Item 1A. Risk Factors
We encourage you to carefully consider
the risks described below and other information contained in this report when considering an investment decision in REX common
stock. Any of the events discussed in the risk factors below may occur. If one or more of these events do occur, our results of
operations, financial condition or cash flows could be materially adversely affected. In this instance, the trading price of REX
stock could decline, and investors might lose all or part of their investment.
Risks Related to our Ethanol and By-Products
Business
During the early months of 2020, a new
strain of COVID-19 spread into the United States and other countries.
In an effort to contain the spread of this
virus, there have been various government mandated restrictions, in addition to voluntary privately implemented restrictions, including
limiting public gatherings, retail store closures, restrictions on employees working and the quarantining of people who may have
been exposed to the virus. The duration of the resulting downturn in economic activity is unknown. However, it has led to reduced
demand for ethanol. This could lead to prolonged production stoppages at our ethanol plants and could result in an adverse material
impact on the results of operations and on our financial position. We idled our NuGen and One Earth ethanol plants for portions
of fiscal year 2020.
The ethanol industry is changing rapidly
which could result in unexpected developments that could negatively impact our operations.
According to the RFA, the ethanol industry
has grown from approximately 1.5 billion gallons of domestic annual ethanol production in 1999 to approximately 16.1 billion gallons
in 2018. In 2020 and 2019, the industry produced approximately 13.8 and 15.8 billion gallons, respectively, with the reduction
reflecting industry conditions. Thus, there have been significant changes in the supply and demand of ethanol over a relatively
short period of time which could lead to difficulty in maintaining profitable operations at our ethanol plants.
The financial returns on our ethanol
investments are highly dependent on commodity prices, which are subject to significant volatility, uncertainty and regional supply
shortages, so our results could fluctuate substantially.
The financial returns
on our ethanol investments are highly dependent on commodity prices, especially prices for corn, natural gas, ethanol, dried distillers
grains, non-food grade corn oil and unleaded gasoline. As a result of the volatility of the prices for these items, our returns
may fluctuate substantially and our investments could experience periods of declining prices for their products and increasing
costs for their raw materials, which could result in operating losses at our ethanol plants.
Our returns on
ethanol investments are highly sensitive to grain prices.
Corn is the principal
raw material our ethanol plants use to produce ethanol and by-products. As a result, changes in the price of corn can significantly
affect our businesses. Rising corn prices result in higher production costs of ethanol and by-products. Because ethanol competes
with non-corn-based fuels, our ethanol plants may not be able to pass along increased grain costs to our customers. At certain
levels, grain prices may make ethanol uneconomical to produce.
The price of corn is
influenced by weather conditions and other factors affecting crop yields, transportation costs, farmer planting decisions, exports,
the value of the U.S. dollar and general economic, market and regulatory factors. These factors include government policies and
subsidies with respect to agriculture and international trade and global and local demand and supply. The significance and relative
effect of these factors on the price of corn is difficult to predict. Any event that tends to negatively affect the production
and/or supply of corn, such as adverse weather or crop disease, could increase corn prices and potentially harm the business of
our ethanol plants, to include intermittent production slowdowns or stoppages. Increasing domestic ethanol capacity could boost
the demand for corn and result in increased corn prices. International demand for corn could also result in higher corn prices.
Our ethanol plants may also have difficulty, from time to time, in physically sourcing corn on economic terms due to regional supply
shortages, transportation issues, delays in farmer marketing decisions or unfavorable local pricing. Such a shortage or price impact
could require our ethanol plants to suspend operations which would have a material adverse effect on our consolidated results of
operations.
The spread between
ethanol and corn prices can vary significantly.
The gross margin at our
ethanol plants depends principally on the spread between ethanol and corn prices. Fluctuations in the spread are likely to continue
to occur. A sustained narrow or negative spread, whether as a result of sustained high or increased corn prices or sustained low
or decreased ethanol prices, would adversely affect the results of operations at our ethanol plants.
Our risk management
strategies may be ineffective and may expose us to decreased profitability and liquidity.
In an attempt to partially
offset the impact of volatility of commodity prices, we enter into: i) forward contracts to sell a portion of our ethanol and distillers
grains production and to purchase a portion of our corn and natural gas requirements and; ii) commodity futures and swap agreements.
The financial impact of these risk management activities is dependent upon, among other items, the prices involved and our ability
to receive or deliver the commodities involved. Risk management activities can result in financial loss when positions are purchased
in a declining market or when positions are sold in an increasing market. In addition, we may not be able to match the appropriate
quantity of corn contracts with quantities of ethanol, distillers grains and non-food grade corn oil contracts. We vary the amount
and type of risk management techniques we utilize, and we may choose not to engage in any risk management activities. Should we
fail to properly manage the inherent volatility of commodity prices, our results of operations and financial condition may be adversely
affected.
The market for
natural gas is subject to market conditions that create uncertainty in the price and availability of the natural gas that our ethanol
plants use in their manufacturing process.
Our ethanol plants rely
upon third parties for their supply of natural gas, which is consumed as fuel in the production process. The prices for and availability
of natural gas are subject to volatile market conditions. These market conditions often are affected by factors beyond the ethanol
plants’ control, such as weather conditions, overall economic conditions, governmental regulation and foreign and domestic
relations. Significant disruptions in the supply of natural gas could impair or completely prevent the ethanol plants’ ability
to economically manufacture ethanol for their customers. Furthermore, increases in natural gas prices may adversely affect results
of operations and financial position at our ethanol plants.
