production and distribution assets targeting large end-user or large feedstock generating markets.

 

Ø  

Expand our intellectual property base.    We intend to build upon our existing intellectual property and proprietary technology and develop and acquire additional intellectual property to support our business and to expand into renewable chemicals, additional advanced biofuels, next generation feedstocks and related renewable products.

RISKS ASSOCIATED WITH OUR BUSINESS

Our business is subject to numerous risks. Before you invest in our Common Stock, you should carefully consider all the information in this prospectus, including matters set forth under the heading “Risk factors” beginning on page 10 of this prospectus. These risks include, among others, that:

 

  Ø  

a loss or reduction of governmental requirements for the use of biofuels could have a material adverse affect on our revenues and operating margins;

 

  Ø  

our gross margins are dependent on the spread between feedstock costs and biodiesel prices;

 

  Ø  

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

 

  Ø  

we have limited working capital and a recent history of unprofitable operations, and these working capital constraints may limit our growth and may cause us to curtail our operations or forgo sales;

 

  Ø  

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

 

  Ø  

a loss or reductions of tax incentives for biodiesel production or consumption could have a material adverse affect on our revenues and operating margins;

 

  Ø  

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

 

 

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  Ø  

our success depends on our ability to manage our growing and changing operations;

 

  Ø  

risk management transactions could significantly increase our operating costs and working capital requirements if we incorrectly estimate our feedstock demands and biodiesel sales as compared to market conditions;

 

  Ø  

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

 

  Ø  

insiders have substantial control over us and will continue to be able to exercise influence over corporate matters following this offering.

CORPORATE INFORMATION

Our predecessor, REG Biofuels, Inc., formerly named Renewable Energy Group, Inc., was formed under the laws of the State of Delaware in August 2006 upon acquiring the assets and operations of the biodiesel division of West Central and two of West Central’s affiliated companies, InterWest, L.C. and REG, LLC. We were incorporated in Delaware in April 2009.

Our principal executive offices are located at 416 South Bell Avenue, Ames, Iowa 50010. Our telephone number at that location is (515) 239-8000. Our website address is www.REGI.com. Information on our website is not part of this prospectus and should not be relied upon in determining whether to make an investment decision.

Renewable Energy Group, REG, the REG logo, and REG-9000® referenced in this prospectus are our trademarks or service marks or registered trademarks or service marks. All other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners.

 

 

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The offering

 

Common Stock offered by us

6,857,140 shares (or 7,937,140 shares if the underwriters exercise their over-allotment option in full)

 

Common Stock offered by the selling stockholders

342,860 shares

 

Common Stock to be outstanding after this offering

7,200,000 shares (or 8,280,000 shares if the underwriters exercise their over-allotment option in full)

 

Class A Common Stock to be outstanding after this offering

21,450,943 shares

 

Total Common Stock and Class A Common Stock to be outstanding after this offering

28,650,943 shares (or 29,730,943 shares if the underwriters exercise their over-allotment option in full)

 

Over-allotment option

The underwriters have an option to purchase a maximum of 1,080,000 additional shares of Common Stock from us to cover over-allotments. The underwriters could exercise this option at any time within 30 days from the date of the prospectus.

 

Use of proceeds

We intend to use approximately $12.0 million of the net proceeds received by us from this offering to exercise the option we hold to acquire our facility in Seneca, Illinois, which we currently lease, with the remaining proceeds to be used for working capital, capital expenditures related to improvements of production processes and logistics, investments in new biofuel businesses, production technologies or other assets, and in opportunities to extend our biorefinery platform to the production of renewable chemicals and feedstocks. If the underwriters exercise their over-allotment option, the first $15.0 million of net proceeds, or such lesser amount if the net proceeds are less than $15.0 million, will be used for certain payments to the former holders of the Series A preferred stock. We intend to use any net proceeds from the exercise of the over-allotment option in excess of $15.0 million as described in the first sentence above. See “Use of proceeds” on page 33. We will not receive any of the proceeds from the sale of Common Stock by the selling stockholders.

 

 

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Directed Share Program

At our request, the underwriters have reserved for sale up to 5% of the common stock being offered by this prospectus for sale at the initial public offering price to our directors, officers, employees and other individuals associated with us and members of their families. We do not know if these persons will choose to purchase all or any portion of these reserved shares, but any purchases they do make will reduce the number of shares available to the general public. See “Underwriting—Directed Share Program.”

 

Risk factors

See “Risk factors” beginning on page 10 of this prospectus for a discussion of factors you should carefully consider before deciding to invest in our Common Stock.

 

Proposed Nasdaq Global Market symbol

“REGI”

The total number of shares of our Common Stock and Class A Common Stock outstanding after this offering is based on no shares of our Common Stock and 13,933,191 shares of our Class A Common Stock outstanding (after giving pro forma effect to the reclassification of our existing common stock into an equivalent number of shares of Class A Common Stock, taking into account the 1-for-2.5 reverse stock split described below and includes 342,860 shares of Class A Common Stock held by our selling stockholders that will be converted into Common Stock prior to completion of this offering), as of September 30, 2011 and:

 

  Ø  

Includes 7,526,439 shares of Class A Common Stock that will be issued as part of the conversion of our outstanding Series A preferred stock and exchange of existing warrants to purchase 287,552 shares of our common stock for 134,173 shares of our Class A Common Stock;

 

  Ø  

Includes 200,000 shares of Class A Common Stock that will be issued to USRG Holdco IX, LLC immediately prior to the completion of this offering in connection with the termination of the Glycerin Option Agreement, dated as of April 8, 2010, between us and USRG Holdco IX, LLC.

 

  Ø  

Excludes up to 4,284,920 shares of Common Stock issuable upon the conversion of the Series B preferred stock issuable upon conversion of our outstanding Series A preferred stock;

 

  Ø  

Excludes 17,916 shares of Class A Common Stock issuable upon the exercise of warrants to purchase Class A Common Stock that will remain outstanding following this offering;

 

  Ø  

Excludes 1,647,119 shares of Class A Common Stock issuable upon the exercise of outstanding restricted stock units, or RSUs;

 

  Ø  

Excludes 87,026 shares of Class A Common Stock issuable upon the exercise of outstanding options, at a weighted average exercise price of $23.75 per share; and

 

  Ø  

Excludes 4,160,000 shares of Class A Common Stock reserved for future issuance under our 2009 Stock Incentive Plan.

Unless otherwise indicated, all information in this prospectus assumes:

 

  Ø  

The reclassification of our existing common stock into an equivalent number of shares of our Class A Common Stock and the authorization of our Common Stock;

 

 

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  Ø  

A 1-for-2.5 reverse stock split of our Class A Common Stock, which will be effective upon the filing of our second amended and restated certificate of incorporation, prior to effectiveness of this registration statement;

 

  Ø  

That our third amended and restated certificate of incorporation, which we will file in connection with the completion of this offering, is in effect;

 

  Ø  

Except for the financial statements and notes thereto, the conversion, effective immediately prior to the completion of this offering, of all outstanding shares of our Series A preferred stock for an aggregate of 7,526,439 shares of Class A Common Stock and 2,999,444 shares of Series B preferred stock, which number includes up to 400,000 shares of Series B preferred stock, issuable upon expiration of the underwriters’ over-allotment option, to be reduced proportionately if the net proceeds from that exercise are greater than $5.0 million and less than $15.0 million, as described under “Use of proceeds”; and

 

  Ø  

No exercise by the underwriters of their over-allotment option to purchase up to 1,080,000 additional shares of Common Stock from us.

All references in this prospectus to common stock include our existing common stock, our Common Stock and our Class A Common Stock. As set forth in the section entitled “Description of capital stock,” all shares of Class A Common Stock outstanding following this offering will automatically convert into shares of Common Stock upon expiration of the underwriters lock-up described in the section entitled “Underwriting.” Our Class A Common Stock will not be listed for trading on any stock exchange and will not be fungible with our Common Stock during the underwriters’ lock-up period. We have agreed not to issue any shares of Common Stock in exchange for shares of Class A Common Stock during the underwriters’ lock-up period as described herein.

 

 

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Summary consolidated financial data

The summary consolidated statements of operations data for each of the three years in the period ended December 31, 2010 have been derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The summary consolidated balance sheet data as of September 30, 2011 and the summary consolidated statements of operations data for each of the nine months ended September 30, 2011 and 2010 have been derived from our unaudited condensed consolidated financial statements that are included elsewhere in this prospectus. You should read this information together with the consolidated financial statements and related notes, unaudited pro forma as adjusted financial information and other information under “Management’s discussion and analysis of financial condition and results of operations” included elsewhere in this prospectus. Operating results for the nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ended December 31, 2011.

 

    Year ended December 31,     Nine months ended
September 30,
 
Consolidated Statement of Operations Data:   2010(1)     2009     2008(2)           2011                 2010        
    (in thousands, except share and per share amounts)  
         

Revenues:

         

Biodiesel sales

  $ 207,902      $ 109,027      $ 69,509      $ 518,346      $ 142,109   

Biodiesel government incentives

    7,240        19,465        6,564        38,763        3,674   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total biodiesel

    215,142        128,492        76,073        557,109        145,783   

Services

    1,313        3,009        9,379        140        1,165   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    216,455        131,501        85,452        557,249        146,948   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs of goods sold:

         

Biodiesel

    194,016        127,373        78,736        463,962        132,518   

Services

    807        1,177        4,470        121        601   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs of goods sold

    194,823        128,550        83,206        464,083        133,119   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    21,632        2,951        2,246        93,166        13,829   

Total operating expenses

    29,681        24,144       24,208        25,134        24,076   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (8,049     (21,193     (21,962     68,032        (10,247
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

    (16,102     (1,364     (2,318     (63,000     2,144   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax benefit (expense) and loss from equity investments

    (24,151     (22,557     (24,280     5,032        (8,103

Income tax benefit (expense)

    3,252        (45,212     9,414        (4,752     3,728   

Income (loss) from equity investments

    (689     (1,089     (1,013     501        (554
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (21,588     (68,858     (15,879     781        (4,929 )  

Less: Net loss attributable to noncontrolling interests

    —          7,953        2,788        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the company

    (21,588     (60,905     (13,091     781        (4,929

Effects of recapitalization

    8,521        —          —          —          8,521   

Less: accretion of preferred stock to redemption value

    (27,239     (44,181     (26,692     (18,553     (21,613

Less: undistributed dividends allocated to preferred stockholders

    (10,027     (14,036     (11,145     (9,467     (7,034
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to the company’s common stockholders

  $ (50,333   $ (119,122   $ (50,928   $ (27,239   $ (25,055
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders:

         

Basic

  $ (4.28   $ (15.35   $ (7.67   $ (2.02   $ (2.22
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted (3)

  $ (4.28   $ (15.35   $ (7.67   $ (2.02   $ (2.22
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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    Year ended December 31,     Nine months ended
September 30,
 
Consolidated Statement of Operations Data:   2010(1)     2009     2008(2)           2011                 2010        
   

(in thousands, except share and per share amounts)

 

Weighted-average shares used to compute net loss per share attributable to common stockholders:

         

Basic

    11,770,848        7,762,891        6,637,422        13,479,891     

 

11,271,765

  

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted(3)

    11,770,848        7,762,891        6,637,422        13,479,891        11,271,765   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per share attributable to common stockholders(4):

         

Basic

  $ (0.41       $ 2.01     
 

 

 

       

 

 

   

Diluted

  $ (0.41       $ 2.01     
 

 

 

       

 

 

   

Pro forma weighted-average shares used to compute net income per share attributable to common stockholders(4):

         

Basic

    19,631,460            21,340,503     
 

 

 

       

 

 

   

Diluted

    19,631,460            21,340,503     
 

 

 

       

 

 

   

 

(1)   Reflects the deconsolidation of Blackhawk Biofuels, LLC, or Blackhawk, as of January 1, 2010, the acquisition of Blackhawk as of February 26, 2010, the acquisition of Central Iowa Energy, LLC, or CIE, as of March 8, 2010, the consolidation of Seneca Landlord, LLC, or Landlord, as of April 8, 2010, the acquisition of Tellurian Biodiesel, Inc., or Tellurian, and American BDF, LLC, or ABDF, as of July 16, 2010, and the acquisition of Clovis Biodiesel, LLC, as of September 21, 2010.
(2)   Reflects the consolidation of Blackhawk as of May 9, 2008 and the acquisition of U.S. Biodiesel Group, Inc., or USBG, as of June 26, 2008.
(3)   Certain potentially dilutive securities were excluded from the calculation of diluted net loss per share attributable to common stockholders during the periods presented as the effect was anti-dilutive.
(4)   The pro forma per share amounts give effect to (i) the filing of our second amended and restated certificate of incorporation, (ii) the automatic conversion of all outstanding shares of Series A preferred stock and the reclassification of our existing common stock into an aggregate of 21,793,803 shares of Class A Common Stock, taking into account a 1-for-2.5 reverse stock split of our Class A Common Stock and 2,999,444 shares of Series B preferred stock in the recapitalization transactions that will occur in connection with this offering, (iii) the issuance of 200,000 shares of Class A Common Stock to USRG Holdco IX, LLC immediately prior to the completion of this offering in connection with the termination of the Glycerin Option Agreement dated as of April 8, 2010, between us and USRG Holdco IX, LLC and (iv) the issuance of 134,173 shares of Class A Common Stock in exchange for existing warrants to purchase 287,552 shares of Class A Common Stock, as if such actions had occurred on the first day of the applicable period.

 

     As of September 30, 2011  
Consolidated Balance Sheet Data:    Actual      Pro Forma(1)      Pro Forma as
Adjusted(2)
 
            (in thousands)         

Cash and cash equivalents

   $ 30,883         30,883         101,138   

Working capital(3)

     65,704         65,704         152,159   

Total debt

   $ 109,366         109,366         93,166   

Total assets

     472,572         474,991         545,246   

Total liabilities

     294,794         177,462         161,262   

Total stockholders’ equity

     36,789         214,481         300,936   

 

(1)   The pro forma column in the consolidated balance sheet data table above reflects (i) the conversion of all outstanding shares of our Series A preferred stock into 7,526,439 shares of Class A Common Stock, taking into account a 1-for-2.5 reverse stock split of our Class A Common Stock, and 2,999,444 shares of Series B preferred stock in the recapitalization transactions that will occur in connection with this offering, (ii) the issuance of 200,000 shares of Class A Common Stock to USRG Holdco IX, LLC immediately prior to the completion of this offering in connection with the termination of the Glycerin Option Agreement dated as of April 8, 2010, between us and USRG Holdco IX, LLC and (iii) the issuance of 134,173 shares of Class A Common Stock in exchange for existing warrants to purchase 287,552 shares of Class A Common Stock.
(2)   The pro forma as adjusted column in the consolidated balance sheet data table above reflects (i) the conversion of all outstanding shares of our Series A preferred stock into 7,526,439 shares of Class A Common Stock, taking into account a 1-for-2.5 reverse stock split of our Class A Common Stock and 2,999,444 shares of Series B preferred stock in the recapitalization transactions that will occur in connection with this offering, (ii) the issuance of 200,000 shares of Class A Common Stock to USRG Holdco IX, LLC immediately prior to the completion of this offering in connection with the termination of the Glycerin Option Agreement dated as of April 8, 2010, between us and USRG Holdco IX, LLC, (iii) the issuance of 134,173 shares of Class A Common Stock in exchange for existing warrants to purchase 287,552 shares of Class A Common Stock (iv) the repayment of $16.2 million principal amount of indebtedness after September 30, 2011 from our cash balance and (v) the issuance and sale by us of 6,857,140 shares of our Common Stock in this offering at an assumed initial public offering price of $14.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
(3)   Working capital is defined as current assets less current liabilities.

 

 

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Risk factors

Investing in our Common Stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes included elsewhere in this prospectus, before making an investment decision. If any of the following risks are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the trading price of our Common Stock could decline and you could lose part or all of your investment.

RISKS ASSOCIATED WITH OUR BUSINESS

Loss or reductions of governmental requirements for the use of biofuels could have a material adverse affect 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. We believe that the increase in demand for our biodiesel in 2011 is directly attributable to the implementation of RFS2. In addition, we believe that biodiesel prices in 2011 have benefited significantly from RFS2.

There can be no assurance that Congress or the EPA will not repeal, curtail or otherwise change the RFS2 program in a manner adverse to us. The petroleum industry has opposed the retroactive application of certain provisions of the rule and fundamental fairness in the implementation of policy involved in 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 product, 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 product 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.

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 for the amount of choice white grease, a common inedible animal fat used by us to make biodiesel,

 

 

 

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was $1.83 in 2008, $1.25 in 2009, $1.06 in 2010 and $1.32 in 2011, 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, and $0.25 per gallon in 2010, and $0.83 in the first ten months of 2011, assuming 7.5 pounds of soybean oil yields one gallon of biodiesel. For 2010, approximately 91% of our total feedstock usage was inedible animal fat, used cooking oil or inedible corn oil and 9% was soybean oil, compared to approximately 78% for inedible animal fat, used cooking or inedible corn oil and 22% for soybean oil in 2009.

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 tax incentives supporting renewable fuels, rather than biodiesel production costs. A lack of 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 Renewable Identification Numbers, or RINs, such as the temporary decrease that occurred in October 2011, would adversely affect our gross margins, cash flow and results of operations. For a detailed description of RINs, see “Industry overview—Government Programs Favoring Biodiesel Production and Use—Renewable Identification Numbers.”

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 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 less volatile than soybean oil, prices for these alternative feedstocks can also vary significantly 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. Historically, the price of animal fat has been affected by the amount of slaughter kills in the United States, as well as demand from other markets. If biodiesel production continues to increase in response to RFS2, we expect that more biodiesel producers will seek to use these 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.

 

 

 

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The market for used cooking oil as a feedstock for biodiesel is still developing and supply is limited. While the commercial supply of inedible corn oil is growing as some ethanol producers are installing corn oil extraction technology in their ethanol plants, it is not generally available in quantities sufficient to cover all our operations. At present, there are a limited number of ethanol plants with the equipment necessary to extract inedible corn oil that can be used in biodiesel production. 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.

We have limited working capital and a recent history of unprofitable operations; these working capital constraints may limit our growth and may cause us to curtail our operations or forgo sales.

We have a limited amount of working capital to support our operations. We became cash flow positive during fourth quarter of 2010 and were cash flow positive in the first three quarters of 2011, but we will need to raise additional working capital to be able to take advantage of the anticipated increased demand for biodiesel resulting from RFS2. Rising commodity prices further increase our demand for working capital, as both our feedstock production costs and costs for biodiesel we acquire from third parties and resell have increased in price, requiring more working capital to manage the same volume of sales. If additional working capital is not available, we may find it necessary to curtail operations and forgo sales, harming our revenues and profitability.

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

Several of our subsidiaries have a significant amount of indebtedness, some of which we have guaranteed. At September 30, 2011, our total long-term debt was $98.8 million, which includes $22.3 million of indebtedness of REG Danville that matured and approximately $16 million of which was renewed in November 2011. This includes consolidated long-term debt owed by our Variable Interest Entities, or VIEs, including Landlord and 416 South Bell, LLC, or Bell, LLC. At September 30, 2011, the amount borrowed by our subsidiaries under our lines of credit was $10.6 million, all of which we guaranteed. In December 2011, certain of our subsidiaries entered into a new revolving credit agreement replacing our previous revolving credit facility with WestLB, AG. As of December 31, 2011, we had $10.0 million outstanding under the new revolving credit facility. We guaranty the obligation of our subsidiaries under this agreement.

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. At March 31, 2011, REG Danville was not in compliance with its financial covenants requiring it to meet a minimum fixed charge coverage ratio and a maximum funded debt-to-EBITDA ratio and it was necessary for us to obtain a waiver from the lender to avoid a default. At June 30, 2011 and September 30, 2011, our Danville subsidiary was in compliance with its financial covenants. For a discussion of the financial covenants related to our debt agreements, see “Management discussion and analysis of financial condition and results of operations—Liquidity.”

Our level of indebtedness relative to our size could restrict our operations and make it more difficult for us to satisfy our debt obligations or obtain additional borrowings for working capital to fund operations. In connection with the Seneca facility transaction, one of our subsidiaries leases the Seneca facility from

 

 

 

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Landlord, an entity owned by certain of our large stockholders. In addition, 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 significant amount of indebtedness could:

 

Ø  

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;

 

Ø  

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

 

Ø  

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

 

Ø  

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

Loss or reductions of tax incentives for biodiesel production or consumption would have a material adverse affect 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. Congress allowed the blenders’ tax credit to expire as of December 31, 2009 and then re-enacted the credit in December 2010, retroactively for all of 2010 and prospectively for 2011. The blenders’ tax credit expired again on December 31, 2011 and there is no assurance that it will be reinstated in 2012. Certain ethanol tax credits have recently been proposed to be curtailed or eliminated as part of United States federal deficit reduction efforts. 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 most of 2010 materially curtailed demand for biodiesel and our ability to cost effectively produce and sell biodiesel, resulting in our idling production at several of our facilities during that period. Although the blenders’ tax credit was reinstated for all of 2010, we were not able to recapture all of the tax credit we would have been able to receive because we had chosen not to blend a significant portion of our production in 2010 after the credit lapsed. It is uncertain what action, if any, Congress may take with respect to extending the blenders’ tax credit beyond 2011 or when such action might be effective. If Congress does not extend the credit beyond 2011, 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 2011 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 RVO for 2012 through RINs obtained in 2011. The resulting buildup of biodiesel inventories may reduce gallons sold in the first quarter of 2012.

