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 2022 and 2021, the industry produced approximately 15.4 and 15.0 billion gallons, respectively, with the reduction from the peak
year reflecting industry conditions and reduced demand. 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 domestic and foreign economic, market and regulatory factors, including, but not limited to,
the impacts from the Russian-Ukraine conflict. 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. The corn harvest near our NuGen facility
for 2022 was negatively impacted by dry weather and we expect will impact the
supply of corn until the 2023 harvest. 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, distillers grains,
and non-food grade corn oil 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, including,
but not limited to, the impacts from the Russian-Ukraine conflict. 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 17.9 billion gallons per year. Under RFS II, there were mandated volumes through 2022 for
conventional and advanced biofuels. After 2022, RFS volumes are to be determined by the EPA in coordination with the Secretaries of Energy
and Agriculture. The EPA has proposed conventional renewable fuel volumes of 15.0 billion gallons for 2023 and 15.25 billion gallons for
2024 and 2025. In addition, the proposal for 2023 also restores the remaining 250 million gallons previously waived in 2016. The implied
excess capacity over the EPA proposed volumes 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 1.4 billion
gallons of ethanol in 2022, up from approximately 1.2 and approximately 1.3 billion gallons in 2021 and 2020, respectively. In 2022 and
2021, approximately 11.4
and 11.6 million metric tons, respectively, of distillers grains were exported, which represented approximately
34% and 36%, respectively, of U.S production. If producers and exporters of ethanol and distillers grains are subject to trade restrictions,
or additional duties are imposed on exports, it may make it uneconomical to export these products. The industry has experienced various
trade policy disputes, tariffs and investigations in foreign countries that have adversely impacted the international demand for our products.
Reduced international demand could lead to further oversupply and reduce pricing.
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.
Consumer demand for gasoline may be impacted by
emerging transportation trends, such as electric vehicles. Most automobile manufacturers have made varying levels of commitments to phase
out internal combustion engine production, such as General Motors with a target date of 2035 to phase out the production of gasoline and
diesel-powered vehicles and Nissan targeting the early 2030s to convert their entire fleet to electric vehicles. There also have been
pledges to ban the sale of internal combustion engines in countries such as Japan and the United Kingdom by 2035, as well as a statewide
ban in California, which several states are imitating. If realized, these bans would accelerate the decline of liquid fuel demand and
by extension demand for ethanol, biodiesel and renewable diesel. Recent federal legislation seeks to address the ever-increasing demand
for electric vehicle infrastructure. Reduced demand for ethanol could cause our results of operations to be materially impacted.
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.
We may not successfully develop our planned
carbon sequestration facility near the One Earth Energy ethanol plant.
The Company has committed significant time and
resources towards a carbon sequestration project near the One Earth Energy ethanol plant. The completion of this project requires numerous
government and landowner approvals. If we are not successful in obtaining all these approvals, we may not be able to complete this project
and could result in a write off of our commitments and investments.
If we are not successful on this project, our
ethanol plant could be at a disadvantage in the industry as our inability to sequester our carbon could result in a higher carbon intensity
(CI) score than our competitors if they are able to sequester their carbon. If we are unable to reduce our CI score, we may not be able
to participate in the state and federal clean fuel programs, including federal tax credits outlined in the Inflation Reduction Act.
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. 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.
The EPA has proposed conventional renewable fuel
volumes of 15.0 billion gallons for 2023 and 15.25 billion gallons for both 2024 and 2025. Additionally, the proposal for 2023 also restores
the remaining 250 million gallons previously waived in 2016.
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 88 total Small
Refinery Exemptions (“SREs”) for 2016 through 2018 totaling approximately 4.3 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.
Flexible fuel vehicles (“FFVs”) 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. In recent years, automobile manufactures have backtracked in the production of FFVs for the U.S.
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 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 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.
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 or other viruses surface, 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.
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 not be able to meet 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 not be able to meet 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 34% of distillers grains produced
in the United States were exported in 2022. 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. While we have taken appropriate precautions to protect our systems, and to date, we have not experienced
any material adverse events related to a security breach or cyber-attack, 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.
We ship much of our products and receive a
portion of our corn via rail, which involves risks involving potential regulatory changes that could adversely affect our cash flows and
operating results.
A large portion of our ethanol and distillers
grains sales are shipped via rail. In addition, we receive some corn via rail. Given the notoriety of recent major train derailments,
it is possible that additional regulations could be enacted. Any changes to existing laws and regulations, or new laws and regulations,
including voluntary measures taken by the rail industry, could result in higher shipping costs, or new requirements for the design, construction
or operation of tank cars that transport hazard materials, such as ethanol. In addition, any derailments involving our products could
result in legal claims being brought against us that could involve significant liabilities.