Fluctuations in the selling price
of commodities may reduce profit margins at our ethanol plants.
Ethanol is marketed as a fuel additive
to reduce vehicle emissions from gasoline, as an octane enhancer to improve the octane rating of gasoline with which it is blended
and, to a lesser extent, as a gasoline substitute. As a result, ethanol prices are influenced by the supply and demand for gasoline,
and our ethanol plants’ results of operations and financial position may be materially adversely affected if gasoline demand
decreases or the price of gasoline declines making ethanol less economical.
Distillers grains compete with other protein
based animal feed products. The price of distillers grains may decrease when the prices of competing feed products decrease. The
prices of competing animal feed products are based in part on the prices of the commodities from which these products are made.
Historically, sales prices for distillers grains have tracked along with the price of corn. However, there have been instances
when the price increase for distillers grains has lagged increases in corn prices.
The production of distillers grains has
increased as a result of increases in dry mill ethanol production in the United States. This could lead to price declines in what
we can sell our distillers grains for in the future. Such declines could have a material adverse effect on our results of operations.
Increased ethanol
production or decreases in demand for ethanol may result in excess production capacity in the ethanol industry, which may cause
the price of ethanol, distillers grains and non-food grade corn oil to decrease.
According to the RFA,
domestic ethanol production capacity is approximately 17.4 billion gallons per year. The EPA set the RFS requirement to be satisfied
by corn-derived ethanol at 15.0 billion gallons for 2019 and 2020. However, the RFS requirements have been reduced through small
refiner waivers (“SRWs”) issued by the EPA. These SRWs were in the amount of approximately 4.0 billion gallons for
85 refinery exemptions of ethanol for 2016 through 2018. There have been no rulings on waiver requests for subsequent years. The
EPA has not yet released a draft rule for the 2021 volumes, despite the fact they typically release a draft mid-year of the preceding
year and finalize the rule by November 30 of the preceding year. Excess capacity in the ethanol industry could have an adverse
effect on the results of our operations. In a manufacturing industry with excess capacity, producers have an incentive to manufacture
additional products for so long as the price exceeds the marginal cost of production (i.e., the cost of producing only the next
unit, without regard for interest, overhead or fixed costs). This incentive could result in the reduction of the market price of
ethanol to a level that is inadequate to generate sufficient cash flow to cover costs.
Excess capacity may also
result from decreases in the demand for ethanol, which could result from a number of factors, including, but not limited to, regulatory
developments and reduced U.S. gasoline consumption. Reduced gasoline consumption could occur as a result of increased prices for
gasoline or crude oil, which could cause businesses and consumers to reduce driving or acquire vehicles with more favorable gasoline
mileage or acquire non-gasoline powered vehicles. In addition, decreased overall economic activity could also lead to reduced gasoline
consumption.
In addition, because
ethanol production produces distillers grains and non-food grade corn oil as by-products, increased ethanol production will also
lead to increased supplies of distillers grains and non-food grade corn oil. An increase in the supply of distillers grains and
non-food grade corn oil, without corresponding increases in demand, could lead to lower prices or an inability to sell our ethanol
plants’ distillers grains and non-food grade corn oil production. A decline in the price of distillers grains or non-food
grade corn oil could have a material adverse effect on the results of our ethanol operations.
The price of ethanol and distillers
grains may decline as a result of trade restrictions or duties on ethanol and distillers grains exports from the United States
or from unfavorable foreign currency exchange rates.
If the United States were to withdraw from
or materially modify certain international trade agreements, our business, financial condition and results of operations could
be materially adversely affected. Ethanol and other products that we produce are sold into various other countries with trade agreements
with the United States. If tariffs were raised on the foreign-sourced goods that lead to retaliatory actions, it could have material
adverse effect on our business, financial condition and results of operations.
The United States exported approximately
1.3 billion gallons of ethanol in 2020, down from approximately 1.5 and approximately 1.7 billion gallons in 2019 and 2018, respectively.
If producers and exporters of ethanol are subject to trade restrictions, or additional duties are imposed on exports, it may make
it uneconomical to export ethanol. Brazil, China and the European Union all have trade barriers or tariffs against fuel ethanol.
In 2013, the European Union imposed a five year tariff of $83.33 per metric ton on U.S. fuel ethanol to discourage competition.
Effective January 1, 2017, China indicated its intention to raise its 5% tariff on U.S. and Brazil fuel ethanol to 30%. On April
1, 2018, China raised their tariff rate to 45%, and later raised it to 70% in the U.S. and China trade war. On September 1, 2017,
Brazil imposed a 20% tariff on U.S. fuel ethanol imports in excess of 150 million liters, or 39.6 million gallons per quarter.
The tariff was extended several times but lapsed in December 2020 and a 20% tariff now applies to all U.S. ethanol exported to
Brazil. This could result in an oversupply of ethanol in the United States, which could have a material adverse effect on the results
of our ethanol operations.