In addition, several states have enacted tax incentives for the use of biodiesel. Like the federal blenders’ tax credit, these tax incentive programs 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.

 

 

 

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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, recapitalizing 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.

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.

Risk management transactions could significantly increase our operating costs and working capital requirements if we incorrectly estimate our feedstock demands and biodiesel sales as compared to market conditions.

In an attempt to partially offset the effects of volatility of feedstock costs and biodiesel fuel prices, we may enter into contracts that establish market positions in feedstocks, such as 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.

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 24% and 29% of our total revenues in 2009 and 2010, respectively. During the first nine months of 2011, Pilot accounted for 23% of our total revenues. Our agreements with Pilot have typically had a one-year term and our current agreement with Pilot expires December 31, 2012. 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.

 

 

 

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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 biodiesel industry. For example, in 2009 and the beginning of 2010, we were required to periodically idle our plants due to insufficient demand 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 feed stocks 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. We have not been in the past, and may not be in the future, able to pass along part or all of any fuel price 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.

 

 

 

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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 have partially constructed plants and planned plant upgrades that require capital that we may not be able to raise.

We have three partially constructed plants, one near New Orleans, Louisiana, one in Emporia, Kansas and one in Clovis, New Mexico, that we expect will require additional investments of approximately $130 to $140 million in the aggregate, excluding working capital requirements, before they would be able to commence production. We also have various upgrades planned for our operating facilities. In order to complete construction of these facilities or upgrade our facilities as planned, we will require additional capital. While we intend to finance certain upgrades to our existing facilities in part with a portion of the proceeds of this offering and from our cash flow from operations, we will need to raise significant capital in addition to the proceeds of this offering to complete construction of the three facilities. We continue to be in discussions with lenders in an effort to obtain financing for our facilities, however, 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 cash flow.

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 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:

 

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

 

 

 

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

 

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

 

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

 

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

 

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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;

 

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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

 

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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 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.

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 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 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 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. 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

 

 

 

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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. We are in the process of finalizing an administrative settlement agreement with the EPA regarding this violation and expect we will have to pay 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 “Industry overview—Government Programs Favoring Biodiesel Production and Use—Renewable Identification Numbers.”

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 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

 

 

 

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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, 2010 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 would 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 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.

 

 

 

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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 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 were 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.

We depend on our ability to maintain relationships with industry participants, including our current stockholders and other strategic partners.

Our ability to maintain commercial arrangements with biodiesel customers, feedstock suppliers, and transportation and logistics services providers may depend on maintaining close working relationships with industry participants including some of our current and principal stockholders, such as Bunge, ED&F Man and West Central. As we continue to develop our business, we expect to use the business relationships of management and our stockholders in order to form strategic relationships such as contractual arrangements, joint ventures, financings or minority investments. There can be no assurance that we will be able to maintain or establish additional necessary strategic relationships, in which case the opportunity to grow our business may be negatively affected.

Some arrangements that we have with our principal stockholders may not be the result of arm’s-length negotiations.

We have entered into various agreements with West Central, Bunge, ED&F Man and USRG, four of our principal stockholders, and their affiliates, relating to corporate and commercial services that are material to the conduct of our business, and we may enter into additional agreements with these parties and their affiliates. Although we believe that these agreements, as a whole, are no less favorable to us than could be obtained through arm’s-length dealing, these agreements include specific terms and conditions that may be different from terms contained in similar agreements negotiated with unaffiliated third parties. In addition, because these parties are also our principal stockholders and because we have significant contractual or strategic relationships with these parties, it may be difficult or impossible for us

 

 

 

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to enforce claims that we may have against one or more of them. For a more complete discussion of our arrangements with our principal stockholders, see the discussion under the heading “Certain relationships and related party transactions.”

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

As of December 15, 2011, our five largest stockholders beneficially owned, in the aggregate, approximately 88.7% of our outstanding capital stock, and we expect that upon completion of this offering and the related recapitalization transactions described herein the same stockholders will continue to beneficially own approximately 54.5% of our outstanding common stock, assuming conversion of the outstanding Series B preferred stock. As a result, these stockholders, were they to act together, would be able 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 a period of three years from and after the closing of this offering. 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.

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 and large integrated agribusiness companies that produce biodiesel along with their soybean crush businesses. 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. 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 have not been engaged in biodiesel production to a large extent. These companies form the primary distribution networks for marketing biodiesel through blended petroleum-based diesel. If these companies seek to engage in direct or indirect biodiesel 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.

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 two 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

 

 

 

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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 execute 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.

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.

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, both as a commercialization partner for companies engaged in the development of new advanced biofuels and by using our biorefinery platform to produce renewable chemicals from bio-mass feedstocks. 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. 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 the Series B preferred stock issuable in connection with the recapitalization 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. Assuming no exercise of the underwriters over-allotment option, as of the date of this prospectus, the amount of this potential obligation would be $75 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.

 

 

 

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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 a commercially 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 affect on our revenues and profits if such price decrease reduces the price we are able to charge for our biodiesel.

Under RFS2 and its increasing required volume obligations, the price of biodiesel has been more sensitive to changes in feedstock costs. Increased RIN values have, in part, offset this sensitivity in price resulting from higher feedstock costs. A reduction in RIN values, such as those experienced in October 2011, may have a material adverse affect on our revenues and profits if such price decrease reduces the price we are able to charge for our biodiesel.

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. The construction of several renewable diesel plants by competitors has been announced. 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 “Industry overview—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. For a detailed description of RINs and RIN values, see “Industry overview—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.

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

 

 

 

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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.

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.

There is currently excess production capacity and low utilization in the biodiesel industry and if non-operational and underutilized facilities commence or increase operations, our results of operations may be negatively affected.

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 statements made by the CEO of the NBB, as of April 2010 2.2 billion gallons per year of biodiesel production capacity in the United States were registered under the RFS2 program. Further, plants under construction and expansion in the United States as of December 2010, 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 utilized for biodiesel production, it would increase competition for our feedstocks, increase the volume of biodiesel on the market and may reduce biodiesel gross margins, harming our revenues and profitability.

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

 

 

 

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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 new product, the environmental impacts associated with biodiesel production and use 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. A draft of the first such triennial report was released in January 2011, with the final report expected to be released in 2012. Should the 2012 study, 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 tax incentives such as the federal blenders’ tax credit 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 petroleum-based diesel fuel is typically less than 20 °F. It is our experience that when biodiesel is mixed with 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. Remedying these performance problems may

 

 

 

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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 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, which may reduce demand for biodiesel produced by us and cause our revenues to decline.

Biodiesel 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 biodiesel production incentives or other financial incentives in their home countries that offset some of their biodiesel production costs and enable them to profitably sell biodiesel in the United States at lower prices than United States-based biodiesel producers. Under RFS2, imported biodiesel may be eligible and, therefore, may compete to meet the volumetric requirements. 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.

In some instances biodiesel may increase emissions of nitrogen oxide as compared to petroleum-based diesel fuel, which could harm air quality. Nitrogen oxide is a contributor to ozone and smog. These emissions may decrease the appeal of biodiesel to environmental groups and agencies who have been historic supporters of the biodiesel industry, potentially harming our ability to market our biodiesel.

In addition, several states have acted to regulate potential nitrogen oxide emissions from biodiesel. Texas currently requires that biodiesel blends contain an additive to eliminate this perceived nitrogen oxide increase. California is in the process of formulating biodiesel regulations that may also require such an additive. In states where such an additive is required to sell biodiesel, the additional cost of the additive may make biodiesel less profitable or make biodiesel less cost competitive against petroleum-based diesel or renewable diesel, which would negatively impact our ability to sell our products in such states and therefore have an adverse effect on our revenues and profitability.

Several biofuels companies throughout the United States have filed for bankruptcy over the last several years due to industry and economic conditions.

Unfavorable worldwide economic conditions, lack of credit and volatile biofuel prices and feedstock costs have likely contributed to the necessity of bankruptcy filings by biofuel producers. Our business has

 

 

 

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been, and in the future may be, negatively impacted by the industry conditions that influenced the bankruptcy proceedings of other biofuel producers, or we may encounter new competition from buyers of distressed biodiesel properties who enter the industry at a lower cost than original plant investors.

RISKS RELATED TO THIS OFFERING AND OUR COMMON STOCK

There is no prior public market for our common stock and an active trading market or any specific price for our common stock may not be established or maintained.

Currently, there is no public trading market for our common stock. We intend to apply to list our Common Stock on the Nasdaq Global Market under the symbol “REGI.” The initial public offering price per share will be determined by agreement among us and the representatives of the underwriters and may not be indicative of the market price of our Common Stock after our initial public offering. An active trading market for our Common Stock may not develop and even if it does develop, may not continue upon the completion of this offering and the market price of our Common Stock may decline below the initial public offering price.

The market price for our Common Stock may be volatile.

The market price for our Common Stock is likely to be highly volatile and subject to wide fluctuations in response to factors including the following:

 

Ø  

actual or anticipated fluctuations in our financial condition and operating results;

 

Ø  

changes in the performance or market valuations of other companies engaged in our industry;

 

Ø  

issuance of new or updated research reports by securities or industry analysts;

 

Ø  

changes in financial estimates by us or of securities or industry analysts;

 

Ø  

investors’ general perception of us and the industry in which we operate;

 

Ø  

changes in the political climate in the industry in which we operate, existing laws, regulations and policies applicable to our business and products, including RFS2, and the continuation or adoption or failure to continue or adopt renewable energy requirements and incentives, including the blenders’ tax credit;

 

Ø  

other regulatory developments in our industry affecting us, our customers or our competitors;

 

Ø  

announcements of technological innovations by us or our competitors;

 

Ø  

announcement or expectation of additional financing efforts, including sales or expected sales of additional common stock;

 

Ø  

additions or departures of key management or other personnel;

 

Ø  

litigation;

 

Ø  

general market conditions in our industry; and

 

Ø  

general economic and market conditions, including continued dislocations and downward pressure in the capital markets.

In addition, stock markets generally and from time to time experience significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may have a material adverse effect on the market price of our Common Stock.

 

 

 

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As noted below, a significant portion of our total outstanding shares of common stock is restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our Common Stock to drop significantly, even if our business is doing well.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

The initial public offering price of our Common Stock will be substantially higher than the net tangible book value per share of our Common Stock immediately after this offering. Therefore, if you purchase shares of our Common Stock in this offering, you will incur an immediate dilution of $3.71 in net tangible book value per share from the price you paid, based on an assumed initial public offering price of $14.00 per share, the midpoint of the initial public offering price range set forth on the cover page of this prospectus. In addition, new investors who purchase shares in this offering will contribute approximately 32% of the total amount of equity capital raised by us through the date of this offering, but will only own approximately 25% of the outstanding share capital and approximately 25% of the voting rights. The exercise of outstanding options and warrants will result in further dilution. For a further description of the dilution that you will experience immediately after this offering, see the section entitled, “Dilution.”

Future sales of shares by existing stockholders could cause our stock price to decline.

If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our Common Stock in the public market after the underwriter lock-up and other liquidity and legal restrictions on resale discussed in this prospectus lapse, the trading price of our Common Stock could decline. Based on shares outstanding as of September 30, 2011, after giving pro forma effect to the completion of this offering and the related recapitalization transactions, we will have outstanding a total of 28,650,943 shares of common stock, assuming no exercise of the underwriters’ over-allotment option. Of these shares, only the shares of Common Stock sold in this offering by us will be listed and eligible for trading on the Nasdaq Global Market after the offering. All of our existing stockholders will own Class A Common Stock or Series B preferred stock, which will not be eligible for trading on the Nasdaq Global Market. The Class A Common Stock will be converted into our Common Stock upon the expiration of the underwriters’ lock-up period described below and the Series B preferred stock will be convertible into Common Stock after the expiration of the underwriters’ lock-up period at the election of the holders or at our election upon the occurrence of certain events. There is currently no public market for our Class A Common Stock, although it is possible that there will be off-market transactions in our Class A Common Stock following the closing of this offering. Of the 21,450,943 shares of our Class A Common Stock that, on a pro forma basis for this offering and the related recapitalization transactions, would have been outstanding as of September 30, 2011, 15,230,356 shares held by our directors and officers, and certain of our stockholders, are subject to lock-up agreements with the underwriters that restrict their ability to sell or transfer their shares. The lock-up agreements pertaining to this offering will expire 180 days from the date of this prospectus, or the initial lock-up period. Notwithstanding the initial lock-up period, if (i) during the period beginning on the date that is 15 calendar days plus three business days before the last day of the 180-day period, and ending on the last day of the initial lock-up period, we issue an earnings release or material news or a material event relating to us occurs; or (ii) prior to the expiration of the initial lock-up period, we announce that we will release earnings results during the 16-day period beginning on the last day of the initial lock-up period, then the restrictions imposed by these lock-up agreements will continue to apply until the expiration of the date that is 15 calendar days plus three business days after the date on which the issuance of the earnings release or the material news or material event occurs. Our underwriters, however, may, in their sole discretion, permit our officers, directors and other current stockholders who are subject to the contractual lock-up to sell shares prior to the expiration of the lock-up agreements. After the lock-up agreements expire and all shares of Class A

 

 

 

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Common Stock are converted to Common Stock, based on shares outstanding as of September 30, 2011 giving pro forma effect to the completion of this offering and the related recapitalization transactions, up to an additional 13,879,067 shares of Common Stock will be eligible for sale in the public market, 13,798,764 of which are held by directors, executive officers and other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act of 1933, or the Securities Act, and various vesting agreements. Following this offering and the related recapitalization transactions, we will have warrants outstanding that will be exercisable for approximately 17,916 shares of our Class A Common Stock. In addition, following this offering and the related recapitalization transactions, 87,026 shares of Class A Common Stock will be issuable upon the exercise of outstanding options. Also, there will be 4,284,920 shares of Class A Common Stock initially issuable upon conversion of the Series B preferred stock issued in the recapitalization, assuming the underwriters’ over-allotment option has not been exercised. All of these shares of Class A Common Stock will become eligible for sale in the public market after the lock-up agreements expire and all shares of Class A Common Stock are converted to Common Stock, to the extent permitted by the provisions of various vesting and other agreements, and Rules 144 and 701 under the Securities Act. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our Common Stock could decline.

We may issue additional Common Stock as consideration for future investments or acquisitions.

We have issued in the past, and may issue in the future, our securities in connection with investments and acquisitions. The amount of our Common Stock or securities convertible into or exchangeable for our Common Stock issued in connection with an investment or acquisition could constitute a material portion of our then outstanding common stock.

We will incur increased costs as a result of operating as a publicly traded company and our management will be required to devote substantial time to compliance initiatives.

Although we have been operating as a reporting company, we have not been responsible for the full corporate governance and financial reporting practices and policies required of a public company pursuant to the Sarbanes-Oxley Act of 2002, as well as the rules implemented by the Nasdaq Global Market. Following the completion of this offering, we will be a publicly traded company and we will incur significant legal, accounting, investor relations and other expenses that we do not currently incur. We will need to dedicate a substantial amount of time to these compliance initiatives. We will need to hire additional accounting, financial and other staff with appropriate experience and financial knowledge to ensure compliance. Furthermore, if we identify issues complying with these requirements, we would likely incur additional costs relating to such issues, and the existence of such issues could adversely affect us, our reputation, investor perceptions of us and the market price of our Common Stock.

We have never paid dividends on our capital stock and we do not anticipate paying any cash dividends in the foreseeable future.

We have paid no cash dividends on any of our classes of capital stock to date, have contractual restrictions against paying cash dividends and currently intend to retain our future earnings to fund the development and growth of our business. As a result, stockholders must look solely to appreciation of our Common Stock to realize a gain on their investment. This appreciation may not occur. Investors seeking cash dividends should not invest in our Common Stock.

 

 

 

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Delaware law and our amended and restated certificate of incorporation and bylaws will contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.

Provisions in our amended and restated certificate of incorporation and bylaws that we intend to adopt before the closing of this offering may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:

 

Ø  

the right of the board of directors to elect a director to fill a vacancy created by the expansion of the board of directors;

 

Ø  

the requirement for advance notice for nominations for election to the board of directors or for proposing matters that can be acted upon at a stockholders’ meeting;

 

Ø  

the ability of the board of directors to alter our bylaws without obtaining stockholder approval;

 

Ø  

the ability of the board of directors to issue, without stockholder approval, up to 10,000,000 shares of preferred stock with rights set by the board of directors, which rights could be senior to those of common stock;

 

Ø  

a classified board;

 

Ø  

the required approval of holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or amend or repeal the provisions of our amended and restated certificate of incorporation regarding the classified board, the election and removal of directors and the ability of stockholders to take action by written consent; and

 

Ø  

the elimination of the right of stockholders to call a special meeting of stockholders and to take action by written consent.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, or DGCL. These provisions may prohibit or restrict large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions in our amended and restated certificate of incorporation and bylaws and under Delaware law could discourage potential takeover attempts and could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in our market price being lower than it would without these provisions.

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

We intend to use the net proceeds from this offering to exercise the option we hold to acquire the Seneca facility for approximately $12.0 million. The remaining net proceeds will be used for working capital, capital expenditures related to improvements of production processes and logistics, and investments. In addition, the first $15.0 million of the net proceeds from the exercise of the over-allotment option, if any, will be used for certain payments to the former holders of the Series A preferred stock. For a further description of our intended use of the net proceeds to us from this offering, see the “Use of proceeds” section of this prospectus.

Because of the number and variability of factors that will determine our use of the net proceeds from this offering, our ultimate use of these proceeds may vary substantially from their currently intended use. Our management will have considerable discretion over the use of the net proceeds to us from this offering. Stockholders may not agree with such uses and the net proceeds may be used in a manner that does not increase our operating results or market value.

 

 

 

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Our failure to apply these funds effectively could have a material adverse effect on our business, delay the development of our products and cause the price of our common stock to decline.

If securities or industry analysts issue an adverse or misleading opinion regarding our stock or do not publish research or reports about our business, our stock price and trading volume could decline.

The trading market for our Common Stock will rely in part on the research and reports that equity research analysts publish about us and our business. It may be difficult for companies such as ours to attract independent equity research analysts to cover our Common Stock. We do not control these analysts or the content and opinions included in their reports. The price of our Common Stock could decline if one or more equity research analysts downgrade our Common Stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business. If one or more equity research analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline. Further, securities analysts may elect not to provide research coverage of our Common Stock after the completion of this offering, and such lack of research coverage may adversely affect the market price of our Common Stock.

 

 

 

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Information regarding forward-looking statements

This prospectus includes forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations for future operations, are forward-looking statements. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “design,” “intend,” “expect” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk factors.” In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

Ø  

the effect of governmental programs on our business;

 

Ø  

government policymaking and mandates relating to renewable fuels;

 

Ø  

the future price and volatility of feedstocks;

 

Ø  

the future price and volatility of petroleum and products derived from petroleum;

 

Ø  

expected future financial performance;

 

Ø  

our liquidity and working capital requirements;

 

Ø  

availability of federal and state governmental tax credits and incentives;

 

Ø  

anticipated trends and challenges in our business and competition in the markets in which we operate;

 

Ø  

our ability to estimate our feedstock demands and biodiesel sales;

 

Ø  

our dependence on sales to a limited number of customers and distributors;

 

Ø  

technological obsolescence;

 

Ø  

our expectations regarding future expenses;

 

Ø  

our ability to successfully implement our acquisition strategy;

 

Ø  

government regulatory and industry certification, approval and acceptance of our product;

 

Ø  

our ability to protect our proprietary technology and trade secrets;

 

Ø  

market acceptance of biodiesel; and

 

Ø  

our expectations regarding the use of proceeds from this offering.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. In addition, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We disclaim any duty to update any of these forward-looking statements after the date of this prospectus to confirm these statements to actual results or revised expectations.

You may rely only on the information contained in this prospectus. Neither we nor any of the underwriters have authorized anyone to provide information different from that contained in this prospectus. Neither the delivery of this prospectus, nor sale of Common Stock, means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or solicitation of an offer to buy shares of Common Stock in any circumstances under which the offer or solicitation is unlawful.

 

 

 

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Use of proceeds

We expect that the net proceeds we will receive from the sale of the shares of Common Stock offered by us will be approximately $86.5 million (or approximately $100.5 million if the underwriters exercise their over-allotment option in full), based on an assumed initial public offering price of $14.00 per share (the midpoint of the range reflected on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $14.00 per share would increase (decrease) the net proceeds to us from this offering by approximately $6.4 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. A one million share increase (decrease) in the number of shares of Common Stock offered by us in this offering would increase (decrease) the net proceeds to us by approximately $13.0 million. If the underwriters’ over-allotment option to purchase additional shares from us is exercised in full, we estimate that we will receive additional net proceeds of $14.0 million. We will not receive any of the proceeds from the sale of Common Stock by the selling stockholders, although we will bear the costs, other than the underwriting discounts and commissions, associated with the sale of these shares. The selling stockholders include entities affiliated with or controlled by certain of our directors.

We intend to use approximately $12.0 million of the net proceeds we receive from this offering to exercise the option we hold to acquire the Seneca facility, which we currently lease. The Seneca facility is beneficially owned by three of our stockholders: Bunge, USRG, and West Central. The option purchase price was determined through negotiation between the current beneficial owners and us in a transaction whereby we acquired the facility from a third party in 2010 and immediately sold the facility to its current owners in a sale/leaseback transaction. We also have certain other arrangements and agreements in place with these parties. See “Certain relationships and related party transactions” beginning on page 115 of this prospectus.