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. This operation is currently
under audit by the IRS and 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 were 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 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 current federal 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 offices, 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 related to tax credits claimed 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 68 Executive Chairman of the Board*
Zafar Rizvi 73 Chief Executive Officer and President*
Edward Kress 73 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 March 29, 2023, there were 71 holders of record of our common stock, including shares held in nominee or street name by brokers.
Dividend Policy
The Company has no history of paying cash dividends
on our common stock.
Issuer Purchases of Equity Securities
On August 31, 2021, our Board of Directors increased
our share repurchase authorization by an additional 1,500,000 shares (split-adjusted). At January 31, 2023, a total of 876,786 shares
remained available to purchase under this authorization.
There were no share repurchases in the fourth
quarter of fiscal year 2022.
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, 2018 and ended January
31, 2023. The graph assumes an investment of $100 in our Common Stock and each index on January 31, 2018 and reinvestment of all dividends.
Item 6. [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, and availability of
corn. 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, the amount of corn stored on farms, weather, federal policy, foreign trade and international disruptions caused by wars or
conflicts. Because the market price of ethanol and distillers grains are not always directly related to corn prices (for example, demand
for crude and other energy and related prices, the export market demand for ethanol and distillers grains, soybean meal prices, and the
results of federal policy decisions and trade negotiations can impact ethanol and distillers grains prices), at times ethanol and distillers
grains 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 approximately 2.9 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 the crush spread decline, it is possible that our ethanol plants will generate operating results that do not provide adequate
cash flows for sustained periods of time. In such cases, production at the ethanol plants may be reduced or stopped altogether in
order to minimize variable costs at individual plants.
We attempt to manage the risk related to the volatility
of commodity prices by utilizing forward grain and natural gas purchase contracts, forward ethanol, distillers grains and non-food grade
corn oil sale contracts and commodity futures agreements, as management deems appropriate. We attempt to match quantities of these sales
contracts with an appropriate quantity of grain purchase contracts over a given period of time when we can obtain an adequate gross margin
resulting from the crush spread inherent in the contracts we have executed. However, the market for future ethanol sales contracts generally
lags the spot market with respect to ethanol price. Consequently, we generally execute fixed price contracts for no more than four months
into the future at any given time and we may lock in our corn or ethanol price without having a corresponding locked in ethanol or corn
price for short durations of time. As a result of the relatively short period of time our fixed price contracts cover, we generally cannot
predict the future movements in our realized crush spread for more than four months; thus, we are unable to predict the likelihood or
amounts of future income or loss from the operations of our ethanol facilities. We utilize derivative financial instruments, primarily
exchange traded commodity future contracts and swaps, in conjunction with certain of our grain procurement and commodity marketing activities.
We reported net income attributable to REX common
shareholders of $27.7 million in fiscal 2022 compared to approximately $52.4 million in fiscal 2021. Our ethanol business had reduced
profits in fiscal 2022 compared to fiscal 2021 as a result of lower crush spreads in fiscal 2022. The two largest drivers of ethanol
profitability
are corn and ethanol pricing, both of which experienced significant volatility within the year. Chicago Board of Trade corn prices per
bushel ranged from a low of $5.64 in July 2022 to a high of $8.18 in April 2022. S&P Global Platts ethanol pricing per gallon ranged
from a low of $1.99 in February 2022 to a high of $2.88 in June 2022.
On August 10, 2017, we purchased, through a 95.35%
owned subsidiary, the entire ownership interest of an entity that owned a refined coal facility. We began operating the refined coal facility
immediately after the acquisition. As the plant was no longer eligible to receive federal production tax credits beginning on November
18, 2021, we ceased operations on that date and subsequently sold the facility. We began classifying this operation as discontinued operations
in the third quarter of fiscal 2021.
One
Earth Sequestration, LLC, a wholly owned subsidiary of One Earth Energy, LLC, is in the exploratory stage of a carbon sequestration project
near the One Earth Energy ethanol plant. A test well has been drilled to a total depth of approximately 7,100 feet, in which almost
2,000 feet of Mt. Simon Sandstone was encountered, which represents the region’s primary carbon storage resource. Three-dimensional
seismic testing has been performed, as well as geological modeling for predicting the movement of injected carbon and the plume area to
determine maximum injection pressure, reservoir quality and storage capacity for the potential wells. We have applied for a Class VI injection
well permit for three wells with the EPA.