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
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
grew from approximately 1.5 billion gallons of domestic annual ethanol production in 1999 to a peak of approximately 16.1 billion
gallons in 2018. In 2021 and 2020, the industry produced approximately 15.0 and 13.8 billion gallons, respectively, with the reduction
from the peak year 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, foreign
production, 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
production 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.
Further, our results may be impacted by a mismatch of gains or losses associated
with the positions during a reporting period when the physical commodity purchase or sale has not yet occurred. 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 17.7 billion gallons per year. On December 7, 2021, the EPA issued proposed RFS volumes
for 2021 and 2022 and reducing the previously finalized volumes for 2020 to account for challenges for that year including the
COVID-19 pandemic. The proposed volumes for conventional biofuels were 13.32 billion gallons and 15.0 billion gallons for 2021
and 2022, respectively. The 2020 volumes were proposed at 12.5 billion gallons, down from the previously finalized 15.0 billion
gallons. 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 1.2
billion gallons of ethanol in 2021, down from approximately 1.3 and approximately 1.5 billion gallons in 2020 and 2019, 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 2021, approximately 11.6 million metric
tons of distillers grains were exported, which represented approximately 36% 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 4% of U.S. global shipments in 2021 versus approximately 51% in 2015, due to punitive tariffs established
beginning January 2017. 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.
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 were 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 above actions led to reduced demand for ethanol. Although most restrictions have been lifted, if
in the future the virus continues to mutate, it 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, largely due to the impact of the pandemic.
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, or if, 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. Recent federal legislation seeks to address the ever-increasing demand for electric vehicle (EV) infrastructure. On
November 15, 2021, the Infrastructure Investment and Jobs Act (IIJA) was signed into law. The IIJA specifically allocates $7.5
billion specifically for EV infrastructure programs and grants on a national level. 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 with RFS II 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. After 2022, RFS volumes are to be determined by the EPA in coordination with the
Secretaries of Energy and Agriculture. 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.
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 SREs 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 SREs 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 SREs should be based solely on whether compliance with RFS II creates such hardship, not whether compliance
and other issues create the hardship. Two of the refiners appealed the decision to the U.S. Supreme Court, and on January 25,
2021, the Supreme Court partially ruled in favor of the small refiners, but only as to the interpretation of “extension”
of a waiver.
On December 7, 2021, the EPA issued proposed
volumes for 2021 and 2022 and reduced the previously finalized volumes for 2020 to account for challenges for that year including
the COVID-19 pandemic. The proposed volumes for conventional biofuels were 13.32 billion gallons and 15.0 billion gallons for
2021 and 2022, respectively. The 2020 volumes were proposed at 12.5 billion gallons, down from the previously finalized 15.0 billion
gallons. In addition, the EPA proposed denying 65 pending applications for SREs in response to the 2020 decision by the U.S. Court
of Appeals for the 10th Circuit. The EPA also proposed adding 250 million gallons of “supplemental obligation”
to the 2022 proposed volumes and stated its intent to add another 250 million gallons to 2023 to address the remand of the 2016
waiver by the D.C Circuit. The EPA implemented a public notice and comment process on this announcement.
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, as
an efficient producer, 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 negatively impacts consumers by causing prices to increase
for dairy, meat and other foodstuffs.
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. 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 36% of distillers grains produced
in the United States were exported in 2021. 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. 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 there has been an increased demand for workers in the U.S. 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, international
disputes, 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
qualified 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 conditions set forth in IRC Section 45. The IRS could ultimately
determine that our refined coal facility and/or its operations did not satisfy the conditions set forth in IRC Section 45. If
we were to lose these tax credits, it 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.
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 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 used patented technology.
As part of the operations, we paid 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
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,
Rising focus on environmental, social and
corporate governance matters from investors and regulators may increase our operating costs, bring down the value of our products
and assets, and impact our ability to access capital markets.
Global climate change continues to receive
significant attention from the public and the scientific community concerning the impacts from human activity, particularly the
impact of greenhouse gas emissions, such as those from carbon dioxide and methane. The Biden administration’s focus on environmental
issues has added pressure to take action domestically where there was already a heavier focus internationally. International,
national, and local regulations are likely to increase in the coming years. Added requirements to reduce greenhouse gas emissions
may increase our production costs. In addition, legislation promoting alternatives to combustion engine vehicles could reduce
the demand for our products.
Climate change is also thought by some to
be the cause for an increase in extreme weather events such as increased intensity of storms, rising sea levels, as well as heavy
rains or droughts in areas historically less prone to those events. Any of these events can have a significant impact on our operations
or quality of raw materials we purchase, resulting in increased costs. At this time, we are unable to determine the financial
impact of any potential adverse weather events caused by climate change.
Incremental to legislative and regulatory
pressure, institutional investors have continued to adopt environmental, social and governance guidelines (ESG). Some investors,
including certain public and private fund management firms, pension funds, university endowments and family, have in recent years,
begun adding stated policies to reduce or eliminate fossil fuel equities and encouraging additional consideration of ESG practices
in a manner that could negatively impact our stock price. This may also result in a reduction of available capital funding for
potential development projects, further impacting our future financial results.
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 through
2020. 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 67 Executive Chairman of the Board*
Zafar Rizvi 72 Chief Executive Officer and President*
Edward Kress 72 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 5, 2022, there were 62 holders of record of our common
stock, including shares held in nominee or street name by brokers.
On August 31, 2021, our Board of Directors increased our share
repurchase authorization by an additional 500,000 shares. At January 31, 2022, a total of 449,413 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, 2017 and
ended January 31, 2022. The graph assumes an investment of $100 in our Common Stock and each index on January 31, 2017 and reinvestment
of all dividends.
Item 6. [Removed and Reserved]
Overview
We have been an investor in ethanol production
facilities beginning in 2006 and a refined coal production facility during the period from 2017 through November 2021. We currently
have equity investments in three ethanol production entities, two of which are majority ownership interests. Our refined coal
business ceased operations in November 2021 and the facility was subsequently sold. We have classified the refined coal business as
discontinued operations. We may make additional alternative energy investments in the future and are currently working on a carbon
sequestration project near our One Earth Energy location.
Our ethanol operations are highly dependent
on commodity prices, especially prices for corn, ethanol, distillers grains, non-food grade corn oil and natural gas. As a result
of price volatility for these commodities, our operating results can fluctuate substantially. The price and availability of corn
is subject to significant fluctuations depending upon a number of factors that affect commodity prices in general, including crop
conditions, weather, federal policy and foreign trade. Because the market price of ethanol is not always directly related to corn
prices, at times ethanol prices may not follow movements in corn prices and, in an environment of higher corn prices or lower
ethanol prices, reduce the overall margin structure at the plants. As a result, at times, we may operate our plants at negative
or minimally positive operating margins.
We expect our ethanol plants to produce at
least 2.8 gallons of denatured ethanol for each bushel of grain processed in the production cycle. We refer to the actual gallons
of denatured ethanol produced per bushel of grain processed as the realized yield. We refer to the difference between the price
per gallon of ethanol and the price per bushel of grain (divided by the realized yield) as the “crush spread.” Should