The remainder of the net proceeds is expected to be used for working capital, capital expenditures related to improvements of production processes and logistics, and investments, including potential acquisitions, joint ventures and other collaborative arrangements, in new biofuel businesses, production technologies or other assets and in opportunities to extend our biorefinery platform to the production of renewable chemicals and feedstocks. We have no agreements with respect to any material investments at this time.

If the underwriters’ over-allotment option is exercised, we are obligated to use the first $15.0 million of net proceeds, or such lesser amount if the net proceeds are less than $15.0 million, to make a one-time special payment to the former holders of our Series A preferred stock. To the extent that the underwriters’ over-allotment option is not exercised, or the net proceeds from the exercise of the over-allotment option are less than $15.0 million, upon expiration of the 30-day option period, we are obligated to issue up to 400,000 additional shares of Series B preferred stock to the former holders of Series A preferred stock, such that the maximum number of shares of Series B preferred stock that we may issue is 3,000,000. The number of shares of Series B preferred stock to be issued to such former holders of Series A preferred stock will be reduced proportionately for any exercise of the over-allotment option resulting in net proceeds in excess of $5.0 million and less than $15.0 million. If the net proceeds from the exercise of the over-allotment option exceed $15.0 million, we intend to use such excess net proceeds as described in the preceding paragraphs.

As of the date of this prospectus, however, except as set forth above, we cannot predict with certainty all of the particular uses for the proceeds of this offering or the amounts that we will actually spend on the uses set forth above. Our management will have significant flexibility in applying the net proceeds of this offering. Pending use of the net proceeds as described above, we intend to invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities.

 

 

 

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Dividend policy

Upon the completion of the offering, holders of the Series B preferred stock are entitled to receive, on each share, out of assets legally available, cumulative dividends semi-annually at an annual rate of 4.50% of the stated value, which is $25 per share. For so long as at least 300,000 shares of Series B preferred stock remain outstanding, without the approval of the holders of at least 75% of the then-outstanding shares of Series B preferred stock, we may not declare, pay or set apart funds for the payment of any dividend or other distribution with respect to any junior stock or parity stock, including the Common Stock, and we will not, subject to certain exceptions, redeem, purchase or otherwise acquire for consideration junior stock or parity stock, including the Common Stock.

We have never declared or paid any cash dividends on the Common Stock. We expect to retain all of our earnings to finance the expansion and development of our business and we do not currently intend to pay any cash dividends on the Common Stock in the foreseeable future. Any future determinations to declare dividends will be at the discretion of our Board of Directors, subject to the restrictions imposed by our Series B preferred stock, and will depend on our financial condition, results of operations, capital requirements, general business requirements, contractual restrictions and other factors our Board of Directors deems relevant. Certain of our subsidiaries have entered into credit agreements that limit their ability to pay dividends. See “Management’s discussion and analysis of financial condition and results of operations—Liquidity and Capital Resources” beginning on page 68 for a discussion of these limitations. Future agreements that we may enter into, including with respect to any future debt we may incur, may also further limit or restrict our ability to pay dividends.

 

 

 

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Capitalization

The following table describes our cash and cash equivalents, short-term debt and capitalization as of September 30, 2011:

 

Ø  

on an actual basis;

 

Ø  

on a pro forma basis, giving effect to (i) the filing of our second amended and restated certificate of incorporation, (ii) the reclassification of our existing common stock into an aggregate of 13,933,191 shares of Class A Common Stock and the automatic conversion of all outstanding shares of Series A preferred stock into 7,526,439 shares of Class A Common Stock and 2,999,444 shares of Series B preferred stock in the recapitalization transactions in connection with this offering, (iii) the issuance of 200,000 shares of Class A common stock to USRG Holdco IX, LLC immediately prior to the completion of this offering in connection with the termination of the Glycerin Option Agreement dated as of April 8, 2010, between us and USRG Holdco IX, LLC and (iv) the issuance of 134,173 shares of Class A Common Stock in exchange for existing warrants to purchase 287,552 shares of Class A Common Stock immediately prior to the completion of this offering; and

 

Ø  

on a pro forma as adjusted basis, giving effect to the (i) repayment of $16.2 million principal amount of indebtedness after September 30, 2011 from our cash balance and (ii) issuance and sale by us and the sale by the selling stockholders of 342,860 shares of Common Stock in this offering at an assumed initial public offering price of $14.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

 

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     As of September 30, 2011  
      Actual     Pro forma     Pro forma
as adjusted
 
     (In thousands, except share and per share data)  

Cash and cash equivalents

   $ 30,883      $ 30,883      $ 101,138   
  

 

 

   

 

 

   

 

 

 

Revolving credit facility

   $ 10,550      $ 10,550      $ 10,550   

Other long term debt

     98,816        98,816        82,616   
  

 

 

   

 

 

   

 

 

 

Total debt

     109,366        109,366        93,166   
  

 

 

   

 

 

   

 

 

 

Series A Preferred Stock, $.0001 par value, 14,000,000 shares authorized, 13,455,522 shares issued and outstanding, actual; 14,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

     140,989        —          —     

Series B Preferred Stock, $.0001 par value, no shares authorized, no shares issued and outstanding, actual; 3,000,000 shares authorized, 2,999,444 shares issued and outstanding, pro forma and pro forma, as adjusted

     —          83,048        83,048   

Stockholders’ equity:

      

Existing common stock, $.0001 par value; 140,000,000 shares authorized, 13,933,191 shares issued and outstanding, actual; no shares authorized, issued or outstanding pro forma and pro forma as adjusted.

     1        —          —     

Common Stock, $.0001 par value; no shares authorized, no shares issued and outstanding, actual; 300,000,000 shares authorized, no shares issued and outstanding, pro forma; 300,000,000 shares authorized, 7,200,000 shares issued and outstanding, pro forma as adjusted

     —          —          1   

Class A Common Stock, $.0001 par value; no shares authorized, no shares issued and outstanding, actual; 140,000,000 shares authorized, 21,793,803 shares issued or outstanding, pro forma; 140,000,000 shares authorized, 21,450,943 shares issued and outstanding, pro forma as adjusted

            2        2   

Additional paid-in capital

     84,650        268,692        355,146   

Warrants - additional paid-in-capital

     3,698        147        147   

Accumulated deficit

     (51,560     (54,360     (54,360
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     36,789        214,481        300,936   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 287,144      $ 406,895      $ 477,150   
  

 

 

   

 

 

   

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $14.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) total stockholders’ equity and total capitalization by $6.4 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses. A one million share increase (decrease) in the number of shares of Common Stock sold by us in this offering would increase (decrease) total stockholders’ equity and total capitalization by approximately $13.0 million, assuming an initial public offering price of $14.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses.

 

 

 

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Capitalization

 

 

The pro forma information set forth in the above table is based on no shares of our Common Stock and 13,933,191 shares of our Class A Common Stock outstanding (after giving pro forma effect to the reclassification of our existing common stock into an equivalent number of shares of Class A Common Stock, taking into account a 1-for-2.5 reverse stock split and includes 342,860 shares of Class A Common Stock held by our selling stockholders that will be converted into Common Stock prior to completion of this offering) as of September 30, 2011; and

 

  Ø  

Excludes up to 4,284,920 shares of Common Stock issuable upon conversion of the Series B preferred stock issuable pursuant to the recapitalization;

 

  Ø  

Excludes 17,916 shares of Class A Common Stock issuable upon the exercise of warrants to purchase Class A Common Stock that will remain outstanding following this offering;

 

  Ø  

Excludes 1,647,119 shares of Class A Common Stock issuable upon the exercise of outstanding restricted stock units;

 

  Ø  

Excludes 87,026 shares of Class A Common Stock issuable upon the exercise of outstanding options, at a weighted average exercise price of $23.75 per share;

 

  Ø  

Excludes 4,160,000 shares of Class A Common Stock reserved for future issuance under our 2009 Stock Incentive Plan; and

 

  Ø  

Includes 200,000 shares of Class A Common Stock that will be issued to USRG Holdco IX, LLC immediately prior to the completion of this offering in connection with the termination of the Glycerin Option Agreement dated as of April 8, 2010, between us and USRG Holdco IX, LLC.

 

  Ø  

Assumes no exercise of the underwriters’ over-allotment option; if the over-allotment option is exercised, up to 400,000 fewer shares of Series B preferred stock may be issued; the maximum number of shares of Series B preferred stock that will be outstanding immediately after the expiration of the 30-day option period will be 2,999,444 shares and the minimum number will be 2,599,444 shares.

 

 

 

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Dilution

Our pro forma net tangible book value as of September 30, 2011 was approximately $208.2 million, or $9.56 per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding as of September 30, 2011. Dilution in net tangible book value per share to new investors represents the difference between the amount per share paid by purchasers of shares of Common Stock in this offering and the net tangible book value per share of common stock immediately after completion of this offering.

After giving effect to the sale of the shares of Common Stock by us in this offering at an assumed public offering price of $14.00 per share, the midpoint of the range on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our net tangible book value as of September 30, 2011 would have been approximately $294.7 million, or $10.29 per share of common stock. This represents an immediate increase in net tangible book value of $0.73 per share of common stock to existing stockholders and an immediate dilution in net tangible book value of $3.71 per share to new investors purchasing shares of Common Stock in this offering.

The following table illustrates this per share dilution:

 

Assumed public offering price per share of Common Stock

    $ 14.00   

Pro forma net tangible book value per common share as of September 30, 2011

    $9.56     

Increase in net tangible book value per share attributable to existing stockholders

    0.73     
 

 

 

   

Pro forma net tangible book value per share as adjusted after this offering

      10.29   
   

 

 

 

Dilution per share to new investors

      $3.71   
   

 

 

 

A $1.00 increase (decrease) in the assumed public offering price per share would increase (decrease) our pro forma net tangible book value as of September 30, 2011 by approximately $6.4 million, or $0.22 per share, resulting in dilution of $3.49 per share to the new investors purchasing shares of Common Stock in this offering.

Separately, a one million share increase (decrease) in the number of shares of Common Stock sold would increase (decrease) our pro forma net tangible book value as of September 30, 2011 by approximately $13.0 million, or $0.09 per share, resulting in dilution of $3.62 per share to the new investors purchasing shares of Common Stock in this offering.

If the underwriters’ over-allotment option to purchase 1,080,000 additional shares from us is exercised in full, the pro forma as adjusted net tangible book value per share after this offering would be $10.39 per share, the increase in pro forma as adjusted net tangible book value per share to existing stockholders would be $0.83 per share and the dilution to new investors purchasing shares in this offering would be $3.61 per share.

As of September 30, 2011, assuming the exercise and payment of all outstanding options, warrants and restricted stock units, excluding warrants that are terminated in connection with the recapitalization, and after giving effect to this offering, pro forma net tangible book value would have been approximately $297.0 million, representing dilution of $4.23 per share to new investors.

 

 

 

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Dilution

 

 

As of September 30, 2011, assuming a 10% increase in the number of shares of Common Stock sold and an assumed public offering price of $14.00 per share, our net tangible book value would have increased by approximately $8.9 million, representing a decrease in dilution of $0.06 per share to new investors.

 

     Shares Purchased     Total Consideration        
      Number      Percent     Amount      Percent     Average
Price
Per
Share
 

Existing stockholders

     21,450,943         74.9   $ 214,481,000         68.0   $ 10.00   

New investors

     7,200,000         25.1        100,800,000         32.0        14.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     28,650,943         100.0   $ 315,281,000       $ 100.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

If the underwriters’ over-allotment option is exercised in full, the number of shares of common stock held by existing stockholders will be reduced to 72.2% of the total number of shares of common stock to be outstanding after this offering; and the number of shares of Common Stock held by the new investors will be increased to 8,280,000 shares or 27.8% of the total number of shares of common stock outstanding after this offering.

A 10% increase in the number of shares sold of Common Stock would decrease the number of shares of common stock held by existing stockholders as a percentage of the total number of shares of common stock outstanding after this offering by 1.9%; the number of shares of Common Stock held by new investors would increase by 720,000 shares, or 2.5% of the total number of shares of common stock outstanding after this offering.

Sales by the selling stockholders in this offering will reduce the number of shares held by existing stockholders to 21,450,943 or approximately 74.9% of the total shares of our common stock outstanding after this offering, or 21,450,943 shares and approximately 72.2% of the total shares of our common stock outstanding after this offering if the over-allotment option is exercised in full. The number of shares to be purchased by new investors will be 7,200,000 or approximately 25.1% of the total shares of our common stock outstanding after this offering, or 8,280,000 shares and approximately 27.8% of the total shares of common stock outstanding after this offering, if the over-allotment option is exercised in full.

 

 

 

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Selected consolidated financial data

The following table sets forth selected historical consolidated financial data that should be read in conjunction with “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and notes thereto. The selected historical consolidated financial data in this section is not intended to replace our historical consolidated financial statements and the related notes thereto. Our historical results are not necessarily indicative of future results, and our operating results for the nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ended December 31, 2011.

The selected consolidated balance sheet data as of December 31, 2010 and 2009, and the selected consolidated statements of operations data for each year ended December 31, 2010, 2009 and 2008, have been derived from our audited consolidated financial statements which are included in this prospectus. The selected consolidated balance sheet data as of December 31, 2008, 2007 and 2006, and the selected consolidated statements of operations data for the years ended December 31, 2007 and 2006 have been derived from our audited consolidated financial statements not included in this prospectus.

The consolidated statements of operations data for the nine month periods ended September 30, 2011 and 2010 and the balance sheet data as of September 30, 2011 have been derived from our unaudited condensed consolidated financial statements that are included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial statements and include all adjustments (consisting of normal recurring adjustments) that we considered necessary for a fair presentation of the results for or as of the periods presented. The balance sheet data as of September 30, 2010 has been derived from our unaudited condensed consolidated financial statements, which are not included in this prospectus.

 

    Year ended December 31,     Nine months ended
September 30,
 
Consolidated statement of operations data:   2010(1)     2009     2008(2)     2007     2006           2011                 2010        
    (In thousands, except share and per share amounts)        

Revenues:

             

Biodiesel sales

  $ 207,902     $ 109,027     $ 69,509     $ 130,562     $ 93,649     $ 518,346      $ 142,109   

Biodiesel government incentives

    7,240       19,465       6,564       9,970       8,915       38,763        3,674   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total biodiesel

    215,142       128,492       76,073       140,532       102,564       557,109        145,783   

Services

    1,313       3,009       9,379       94,018       75,465       140        1,165   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    216,455       131,501       85,452       234,550       178,029       557,249        146,948   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs of goods sold:

             

Biodiesel

    194,016       127,373       78,736       141,748       92,423       463,962        132,518   

Services

    807       1,177       4,470       71,258       70,751       121        601   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs of goods sold

    194,823       128,550       83,206       213,006       163,174       464,083        133,119   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    21,632       2,951       2,246       21,544       14,855       93,166        13,829   

Total operating expenses

    29,681       24,144       24,208       29,453       11,688       25,134        24,076   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (8,049     (21,193     (21,962     (7,909     3,167       68,032        (10,247

Total other income (expense), net

    (16,102     (1,364     (2,318     36,623       (377  

 

 

 

 

 

 

 

 

 

(63,000

 

 

 

 

 

 

 

 

 

 

 

 

2,144

 

 

 

  

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax benefit (expense) and income (loss) from equity investments

    (24,151     (22,557     (24,280     28,714       2,790    

 

 

 

 

 

5,032

 

 

  

 

 

 

 

(8,103

 

Income tax benefit (expense)

    3,252       (45,212     9,414       3,198       745       (4,752     3,728   

Income (loss) from equity investments

    (689     (1,089     (1,013     113       493       501        (554
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (21,588     (68,858     (15,879     32,025       4,028    

 

 

 

 

 

781

 

 

  

 

 

 

 

(4,929

 

Less: Net (income) loss attributable to noncontrolling interests

    —          7,953       2,788       (141     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the company

    (21,588     (60,905     (13,091     31,884       4,028    

 

 

 

 

 

781

 

 

  

 

 

 

 

(4,929

 

Effects of recapitalization

    8,521       —          —          —          —          —          8,521   

 

 

 

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Table of Contents

Selected consolidated financial data

 

 

    Year ended December 31,     Nine months ended
September 30,
 
Consolidated statement of operations
data:
  2010(1)     2009     2008(2)     2007     2006           2011                 2010        
    (in thousands, except share and per share amounts)        

Less: accretion of preferred stock to redemption value

    (27,239     (44,181     (26,692     (4,434     —          (18,553     (21,613

Less: participating preferred dividends

    —          —          —          (7,276     (309     —          —     

Less: undistributed dividends allocated to preferred stockholders

    (10,027     (14,036     (11,145     (7,112     (1,095     (9,467     (7,034
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the company’s common stockholders

  $ (50,333   $ (119,122   $ (50,928     13,062        2,624      $ (27,239   $ (25,055
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

             

Basic

  $ (4.28   $ (15.35   $ (7.67   $ 2.51      $ 0.66      $ (2.02   $ (2.22
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted(3)

  $ (4.28   $ (15.35   $ (7.67   $ (0.40   $ 0.66      $ (2.02   $ (2.22
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net income (loss) per share attributable to common stockholders:

             

Basic

    11,770,848        7,762,891        6,637,422        5,198,597        3,983,344        13,479,891        11,271,765   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted(3)

    11,770,848        7,762,891        6,637,422        8,094,689        3,983,344        13,479,891        11,271,765   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income (loss) per share attributable to common stockholders(4):

             

Basic

  $ (0.41           $ 2.01     
 

 

 

           

 

 

   

Diluted

  $ (0.41           $ 2.01     
 

 

 

           

 

 

   

Pro forma weighted-average shares used to compute net income (loss) per share attributable to common stockholders(4):

             

Basic

    19,631,460                21,340,503     
 

 

 

           

 

 

   

Diluted

    19,631,460                21,340,503     
 

 

 

           

 

 

   
    As of December 31,     As of September 30,  
Consolidated Balance Sheet Data:   2010(1)     2009     2008(2)     2007     2006    

2011

   

2010

 
    (In thousands)        

Cash and cash equivalents

    4,259        5,855        15,311        18,965        53,698        30,883        11,486   

Working capital (deficit)(5)

    (3,581     10,786        25,984        36,157        69,930        65,704        13,828   

Total assets

    369,643        200,558        251,984        169,706        143,606        472,572        357,664   

Total liabilities

    212,091        78,567        65,359        32,283        68,767        294,794        184,338   

Total long-term obligations

    61,024        25,749        25,161        2,843        3,020        77,675        84,574   

Redeemable preferred stock

    122,436        149,122        104,607        43,707        20,934        140,989        116,810   

Total stockholders’ equity (deficit)

    35,116        (27,131     82,018        93,716        53,905        36,789        56,516   

 

(1)   Reflects the deconsolidation of Blackhawk as of January 1, 2010, the acquisition of Blackhawk as of February 26, 2010, the acquisition of CIE as of March 8, 2010, the consolidation of Landlord as of April 8, 2010, the acquisition of Tellurian and ABDF as of July 16, 2010 and the acquisition of Clovis Biodiesel, LLC as of September 21, 2010.
(2)   Reflects the consolidation of Blackhawk as of May 9, 2008 and the acquisition of USBG as of June 26, 2008.
(3)   Certain potentially dilutive securities were excluded from the calculation of diluted net income (loss) per share attributable to common stockholders during the periods presented as the effect was anti-dilutive, except for 2007, which reflects the inclusion of preferred shares but excludes warrants and options as the effect was anti-dilutive.
(4)   The pro forma per share amounts give effect to (i) the filing of our second amended and restated certificate of incorporation, (ii) the automatic conversion of all outstanding shares of Series A preferred stock and the reclassification of our existing common stock into an aggregate of 21,793,803 shares of Class A Common Stock, taking into account the concurrent 1-for-2.5 reverse stock split of our Class A Common Stock and shares of Series B preferred stock in the recapitalization transactions in connection with this offering, (iii) the issuance of 200,000 shares of Class A Common Stock to USRG immediately prior to the completion of this offering in connection with the termination of the Glycerin Option Agreement dated as of April 8, 2010, between us and USRG and (iv) the issuance of 134,173 shares of Class A Common Stock in exchange for existing warrants to purchase 287,552 shares of Class A Common Stock, as if such actions had occurred on the first day of the applicable period.
(5)   Working capital is defined as current assets less current liabilities.

 

 

 

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Management’s discussion and analysis of financial condition and results of operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk factors” included elsewhere in this prospectus.

OVERVIEW

We are the largest producer of biodiesel in the United States. We have been a leader of the biodiesel industry since 1996. We have transitioned from being primarily an operator of a third party-owned network of facilities to now owning five operating biodiesel production facilities and leasing a sixth biodiesel production facility with aggregate nameplate production capacity of 212 mmgy. We have transitioned from producing biodiesel from higher cost virgin vegetable oils, such as soybean oil, to primarily producing biodiesel from lower cost feedstocks, such as inedible animal fat, used cooking oil and inedible corn oil. We own biodiesel production facilities with nameplate capacities consisting of: a 12 mmgy facility in Ralston, Iowa, a 35 mmgy low-cost feedstock production facility near Houston, Texas, or the Houston facility, a 45 mmgy low-cost feedstock production facility in Danville, Illinois, a 30 mmgy low-cost feedstock production facility in Newton, Iowa and on July 12, 2011, we completed our acquisition of SoyMor Biodiesel, LLC, or SoyMor, a 30 mmgy biodiesel production facility in Albert Lea, Minnesota. As part of our acquisition strategy, in April 2010, we signed a seven year lease for a 60 mmgy low-cost feedstock production facility in Seneca, Illinois.