In 2020, approximately 11.0 million metric
tons (“mmt”) of distillers grains were exported which represented a record high of 38% of U.S. production. However,
the export market may be jeopardized if foreign governments impose trade barriers or other measures to protect the foreign local
markets. Exports to China were approximately 2% of U.S. global shipments in 2019 versus approximately 51% in 2015, due to punitive
tariffs established beginning January 2017 in effect for 5 years per the RFA. Chinese exports rebounded slightly in 2020 but still
remained depressed compared to earlier years. If producers and exporters of distillers grains are subjected to trade barriers when
selling distillers grains to foreign customers, there may be a reduction in the price of distillers grains in the United States.
In addition, foreign currency exchange rate fluctuations could reduce the demand for United States exports of distillers grains.
Declines in the price we receive for our distillers grains could lead to decreased revenues and may result in our inability to
operate our ethanol plants profitably.
Future demand for ethanol is uncertain
and changes in overall consumer demand for transportation fuel could affect demand.
There are limited markets for ethanol other
than what is federally mandated. Increased consumer acceptance of E15 and E85 fuel is likely necessary in order for ethanol to
achieve significant market share growth beyond federal mandate levels.
We depend on our partners to operate
certain of our ethanol investments.
Our investments currently represent both
majority and minority equity positions. Day-to-day operating control of minority owned plants generally remains with the local
investor group. We do not have the ability to directly modify the operations of these plants in response to changes in the business
environment or in response to any deficiencies in local operations of the plants. In addition, local plant operators, who also
represent the primary suppliers of corn and other crops to the plants, may have interests, such as the price and sourcing of corn
and other crops, that may differ from our interest, which is based solely on the operating profit of the plant. The limitations
on our ability to control day-to-day plant operations could adversely affect plant results of operations.
We may not successfully acquire or develop
additional ethanol investments.
The growth of our ethanol
business depends on our ability to identify and develop new ethanol investments. Our ethanol development strategy depends on referrals,
and introductions, to new investment opportunities from industry participants, such as ethanol plant builders and owners, financial
institutions, marketing agents and others. We must continue to maintain favorable relationships with these industry participants,
and a material disruption in these sources of referrals would adversely affect our ability to expand our ethanol investments.
Any expansion strategy
will depend on prevailing market conditions for the price of ethanol and the cost of corn and natural gas and the expectations
of future market conditions. Additional financing may also be necessary to implement any expansion strategy, which may not be accessible
or available on acceptable terms. In addition, failure to adequately manage the risks associated with additional ethanol investments
could have a material adverse effect on our business.
Our ethanol plants may be adversely
affected by technological advances and efforts to anticipate and employ such technological advances may prove unsuccessful.
The development and implementation of new
technologies may result in a significant reduction in the costs of ethanol production. For instance, any technological advances
in the efficiency or cost to produce ethanol from inexpensive cellulosic sources such as corn stalk, wheat, oat or barley straw
could have an adverse effect on our ethanol plants, because our plants are designed to produce ethanol from corn, which is, by
comparison, a raw material with other high value uses. We cannot predict when new technologies may become available, the rate of
acceptance of new technologies by competitors or the costs associated with new technologies. In addition, advances in the development
of alternatives to ethanol could significantly reduce demand for or eliminate the need for ethanol.
Any advances in technology which require
significant unanticipated capital expenditures to remain competitive or which reduce demand or prices for ethanol would have a
material adverse effect on the results of our ethanol operations.
In addition, alternative fuels, additives
and oxygenates are continually under development. Alternative fuel additives that can replace ethanol may be developed, which may
decrease the demand for ethanol. It is also possible that technological advances in engine and exhaust system design and performance
could reduce the use of oxygenates, which would lower the demand for ethanol. Consumer demand for gasoline may be reduced by transportation
related technological advances such as electric and hybrid vehicles. Several automobile manufacturers have announced target dates
into the 2030s for ceasing production of gasoline vehicles and shifting production to electric vehicles. In addition, countries
such as Japan and the United Kingdom as well as the state of California have pledged to ban the sale of vehicles with internal
combustion engines over time. The Biden administration, in its early stages, appears to have placed an increased emphasis on electric vehicles. Reduced demand for ethanol could cause our results of operations to be materially adversely affected.
The U.S. ethanol industry is highly
dependent upon a myriad of federal and state legislation and regulation and any changes in legislation or regulation could materially
and adversely affect our results of operations and financial position.
The renewable fuel standard program was
authorized under the Energy Policy Act of 2005 and was expanded under the Energy Independence and Security Act of 2007 (EISA).
EISA increased the amount of renewable fuel required to be blended into gasoline and required a minimum usage of corn-derived renewable
fuels of 12.0 billion gallons in 2010, increasing annually by 600 million gallons to 15.0 billion gallons in 2015 through 2022,
with no specified volume subsequent to 2022. The EPA has the authority to assign the mandated amounts of renewable fuels to be
blended into transportation fuel to individual fuel blenders. RFS II has been a primary factor in the growth of ethanol usage.
Over the past several years various pieces of legislation have been introduced to the U.S. Congress that were intended to reduce
or eliminate ethanol blending requirements. To date, none of the bills have been successful but they are an indication of the continued
effort to undermine the EISA.