During 2010, we sold 68 million gallons of biodiesel, including five million gallons we purchased from third parties and resold and including eight million gallons we manufactured for others. The 68 million gallons we sold in 2010 represented approximately 22% of the total biodiesel produced in the United States in 2010. In the first nine months of 2011, we sold approximately 102 million gallons, including approximately 12 million gallons we purchased from third parties and resold and six million gallons we manufactured for others. The 102 million gallons we sold in the first nine months of 2011 represented approximately 15% of the total biodiesel produced in the United States during the first nine months of 2011. We estimate that we sold between 44 and 46 million gallons of biodiesel in the fourth quarter of 2011, which includes between three and five million gallons that we purchased from third parties and resold. Based on the midpoint of our estimated range of fourth quarter gallons, we sold approximately 147 million gallons in 2011, an increase of approximately 116% over 2010.

On July 12, 2011, we acquired SoyMor’s production facility, now owned by our subsidiary REG Albert Lea, LLC. We built and operated this facility under a management and operation services agreement, or MOSA, until SoyMor idled the facility in February 2008. In August 2011, we recommenced operations at the facility using soybean oil feedstock. We intend to upgrade the facility to process a wide variety of lower cost feedstocks as project financing becomes available and market conditions warrant. See “Note 5—Acquisitions” to our condensed consolidated financial statements for a description of the transaction.

The implementation of the Renewable Fuel Standard, or RFS2, has led to a significant year-over-year increase in demand and substantial increase in sales price per gallon during 2011. Over the three years prior to the implementation of RFS2, challenging biodiesel industry conditions had a significant effect on our results of operations. The United States biodiesel industry experienced a downturn beginning in 2008

 

 

 

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Management’s discussion and analysis of financial condition and results of operations

 

 

as a result of a variety of factors, including the imposition of anti-dumping tariffs and countervailing duties on exports of United States biodiesel to the European Union, or EU, the worldwide economic crisis, falling petroleum-based diesel fuel prices, an uncertain regulatory environment and high soybean oil prices. As a result of these factors, the average price for B100 Upper Midwest Biodiesel as reported by The Jacobsen fell from $4.47 per gallon in 2008 to $3.07 per gallon in 2009.

In response to these industry dynamics, we reduced expenses in our biodiesel business by shifting production to lower cost feedstocks such as inedible animal fat, used cooking oil and inedible corn oil. In addition, we periodically idled our plants when there was insufficient demand. Beginning in 2008, the services segment of our business became significantly less active as construction of new biodiesel production facilities largely stopped and the third party-owned facilities managed by us also saw decreased volume from poor industry conditions. However, in anticipation of increased demand for biodiesel as a result of RFS2, we elected to use our available resources and our market position to acquire our Danville and Newton facilities, each of which is capable of processing lower cost feedstock processing capabilities which we managed prior to acquiring these facilities. We also leased and obtained an option to buy the Seneca facility, a lower cost feedstock facility, and focused on developing sufficient and reliable supplies of lower cost feedstocks.

During the second half of 2010, we and the biodiesel industry began to benefit from RFS2, which became effective July 1, 2010 and requires Obligated Parties, including petroleum refiners and petroleum importers in the 48 contiguous states and Hawaii that have annual renewable fuel volume obligations, to use specified amounts of biomass-based diesel, which includes biodiesel, as discussed further below. In addition, the $1.00 per gallon federal blenders’ tax credit, which had expired as of December 31, 2009, was reinstated in December 2010 retroactively for all of 2010 and prospectively for 2011. As a result of these regulatory changes, as well as improving general economic conditions and relatively high petroleum prices, the price of and demand for biodiesel have increased significantly. In the first nine months of 2010, with RFS2 implemented in July 2010 and prior to the reinstatement of the blenders’ tax credit, our average price for B100 was $3.16 per gallon. In the first nine months of 2011, our average price per gallon of B100 was $5.24, or 66% higher than the average price during the first nine months of 2010, and we sold approximately 102 million gallons of biodiesel, including approximately twelve million gallons we purchased from third parties and resold and six million gallons that we manufactured for others, compared to approximately 68 million gallons sold in all of 2010.

We have completed eight acquisitions since the beginning of 2010, which include the acquisition of five biodiesel plants, and we intend to continue to seek opportunities to acquire biodiesel production facilities located in the United States and in international markets. 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. We plan to complete construction of these facilities as financing becomes available, subject to market conditions. 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, excluding working capital.

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

Biodiesel Segment

Our Biodiesel segment, as reported herein, includes:

 

Ø  

the operations of the following biodiesel production facilities:

 

 

 

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Management’s discussion and analysis of financial condition and results of operations

 

 

  Ø  

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

 

  Ø  

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

 

  Ø  

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

 

  Ø  

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

 

  Ø  

a leased 60 mmgy nameplate biodiesel production facility located in Seneca, Illinois, which began production in August 2010, since commencement of the lease in April 2010; and

 

  Ø  

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

 

Ø  

purchases and resale of biodiesel and raw material feedstocks produced by third parties;

 

Ø  

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

 

Ø  

our production of biodiesel under toll manufacturing arrangements with third parties using their feedstocks at our facilities.

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 2009 and 2010, our revenues from the sale of co-products were less than five percent of our total Biodiesel segment revenues.

As discussed under the heading “Industry overview—Government Programs Favoring Biodiesel Production and Use—Renewable Identification Numbers,” when we produce a gallon of biodiesel, we generate 1.5 Renewable Identification Numbers, or RINs, per gallon. RINs are used to track compliance with RFS2. RFS2 allows us to attach between zero and 2.5 RINs to any gallon of biodiesel. When we sell a gallon of biodiesel we generally attach 1.5 RINs. As a result, a portion of our selling price for a gallon of biodiesel is generally attributable to RINs. The value of RINs has become significant to the price of biodiesel, contributing approximately $1.11, or 26%, of the average Jacobsen B100 Upper Midwest spot price of a gallon of biodiesel in December 2010 and $1.83, or 38% of the average Jacobsen B 100 Upper Midwest spot price of a gallon of biodiesel in December 2011.

Services Segment

Our Services segment includes:

 

  Ø  

biodiesel facility management and operational services, whereby we provide day-to-day management and operational services to biodiesel production facilities as well as other clean-tech companies; and

 

  Ø  

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. Pursuant to a MOSA with a facility owner, we have provided a broad range of management and operations services, typically for a monthly fee based on gallons of biodiesel produced or marketed and a contingent payment based on the facility’s net income. We do not recognize revenues from the sale of biodiesel produced at managed facilities, which is sold for the account of the third party owner. In 2009, we provided notice of termination of our five remaining third party MOSAs because we determined the terms were not favorable to us. During 2010, we ceased providing services to three of these facilities, acquired one and continue to provide limited services to the other facility. The termination of our MOSAs has not had a significant impact on our financial statements.

 

 

 

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In addition, historically we have provided construction management services to the biodiesel industry, including assistance with pre-construction planning, such as site selection and permitting, facility and process design and engineering, engagement of subcontractors to perform construction activity and supply biodiesel processing equipment and project management services. Because we do not have internal construction capabilities and do not manufacture biodiesel processing equipment, we rely on our prime subcontractors, Todd & Sargent, Inc. and its joint venture with the Weitz Company, TSW, LLC, to fulfill the bulk of our obligations to our customers. Payments to these prime subcontractors historically represented most of the costs of goods sold for our Services segment.

Demand for our construction management and facility management and operational services depends on capital spending by potential customers and existing customers, which is directly affected by trends in the biodiesel industry. Due to the current economic climate and overcapacity in the biodiesel industry, we have not received any orders or provided services to outside parties for new facility construction services since 2009. We have, however, utilized our construction management expertise internally to upgrade two of our facilities during the last three years. We anticipate revenues derived from construction management services will be minimal in future periods.

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 been more expensive to produce than petroleum-based diesel fuel and as a result the industry depends on federal and, to a lesser extent, state usage requirements and tax incentives.

On July 1, 2010, RFS2 was implemented, stipulating volume requirements for the amount of biomass-based diesel 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 two categories of an Obligated Party’s annual renewable fuel volume requirement, or RVO, biomass-based diesel and advanced biofuel. According to the NBB, biodiesel is the only commercially significant RFS2-compliant biomass-based diesel fuel produced in the United States. The RFS2 program requires the domestic use of 800 million gallons of biodiesel in 2011 and one billion gallons in 2012. The EPA recently proposed a requirement for domestic use of biodiesel by Obligated Parties of 1.28 billion gallons in 2013. Our sales volumes have increased significantly during 2011 as a result of RFS2-generated demand.

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, 2009, but was reinstated on December 17, 2010, retroactively for 2010 and prospectively for 2011. The blenders’ tax credit has again expired as of December 31, 2011 and it is uncertain whether it will be reinstated. As a result of the uncertainty about the reinstatement of the blenders’ tax credit for most of 2010, we elected to sell mostly unblended biodiesel. Accordingly, we were not entitled to claim the blenders’ tax credit for these gallons on a retroactive basis. The absence of the blenders’ tax credit during most of 2010 also affected our ability to cost effectively sell biodiesel and as a consequence, we idled several of our plants for various periods of time. During 2010, most of our facilities operated at less than 50% utilization due to decreased demand for biodiesel. With the 2011 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 RVO for 2012 through RINs obtained in 2011. The resulting buildup of biodiesel inventories may reduce gallons sold in the first quarter of 2012.

 

 

 

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Biodiesel and feedstock price fluctuations

Our operating results generally reflect the relationship between the price of biodiesel 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 correlated to 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 refining capacity and natural disasters. Recently enacted government requirements and incentive programs, such as RFS2 and the blenders’ tax credit, have reduced this correlation, although it remains a significant factor in the market price of our product.

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. During the first nine months of 2011, RIN value represented approximately a third of the price of each gallon of biodiesel that we sold. From September 2011 through October 2011, we believe RIN prices declined primarily due to the biomass-based diesel industry producing over 100 million gallons for the two consecutive months of August and September 2011, according to EPA data.

During 2010, feedstock expense accounted for 76% of our costs of goods sold, while methanol and chemical catalysts expense accounted for 5% and 3% of our costs of goods sold, respectively. Methanol, a reactant in the production process, represents our second largest cost, the price of which is correlated to the cost of natural gas.

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

 

Feedstock    Factors Influencing Supply

Inedible Animal Fat

   Export demand
   Number of slaughter kills in the United States
   Demand for inedible animal fat from other markets

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 Corn Oil

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

Soybean Oil

   Export demand
   Weather conditions
   Farmer planting decisions
   Government policies and subsidies
   Crop disease

 

 

 

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During 2010, 91% of our feedstocks were comprised of inedible animal fats, used cooking oil and inedible corn oil, while as recently as 2007 we used 100% 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 December 2011, 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 2010 was $0.42 per pound, or $3.16 per gallon of biodiesel, in 2010, compared to $0.25 per pound, or $1.88 per gallon of biodiesel, in 2006, $0.36 per pound, or $2.72 per gallon of biodiesel, in 2007 and $0.51 per pound, or $3.85 per gallon of biodiesel, in 2008, assuming 7.5 pounds of soybean oil yields one gallon of biodiesel.

Over the period from January 2008 to December 2011, the price of choice white grease, an inedible animal fat (based on daily closing nearby prices for Missouri River delivery of choice white grease reported by The Jacobsen), have ranged from $0.0950 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 price for choice white grease during 2010 was $0.29 per pound, or $2.34 per gallon of biodiesel, compared to $0.33 per pound, or $2.64 per gallon of biodiesel, in 2008, assuming 8.0 pounds of choice white grease yields one gallon of biodiesel.

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. The results were derived using assumed conversion factors for the yield of each feedstock and subtracting the cost of producing one gallon of biodiesel made from each respective lower cost feedstock from the cost of producing one gallon of biodiesel made from soybean oil.

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*   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).
(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 market values delivered to Illinois as reported by The Jacobsen (Based on 8.2 pounds per gallon).
(3)   Choice white grease prices are based on the monthly average of the daily low prices of Missouri River choice white grease as reported by The Jacobsen (Based on 8.0 pounds per gallon).
(4)   Edible/tech tallow prices are based on the monthly average of the daily low sales prices of Missouri River edible/tech tallow as reported by The Jacobsen (Based on 7.6 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 each of them and the biodiesel price per gallon, from January 2008 to December 2011.

LOGO

 

 

(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.

 

 

 

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COMPONENTS OF REVENUES AND EXPENSES

We derive revenues in our Biodiesel segment from the following sources:

 

Ø  

sales of biodiesel produced at our wholly-owned facilities, including transportation, storage and insurance costs to the extent paid for by our customers;

 

Ø  

fees from toll manufacturing at our facilities for third parties;

 

Ø  

revenues from our sale of biodiesel produced by third parties through toll manufacturing arrangements with us;

 

Ø  

resale of finished biodiesel and raw material feedstocks acquired from others;

 

Ø  

sales of glycerin, other co-products of the biodiesel production process; and

 

Ø  

incentive payments from federal and state governments, including the federal biodiesel blenders’ tax credit, which we receive directly when we sell our biodiesel blended with petroleum-based diesel, primarily as B99.9, a less than one percent petroleum-based diesel mix with biodiesel, rather than in pure form, or B100, as well as, from the USDA Advanced Biofuel Program and RINs.

We derive revenues in our Services segment from the following sources:

 

Ø  

fees received from operations management services that we provide for biodiesel production facilities, typically based on production rates and profitability of the managed facility; and

 

Ø  

amounts received for services performed by us in our role as general contractor and construction manager for biodiesel production facilities.

Cost of goods sold for our Biodiesel segment includes:

 

Ø  

with respect to our production facilities, expenses incurred for feedstocks, catalysts and other chemicals used in the production process, leases, utilities, depreciation, salaries and other indirect expenses related to the production process, and, when required by our customers, transportation, storage and insurance;

 

Ø  

with respect to biodiesel acquired from third parties produced under toll manufacturing arrangements, expenses incurred for feedstocks, transportation, catalysts and other chemicals used in the production process and toll processing fees paid to the facility producing the biodiesel;

 

Ø  

with respect to finished goods acquired from third parties, the purchase price of biodiesel on the spot market or under contract, and related expenses for transportation, storage, insurance, labor and other indirect expenses; and

 

Ø  

changes during the applicable accounting period in the market value of derivative and hedging instruments, such as exchange traded contracts, related to feedstocks and commodity fuel products.

Cost of goods sold for our Services segment includes:

 

Ø  

with respect to our facility management and operations activities, primarily salary expenses for the services of management employees for each facility and others who provide procurement, marketing and various administrative functions; and

 

Ø  

with respect to our construction management services activities, primarily our payments to subcontractors constructing the production facility and providing the biodiesel processing equipment, and, to a much lesser extent, salaries and related expenses for our employees involved in the construction process.

 

 

 

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Selling, general and administrative expense consists of expenses generally involving corporate overhead functions and operations at our Ames, Iowa headquarters.

Other income (expense), net is primarily comprised of the changes in fair value of the embedded derivative related to the Series A preferred stock conversion feature, changes in fair value of interest rate swap, interest expense, interest income, the impairment of investments we made in biodiesel plants owned by third parties and the changes in valuation of the Seneca Holdco, LLC liability associated with the put and call options on the equity interest in Seneca Landlord, LLC, or Landlord.

ACCOUNTING FOR INVESTMENTS

We use the equity method of accounting to account for the operating results of entities over which we have significant influence. Significant influence may be reflected by factors such as our ownership percentage, our significant operational influence due to our management of biodiesel operations at a third party owned facility and participation by one of our employees on the facility’s board of directors. Prior to our acquisition on July 12, 2011, we accounted for our approximately 9% ownership interest in SoyMor under the equity method due to our ownership interest, MOSA and board seat. In the past we used this method to account for our interests in other entities where we had a significant management roll under a MOSA and had board participation. One of our wholly-owned subsidiaries acquired substantially all of the assets of SoyMor in July 2011; therefore, beginning on the date of acquisition we are no longer accounting for our interest under the equity method, and the operations of SoyMor, like all of our other wholly-owned subsidiaries are consolidated in our consolidated financial statements. Until January 1, 2011, we used the equity method of accounting to account for the operating results of Bell, LLC which owns our headquarters building. We own 50% of Bell, LLC and one of our employees is a member of Bell, LLC’s board of managers. Under the equity method, we recognized our proportionate share of the net income (loss) of each entity in the line item “Loss from equity investments.”

We use the cost method of accounting to account for our minority investment in three previously managed plants, East Fork Biodiesel, LLC, or EFB, Western Iowa Energy, LLC, or WIE, since May, 2010, and Western Dubuque Biodiesel, LLC, or WDB, since August 2010. Because we do not have the ability to influence the operating and financial decisions of EFB, WIE, or WDB, and do not maintain a position on the board of directors, the investment is accounted for using the cost method. Under the cost method, the initial investment is recorded at cost and assessed for impairment. There was a $0.4 million impairment recorded during 2010, relating to the wind up and liquidation of EFB, which fully impaired the remaining investment. We have not recorded any impairment of our investments in WIE or WDB.

For additional information with regards to prior accounting treatment for now acquired investments including Blackhawk and CIE, please see “Note 5—Blackhawk,” “Note 6—Acquisitions and Equity Transactions” and “Note 7—Variable Interest Entities” to our audited consolidated financial statements.

In June 2009, the Financial Accounting Standards Board, or FASB, amended its guidance on accounting for variable interest entities, or VIEs. As of January 1, 2010, we evaluated each investment and determined we do not hold a controlling interest in any of our investments in third party owned plants that would empower us to direct the activities that most significantly impact economic performance. As a result, we are not the primary beneficiary and do not consolidate these VIEs. See “Note 6—Variable Interest Entities” to our condensed consolidated financial statements for more information.

On April 8, 2010, we determined that Landlord was a VIE and it was consolidated into our financial statements as we are the primary beneficiary. See “Note 6—Variable Interest Entities” to our condensed consolidated financial statements for a description of the transaction. We have a put/call option with Seneca

 

 

 

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Holdco, LLC to purchase Landlord and currently lease the plant for production of biodiesel, both of which represent a variable interest in Landlord that is significant to the VIE. Although we do not have an ownership interest in Seneca Holdco, LLC, it was determined that we are the primary beneficiary due to the related party nature of the entities involved, our ability to direct the activities that most significantly impact Landlord’s economic performance and the structure of our relationship with Landlord that ultimately gives us the majority of the benefit from the use of Landlord’s assets.

During 2007, we invested, through a wholly-owned subsidiary, in Bell, LLC, a VIE joint venture, whereby we own 50% of the outstanding units. Bell, LLC owns and leases to us its corporate office building located in Ames, Iowa, which we use as our corporate headquarters. We currently have the right to exercise a call option with the other joint venture member, Dayton Park, LLC, to purchase Bell, LLC; therefore, we have determined we are the primary beneficiary of Bell, LLC and have consolidated Bell, LLC into our financial statements in accordance with ASC Topic 810, “Consolidation”, or ASC Topic 810. See “Note 7—Variable Interest Entities” to our condensed consolidated financial statements for a description of the consolidation.

Risk Management

The profitability of the biodiesel production business largely depends on the spread between prices for feedstocks and for biodiesel fuel. We actively monitor changes in prices of these commodities and attempt to manage a portion of the risks of these price fluctuations. 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. Adverse price movements for these commodities directly affect our operating results. As a result of our acquisitions in 2010 and 2011, our exposure to these risks has increased. In making risk management decisions, we receive input from others with risk management expertise and utilize research conducted by outside firms to provide additional market information.

We 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 were supplied under a three-year agreement with West Central that expired on July 8, 2010. However, we continue to purchase under, and expect to renegotiate terms similar to, those contained in the expired agreement. The purchase price for soybean oil under this agreement is indexed to prevailing Chicago Board of Trade, or CBOT, soybean oil market prices with a negotiated market basis. We utilize futures contracts and options to hedge, or lock in, the cost of portions of our future soybean oil requirements generally for varying periods up to one year.

Inedible animal fat was the primary feedstock that we used to produce biodiesel in 2010. During 2011, we have increased our use of inedible animal fat, used cooking oil and inedible corn oil (lower cost feedstocks) as a result of increased biodiesel production at our owned facilities with multi-feedstock processing capabilities. We utilize several varieties of inedible animal fat, such as beef tallow, choice white grease derived from pork and poultry fat. We manage lower cost feedstock supply risks related to biodiesel production through supply contracts with lower cost feedstock suppliers/producers. There is no established futures market for lower cost feedstocks. The purchase price 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 hedge against changing lower cost feedstock prices have involved entering into futures contracts 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.

 

 

 

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Our ability to mitigate our risk of falling biodiesel 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, which have been relatively limited to date, generally involve entering into futures contracts 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.

Changes in the value of these futures or options instruments are recognized in current income or loss.

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:

Revenue recognition.

We recognize revenues from the following sources:

 

Ø  

the sale of biodiesel, including RINs, biodiesel co-products and raw material feedstocks purchased by us or produced by us at owned manufacturing facilities, leased manufacturing facilities and manufacturing facilities with which we have tolling arrangements;

 

Ø  

fees received under toll manufacturing agreements with third parties;

 

Ø  

fees received from federal and state incentive programs for renewable fuels;

 

Ø  

fees from construction, operations and project management; and

 

Ø  

fees received for the marketing and sales of biodiesel produced by third parties.

Biodiesel sales and raw material feedstock revenues are recognized when there is persuasive evidence of an arrangement, delivery has occurred, the price has been fixed or is determinable and collectability can be reasonably assured.

We refer to agreements under which a biodiesel facility produces biodiesel for a third party using such third party’s feedstock as tolling arrangements. Generally, the party producing the biodiesel receives a per gallon fee. Fees received under toll manufacturing agreements with third parties are generally established at an agreed upon amount per gallon of biodiesel produced. The fees are recognized where there is persuasive evidence of an arrangement, delivery has occurred, the price has been fixed or is determinable and collectability can be reasonably assured.

 

 

 

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Revenues associated with the 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. Our revenue from governmental incentive programs is comprised of amounts received from the USDA Advanced Biofuel Program, or the USDA Program, and the blender’s tax credit. For a discussion of the blender’s tax credit, see the section entitled “Risk factors—Loss or reductions of tax incentives for biodiesel production or consumption would have a material adverse effect on our revenues and operating margins” and “—Factors Influencing Our Results of Operations—Governmental programs favoring biodiesel production and use.” In connection with the blender’s tax credit, we file a claim with the Internal Revenue Service for a refund of excised taxes each week for gallons we have blended to B99.9 and sold during the prior week. During 2011, we have collected these claims in approximately 20 days on average from the time we file and we currently have no filed claims older than one month. Other than routine audits of these claims, we have had no denials or challenges of our claims and no issues with collectability. In connection with the USDA Program, funds are allocated to the Company based on our proportionate eligible biofuels production and available funds under the USDA Program. Due to the uncertainty of the amounts to be received, we do not record amounts until we have received notification from the USDA or are in receipt of the funds.

Historically, we have provided consulting and construction services under turnkey contracts. These jobs require design and engineering effort for a specific customer purchasing a unique facility. We record revenues on these fixed-price contracts on the percentage of completion basis using the ratio of costs incurred to estimated total costs at completion as the measurement basis for progress toward completion and revenue recognition. The total contract price includes the original contract plus any executed change orders only when the amounts have been received or awarded.

Contract costs include all direct labor and benefits, materials unique to or installed in the project and subcontract costs. Contract accounting requires significant judgment relative to assessing risks, estimating contract costs and making related assumptions for schedule and technical issues. We routinely review estimates related to contracts and reflect revisions to profitability in earnings on a current basis. If a current estimate of total contract cost indicates an ultimate loss on a contract, we would recognize the projected loss in full when it is first determined. We recognize additional contract revenue related to claims when the claim is probable and legally enforceable.

Changes relating to executed change orders, job performance, construction efficiency, weather conditions and other factors affecting estimated profitability may result in revisions to costs and revenues and are recognized in the period in which the revisions are determined.

Billings in excess of costs and estimated earnings on uncompleted contracts represents amounts billed to customers prior to providing related construction services.

Fees for managing ongoing operations of third party plants, marketing biodiesel produced by third party plants and from other services are recognized as services are provided. We also have performance-based incentive agreements that are included as management service revenues. These performance incentives are recognized as revenues when the amount to be received is determinable and collectability is reasonably assured.

In the past, we have acted as a sales agent for certain third parties under our MOSAs, thus we recognized revenues on a net basis in accordance with ASC Topic 605-45, “Revenue Recognition.” We included the fees earned under the MOSAs in revenue. Our third party MOSAs all either expired or were terminated during 2010.

 

 

 

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Impairment of Long-Lived Assets and Certain Identifiable Intangibles:    We review long-lived assets, including property, plant and equipment and definite-lived intangible assets, for impairment in accordance with ASC Topic 360-10, “Property, Plant, and Equipment,” or ASC Topic 360-10 Asset impairment charges are recorded for long-lived assets and intangible assets subject to amortization when events and circumstances indicate that such assets may be impaired and the undiscounted net cash flows estimated to be generated by those assets are less than their carrying amounts. If estimated future undiscounted cash flows are not sufficient to recover the carrying value of the assets, an impairment charge is recorded for the amount by which the carrying amount of the assets exceeds its fair value. Fair value is determined by management estimates using discounted cash flow calculations. The estimate of cash flows arising from the future use of the asset that are used in the impairment analysis requires judgment regarding what we would expect to recover from the future use of the asset.

Significant assumptions used by management in the undiscounted cash flow analysis include the projected demand for biodiesel based on annual renewable fuel volume obligations under RFS2, our capacity to meet that demand, the market price of biodiesel and the cost of feedstock used in the manufacturing process. For facilities under construction, management’s estimates also include the capital expenditures necessary to complete construction of the plant. Our facilities under construction are expected to have substantially similar operating capabilities and results as our current operating facilities. Such operating capabilities would include similar feedstock capabilities, similar access to low cost feedstocks, proximity to shipping from our vendors and to our customers, and our ability to transfer best practices among our various operating facilities to maximize production volumes and reduce operating costs.

We estimated the future cash flows from the facilities under construction utilizing the following significant assumptions:

Costs to complete:    The remaining costs to complete the plant construction were developed by management, using historical and plant-specific knowledge, and external estimates. Management’s estimate of costs included those required to finish the general structure of each facility, as well as furnish it with the appropriate equipment necessary to produce biodiesel. There has not been an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group). There can be no assurance actual costs to complete or upgrade these facilities will be consistent with these estimates.

Gallons sold:    We estimated the aggregate gallons to be produced and sold based upon nameplate capacity of the plants under construction coupled with historical operating rates for our existing plants.

Gross margin per gallon:    We have estimated rising sales prices and costs after 2011. This annual increase is a consequence of anticipated increased demand for biodiesel, market trends expected for the energy industry and normal inflationary pressures. Biodiesel sales prices were estimated using the expected prices for biodiesel, RINs and co-products. When building the estimate for future prices, we weighed historical evidence, CBOT and NYMEX future prices, and industry forecasts. To develop the estimated feedstock prices, we utilized soybean oil as a base coupled with a spread to soybean oil for all other feedstocks based on historical experience and expected future price changes.

Plant operation costs:    We estimated plant operation costs to increase with production, until a steady cost level is reached once the plants are operating in a stabilized manner. Plant operating costs are estimated based upon costs at currently operating plants and take into account the size of the plants under construction and production volumes.

Financing of facilities under construction:    In 2008, we halted construction on our New Orleans, Louisiana, and Emporia, Kansas facilities as a result of conditions in the biodiesel industry and the

 

 

 

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credit markets. We continue to pursue financing and intend to complete the facilities, when industry conditions improve and financing becomes available on terms satisfactory to us. Since construction halted at these facilities in 2008, we have continued to monitor the construction sites and perform routine maintenance on the partially constructed assets. We also have pursued programs under which we could obtain a government guarantee to enhance our ability to obtain financing for these facilities, but at this point have not been able to obtain any such guarantees. We will continue to pursue such government programs in the future to the extent they arise. If available, we would also consider using funds from operations to fund a portion of the construction at these facilities. As currently configured, the assets can be completed as biodiesel production facilities, or with alternative or additional capabilities for the manufacture of specialty chemicals or other renewable products such as advanced biofuels and renewable chemicals. Some of the existing components could be transported for use at our other production facility locations, or they could be sold to third parties for various uses. The Emporia construction project benefits from a city incentive package that continues through July 1, 2013. In addition, from time to time we have had discussions with potential investors and commercial partners regarding these facilities. We have also invested in third party engineering studies to revise and enhance construction completion plans on a more cost effective basis. We cannot assure you if or when such facilities will be completed or any alternate transaction regarding such facilities that we may pursue will be consummated.

Period of time used in recovery analysis:    To estimate the period of time utilized in the recovery analysis, we followed the guidance included in ASC Topic 360-10-35-31, which states in part that estimates of future cash flows used to test the recoverability of a long-lived asset (asset group) shall be made for the remaining useful life of the asset (asset group) to the entity. For purposes of this Subtopic, the primary asset is the principal long-lived tangible asset being depreciated or intangible asset being amortized that is the most significant component asset from which the asset group derives its cash-flow-generating capacity. We considered the plant assets and their operational functionality and determined that the inner equipment of the plants, (e.g. tanks, separators, filters, heaters, etc.), is the most significant component of the asset group. We have determined that the useful life of this equipment has a range of 10-30 years depending on its use, with the majority of the equipment having a 20 year life. Therefore, we have selected a 20 year period from the original date the assets are placed into service as the time period over which the cash flows would be projected.

Our analysis determined that the undiscounted cash flows of each plant exceeded its carrying value by a significant margin and therefore no charge for impairment was needed.

During 2010, certain of our soybean oil supply agreements were cancelled. The original agreements were recorded as intangible assets in the amount of $7.0 million. As a result of the cancellations, the full amount was charged off as an impairment during the quarter ended September 30, 2010.

We also recorded an impairment on deferred financing cost related to Gulf Opportunity Zone, or GOZone, bonds available as part of Congress’ tax incentive program to help the Gulf Coast recover from Hurricane Katrina. We determined that it was not probable that the GOZone bonds allocation would be extended past the December 14, 2010 deadline or that the bonds would be issued prior to the deadline, and accordingly, we returned our allocation prior to the deadline. The amount of the impairment for the quarter ended September 30, 2010 was $0.3 million.

Total asset impairment charges of $7.5 million were recorded for the nine months ended September 30, 2010.

 

 

 

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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 methodology. 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. The annual impairment tests as of July 31, 2011 and 2010 determined that the fair value at each of the reporting units exceeded its carrying value by significant margins. There has been no impairment of goodwill recorded in 2011, 2010, or 2009.

We engaged an independent external valuation specialist to provide assistance in measuring the fair value of our services reporting unit using an income approach. The income approach uses a discounted cash flow, or DCF, analysis based on cash flow estimates prepared by us. 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, as well as a weighted average cost of capital (WACC) of approximately 19% were used to determine the reporting unit’s fair value.

Income before income taxes and loss from equity investments, as it appears in the segment footnote disclosure, presents only the income from third parties after the elimination of intersegment revenues and associated costs. The Company’s declines in income before income taxes and loss from equity investments 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. 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, income before income taxes and loss from equity investments increased from 2009 to 2010 and again for the nine-month period ended September 30, 2011 compared to the same period in the prior year. Additionally, the operating results for the services segment were significantly impacted by the significant improvement in the biodiesel industry primarily 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 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.

The annual impairment tests as of July 31, 2011 and 2010 determined that the fair value at each of the reporting units exceeded its carrying value by significant margins. No impairment of goodwill was recorded in 2011, 2010 or 2009. Results of the services reporting unit goodwill impairment test as of July 31, 2011 and 2010 indicated the estimated fair value of the services reporting unit was $53 million and $46 million, respectively, as compared to a carrying value of $20 million and $23 million, respectively.

Income taxes.    We recognize deferred taxes by the asset and liability method. Under this method, deferred income taxes are recognized for differences between the financial statement and tax bases of

 

 

 

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assets and liabilities at enacted statutory tax rates in effect for the years in which 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. In addition, valuation allowances are established if necessary to reduce deferred tax assets to amounts expected to be realized.

On December 31, 2009, we determined that it is unlikely that our deferred tax assets will be fully realized in the future based on available evidence; therefore, a full valuation allowance was established against the assets. On a quarterly basis, any deferred tax assets are reviewed to determine the probability of realizing the assets. At September 30, 2011, we had net deferred income tax assets of approximately $24.6 million with a valuation allowance of $19.7 million, which resulted in a net deferred tax asset of $4.9 million and is partially offset by an accrued liability of $1.5 million for uncertain tax benefits. 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.

Prior to the merger of our wholly-owned subsidiary with and into Blackhawk, or the Blackhawk Merger, Blackhawk was treated as a partnership for federal and state income tax purposes and generally did not incur income taxes. Instead, its earnings and losses were included in the income tax returns of its members. Therefore, no provision or liability for federal or state income taxes was included in our consolidated financial statements aside from our pro-rata share included on our Schedule K-1 determined based on our ownership interest for the year ending December 31, 2009 and the period ending February 26, 2010 prior to acquisition.

Consolidations.    Prior to January 1, 2010, we consolidated Blackhawk according to the then existing requirements of ASC Topic 810, as it was determined that we were the primary beneficiary. We determined that we were the primary beneficiary as we held significant variable interest through which we received the majority of Blackhawk’s expected losses or the majority of its expected residual returns. Variable interests in Blackhawk held by us were the subordinated convertible note, membership units, guaranty of indebtedness of up to $1.5 million, warrants, MOSA and the designed-build agreement.

As a result of the consolidation, all accounts of Blackhawk have been included in our financial statements as of May 9, 2008, the date of the transaction. As required by ASC Topic 810 the assets, including cash of $2.2 million, and liabilities consolidated by us were recorded at their relative fair values.

On May 9, 2008, we, through our subsidiary, entered into a MOSA with Blackhawk. The agreement provides for the overall management of Blackhawk’s facility by REG, including the procurement of feedstocks as necessary for the operation of the plant, performance of administrative, sales and marketing functions, and other services as needed. The term of the agreement is five years from the end of the first month in which biodiesel was produced for sale and will continue thereafter unless one of the parties gives 24-months notice to terminate the agreement. The MOSA is still in affect with Blackhawk, now known as REG Danville, LLC, and upon notice, will expire on April 30, 2014.

Beginning in March 2009, Blackhawk, now REG Danville, LLC, entered into a series of monthly toll processing agreements with REG under which Blackhawk has agreed to process biodiesel for the account of REG using feedstocks provided by REG. These agreements have continued on substantially similar terms since that time. REG has been obligated to request Blackhawk to produce a minimum amount of biodiesel under these agreements, which minimum is determined on a monthly basis. Blackhawk receives a set fee per gallon up to 2.5 million gallons produced and a reduced fee per gallon thereafter, which is also determined on a monthly basis. The agreements also waive the biodiesel production fee of $0.0425 per gallon payable to REG under the terms of the MOSA.

 

 

 

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On January 1, 2010, we deconsolidated Blackhawk as a result of adopting ASU No. 2009-17, as it was determined that we were no longer the primary beneficiary. Although the financial arrangements mentioned above resulted in us holding a substantial variable interest in Blackhawk, Blackhawk did not give us the power through the MOSA or the tolling arrangements to direct the activities that most significantly impact Blackhawk’s economic performance. Specifically, we entered into a tolling arrangement with Blackhawk on a month to month basis which required Blackhawk’s Board to approve the monthly volume and toll fee paid to Blackhawk. While we proposed this amount, the Blackhawk Board ultimately determined whether the volume and toll fee was acceptable to Blackhawk each month, which was the primary driver of Blackhawk’s economic performance. In addition, while the MOSA requires that we provide certain services for Blackhawk, the terms of the MOSA as well as Blackhawk’s limited liability company agreement explicitly specified ultimate power to direct the activities and business affairs of Blackhawk was held by its independent board. We concluded the activities that were most significant to Blackhawk’s economic performance, including budgeting, feedstock procurement, marketing and securing and allocating capital, were performed by Blackhawk’s independent board and therefore indicate our role in the MOSA was that of a service provider. Specifically, although we were able to make recommendations on the pricing of feedstock and finished product, these recommendations were presented to the independent board or its delegate for approval. We did not act as the independent board’s delegate. Furthermore, although we provided input in determining the capital and operating budget for the production facility, ultimate authority to approve the operating budget rested with Blackhawk’s Board which also was required to approve all capital expenditures before costs are incurred.

As a result of the above agreements and upon adoption of ASU No. 2009-17, we determined we were not the primary beneficiary of Blackhawk. Consequently, subsequent to adopting this accounting pronouncement, we deconsolidated Blackhawk. Upon deconsolidation, an equity investment in Blackhawk of $4.0 million and a subordinated convertible note receivable of $24.3 million were recognized at fair value using the option available under ASC Topic 825, “Financial Instruments,” or ASC Topic 825, and the previously consolidated amounts were removed from the consolidated balance sheet. The difference between the amounts recognized at fair value and the removal of the previously consolidated amounts was recorded to retained earnings (accumulated deficit).

As of June 30, 2010, we determined the acquisition price of Blackhawk and CIE. For the Blackhawk Merger and the acquisition of substantially all of the assets and liabilities of CIE pursuant to the CIE asset purchase agreement, the allocation of the recorded amounts of consideration transferred and the recognized amounts of the assets acquired and liabilities assumed are based on the final appraisals and evaluation and estimations of fair value as of the acquisition date. We determined the goodwill recorded was $44.2 million and $24.6 million for REG Danville and REG Newton, LLC, or REG Newton, respectively.

On April 8, 2010, we determined that Landlord was a VIE and consolidated it into our financial statements as we are the primary beneficiary (ASC Topic 810). We have a put/call option with Seneca Holdco, LLC to purchase Landlord and we currently lease the plant for production of biodiesel, both of which represent a variable interest in Landlord that are significant to the VIE. Although we do not have an ownership interest in Seneca Holdco, LLC, we determined that we are the primary beneficiary because the equity owners are our stockholders; our ability to direct the activities that most significantly impact Landlord’s economic performance; and the design of the leasing arrangement that ultimately gives us the majority of the benefit from the use of Landlord’s assets. We have elected the fair value option available under ASC Topic 825 on the $4.0 million investment made by Seneca Holdco, LLC and the associated put and call options. Changes in the fair value after the date of the transaction are recorded in earnings. Those assets are owned by and those liabilities are obligations of Landlord, which we have consolidated as the primary beneficiary.

 

 

 

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During 2007, we invested, through a wholly-owned subsidiary, in Bell, LLC, a VIE joint venture, whereby we own 50% of the outstanding units. Commencing January 1, 2011, we have the right to execute a call option with the joint venture member, Dayton Park, LLC, to purchase Bell, LLC; therefore, we determined we were the primary beneficiary of Bell, LLC and consolidated Bell, LLC into our financial statements in accordance with ASC Topic 810. See “Note 6—Variable Interest Entities” to our condensed consolidated financial statements for a description of the consolidation.

Valuation of Preferred Stock Embedded Derivatives.    The terms of our Series A Preferred Stock provide for voluntary and, under certain circumstances, automatic conversion of the Series A Preferred Stock to common stock based on a prescribed formula. In addition, shares of Series A Preferred Stock are subject to redemption at the election of the holder beginning February 26, 2014. The redemption price is equal to the greater of (i) an amount equal to $13.75 per share of Series A Preferred Stock plus any and all accrued dividends, not exceeding $16.50 per share, and (ii) the fair market value of the Series A Preferred Stock. Under ASC Topic 815-40, “Derivatives and Hedging,” or ASC Topic 815-40, we are required to bifurcate and account for as a separate liability certain derivatives embedded in our contractual obligations. An “embedded derivative” is a provision within a contract, or other instrument, that affects some or all of the cash flows or the value of that contract, similar to a derivative instrument. Essentially, the embedded terms contain all of the attributes of a free-standing derivative, such as an underlying market value, a notional amount or payment provision, and can be settled “net,” but the contract, in its entirety, does not meet the ASC Topic 815-40 definition of a derivative. For a description of the redemption and liquidation rights associated with Series A preferred stock, see “Note 4—Redeemable Preferred Stock” to our condensed consolidated financial statements.

We have determined that the conversion feature of Series A preferred stock is an embedded derivative because the redemption feature allows the holder to redeem Series A preferred stock for cash at a price which can vary based on the fair market value of the Series A preferred stock, which effectively provides the holders of the Series A preferred stock with a mechanism to “net settle” the conversion option. Consequently, the embedded conversion option must be bifurcated and accounted for separately because the economic characteristics of this conversion option are not considered to be clearly and closely related to the economic characteristics of the Series A preferred stock, which is considered more akin to a debt instrument than equity.

Upon issuance of Series A Preferred Stock, we recorded a liability representing the estimated fair value of the right of preferred holders to receive the fair market value of the common stock issuable upon conversion of the Series A preferred stock on the redemption date. This liability is adjusted each quarter based on changes in the estimated fair value of such right, and a corresponding income or expense is recorded as Other Income in our statements of operations.

We use the option pricing method to value the embedded derivative. We use the Black-Scholes options pricing model to estimate the fair value of the conversion option embedded in the Series A preferred stock. The Black-Scholes options pricing model requires the development and use of highly subjective assumptions. These assumptions include the expected volatility of the value of our equity, the expected conversion date, an appropriate risk-free interest rate, and the estimated fair value of our equity. The expected volatility of our equity is estimated based on the volatility of the value of the equity of publicly traded companies in a similar industry and general stage of development as us. The expected term of the conversion option is based on the period remaining until the contractually stipulated redemption date of February 26, 2014. The risk-free interest rate is based on the yield on United States Treasury STRIPs with a remaining term equal to the expected term of the conversion option. The development of the estimated fair value of our equity is discussed below in the “Valuation of the Company’s Equity.”

 

 

 

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The significant assumptions utilized in our valuation of the embedded derivative are as follows:

 

     September 30,
2011
    December 31,
2010
    February 26,
2010
    December 31,
2009
    December 31,
2008
    June 30,
2008
 

Expected volatility

     40.00     40.00     40.00     50.00     55.00     55.00

Risk-free rate

     2.70     4.10     4.40     4.11     4.39     4.58

The estimated fair values of the conversion feature embedded in the Series A preferred stock is recorded as a derivative liability. The derivative liability is adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as change in fair value of Series A preferred stock embedded derivative. The impact of the change in the value of the embedded derivative is not included in the determination of taxable income. For a discussion of the conversion of our Series A Preferred Stock, see the section entitled “Certain relationships and related party transactions—Recapitalization” in this prospectus.