Under EISA, the EPA has the authority to
waive or modify the mandated RFS II requirements in whole or in part. In order to grant a waiver, the EPA administrator must determine
in consultation with the Secretaries of Agriculture and Energy, that one of the following two conditions has been met: i) there
is inadequate domestic renewable fuel supply or ii) implementation of the requirement would severely harm the economy or environment
of a state, region or the country. In certain past years the EPA has taken action to reduce the mandated gallons called for under
EISA for both conventional and advanced renewable fuels.
Pursuant to RFS II, if mandatory renewable
fuel volumes are reduced by at least 20% for two consecutive years, the EPA is required to modify, or reset, statutory volumes
through 2022. While conventional ethanol was maintained at 15 billion gallons, 2019 was the second consecutive year the total proposed
RVOs was more than 20% below statutory volumes levels. The EPA Administrator directed his staff to initiate the reset rulemaking
process. However, the EPA announced it would not move forward with a reset rulemaking in 2020. After 2022, volumes will be determined
by the EPA in coordination with the Secretaries of Energy and Agriculture, taking into account such factors as environmental impact,
energy security, future production rates, costs to consumers, infrastructure, impacts on commodity and food prices, job creation
and rural economic development.
Obligated parties use RINs to show compliance
with RFS-mandated volumes. RINs are attached to renewable fuels by producers and detached when the renewable fuel is blended with
transportation fuel or traded in the open market. The market price of detached RINs affects the price of ethanol in certain markets
and influences the purchasing decisions by obligated parties. As a result of fluctuations in RINs pricing, certain obligated parties
have petitioned the EPA and filed court actions to change the point of obligation or to seek relief from their obligation. The
EPA granted 85 total SRWs for 2016 through 2018 totaling approximately 4.0 billion gallons. This action led to reduced values for
RINs and further action could decrease RIN values and ethanol pricing.
In January 2020, the U.S Court of Appeals
for the 10th Circuit overturned the EPA’s granting of refinery exemptions to three refineries on two separate
grounds. The Court ruled refineries are eligible for SRWs only if such waivers are extensions of waivers granted in previous years.
The refineries did not qualify for waivers in the year prior to the year the EPA granted them. The Court also stated the disproportionate
economic hardship of SRWs should be based solely on whether compliance with RFS II creates such hardship, not whether compliance
and other issues create the hardship. The refiners appeal was denied. Two of the refiners appealed the decision to the U.S. Supreme
Court, and in January 2021, the Supreme Court announced they agreed to hear the case.
Due to the 10th Circuit ruling,
a number of refiners have applied for gap year SRWs in an effort to establish continuous years of relief and to attempt to ensure
they qualify for SRWs going forward. Until the Supreme Court rules on this case, there remains uncertainty regarding volume obligations.
The EPA has not ruled on SRWs for years after 2018.
At the same time the EPA took action (in
2019) to allow the RVP waiver for E-15 for the summer months, it also took RIN market reform action. The reform action requires
public disclosure when RIN holdings exceed specified thresholds by an entity and requires the reporting of additional price and
affiliate data to the EPA.
Flexible fuel vehicles receive preferential
treatment in meeting federally mandated corporate average fuel economy (“CAFE”) standards for automobiles manufactured
by car makers. High blend ethanol fuels such as E-85 result in lower fuel efficiencies. Absent the CAFE preferences, car makers
would not likely build flexible-fuel vehicles. Any change in CAFE preferences could reduce the growth of E-85 markets and result
in lower ethanol prices.
Unfavorable changes in legislation or regulations
could materially and adversely affect our results of operations and financial position.
The inability to generate or obtain
RINs could adversely affect our operating results. Virtually all of our ethanol is sold with RINs that are used by customers
to comply with RFS II. If our production does not meet EPA requirements for RIN generation in the future, we would have to purchase
RINs in the open market or sell our ethanol at substantially lower prices to adjust for the absence of RINs. The price of RINs
varies based on many factors and cannot be predicted. Failure to obtain sufficient RINS or reliance on invalid RINs could subject
us to fines and penalties imposed by the EPA.
Various studies have criticized the
efficiency of ethanol, in general, and corn-based ethanol in particular, which could lead to the reduction or repeal of incentives
and tariffs that promote the use and domestic production of ethanol or otherwise negatively impact public perception and acceptance
of ethanol as an alternative fuel.
Although many trade groups, academics and
governmental agencies have supported ethanol as a fuel additive that promotes a cleaner environment, others have criticized ethanol
production as consuming considerably more energy and emitting more greenhouse gases than other biofuels and as potentially depleting
water resources. Other studies have suggested that corn-based ethanol is less efficient than ethanol produced from switchgrass
or wheat grain and that it negatively impacts consumers by causing prices to increase for dairy, meat and other foodstuffs from
livestock that consume corn.
If these views gain acceptance, support
for existing measures promoting use and domestic production of corn-based ethanol could decline, leading to reduction or repeal
of these measures. These views could also negatively impact public perception of the ethanol industry and acceptance of ethanol
as an alternative fuel.
Federal support of cellulosic ethanol
may result in reduced incentives to corn-derived ethanol producers.