Valuation of Seneca Holdco, LLC Liability.    In connection with the agreements under which we lease the Seneca facility (See “Note 6—Variable Interest Entities to our condensed consolidated financial statements), we have the option to purchase, or Call Option, and Seneca Holdco, LLC has the option to require us to purchase, or Put Option, the membership interest of Landlord whose assets consist primarily of a biodiesel plant located in Seneca, Illinois. Both the Put Option and the Call Option have a term of seven years and are exercisable by either party at a price based on a pre-defined formula. We have valued the amounts financed by Seneca Holdco, LLC, the Put Option and the Call Option using an option pricing model. The fair values of the Put Option and the Call Option were estimated using an option pricing model, and represent the probability weighted present value of the gain that is realized upon exercise of each option. The option pricing model requires the development and use of highly subjective assumptions. These assumptions include (i) the value of our equity, (ii) expectations regarding future changes in the value of our equity, (iii) expectations about the probability of either option being exercised, including the our ability to list our securities on an exchange or complete a public offering and (iv) an appropriate risk-free rate. We considered current public equity markets, relevant regulatory issues, biodiesel industry conditions and our position within the industry when estimating the probability that we will raise additional capital. Differences in the estimated probability and timing of this event may significantly impact the fair value assigned to the Seneca Holdco, LLC liability as we determined it is not likely that the Put Option will become exercisable in the absence of this event.

The significant assumptions utilized in our valuation of the Seneca Holdco, LLC liability are as follows:

 

     September 30,
2011
    December 31,
2010
    April 9,
2010
 

Expected volatility

     50.00     50.00     50.00

Risk-free rate

     2.70     2.45     3.36

Probability of IPO

     75.00     70.00     60.00

Preferred Stock Accretion.    Beginning October 1, 2007, the date that we determined that there was a more than remote likelihood that our then outstanding preferred stock would become redeemable, we commenced accretion of the carrying value of the preferred stock over the period until the earliest redemption date, which was August 1, 2011, to the preferred stock’s redemption value, plus accrued but unpaid dividends using the effective interest method. This determination was based upon the current state of the public equity markets which restricted our ability to execute a qualified public offering, our historical operating results and the volatility in the biodiesel and renewable fuels industries which have resulted in lower projected profitability. Prior to October 1, 2007, we had determined that it was not

 

 

 

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probable that the preferred stock would become redeemable; therefore, the carrying value was not adjusted in accordance with ASC Topic 480-10-S99, “Classification and Measurement of Redeemable Securities,” or ASC Topic 480-10-S99.

On February 26, 2010, after issuance of the Series A preferred stock, we determined that there was a more than remote likelihood that the Series A preferred stock would become redeemable and we commenced accretion of the carrying value of the Series A preferred stock over the period until the earliest redemption date (February 26, 2014) to the Series A preferred stock’s redemption value, plus dividends, using the effective interest method. This determination was based upon the state of the public equity markets at the time which restricted our ability to execute a qualified public offering, our historical operating results and the volatility in the biodiesel and renewable fuels industries.

Accretion of $6.5 and $18.6 million for the three and nine months ended September 30, 2011, respectively, and $5.4 and $21.6 million for the three and nine months ended September 30, 2010, respectively, has been recognized as a reduction to income available to common stockholders in accordance with paragraph 15 of ASC Topic 480-10-S99.

Valuation of the Company’s Equity.    Since quoted market prices for our securities are not available, we estimate the fair value of our equity based on the best information available at the time of the valuation.

We considered contemporaneous valuations prepared by an unrelated valuation firm that used three generally accepted valuation approaches to estimate the fair value of our aggregate equity: the income approach, the market approach and the cost approach. Ultimately, the estimated fair value of our aggregate equity is developed using the Income Approach—Discounted Cash Flow, or DCF, method. The value derived using this approach is supported by a variation of the Market Approach, when data for the valuation and expected financial performance of comparable guideline companies is available. For our June 30, 2011 and September 30, 2011 valuations, the market approach was not relied upon because we determined the income approach was more appropriate given the lack of comparable publicly traded pure-play biodiesel companies. The Cost approach is based on the current replacement cost which is considered, but difficult to determine and therefore not relied upon.

Material underlying assumptions in the DCF analysis include the gallons produced and managed, gross margin per gallon, expected long-term growth rates and an appropriate discount rate. Gallons produced and managed as well as the gross margin per gallon were determined based on historical and forward-looking market data.

The discount rate used in the DCF analysis is based on macroeconomic, industry and company-specific factors and reflects the perceived degree of risk associated with realizing the projected cash flows. The selected discount rate represents the weighted average rate of return that a market participant investor would require on an investment in our debt and equity. The percent of total capital assumed to be comprised of debt and equity when developing the weighted average cost of capital was based on a review of the capital structures of our publicly traded industry peers. The cost of debt was estimated utilizing the adjusted average 20-Year Baa-rated corporate bond rate during the previous 12 months representing a reasonable market participant rate based on our publicly traded industry peers. Our cost of equity was estimated utilizing the capital asset pricing model, which develops an estimated market rate of return based on the appropriate risk-free rate adjusted for the risk of the industry relative to the market as a whole, an equity risk premium and a company specific risk premium. The risk premiums included in the discount rate were based on historical and forward looking market data.

 

 

 

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Discount rates utilized in our DCF model are as follows:

 

     September 30,
2011
    June 30,
2011
    December 31,
2010
    February 26,
2010
    December 31,
2009
    December 31,
2008
    June 30,
2008
 

Discount rate

     18.00     19.5     16.00     15.00     13.00     15.00     13.50

Valuations derived from this model are subject to ongoing internal and external verification and review. Selection of inputs involves management’s judgment and may impact net income. This analysis is done on a regular basis and takes into account factors that have changed from the time of the last common stock issuance. Other factors affecting our assessment of price include recent purchases or sales of common stock, if available.

On a quarterly basis we engage a third party valuation firm to estimate the fair value of our equity. The third party valuation firm as an additional income methodology uses the probability-weighted expected return method, under which, the value of equity is estimated based upon an analysis of future values for the entire equity assuming various future outcomes. Share value is based upon the probability weighted present value of these expected outcomes, as well as the rights of each class of preferred and common stock. Expected valuations under each future event scenario are estimated based upon our forecast financial statements. Estimated probabilities of occurrences of future events and expected dates of each event are estimated based upon discussions with our management and analysis of market conditions.

In anticipation of this offering, we considered whether the estimates of the fair value of the common stock used in the accounting for acquisitions during July 2011 and share-based compensation for RSUs granted in September 2011 were reasonable based on conducting a retrospective analysis. We considered the valuation methodologies that the investment banking firms discussed with us in preparation for this offering in the context of generally accepted valuation approaches. We further considered the likelihood of proceeding with this offering and the changes in the macroeconomic environment during the third and fourth quarter of 2011. Based on such considerations, we determined that the valuation estimates completed by management at the time of each equity offering accurately reflected the fair value of our common stock at that time.

June 2011 Valuation

The factors we considered in determining the fair value of our equity in June 2011 included:

 

Ø  

a contemporaneous third-party valuation based on the income approach;

 

Ø  

a substantial increase in our revenue from the three months ended March 31, 2011 to the three months ended June 30, 2011, reflecting an increase in overall demand for biodiesel;

 

Ø  

the commencement of our initial public offering process, including holding an organizational meeting during April 2011;

 

Ø  

a discount rate applied of approximately 19.5% based on the weighted average cost of capital calculated using a risk-free rate of 4.1%, an equity risk premium of 18.9% and an after-tax cost of debt of 5.3%; and

 

Ø  

an estimated 75% probability for an IPO in September 2011, a 20% probability of an IPO in November 2011 and a 5% probability of some other liquidity event.

September 2011 Valuation

The factors we considered in determining the fair value of our equity in September 2011 included:

 

Ø  

a contemporaneous third-party valuation based on the income approach;

 

 

 

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Ø  

a discount rate of approximately 18.0% based on the weighted average cost of capital calculated using a risk-free rate of 2.7%, an equity risk premium of 18.1% and an after-tax cost of debt of 5.4%;

 

Ø  

further increases in our revenues as a result of increased demand;

 

Ø  

increased expectations of our production rates due, in part, to our completion of the acquisition and planned upgrade of our Albert Lea facility;

 

Ø  

an increase in RIN values;

 

Ø  

an estimated 75% probability for an IPO in November 2011, a 23 % probability of an IPO in February 2012 and a 2% probability of some other liquidity event; and

 

Ø  

increased levels of working capital generated from operations making growing trade volume easier to manage and cost of funds lower.

We expect there to be a difference between the estimated fair value of our equity in June 2011 and September 2011 and the price of our common stock sold in this offering. We believe the difference is primarily attributable to:

 

Ø  

Different valuation methodologies. The valuation prepared to determine our estimated initial public offering price used different methods than were used to determine our stock price for recent transactions. Our preliminary estimated initial public offering (IPO) price was determined with guidance from our underwriters that is based primarily on the market valuation approach referenced against guideline comparable companies in the Clean Tech sector and current market conditions. Specifically, our estimated IPO price is based on a multiple of our estimated 2012 and 2013 EBITDA, whereas our June 30, 2011 and September 30, 2011 contemporaneously prepared valuations were based on a DCF of our 5-year financial projection model. We believe the market valuation approach is appropriate for valuation at this time since it will likely be the guiding valuation methodology once we become a public company.

 

Ø  

Market conditions. Market conditions differ considerably today relative to those present in July and September 2011. We have been advised by our underwriters that investors are likely to ascribe a lower EBITDA valuation multiple to our EBITDA today due to higher volatility in the equity capital markets and an overall decline in equity values since June 2011. Equity values for companies deemed comparable to ours have decreased since June 2011 from five percent to 60 percent. Furthermore, cleantech indices have declined during the same time period such as the WilderHill Clean Energy Index down 41.5%, the WilderHill New Energy Global Innovation Index as tracked by the PowerShares Global Clean Energy Portfolio down 37.2% and the Cleantech Index down 25.4%. These conditions impact our expected initial public offering price more than they impacted prior valuations because the market valuation approach is more sensitive to current market conditions than the income approach used in our June 2011 and September 2011 valuations.

 

Ø  

IPO Discount. We expect an IPO discount to be applied to the value our common stock, which is consistent with IPO market pricing. It is our understanding that IPO discounts can generally range from 0% to 50%, depending on other market and global economic conditions and that the average IPO discount for new issuers since the beginning of 2010 with market capitalizations of $1.0 billion or less was approximately 30%. In addition, many companies in the renewable fuel and chemicals sector that have recently gone public since the beginning of 2011 have experienced significant decreases in value and significant volatility since their offerings, creating more difficult market conditions for the new issue market. No IPO discount was considered in the June 2011 and September 2011 valuations since a 10% discount for lack of marketability was already included in those valuations.

 

 

 

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RESULTS OF OPERATIONS

Three and nine months ended September 30, 2011 and September 30, 2010

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

 

Three Mont Three Mont Three Mont Three Mont
     Three Months Ended
September  30,
    Nine Months Ended
September  30,
 
      2011     2010     2011     2010  

Revenues

        

Biodiesel

   $  233,925      $   62,965      $  518,346      $   142,109   

Biodiesel government incentives

     22,497        -            38,763        3,674   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total biodiesel

     256,422        62,965        557,109        145,783   

Services

     80        157        140        1,165   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     256,502        63,122        557,249        146,948   

Costs of goods sold

        

Biodiesel

     201,878        56,569        463,962        132,518   

Services

     79        68        121        601   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     201,957        56,637        464,083        133,119   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     54,545        6,485        93,166        13,829   

Selling, general and administrative expenses

     11,045        5,782        25,134        16,599   

Impairment of assets

     -            7,336        -            7,477   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     43,500        (6,633     68,032        (10,247

Other income (expense), net

     (41,404     (811     (63,000     2,144   

Income tax benefit (expense)

     (4,752     -            (4,752     3,728   

Income (loss) from equity investments

     649        (173     501        (554
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to REG

     (2,007     (7,617     781        (4,929

Effects of recapitalization

     -            -            -            8,521   

Accretion of preferred stock to redemption value

     (6,477     (5,367     (18,553     (21,613

Undistributed dividends allocated to preferred stockholders

     (3,221     (2,961     (9,467     (7,034
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to the Company’s common stockholders

   $ (11,705   $ (15,945   $ (27,239   $ (25,055
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenues. Our total revenues increased $193.4 million, or 306%, and $410.3 million, or 279%, to $256.5 million and $557.2 million for the three and nine months ended September 30, 2011, respectively, from $63.1 million and $146.9 million for the three and nine months ended September 30, 2010, respectively. This increase was due to an increase in biodiesel revenues as follows:

Biodiesel. Biodiesel revenues including government incentives increased $193.4 million, or 307%, and $411.3 million, or 282% to $256.4 million and $557.1 million during the three and nine months ended September 30, 2011, respectively, from $63.0 million and $145.8 million for the three and nine months ended September 30, 2010, respectively. This increase in biodiesel revenues was due to an increase in both gallons sold and selling price. Due to higher RIN and energy prices in the first nine months of 2011, our average B100 sales price per gallon increased $2.54, or 80%, and $2.08, or 66%, to $5.72 and $5.24 during the three and nine months ended September 30, 2011, respectively, compared to $3.18 and $3.16 during the three and nine months ended September 30, 2010, respectively. The increase in sales

 

 

 

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price from the first nine months of 2010 to the first nine months of 2011 contributed to an $85.1 million increase in revenues when applied to the number of gallons sold during the first nine months of 2010. Gallons sold, excluding tolled gallons, increased 23.2 million, or 130%, and 55.8 million, or 136%, to 41.1 million and 96.7 million during the three and nine months ended September 30, 2011, respectively, compared to 17.9 million and 40.9 million during the three and nine months ended September 30, 2010, respectively. The increase in gallons sold for the nine months ended September 30, 2011 accounted for a revenue increase of $292.4 million using pricing for the nine months of 2011. We tolled 5.6 million gallons and 7.5 million gallons at the REG Houston facility for the nine months ended September 30, 2011 and 2010, respectively. This increase in gallons sold reflects significantly stronger market demand primarily as a result of RFS2. In response to this increase in demand, our Ralston, Newton, Danville and Seneca facilities produced biodiesel continuously through the first three quarters of 2011, and REG Albert Lea commenced operations during third quarter 2011. In addition to the increase in gallons sold and selling price, we received notification and payment of $9.9 million from the USDA Advanced Biofuel Program during third quarter 2011.

In the fourth quarter of 2011, we expect our gross margin to be generally comparable to our gross margin of 17% in the nine months ended September 30, 2011, but lower than the 21% gross margin achieved in the third quarter, as the third quarter benefitted from the $9.9 million USDA payment referred to above and generally higher RIN prices. Average daily reported RIN prices were approximately 16% higher in the third quarter than in the fourth quarter of 2011. However, with the 2011 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 RVO for 2012 through RINs obtained in 2011. The resulting buildup of biodiesel inventories may reduce gallons sold in the first quarter of 2012.

Services. Services revenues decreased $0.1 million, or 50%, and $1.1 million, or 92%, to $0.1 million for the three and nine months ended September 30, 2011, respectively, from $0.2 million and $1.2 million for the three and nine months ended September 30, 2010, respectively. This decrease was due to our decision to cancel our remaining network plant MOSAs during 2010.

Costs of goods sold. Our cost of goods sold increased $145.4 million, or 257%, and $331.0 million, or 249%, to $202.0 million and $464.1 million for the three and nine months ended September 30, 2011, respectively, from $56.6 million and $133.1 million for the three and nine months ended September 30, 2010, respectively. This increase was primarily due to costs associated with the increase in gallons sold in the 2011 period as follows:

Biodiesel. Biodiesel cost of goods sold increased $145.3 million, or 257%, and $331.5 million, or 250%, to $201.9 million and $464.0 million for the three and nine months ended September 30, 2011, respectively, compared to $56.6 million and $132.5 million for the three and nine months ended September 30, 2010, respectively. The increase in biodiesel cost of goods sold is primarily the result of the additional gallons sold in the 2011 period as discussed above and an increase in average feedstock prices. Average inedible animal fat costs for the three and nine months ended September 30, 2011 were $0.50 and $0.47 per pound, respectively, compared to $0.27 and $0.28 per pound for the three and nine months ended September 30, 2010, respectively. Soybean oil costs for the three and nine months ended September 30, 2011 were $0.58 and $0.57 per pound, respectively, and were $0.38 and $0.37 per pound for the three and nine months ended September 30, 2010, respectively. We had gains of $6.1 million and $4.0 million from hedging activity in the three and nine months ended September 30, 2011, respectively, compared to gains of $0.4 million and $0.9 million from hedging arrangements in the three and nine months ended September 30, 2010, respectively.

 

 

 

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Services. Costs of services increased $0.0 million and decreased $0.5 million to $0.1 million for the three and nine months ended September 30, 2011, respectively, from $0.1 million and $0.6 million for the three and nine months ended September 30, 2010, respectively. Costs incurred to perform services under the MOSAs decreased due to our decision to cancel the MOSAs during 2010.

Selling, general and administrative expenses.    Our selling, general and administrative, or SG&A, expenses were $11.0 million and $25.1 million for the three and nine months ended September 30, 2011, respectively, compared to $5.8 million and $16.6 million for the three and nine months ended September 30, 2010 respectively. SG&A expenses increased $5.2 million, or 90%, and $8.5 million, or 51%, for the three and nine months ended September 30, 2011, respectively. The increase was partly related to the additional non-cash stock compensation expense of $1.1 million and $3.0 million for the three and nine months ended September 30, 2011, respectively, compared to $0.4 million and $0.5 million for the three and nine months ended September 30, 2010, respectively. Additionally, depreciation expense increased $0.2 million, the provision for bad debt expense increased $1.3 million, travel expense increased $0.2 million and insurance expense increased approximately $0.2 million, for an aggregate of $1.9 million, in the first nine months of 2011 when compared to the same period for 2010. During third quarter 2011, we accrued $3.1 million in expense related to the 2011 cash incentive plan based upon the achievement of the company performance targets for 2011.

Other income (expense), net.    Other expense was $41.4 million and $63.0 million for the three and nine months ended September 30, 2011 and other expense was $0.8 million and other income was $2.1 million for the three and nine months ended September 30, 2010. 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 $38.5 million and $55.6 million of expense for the three and nine months ended September 30, 2011, respectively, and $2.0 million and $7.0 million for the three and nine months ended September 30, 2010, respectively. We refer to the combination of the Call Option and the Put Option related to the purchase of the membership interest of Landlord, which owns the Seneca facility, as the Seneca Holdco liability. The change in fair value of the Seneca Holdco liability was $1.0 million and $2.5 million of expense for the three and nine months ended September 30, 2011, respectively, and was $1.8 million and $2.1 million of expense for each of the three and nine months ended September 30, 2010. Interest expense increased $0.7 million and $2.4 million for the three and nine months ended September 30, 2011, respectively, from $1.5 million and $3.2 million for the three and nine months ended September 30, 2010, respectively. This increase was primarily attributable to the debt related to the consolidation of Landlord during 2010 and new borrowings on the WestLB Revolver.

Income tax benefit (expense).    There was income tax expense recorded during the quarter ended September 30, 2011 of $4.8 million, compared to an income tax benefit of $3.7 million for the nine months ended September 30, 2010. Deferred tax liabilities were recorded as a result of the Blackhawk Merger and CIE Asset Acquisition in 2010. As the deferred tax liabilities were recorded, the resulting decrease in net deferred tax assets required a lower valuation allowance. The release of the associated valuation allowance recorded after finalization of the Blackhawk and CIE purchase accounting transactions resulted in an income tax benefit for the nine months ended September 30, 2010. During the third quarter 2011, the Company revised its forecasted taxable income for the current year end and projected it would incur an income tax liability for the twelve months ending December 31, 2011. The forecasted income tax liability results from a significant increase in taxable income, as well as limitations on the Company’s ability to utilize its entire carryforward net operating losses in 2011. The revised forecast resulted in an income tax expense of $4.8 million in both the three and nine months ended September 30, 2011. At September 30, 2011, we had net deferred income tax assets of approximately

 

 

 

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$24.6 million with a valuation allowance of $19.7 million, which resulted in a net deferred tax asset of $4.9 million and was partially offset by an accrued liability for uncertain tax benefits. The Company had an income tax liability of $7.5 million as of September 30, 2011.

Income/(loss) from equity investments.    Gain from equity investments was $0.5 million for the first three quarters of 2011 and a loss of $0.6 million for the first three quarters of 2010. The change is due to lower levels of overall biodiesel production at equity method investees that were generating gross losses during the first nine months of 2010 and the change of investments from equity method to cost method during the last half of 2010, coupled with a gain of $0.7 million from our investment in SoyMor biodiesel when we purchased the assets of SoyMor during the quarter ended September 30, 2011.

Effects of Biofuels Merger Recapitalization.    In February 2010, we acquired REG Biofuels, Inc., or Biofuels, our accounting predecessor, which transaction we refer to as the Biofuels Merger. Due to the Biofuels Merger, we recorded the effect from recapitalization of $8.5 million in 2010. To account for the exchange of one series of preferred shares for the newly issued series of preferred shares, we compared the fair value of the preferred shares issued to the carrying amount of the preferred and common shares that were redeemed. The excess of the carrying amount of preferred and common shares that were redeemed over the fair value of the preferred 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 $6.5 million and $18.6 million for the three and nine months ended September 30, 2011, respectively, compared to $5.4 and $21.6 million for the three and nine months ended September 30, 2010, respectively. During the first quarter of 2010, we accreted two months of the previously issued Biofuels preferred stock (redemption date of August 1, 2011) and one month of newly issued Series A Preferred Stock (redemption date February 26, 2014). Monthly accretion expense decreased after the Biofuels Merger in 2010 as a result of the new redemption amount and redemption date of our Series A Preferred Stock.