The American Recovery and Reinvestment
Act of 2009 and EISA provide funding opportunities in support of cellulosic ethanol obtained from biomass sources such as switchgrass
and poplar trees. The amended RFS mandates an increasing level of production of non-corn-derived biofuels. These federal policies
may suggest a long-term political preference for cellulosic processes using alternative feedstocks such as switchgrass, silage
or wood chips. Cellulosic ethanol has a smaller carbon footprint than corn-derived ethanol and is unlikely to divert foodstuff
from the market. Our plants are designed as single-feedstock facilities, located in corn production areas with limited alternative
feedstock nearby, and would require significant additional investment to convert to the production of cellulosic ethanol. The adoption
of cellulosic ethanol as the preferred form of ethanol could have a significant adverse effect on our ethanol business.
Our ethanol business is affected by environmental and other
regulations which could impede or prohibit our ability to successfully operate our plants.
Our ethanol production facilities are subject
to extensive air, water and other environmental regulations. We have had to obtain numerous permits to construct and operate our
plants. Regulatory agencies could impose conditions or other restrictions in the permits that are detrimental, or which increase
our costs. More stringent federal or state environmental regulations could be adopted which could significantly increase our operating
costs or require us to expend considerable resources.
Our ethanol plants emit various airborne
pollutants as by-products of the ethanol production process, including carbon dioxide (a greenhouse gas). In 2007, the U.S. Supreme
Court classified carbon dioxide as an air pollutant under the Clean Air Act in a case seeking to require the EPA to regulate carbon
dioxide in vehicle emissions. In February 2010, the EPA released its final regulations on the Renewable Fuel Standard program.
We believe our plants are grandfathered up to certain operating capacity, but recent plant expansion requires us to meet a 20%
threshold reduction in greenhouse gas (GHG) emissions from a 2005 baseline measurement to produce ethanol eligible for the RFS
II mandate. To further expand our plant capacity, we may be required to obtain additional permits, install advanced technology
equipment, or reduce drying of certain amounts of distillers grains. We may also be required to install carbon dioxide mitigation
equipment or take other steps in order to comply with future laws or regulations. Compliance with future laws or regulations with
respect to emissions of carbon dioxide, or if we choose to expand capacity at certain of our plants, compliance with then-current
regulations of carbon dioxide, could be costly and may prevent us from operating our plants as profitably, which may have a negative
impact on our financial performance. We also face the risk of ethanol production above our grandfathered capacity not qualifying
for RINS if the plants do not meet certain emission requirements.
The California Air Resources Board (“CARB”)
adopted a Low Carbon Fuel Standard (“LCFS”) requiring a 10% reduction in GHG emissions from transportation fuels. An
Indirect Land Use Charge is included in this lifecycle GHG emission calculation. This standard could have an adverse impact on
the market for corn-based ethanol in California if corn-based ethanol fails to achieve lifecycle GHG emission reductions and in
other states if they adopt similar standards. This could have a negative impact on our financial performance.
Our ethanol business may become subject
to various environmental and health and safety and property damage claims and liabilities.
Operation of our ethanol business exposes
the business to the risk of environmental and health and safety claims and property damage claims, such as failure to comply with
environmental regulations. These types of claims could also be made against our ethanol business based upon the acts or omissions
of other persons. Serious claims could have a material negative impact on our results of operations, financial position and future
cash flows.
Our business is not diversified.
Our financial results depend heavily on
our ability to operate our ethanol plants profitably. Our lack of diversification could have a material negative impact on our
results of operations, financial position and future cash flows should our ethanol plants operate unprofitably.
We may have commitments to produce and
sell ethanol.
We may, at times, sell our products with
forward contracts. If we are unable to produce the products due to economic conditions, business interruption, or other factors,
we may incur additional costs or have to obtain commodities at unfavorable prices to meet our contractual commitments. This could
have a material adverse effect on our results of operations.
We may have commitments to purchase
commodities.
We may, at times, purchase certain commodities
with forward contracts without a corresponding quantity of ethanol sold via forward contracts at known prices. Should ethanol and
by-product prices decline to levels that would lead to significant unprofitable results of operations, we may incur additional
costs and/or losses to meet our contractual commitments. This could have a material adverse effect on our results of operations.
Our revenue from the sale of distillers
grains depends upon its continued market acceptance as an animal feed.
Distillers grains is a by-product from
the fermentation of corn to produce ethanol. Antibiotics may be used during the fermentation process to control bacterial contamination;
therefore, antibiotics may be present in small quantities in distillers grains marketed as animal feed. The U. S. Food and Drug
Administration’s Center for Veterinary Medicine has expressed concern about potential animal and human health hazards from
the use of distillers grains as an animal feed due to the possibility of antibiotic residues. If the public became concerned about
the impact of distillers grains in the food supply or as an acceptable animal feed, the market for distillers grains could be negatively
impacted, which would have a negative impact on our results of operations. We may not be able to obtain a suitable replacement
for antibiotics, should this be required, which would also negatively impact the market for distillers grains.
An estimated 38% of distillers grains produced
in the United States were exported in 2020. The price of distillers grains has benefitted from the exports of the product. In recent
years, certain countries have refused to import U.S. distillers grains for a variety of reasons. If export shipments are rejected
or delayed, the market price for distillers grains would be negatively impacted, which would have a negative impact on our ethanol
results of operations.