Undistributed dividends.    Undistributed preferred stock dividends were $3.2 million and $9.5 million for the three and nine months ended September 30, 2011, respectively, compared to $3.0 million and $7.0 million for the three and nine months ended September 30, 2010, respectively. During the first quarter of 2010, we accrued dividends of the previously issued Biofuels preferred stock prior to the Biofuels Merger on February 26, 2010, All prior undistributed dividends were foregone and cancelled as part of the merger agreement.

 

 

 

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Fiscal year ended December 31, 2010 and fiscal year ended December 31, 2009

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

 

     Twelve Months Ended
December 31,
 
      2010     2009  

Revenues

    

Biodiesel

   $ 207,902     $ 109,027  

Biodiesel government incentives

     7,240       19,465  
  

 

 

   

 

 

 

Total biodiesel

     215,142       128,492  

Services

     1,313       3,009  
  

 

 

   

 

 

 

Total

     216,455       131,501  
  

 

 

   

 

 

 

Cost of goods sold

    

Biodiesel

     194,016       127,373  

Services

     807       1,177  
  

 

 

   

 

 

 

Total

     194,823       128,550  
  

 

 

   

 

 

 

Gross profit

     21,632       2,951  

Selling, general and administrative expenses

     22,187       25,565  

Gain on sale of assets—related party

     —          (2,254

Impairment of assets

     7,494       833  
  

 

 

   

 

 

 

Loss from operations

     (8,049     (21,193

Other income (expense)

     (16,102     (1,364

Income tax benefit (expense)

     3,252       (45,212

Loss from equity investments

     (689     (1,089
  

 

 

   

 

 

 

Net loss

     (21,588     (68,858

Net loss attributable to non-controlling interests

     —          7,953  
  

 

 

   

 

 

 

Net loss attributable to REG

     (21,588     (60,905

Effects of recapitalization

     8,521       —     

Accretion of preferred stock to redemption value

     (27,239     (44,181

Less: undistributed dividends allocated to preferred stockholders

     (10,027     (14,036
  

 

 

   

 

 

 

Net loss attributable to the company’s common stockholders

   $ (50,333   $ (119,122
  

 

 

   

 

 

 

During 2009, Blackhawk was consolidated in our financial results. During first quarter 2010, Blackhawk was excluded from our financial results until the date of the Blackhawk Merger, February 26, 2010. After February 26, 2010, Blackhawk was included in our financial results. See “Note 5—Blackhawk” and “Note 7—Variable Interest Entities” in our audited consolidated financial statements for additional information relating to the Blackhawk consolidation.

Revenues.    Our total revenues increased $85.0 million, or 65%, to $216.5 million in 2010, from $131.5 million in 2009. This increase was due to an increase in biodiesel revenues, offset by a small decrease in services revenues, as follows:

Biodiesel.    Biodiesel revenues including government incentives increased $86.6 million, or 67%, to $215.1 million during the year ended December 31, 2010, from $128.5 million for the year ended December 31, 2009. This increase in biodiesel revenues was due to an increase in both average selling price and gallons sold. As a result of higher energy prices during 2010, the average sales price

 

 

 

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per gallon increased $0.57, or 22%, to $3.16, compared to $2.59 during 2009. The increase in sale price from 2009 to 2010 contributed to a $25.4 million revenue increase when applied to the number of 2009 gallons sold. Total gallons sold increased 34% to 59.5 million gallons during 2010 from 44.5 million gallons during 2009. The increase in gallons sold was primarily the result of additional demand. At 2010 pricing, the additional gallons sold in 2010 represented $47.4 million in additional revenues. We produced and sold 54.1 million gallons at our owned or leased facilities during 2010; compared to 41.5 million gallons at our owned or tolling facilities during 2009, which represents an increase of 12.6 million gallons, or 30.4%. We also purchased 5.4 million gallons of third party product in 2010 and 3.0 million gallons in 2009. During 2010 under a tolling arrangement, our Houston facility shipped 8.2 million gallons compared to 14.0 million gallons during 2009. For a description of “tolling arrangements,” see “—Critical Accounting Policies—Revenue Recognition.” As a result of these shipments, we earned toll fee revenues of $3.8 million during 2010, and $5.6 million during 2009. We had biodiesel government incentives revenue of $3.6 million during fourth quarter 2010 due to the reenactment of the blenders’ tax credit on December 17, 2010. We expect to continue to increase production based on anticipated additional demand for our product as a result of the implementation of RFS2.

Services.    Services revenues decreased $1.7 million, or 57%, to $1.3 million for the year ended December 31, 2010, from $3.0 million for the year ended December 31, 2009. Our revenues generated from management services decreased during 2010 due to decreased production at the third party plants driven by the expiration of the blenders’ tax credit and due to the termination of the MOSA arrangements.

Cost of goods sold.    Our cost of goods sold increased $66.2 million, or 51%, to $194.8 million for the year ended December 31, 2010, from $128.6 million for the year ended December 31, 2009. This increase was primarily due to costs associated with the increase in gallons sold in the 2010 period as follows:

Biodiesel.    Biodiesel cost of goods sold increased $66.6 million, or 52%, to $194.0 million for the year ended December 31, 2010, compared to $127.4 million for the year ended December 31, 2009. The increase in cost of goods sold is primarily the result of additional gallons sold in the 2010 period as outlined above and an increase in feedstock prices. Average animal fat costs for 2010 and 2009 were $0.30 and $0.24 per pound, respectively. Average soybean oil costs for 2010 and 2009 were $0.38 and $0.33 per pound, respectively. We had losses of $1.2 million from hedging activity during 2010, compared to a loss of $1.1 million from hedging activities in 2009. 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.

Services.    Cost of services decreased $0.4 million, or 33%, to $0.8 million for the year ended December 31, 2010, from $1.2 million for the year ended December 31, 2009. We had limited construction activity during 2010 and minimal associated costs. Costs incurred to perform services under the MOSAs decreased due to reduced employee costs stemming from the termination of our MOSAs during 2010.

Selling, general and administrative expenses.    Our SG&A expenses were $22.2 million for the year ended December 31, 2010, compared to $25.6 million for the year ended December 31, 2009. The decrease was primarily due to our 2009 expenses including the consolidation of Blackhawk SG&A expenses, which although still included in expenses during 2010, have been greatly reduced due to the completion of the Blackhawk Merger and start up of the facility. SG&A was further reduced by other cost cutting measures undertaken by management during 2010, which reduced wages by $1.4 million and reduced information technology expenses by $0.6 million during 2010.

 

 

 

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Gain on sale of assets—related party.    In July 2009, we sold our Stockton, California terminal facility to Westway Feed Products, Inc., or Westway, for $3.0 million in cash. We recognized a gain on the sale of this asset of $2.3 million. We had no similar sales in 2010.

Impairment of Long Lived and Intangible Assets.    During 2010, the raw material supply agreements for the New Orleans and Emporia facilities were cancelled. The original agreements were recorded as an intangible asset in the amount of $7.0 million. As a result of the cancellations the full amount was charged off during the three months ended December 31, 2010. We also impaired deferred financing costs related to the New Orleans project because we determined that it was unlikely that the previously contemplated Gulf Opportunity Zone bond financing, available as part of Congress’ tax incentive program to help the Gulf Coast recover from Hurricane Katrina, would be completed prior to the deadline. The amount of the impairment for 2010 was $0.3 million.

Other income (expense), net.    Other expense was $16.1 million for the year ended December 31, 2010 and $1.4 million during the year ended December 31, 2009. Other income and expense is primarily comprised of the changes in fair value of the Series A Preferred Stock conversion feature embedded derivative, changes in fair value of the Seneca Holdco, LLC 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 $8.2 million expense for year ended December 31, 2010, compared $2.3 million expense for the year ended December 31, 2009. The change in the fair value of the Seneca Holdco, LLC liability for the year ending December 31, 2010, was an expense of $4.2 million. Interest expense increased $2.5 million to $4.9 million for the year ended December 31, 2010, from $2.4 million for the year ended December 31, 2009. This increase was primarily attributable to the Seneca Transaction during the second quarter of 2010, the $49.4 million of debt assumed in connection with the Blackhawk Merger and the CIE Asset Acquisition during the first quarter of 2010. Other income and expense during 2009 included $1.4 million of miscellaneous income from the release of an escrow related to our Stockton terminal facility that occurred in the first half of 2009 and grant income of $1.0 million. In addition, during 2010 we fully wrote off our investment in East Fork Biodiesel, LLC for an additional expense of $0.4 million.

Income tax benefit (expense).    We recorded income tax expense for the year ended December 31, 2009 due to the full valuation allowance against the income tax expense. Income tax benefit was $3.3 million for the year ending December 31, 2010, compared to income tax expense of $45.2 million for the year ended December 31, 2009. Deferred tax liabilities were recorded as a result of the Blackhawk Merger and CIE Asset Purchase. As the deferred tax liabilities were recorded, the resulting decrease in net deferred tax assets required a lower valuation allowance. The release of the associated valuation allowance resulted in an income tax benefit. The income tax expense for the year ended December 31, 2009 was the result of our recording a full valuation allowance for our deferred tax assets.

Loss from equity investments.    Loss from equity investments was $0.7 million for the year ended December 31, 2010 and $1.1 million for the year ended December 31, 2009.

Non-controlling interest.    Net benefit from the removal of non-controlling interests was $8.0 million for the year ended December 31, 2009, resulting from the consolidation of Blackhawk in 2009. In 2010, there was no income or loss from non-controlling interest due to our acquisition of Blackhawk.

Effects of Biofuels Merger Recapitalization.    We recorded the effect from recapitalization of $8.5 million resulting from the Biofuels Merger in 2010. To account for the exchange of the then-existing series of preferred shares for the newly issued series of preferred shares, we compared the fair value of the preferred shares issued to the carrying amount of the preferred and common shares that were redeemed. The excess of the carrying amount of preferred and common shares that were redeemed over

 

 

 

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the fair value of the preferred 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 $27.2 million for the year ended December 31, 2010, compared to $44.2 million for the year ended December 31, 2009. The accretion amount increases as the redemption date becomes closer due to the use of the effective interest rate method. Accretion during 2009 was higher based on the previous redemption date of August 1, 2011. During 2010, we accreted two months of the previously issued Biofuels preferred stock (redemption date of August 1, 2011) and ten months of newly issued Series A Preferred Stock (redemption date February 26, 2014). Monthly accretion expense decreased after issuance of our new Series A Preferred Stock as a result of the new redemption amount and redemption date.

Undistributed dividends.    Undistributed preferred stock dividends were $10.0 million and $14.0 million for the years ended December 31, 2010 and 2009, respectively. During the first quarter of 2010, we accrued dividends of the previously issued Holdco preferred stock prior to the Biofuels Merger on February 26, 2010. All prior undistributed dividends were cancelled as part of the merger agreement.

Fiscal year ended December 31, 2009 and fiscal year ended December 31, 2008

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

 

     Twelve Months Ended
December 31,
 
      2009     2008  

Revenues

    

Biodiesel

   $ 109,027     $ 69,509  

Biodiesel government incentives

     19,465       6,564  
  

 

 

   

 

 

 

Total biodiesel

     128,492       76,073  

Services

     3,009       9,379  
  

 

 

   

 

 

 

Total

     131,501       85,452  
  

 

 

   

 

 

 

Cost of goods sold

    

Biodiesel

     127,373       78,736  

Services

     1,177       4,470  
  

 

 

   

 

 

 

Total

     128,550       83,206  
  

 

 

   

 

 

 

Gross profit

     2,951       2,246  

Selling, general and administrative expenses

     25,565       24,048  

Gain on sale of assets—related party

     (2,254     —     

Impairment of assets

     833       160  
  

 

 

   

 

 

 

Loss from operations

     (21,193     (21,962

Other income (expense)

     (1,364     (2,318

Income tax benefit (expense)

     (45,212     9,414  

Loss from equity investments

     (1,089     (1,013
  

 

 

   

 

 

 

Net loss

     (68,858     (15,879

Net loss attributable to non-controlling interests

     7,953       2,788   
  

 

 

   

 

 

 

Net loss attributable to REG

     (60,905     (13,091

Less—accretion of preferred stock to redemption value

     (44,181     (26,692

Less—undistributed dividends allocated to preferred stockholders

     (14,036     (11,145
  

 

 

   

 

 

 

Net loss attributable to the Company’s common stockholders

   $ (119,122     (50,928
  

 

 

   

 

 

 

 

 

 

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During 2008 and 2009, Blackhawk was consolidated in our financial results.

Revenues.    Our total revenues increased $46.0 million, or 54%, to $131.5 million for the year ended December 31, 2009 from $85.5 million for the year ended December 31, 2008. This increase was due to an increase in revenues from the Biodiesel segment and a decrease in revenues from the Services segment, as follows:

Biodiesel.    Biodiesel revenues including government incentives increased $52.4 million, or 69%, to $128.5 million for the year ended December 31, 2009 from $76.1 million for the year ended December 31, 2008. This increase in biodiesel revenue was primarily due to an increase in gallons sold. Gallons sold increased 253% from 12.6 million gallons during 2008 to 44.5 million gallons during 2009, excluding gallons tolled at our Houston facility. At 2009 pricing levels, the increase in gallons from 2008 to 2009 accounted for a revenue increase of $82.6 million. The increase in gallons sold is primarily the result of finished biodiesel produced by CIE and Blackhawk for us under tolling arrangements of 23.7 million gallons during 2009. For a description of “tolling arrangements”, see “Critical Accounting Policies—Revenue Recognition.” Our acquisition of the Houston facility in June 2008 resulted in 6.0 million gallons of production for our account during 2009, compared to zero gallons during 2008. The overall increase in gallons sold was partially offset by a reduction in our average B100 sales price from $4.46 in 2008 to $2.59 in 2009, reflecting lower market pricing. The decrease in sale price from 2008 to 2009 contributed to a $23.6 million revenue decrease when applied to 2008 gallons sold. Under the Houston facility’s tolling arrangement we produced 14.0 million gallons, during 2009, at our Houston facility compared to 8.8 million gallons during the same period of 2008. As a result of this production, revenues include an average toll fee of $0.40 per gallon.

Services.    Services revenues decreased $6.4 million, or 68%, to $3.0 million for the year ended December 31, 2009 from $9.4 million for the year ended December 31, 2008 almost entirely as a result of lower construction management services revenues due to decreased construction activity. The consolidation of Blackhawk as of May 9, 2008 resulted in the elimination for financial reporting purposes of all construction revenue related to the Blackhawk construction project, which, prior to the elimination represented substantially all of our construction revenues in 2009. In the first nine months of 2008, REG recognized $2.5 million of revenue from construction services including completion activities related to one other facility. Revenues generated from management services we provided to third party owned facilities were $1.6 million for the year ended December 31, 2009, compared to $3.7 million for the year ended December 31, 2008. This decrease was due to decreased production at the third party plants driven by the narrowing of the spread between feedstock and biodiesel prices.

Cost of goods sold.    Our cost of goods sold increased $45.4 million, or 55%, to $128.6 million for the year ended December 31, 2009 from $83.2 million for the year ended December 31, 2008. This increase is due to an increase in cost of goods sold in the Biodiesel segment, partially offset by lower cost of services, as follows:

Biodiesel.    Biodiesel costs of goods sold increased $48.7 million, or 62%, to $127.4 million for the year ended December 31, 2009 from $78.7 million for the year ended December 31, 2008. The increase in cost of goods sold is primarily the result of additional gallons sold in the 2009 periods as outlined above. Cost of goods during 2009 includes $59.4 million of cost of goods for 23.7 million gallons produced through tolling arrangements with others. Increases in gallons were offset mostly by average feedstock price reductions. Average feedstock cost for the year ended December 31, 2008 was $0.48 per pound, reflecting high soybean oil prices as we did not process a significant amount of animal fat in 2008. Average feedstock cost for the year ended December 31, 2009 was $0.33 per pound for soybean oil, which represents an approximate 31% cost reduction for soybean oil compared to 2008. The remaining feedstock cost reduction was due to use of inedible animal fat

 

 

 

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under the tolling arrangements during 2009, which is generally a lower cost feedstock. Average inedible animal fat cost during 2009 was $0.24 per pound. Risk management gains and losses, which offset costs of goods sold, were approximately $1.1 million of losses for 2009, compared to $0.4 million of gains for 2008. 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.

Services.    Cost of services decreased $3.3 million, or 73%, to $1.2 million for the year ended December 31, 2009 from $4.5 million for the year ended December 31, 2008. The decrease in cost of services revenue was attributable to decreased construction activity in 2009. Costs incurred to perform services under the MOSAs were consistent for both periods as we provided services to the same number of third party facilities in each period.

Selling, general and administrative expenses.    Our SG&A expense increased $1.6 million, or 7%, to $25.6 million for the year ended December 31, 2009 from $24.0 million for the year ended December 31, 2008. The increase was attributable to a $4.3 million increase in professional expenses for the year ending December 31, 2009 compared to year ending December 31, 2008. This increase is almost entirely related to the consolidation transactions during 2009. Costs also increased due to the inclusion of $2.8 million in expenses relating to Blackhawk in 2009 compared to $1.3 million during 2008. Also, during the first quarter of 2009, we collected a doubtful receivable account which was accounted for as a $1.5 million decrease to SG&A expenses. Non-cash stock compensation expense for the year ended December 31, 2009 was $2.5 million compared to $3.6 million for the year ended December 31, 2008. The net amortization expense, excluded from interest expense, for the year ended December 31, 2009 was $1.0 million compared to $0.7 million of net amortization income for the year ended December 31, 2008.

Gain on sale of assets—related party.    In July 2009, we sold the Stockton terminal facility to Westway for $3.0 million in cash. We recognized a gain on the sale of this asset of $2.3 million. We had no similar sale in 2008.

Impairment of Long Lived and Intangible Assets.    Impairment of long lived assets increased $0.6 million, to $0.8 million for the year ended December 31, 2009 from $0.2 million for the year ended December 31, 2008. The $0.8 million impairment in 2009 related to a write off of construction inventory. The $0.2 million impairment in 2008 related to a partial write off of abandoned capital assets.

Other income (expense), net.    Other income and expense was $1.4 million of expense for the year ended December 31, 2009 and $2.3 million of expense for the year ended December 31, 2008. Other expense is primarily comprised of the changes in fair value of the preferred stock conversion feature embedded derivative, interest expense, interest income, and the other non-operating items. The change in fair value of the preferred stock conversion feature embedded derivative resulted in expense of $2.3 million for the year ending December 31, 2009, compared to income of $2.1 million for the year ending December 31, 2008. The expense was recorded as a result of a net increase in the fair market value of our common stock. The change in fair value of interest rate swap recognized a gain of $0.4 million for the year ended December 31, 2009 and a loss of $1.4 million for the year ended December 31, 2008 as a result of the consolidation of Blackhawk into our financial statements. Interest expense increased $0.5 million, to $2.4 million for the year ended December 31, 2009 from $1.9 million for the year ended December 31, 2008. This increase was primarily attributable to new debt of $1.8 million for 2009 and interest paid to TSW, LLC during 2009 and the consolidation of Blackhawk into our financial statements, which accounted for $0.2 million in interest expense for 2008. We incurred impairment of investments of $0.2 million for the year ended December 31, 2009 versus $1.4 million for the year ended December 31, 2008 related to a write down of our investment in East Fork Biodiesel, LLC. Other income during 2009 included $1.4 million of miscellaneous income relating to release of an escrow related to REG’s Stockton terminal facility that occurred in the first quarter and $1.0 million of grant income.

 

 

 

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Income tax (expense) benefit.    Income tax expense was $45.2 million for the year ended December 31, 2009 compared to an income tax benefit of $9.4 million for the year ended December 31, 2008. The expense was a result of our conclusion as of December 31, 2009 that we were required to establish a valuation allowance for the entire amount of the net deferred tax assets since evidence was not available to prove that it was more likely than not that we would be able to realize these assets.

Loss from equity investments.    Loss from equity investments was $1.1 million for the year ended December 31, 2009 compared to a loss of $1.0 million for the year ended December 31, 2008. The loss from equity investments was primarily attributable to losses sustained by partially owned facilities.

Non-controlling interest.    Non-controlling interest was $8.0 million for the year ended December 31, 2009 compared to a loss of $2.8 million for the year ended December 31, 2008. The increase in non-controlling interest was primarily attributable to the losses sustained by Blackhawk which were consolidated.

Preferred stock accretion.    Preferred stock accretion was $44.2 million for the year ended December 31, 2009, compared to $26.7 million for the year ended December 31, 2008. Accretion of preferred stock to redemption value increased during 2009 due to the full year impact of issuances of preferred stock during 2008, as well as the impact of using the effective interest rate method. As the redemption date becomes closer, the accretion amount increases.

Undistributed dividends.    Undistributed preferred stock dividends were $14.0 million and $11.1 million for the years ended December 31, 2009 and 2008, 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 September 30, 2011, we received cash proceeds of $132.2 million from private sales of preferred stock and common stock. Based on available funds, current plans and business conditions, we believe that our available cash, amounts available under our credit agreement and amounts expected to be generated from future operations will be sufficient to meet our cash requirements for at least the next twelve months. At September 30, 2011 and December 31, 2010, we had cash and cash equivalents of $30.9 million and $4.3 million, respectively. At September 30, 2011, we had total assets of $472.6 million, compared to total assets of $369.6 million at December 31, 2010. At September 30, 2011, we had debt of $109.4 million, compared to debt of $96.1 million at December 31, 2010.