We extract non-food grade corn oil immediately
prior to the production of distillers grains. Several studies are attempting to determine whether non-food grade corn oil extraction
may impact the nutritional value of the resulting distillers grains. If it is determined that non-food grade corn oil extraction
adversely impacts the nutritional energy content of distillers grains, the value of the distillers grains we sell may be negatively
impacted, which would have a negative impact on our results of operations.
We face significant
competition in the ethanol industry.
We face significant competition
for new ethanol investment opportunities. There are varied enterprises seeking to participate in the ethanol industry. Some enterprises
provide financial and management support similar to our business model. Other enterprises seek to acquire or develop plants which
they will directly own and operate. Many of our competitors are larger and have greater financial resources and name recognition
than we do. We must compete for investment opportunities based on our strategy of supporting and enhancing local development of
ethanol plant opportunities. We may not be successful in competing for investment opportunities based on our strategy.
The ethanol industry
is primarily comprised of entities that engage exclusively in ethanol production and large integrated grain companies that produce
ethanol along with their base grain business. Several large oil companies have entered the ethanol production market. If these
companies increase their ethanol plant ownership or if other oil companies seek to engage in direct ethanol production, there would
be less of a need to purchase ethanol from independent producers such as our ethanol plants. No assurance can be given that our
ethanol plants will be able to compete successfully or that competition from larger companies with greater financial resources
will not have a materially adverse impact on the results of our ethanol operations.
We may face competition
from foreign producers.
There is a risk of foreign
competition in the ethanol industry. Brazil is presently the second largest producer of ethanol in the world. Brazil’s ethanol
production is sugarcane based, and, depending on feedstock prices, may be cheaper to produce than corn-derived ethanol. Under the
RFS, certain parties were obligated to meet an advanced biofuel standard. In recent years, sugarcane based ethanol imported from
Brazil has been one of the most economical means for obligated parties to comply with this standard.
If significant additional
foreign ethanol production capacity is created, such facilities could create excess supplies of ethanol, which may result in lower
prices of ethanol. In addition, foreign ethanol producers may be able to produce ethanol at costs lower than ours. These risks
could have significant adverse effects on our financial performance.
We are exposed to
credit risk from our sales of ethanol and distillers grains to customers.
The inability of a customer
to make payments to us for our accounts receivable may cause us to experience losses and may adversely impact our liquidity and
our ability to make our payments when due.
We may not be able
to hire and retain qualified personnel to operate our ethanol plants.
Our ability to attract
and retain competent personnel has a significant impact on operating efficiencies and plant profitability. Competition for key
plant employees in the ethanol industry can be intense, and we may not be able to attract and retain qualified employees. Failure
to do so could have a negative impact on our financial results at individual plants.
Our plants depend on an uninterrupted supply of energy and
water to operate. Unforeseen plant shutdowns could harm our business.
Our plants require a significant and uninterrupted
supply of natural gas, electricity and water to operate. We generally rely on third parties to provide these resources. If there
is an interruption in the supply of energy or water for any reason, such as supply, delivery or mechanical problems and we are
unable to secure an adequate alternative supply to sustain plant operations, we may be required to stop production. A production
halt for an extended period of time could result in material losses.
We rely on information technology in
our operations and financial reporting and any material failure, inadequacy, interruption or security breach of that technology
could harm our ability to efficiently operate our business and report our financial results accurately and timely.
We rely heavily on information technology
systems across our operations, including for management of inventory, purchase orders, production, invoices, shipping, accounting
and various other processes and transactions. Our ability to effectively manage our business, coordinate the production, distribution
and sale of our products and ensure the timely and accurate recording and disclosure of financial information depends significantly
on the reliability and capacity of these systems. The failure of these systems to operate effectively, problems with transitioning
to upgraded or replacement systems, or a breach in security of these systems through a cyber-attack or otherwise could cause delays
and/or interruptions in plant operations, product sales, reduced efficiency of our operations and delays in reporting our financial
results. Significant capital investments could be required to remediate any such problem. Security breaches of employee information
or other confidential or proprietary data could also adversely impact our reputation and could result in litigation against us
or the imposition of penalties.
We are exposed to potential business
disruption from factors outside our control, including natural disasters, severe weather conditions, accidents, pandemic diseases
and unforeseen operational failures any of which could negatively affect our transportation operations and could adversely affect
our cash flows and operating results.
Potential business
disruption in available transportation due to natural disasters, severe weather conditions, the outbreak of a pandemic disease,
significant track damage resulting from a train derailment, strikes or other interruptions by our transportation providers could
result in delays in procuring and supplying raw materials to our ethanol facilities, or transporting ethanol and distillers grains
to our customers. Such business disruptions may result in our inability to meet customer demand or contract delivery requirements,
as well as the potential loss of customers.
Rail cars used to transport ethanol
may need to be modified or replaced to meet proposed rail safety regulations.
The leased rail cars we use to transport
ethanol to market will need to be retrofitted or replaced as the Enhanced Tank Car Standards and Operation Controls for High-Hazard
Flammable Trains adopted by the U.S. Department of Transportation (“DOT”) imposes an enhanced tank car standard known
as the DOT specification 117 and establishes a schedule to retrofit or replace older tank cars that carry crude oil and ethanol.
The rule also establishes braking standards intended to reduce the severity of accidents and new operational protocols. This could
lead to increased rail car lease costs and delays in transportation of ethanol if rail cars are out of service for extended periods
of time.
We operate in a capital intensive industry.
Limitations on external financing could adversely affect our financial performance.
We may need to incur additional financing
to fund growth of our business or in times of increasing liquidity requirements (such as increases in raw material costs). Bankruptcy
filings by several ethanol companies in past years and capital market volatility has reduced available capital for the ethanol
industry. Any delays in obtaining additional financing, or our inability to do so, could have a material adverse impact on our
financial results.
Risks Related to our Refined Coal Operations
We believe our refined coal production
company qualifies to earn tax credits under IRC Section 45 through November 18, 2021. Our ability to generate returns and avoid
write-offs in connection with this investment is subject to various risks and uncertainties. These include, but are not limited
to, the risks and uncertainties as set forth below.
Availability of the tax credits under IRC Section 45.
Our ability to claim tax credits under
IRC Section 45 depends upon our refined coal operation satisfying certain ongoing conditions set forth in IRC Section 45. The IRS
could ultimately determine that our refined coal facility and/or its operations have not satisfied, or have not continued to satisfy,
the conditions set forth in IRC Section 45. As our refined coal operation is expected to generate pre-tax losses, the unavailability
of the tax credits for any reason could have a material impact on our results of operations.
The refined coal operation depends on
one customer.
The refined coal operation receives tax
credits by selling its refined coal to an unrelated party. The unrelated party is not obligated to continue purchasing refined
coal from us. Our user of refined coal could convert its fuel source to natural gas, oil or some other source instead of coal depending
on the price of natural gas, oil or other sources relative to that of coal. If the unrelated party ceases to purchase refined coal
from us, we would likely cease operations, given that we only intend to operate the refined coal plant until November 18, 2021.
Market demand for coal may also decline as a result of an economic slowdown. Sustained low natural gas prices may also cause users
of coal to phase out or close existing coal using operations. If users of coal burn less coal or eliminate the use of coal, there
would be less need for our product. A reduction or cessation of refined coal sales could have a material impact on our results
of operations.
Environmental concerns regarding coal could lead to reduced or suspended refined coal operations.
Environmental concerns about greenhouse
gases, toxic wastewater discharges and the potentially hazardous nature of coal combustion waste could lead to regulations that
discourage the burning of coal. Such regulations could mandate that electric power generating companies purchase a minimum amount
of power from renewable energy sources such as wind, hydroelectric, solar and geothermal. This could result in utilities burning
less coal, which could have a material impact on our results of operations.
Our refined coal operation and its by-products may result
in environmental and product liability claims and environmental compliance costs.
The construction and operation of refined
coal operations are subject to Federal, state and local laws, regulations and potential liabilities arising under or relating to
the protection or preservation of the environment, natural resources and human health and safety. Such laws and regulations generally
require the operations and/or the utilities at which the operations are located to obtain and comply with various environmental
registrations, licenses, permits, inspections and other approvals. Such laws and regulations also impose liability, without regard
to fault or the legality of a party’s conduct, on certain entities that are considered to have contributed to, or are otherwise
involved in, the release or threatened release of hazardous substances into the environment. Such hazardous substances could be
released as a result of burning refined coal in a number of ways, including air emissions, wastewater, and by-products such as
fly ash. One party may, under certain circumstances, be required to bear more than its share or the entire share of investigation
and cleanup costs at a site if payments or participation cannot be obtained from other responsible parties. We may be exposed to
the risk of becoming liable for environmental damage we may have had little, if any, involvement in creating. Such risk remains
even after production ceases at an operation to the extent the environmental damage can be traced to the types of chemicals or
compounds used or operations conducted in connection with the use of refined coal.
Once we permanently cease operations, we
are responsible to remove all the equipment, supplies and materials from the utility host site. This could result in additional
cost and the risk of environmental damage or impact.
No assurances can be given that
contractual arrangements and precautions taken to ensure assumption of these risks by facility owners or operators will
result in that facility owner or operator accepting full responsibility for any environmental damage. It is also not uncommon
for private claims by third parties alleging contamination to also include claims for personal injury, property damage,
diminution of property or similar claims. Furthermore, many environmental, health and safety laws authorize citizen suits,
permitting third parties to make claims for violations of laws or permits and force compliance. Our insurance may not cover
all environmental risk and costs or may not provide sufficient coverage in the event of an environmental claim. If
significant uninsured losses arise from environmental damage or product liability claims, or if the costs of environmental
compliance increase for any reason, our results of operations and financial condition could be adversely affected.
We rely on a third party to operate the refined coal facility.
We rely on an unrelated third party to
operate the refined coal plant. Should the third party fail to perform or underperform in the operation, management or regulatory
compliance of the facility, our results of operations and financial condition could be adversely affected as we are not experienced
in operating a refined coal facility.
We will have to generate taxable income
to utilize the Section 45 federal production tax credits.
If we do not generate sufficient taxable
income to utilize the tax credits earned by our refined coal operation, we could incur write-offs of the related tax attributes
which could adversely affect our results of operations and financial condition.
We use patented technology.
As part of the operations, we pay a license
fee for patented technology. If our third party operator is subject to patent infringement claims, we may incur legal fees to defend
our position and be subject to additional costs and fees.