Our borrowings (in millions) are as follows:

 

     

September 30,

2011

    

December 31,

2010

 

Revolving lines of credit

   $ 10.6       $ 9.5   

REG Danville term loan

     22.3         23.6   

REG Newton term loan

     23.1         23.6   

REG Albert Lea term loan

     10.0         —     

Other

     2.5         3.1   
  

 

 

    

 

 

 

Total notes payable

   $ 68.5       $ 59.8   
  

 

 

    

 

 

 

Seneca Landlord term loan

   $ 36.3       $ 36.3   

Bell, LLC promissory note

     4.6         —     
  

 

 

    

 

 

 

Total notes payable—variable interest entities

   $ 40.9       $ 36.3   
  

 

 

    

 

 

 

 

 

 

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On February 26, 2010, in connection with the Blackhawk Merger, our subsidiary, REG Danville assumed a $24.6 million term loan, as well as a $5.0 million revolving credit line with Fifth Third Bank that expired on November 30, 2010. As of September 30, 2011, there was $22.3 million of principal outstanding under the term loan. The term loan is secured by our Danville facility. The term loan bears interest at a fluctuating rate per annum equal to LIBOR plus the applicable margin of 4%. Until June 30, 2010, REG Danville was required to only make monthly payments of accrued interest. Beginning on July 1, 2010, REG Danville was required to make monthly principal payments equal to $135,083 plus accrued interest. In addition to these monthly payments, as a result of the amendment to the loan agreement dated February 26, 2010, REG Danville was required to make annual principal payments equal to 50% of REG Danville’s Excess Cash Flow (as defined in the loan agreement), or the 50% Excess Payment, with respect to each fiscal year until $2.5 million has been paid from the Excess Cash Flow. Thereafter, REG Danville was required to make annual payments equal to 25% of its Excess Cash Flow. Excess Cash Flow is equal to EBITDA less certain cash payments made during the period including principal payments, lease payments, interest payments, tax payments, approved distributions and capital expenditures. REG Danville did not have Excess Cash Flow during 2010 and no amounts have been accrued or paid. REG Danville was subject to various loan covenants that restrict its ability to take certain actions, including prohibiting it from paying any dividend to us until the 50% Excess Payment is made and certain financial ratios are met. The term loan was due to mature on November 3, 2011 and was refinanced as described below. Amounts outstanding on the term loan were $22.3 million as of September 30, 2011.

On November 3, 2011, REG Danville, LLC entered into an 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 loan requires monthly principal payments of $150,000 and interest based on a rate of LIBOR plus 5% per annum. The loan is secured by our Danville facility. We have guaranteed the debt service reserve of $1.5 million related to this loan. 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. A one-time principal payment was made in November 2011 totaling $6.2 million and is classified in current maturities of notes payable within the condensed consolidated balance sheet at September 30, 2011. The one-time principal payment includes $2.0 million paid from the debt service reserve, which was reduced from $3.5 million to $1.5 million, which is the continuing guarantee obligation of Renewable Energy Group, Inc. Amounts outstanding on the term loan after the amendment were $16.0 million.

On March 8, 2010, in connection with the CIE Asset Acquisition, one of our subsidiaries, REG Newton, refinanced a $23.6 million term loan, or the AgStar Loan, and obtained a $2.4 million line of credit, or the AgStar Line, with AgStar Financial Service, PCA, or AgStar. As of September 30, 2011, there was $23.1 million of principal outstanding under the AgStar Loan and $0.6 million of principal outstanding under the AgStar Line. These amounts are secured by our Newton facility. We have guaranteed the obligations under the AgStar Line and have a limited guarantee related to the obligations under the AgStar Loan, which provides that we will not be liable for more than the unpaid interest, if any, on the AgStar Loan that has accrued during an 18-month period beginning on March 8, 2010. The AgStar Loan bears interest at 3% plus the greater of (i) LIBOR or (ii) two percent. Beginning on October 1, 2011, monthly principal payments of approximately $120,000 and accrued interest are due based on a 12-year amortization schedule. Under the AgStar Loan, REG Newton is required to maintain a debt service reserve account, or the Debt Reserve, equal to 12-monthly payments of principal and interest on the AgStar Loan. Beginning on January 1, 2011 and at each fiscal year-end thereafter, until such time as the balance in the Debt Reserve contains the required 12-months of payments, REG Newton must deposit an amount equal to REG Newton’s Excess Cash Flow, which is defined in the AgStar Loan agreement as

 

 

 

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EBITDA, less the sum of required debt payments, interest expense, any increase in working capital from the prior year until working capital exceeds $6.0 million, up to $0.5 million in maintenance capital expenditure, allowed distributions and payments to fund the Debt Reserve. In the event any amounts are past due, AgStar may withdraw such amounts from the Debt Reserve. REG Newton was not required to make a Debt Reserve deposit for 2010. REG Newton is subject to various standard loan covenants that restrict its ability to take certain actions, including prohibiting REG Newton from making any cash distributions to us in excess of 35% of REG Newton’s net income for the prior year. On November 15, 2010, REG Newton amended the loan agreement to revise certain financial covenants. In exchange for these revisions, REG Newton agreed to begin reduced principal payments of approximately $60,000 per month within two months after the enactment of the reinstated blenders’ tax credit, which was March 1, 2011. The AgStar Loan matures on March 8, 2013 and the AgStar Line expires on March 5, 2012. The AgStar Line is secured by REG Newton’s accounts receivable and inventory.

During July 2009, we and certain subsidiaries entered into an agreement with Bunge North America, or Bunge, to provide services related to the procurement of raw materials and the purchase and resale of biodiesel produced by us. The agreement provides for Bunge to purchase up to $10.0 million in feedstock for, and biodiesel from, us. Feedstock is paid for daily as it is processed. Biodiesel is purchased and paid for by Bunge the following day. On November 8, 2011, we gave notice of termination to Bunge in accordance with the agreement. In June 2009, we entered into an extended payment terms agreement with West Central to provide up to $3.0 million in outstanding payables for up to 45 days. Both of these agreements provide additional working capital resources to us. As of September 30, 2011, we had $4.0 million outstanding under these agreements.

Our previous revolving credit facility with West LB, AG was replaced by a new revolving credit agreement that two of our subsidiaries entered into on December 23, 2011 with a bank group and Wells Fargo Capital Finance, LLC, as agent, which we refer to as the Wells Fargo Revolver. We have guaranteed the obligations of our subsidiaries under the Wells Fargo Revolver, which provides for the extension of revolving loans in an aggregate principal amount not to exceed $40.0 million, based on eligible inventory, accounts receivable and blenders’ credits of the subsidiary borrowers and the inventory of certain affiliates. Our subsidiaries borrowed $10.0 million under the new revolving credit agreement on December 23, 2011 to repay in full the outstanding balance under the previous revolving credit facility. The Wells Fargo Revolver has a stated maturity date of December 23, 2016.

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), which may range from 2.50 to 3.25 percent, based on the Quantity Average Excess Availability Amount (as defined). 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 ½%, (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 Credit Agreement), 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 new revolving credit agreement.

The Wells Fargo Revolver contains various loan covenants that restrict each subsidiary borrower’s ability to take certain actions, including restrictions on incurrence of indebtedness, creation of liens, mergers or consolidations, dispositions of assets, repurchase or redemption of capital stock, making certain investments, entering into certain transactions with affiliates or changing the nature of the subsidiary’s

 

 

 

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business. In addition, the subsidiary borrowers are required to maintain a Fixed Charge Coverage Ratio (as defined in the Wells Fargo Revolver) of at least 1.0 to 1.0 and to have Excess Availability (as defined in the Wells Fargo Revolver) of at least $4 million. The new revolving credit agreement is secured by the subsidiary borrowers’ membership interests and substantially all of their assets, and the inventory of REG Albert Lea, LLC and REG Houston, LLC, subject to a $25 million limitation.

In connection with our agreement to lease the Seneca facility, Landlord received from Seneca Holdco, LLC, which is owned by three of our investors, an investment of $4.0 million to fund certain repairs to the Seneca facility. Landlord leases the Seneca facility to our subsidiary, REG Seneca, with rent being set at an amount to cover debt service and other expenses. REG Seneca pays Landlord a $600,000 annual fee, payable quarterly, which is guaranteed by us. See “Note 6—Variable Interest Entities” to our condensed consolidated financial statements for additional information.

On April 8, 2010, Landlord entered into a note payable agreement with WestLB, AG. The note requires that interest be accrued at different rates based on whether it is a Base Rate Loan or Eurodollar loan. Interest is at either 2.0% over the higher of 50 basis points above the Federal Funds Effective Rate or the WestLB prime rate for Base Rate loans or 3.0% over adjusted LIBOR for Eurodollar loans. The loan was a Eurodollar loan as of September 30, 2011. The effective rate at September 30, 2011 was 3.23%. Interest is paid monthly. Principal payments have been deferred until February 2012. At that time, Landlord will be required to make monthly principal payments of $201,389, with the remaining unpaid principal due at maturity on April 8, 2017. The note payable is secured by the Seneca facility. The balance of the note as of September 30, 2011 was $36.3 million.

The Company has 50% ownership in Bell, LLC, a VIE joint venture that owns and leases to the Company its corporate office building located 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, to purchase Bell, LLC; therefore, the Company determined it was the primary beneficiary of Bell, LLC and consolidated Bell, LLC into the Company’s financial statements. The Company is the primary beneficiary due to its ownership interest and as a result of having an exercisable call option that allows us 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. Through consolidation of Bell, LLC on January 1, 2011, the Company recorded an outstanding promissory note balance of $4.8 million. Bell, LLC makes monthly principal payments of approximately $15,000 plus interest. The note bears interest at a rate of 4.50% per annum and the note matures July 14, 2014. The note is secured by a mortgage interest in the office building and has an outstanding balance of $4.6 million at September 30, 2011.

On August 4, 2011, REG Albert Lea entered into a Loan Agreement with USRG Holdco IX, LLC (USRG) and USRG Management Company, LLC, under which USRG loaned REG Albert Lea $10.0 million (the Loan) for the purpose of purchasing feedstocks and chemicals for REG Albert Lea’s biodiesel production facility. The Loan, which carried an interest rate of 12% per annum and was secured by the assets and operations of the facility, was repaid in due course prior to maturity in December 2011 from our cash balance.

As of September 30, 2011, we and our subsidiaries were in compliance with all restrictive financial covenants associated with the borrowings.

 

 

 

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Cash flow.    The following table presents information regarding our cash flows and cash and cash equivalents for the years ended December 31, 2010, 2009 and 2008 and the nine months ended September 30, 2011 and 2010:

 

     Year Ended December 31,     Nine Months Ended
September  30,
 
      2010     2009     2008           2011                 2010        
     (in thousands)  

Net cash flows from operating activities

   $ (14,593   $ (8,209   $ (3,636   $ 22,960      $ (5,597

Net cash flows from investing activities

     (4,562     371        (26,173     (1,875     (3,936

Net cash flows from financing activities

     17,559        (1,618     26,155        5,539        15,164   

Net change in cash and cash equivalents

     (1,596     (9,456     (3,654     26,624        5,631   

Cash and cash equivalents, end of period

   $ 4,259      $ 5,855      $ 15,311      $ 30,883      $ 11,486   

Operating activities.    Net cash provided in operating activities was $23.0 million and net cash used in operating activities was $5.6 million for the nine months ended September 30, 2011 and 2010, respectively. The increase in cash provided from operating activities is largely related to improved operating margins realized from an increase in market demand, gallons sold and plant utilization. For the nine months ended September 30, 2011, the net income was $0.8 million, which includes an increase in the non-cash change in the preferred stock embedded derivative liability of $55.6 million, depreciation and amortization expense of $6.5 million, non-cash stock compensation expense of $3.0 million and an increase in the non-cash change in the Seneca Holdco liability of $2.1 million. These charges were offset by non-cash benefits including a $3.4 million increase for changes in the deferred tax benefit. We also used $42.5 million to fund net working capital requirements, consisting of a $16.4 million increase in inventory due to increase sales volume, a $20.7 million increase in accounts receivable, a $14.6 million increase in prepaid expenses and a decrease in deferred revenues of $8.3 million, which was partially offset by a $17.5 million increase in accounts payable and accruals. The net result was a cash source from operations of $23.0 million.

The net use of cash from operating activities for the nine months ended September 30, 2010 of $5.6 million reflects $4.9 million in net losses from operations, which includes non-cash charges for impairment of intangible assets of $7.3 million, depreciation expense of $3.7 million and non-cash change in Seneca Holdco liability of $2.0 million. These charges were offset by non-cash benefits including a $3.7 million increase for changes in the deferred tax benefit and a $7.0 million change in the fair value of preferred stock conversion feature embedded derivative. It also included a net working capital decrease of $5.1 million which included an accounts receivable decrease of $4.7 million and a collective prepaid expense and inventory decrease of $0.6 million, which was partially offset by a net decrease in accounts payable and accruals of $5.8 million and a decrease in deferred revenues of $4.6 million. The net result was a cash use from operations of $5.6 million.

Net cash used in operating activities was $14.6 million and $8.2 million for the year ended December 31, 2010 and 2009, respectively. For 2010, net loss was $21.6 million which includes non-cash charges for impairment of intangible assets of $7.3 million, depreciation and amortization expense of $5.9 million, non-cash change in the preferred stock embedded derivative liability of $8.2 million and non-cash change in the Seneca Holdco, LLC liability of $3.7 million. These charges were offset by non-cash benefits including a $3.3 million increase for changes in the deferred tax benefit. We also used $17.8 million to fund net working capital requirements, including an accounts receivable increase of $4.9 million, an increase in inventories of $15.9 million and a decrease in accounts payable of $3.4 million which were partially offset by an increase in deferred revenues of $3.9 million. This resulted in a net cash use from operations of $14.6 million for 2010. The net use of cash from operating activities during 2009, of $8.2

 

 

 

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million resulted primarily from a $68.9 million net loss from operations, a $2.3 million gain on the sale of property, and changes in allowance for doubtful accounts of $1.4 million. Those were primarily offset by a charge to deferred taxes of $45.2 million. In addition, they were partially offset by net working capital decrease of $5.9 million, non-cash depreciation and amortization of $5.8 million and stock-based compensation expenses totaling $2.5 million. Working capital decreases were primarily a result of an increase in deferred revenues of $5.5 million, a decrease in prepaid expenses of $2.9 million and an increase in accounts payable of $3.4 million, which was offset by an accounts receivable increase of $3.7 million. Cash used in operating activities in 2008 was $3.6 million, as a net loss of $15.9 million and $8.3 million in non-cash deferred tax benefits were partially offset by positive working capital changes of $13.6 million.

Investing activities.    Net cash used for investing activities for the nine months ended September 30, 2011 was $1.9 million, consisting of net cash used to pay for facility construction of $2.3 million and cash provided from the release of restricted cash in the amount of $0.4 million. Net cash used in investing activities for the nine months ended September 30, 2010 was $3.9 million, consisting primarily of cash paid for Seneca construction of $3.9 million.

Net cash used for investing activities for the year ended December 31, 2010 was $4.6 million, consisting mostly of cash used to pay for Seneca construction of $4.0 million. Net cash provided from investing activities for the year ended December 31, 2009 was $0.4 million, as $7.4 million in facility construction costs for Danville were partially offset by receipt of $4.7 million from a construction escrow fund related to construction of the Danville facility. We also received $3.0 million for the sale of our Stockton terminal facility to Westway. Net cash used in investing activities for the year ended December 31, 2008 was $26.2 million. In 2008, we invested $67.2 million in construction of facilities, which includes $15.9 million from a construction escrow fund related to the Danville facility and $16.9 million related to the acquisition of USBG.

Financing activities.    Net cash provided from financing activities for the nine months ended September 30, 2011 was $5.5 million, which represents $10.0 million in borrowings on our USRG debt and $1.0 million in borrowings on our WestLB Revolver. This was offset by $3.5 million in principal payments in connection with outstanding notes payable. We also paid $1.3 million related to the pending issuance of common and preferred stock and $0.7 million for debt issuance cost. Net cash provided from financing activities for the nine months ended September 30, 2010 was $15.2 million, which reflects an $8.0 million cash investment in our common stock, $4.0 million cash proceeds received from the Seneca investors and $5.5 million in borrowings on our line of credit.

Net cash provided from financing activities for the year ended December 31, 2010 was $17.6 million, which represents $8.0 million cash investment from ARES Corporation, $4.0 million cash proceeds received from the Seneca investors and $9.4 million in borrowings on our line of credit. This was partially offset by principal payments in connection with the note payable and cash paid for debt issuance. Net cash used in financing activities for the year ended December 31, 2009 was $1.6 million, which consisted of the payoff of the WestLB borrowings of $1.8 million, pay down of notes payable of $0.8 million and changes in the balance of the REG Danville line of credit for a net result of $0.9 million. Net cash provided by financing activities was $26.2 million in 2008. In 2008, cash provided by financing activities related primarily to the issuance of the Blackhawk notes payable. In February 2008, we, through two of our subsidiaries, obtained the first line of credit from WestLB. Borrowings ranged from $1.3 million to $4.2 million during the one year loan period.

 

 

 

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Capital expenditures.    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, with expected aggregate nameplate production capacity of 135 mmgy. We estimate completion of the New Orleans, Emporia and the Clovis facilities will require an estimated $130 to $140 million, excluding working capital. We also plan to undertake various facility upgrades when funding becomes available to further expand processing capabilities at our existing facilities, most significantly our Houston facility and our newly acquired Albert Lea facility. 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.

Contractual Obligations:

The following table describes our commitments to settle contractual obligations in cash as of December 31, 2010:

 

     Payments Due by Period  
      Total      Less Than
1 Year
     Years 1-3      Years 4-5      More Than
5 Years
 
     (in thousands)  

Long Term Debt(1)

   $ 99,774       $ 30,097       $ 36,660       $ 7,974       $ 25,043   

Operating Lease Obligation(2)

     89,214         7,268         23,799         15,005         43,142   

Purchase Obligation(3)

     18,087         10,039         8,048         —           —     

Other Long-Term Liabilities(4)

     2,201         160         301         80         160   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 209,276       $ 47,564       $ 68,808       $ 23,059       $ 68,345   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)   See footnotes to the financial statements for additional detail. Includes fixed interest associated with these obligations.
(2)   Operating lease obligations consist of terminals, rail cars, vehicles, ground leases and the Ames office lease.
(3)   Purchase obligations for our production facilities and partially completed facilities.
(4)   Includes incentive compliance and other facility obligations. Also, represents $1.5 million of liability for unrecognized tax benefits as the timing and amounts of cash payments are uncertain the amounts have not been classified by period.

On August 4, 2011, REG Albert Lea, LLC, one of our wholly-owned subsidiaries entered into a $10.0 million loan agreement to obtain short-term working capital in order to purchase feedstocks and chemicals for our biodiesel production facility. The note was due in full and repaid in due course prior to maturity in December 2011. In November 2011, we repaid $6.2 million of our term loan with Fifth Third Bank. On December 23, 2011, our subsidiaries borrowed $10.0 million under the Wells Fargo Revolver, which was used to repay our revolving credit facility with West LB, AG.

 

 

 

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Management’s discussion and analysis of financial condition and results of operations

 

 

QUARTERLY RESULTS OF OPERATIONS

 

     

March 31,

2010

   

June 30,

2010

    September 30,
2010
    December 31,
2010
   

March 31,

2011

   

June 30,

2011

    September 30,
2011
 
     (In thousands)  

Revenues

     37,489        46,337        63,122        69,507        104,435        196,312        256,502   

Net Income (Loss)

     3,081        (392     (7,617     (16,660     3,736        (948     (2,007

(Income) Loss from Equity Investments

     (215     (166     (173     (135     (65     (83     649   

Income tax (Benefit) Expense

     6,328        (2,600     —          (476     —          —          (4,752

Impairments of Investments

       (400     —          —          —          —          —     

Interest Expense

     (341     (1,394     (1,483     (1,722     (1,708     (1,751     (2,183

Other Income

     33        57        340        537        38        34        69   

Change in Fair Value of Seneca Holdco Liability

       (371     (1,773     (2,035     727        (2,250     (977

Change in Fair Value of Interest Rate Swap

     72        116        103        178        166        166        170   

Change in Fair Value of Preferred Stock Conversion Feature Embedded Derivatives

     —          5,001        1,996        (15,205     2,557        (19,645     (38,483

Straight-line Lease Expense

     —          627        948        948        798        618        393   

Depreciation

     1,066        1,164        1,443        1,618        1,689        1,705        1,851   

Amortization(1)

     (141     209        301        268        325        312        615   

Impairments on Assets

     141        —          7,336        17        —          —          —     

Stock-based Compensation

     36        32        423        885        990        990        1,067   

 

(1)   Represents amortization expense not included in interest expense.

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 and our audited consolidated financial statements.

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.

 

 

 

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Commodity Price Risk

Over the period from January 2007 through December 2011, average petroleum-based 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 $2.41 per gallon during this period. Over the period from January 2006 through December 2011, 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 $0.4099 per pound during this period. Over the period from January 2008 through December 2011, 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 $0.3274 per pound 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 and price of feedstocks are subject to wide fluctuations due to unpredictable factors such as weather conditions during the growing season, kill ratios, carry-over from the previous crop year and current crop year yield, governmental policies with respect to agriculture, and supply