Risks Related to our eSteam investment
eSteam testing methods and results are
not known.
We do not have specific testing methodologies
or specifications developed for testing the viability of the eSteam technology. The actual eSteam testing process could result
in injury to others, and property and other damages that could expose us to claims for damages from unrelated parties.
Our eSteam technology may be subject
to patent challenges.
If our patents of the eSteam technology
are challenged, we could be required to spend considerable time and resources defending our patents.
Operations utilizing our eSteam technology
may cause environmental damage.
When testing and operating the eSteam technology,
we may cause environmental damage, as we would be injecting water and other fluids into the ground to generate underground steam
in order to extract oil. We could be subject to significant penalties and fines if we were to cause environmental damage.
Risks Related to REX and General Risk
Factors
Given the amount of our cash and short-term
investments, actions by the Federal Reserve, related to the COVID-19 outbreak, which have reduced interest rates and could impact
future periods.
Depending on the length of time interest
rates remain at these levels, this could result in an adverse material impact on the results of operations and on our financial
position.
We have concentrations of cash deposits
at financial institutions that exceed federal insurance limits.
We generally have cash deposits that exceed
federal insurance limits. Should the financial institutions we deposit our cash in experience insolvency or other financial difficulty,
our access to cash deposits could be limited. In extreme cases, we could lose our cash deposits entirely. This would negatively
impact our liquidity and results of operations.
We may fail to realize the anticipated
benefits of mergers, acquisitions, or other investments.
We intend to continue seeking growth opportunities.
Acquisitions and similar transactions involve many risks that could harm our business, which include:
● Future acquisitions could result in operating losses or loss of investment,
Federal, state and local jurisdictions
may challenge our tax return positions.
We use significant judgments, estimates
and interpretation and application of complex tax laws in preparing the tax returns we file, and the positions contained therein.
We believe that our tax return positions are fully supportable. However, certain positions may be successfully challenged by federal,
state and local jurisdictions. We are currently undergoing a federal income examination for the years ended January 31, 2015, 2016
and 2017. This could result in material additional income tax payments we would have to make and higher income tax expense in future
periods.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The information required by this Item 2
is set forth in Item 1 of this report under “Ethanol Investments” and “Facilities”.
Item 3. Legal Proceedings
We are, from time to time, involved in
various legal proceedings incidental to the conduct of our business. We believe that any current proceedings will not have a material
adverse effect on our financial condition or results of operations.
Information About Our Executive Officers
Set forth below is certain information
about each of our executive officers.
Name Age Position
Stuart Rose 66 Executive Chairman of the Board*
Zafar Rizvi 71 Chief Executive Officer and President*
Edward Kress 71 Secretary*
*Also serves as a director.
Stuart Rose was elected our Executive
Chairman of the Board in 2015. Mr. Rose had served as our Chairman of the Board and Chief Executive Officer since our incorporation
in 1984 as a holding company. Prior to 1984, Mr. Rose was Chairman of the Board and Chief Executive Officer of Rex Radio and Television,
Inc., which he founded in 1980 to acquire the stock of a corporation which operated four retail stores.
Zafar Rizvi was elected Chief Executive
Officer in 2015. Mr. Rizvi has been our President and Chief Operating Officer since 2010, was Vice President from 2006 to 2010.
From 1991 to 2006, Mr. Rizvi was our Vice President – Loss Prevention.
Douglas Bruggeman has been our Vice
President–Finance and Treasurer since 1989 and was elected Chief Financial Officer in 2003. From 1987 to 1989, Mr. Bruggeman
was our Manager of Corporate Accounting. Mr. Bruggeman was employed with the accounting firm of Ernst & Young prior to
joining us in 1986.
Edward Kress has been our Secretary
since 1984. Mr. Kress has been a partner of the law firm of Dinsmore & Shohl LLP (formerly Chernesky, Heyman &
Kress P.L.L.), our legal counsel, since 1988. Mr. Kress has practiced law in Dayton, Ohio since 1974.
Item 4. Mine Safety Disclosures
Not Applicable.
PART II
SHAREHOLDER INFORMATION
Our common stock is traded on the New York Stock Exchange under
the symbol REX.
As of April 9, 2021, there were 67 holders of record of our
common stock, including shares held in nominee or street name by brokers.
Issuer Purchases of Equity Securities
On March 20, 2018, our Board of Directors increased our share
repurchase authorization by an additional 500,000 shares. At January 31, 2021, a total of 33,512 shares remained available to purchase
under this authorization.
Equity Compensation Plans
Refer to Item 12 – Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for information regarding shares authorized
for issuance under equity compensation plans.
Performance Graph
The following graph compares the yearly
percentage change in the cumulative total shareholder return on our Common Stock against the cumulative total return of the S&P
500 Stock Index and a peer group comprised of Alto Ingredients, Inc. and Green Plains, Inc. for the period commencing January 31,
2016 and ended January 31, 2021. The graph assumes an investment of $100 in our Common Stock and each index on January 31, 2016
and reinvestment of all dividends.
Item 6. Selected Financial Data
The following statements of operations
and balance sheet data have been derived from our consolidated financial statements and should be read in conjunction with Management’s
Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related
Notes. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion