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, which it matched in 2024. In 2023 and 2022, the industry produced approximately 15.6 and 15.4 billion gallons,
respectively, 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, distillers
grains, distillers corn oil and gasoline, and availability of corn. 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.
The gross margin at our
ethanol plants depends principally on the spread between ethanol, distillers grains, distillers corn oil, 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 returns on
ethanol investments are highly sensitive to corn 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 as well as other conflicts and political unrest, both foreign
and domestic. These factors include government policies and subsidies with respect to agriculture, international trade and tariffs,
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 or lower 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 impacted 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.
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 distillers 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 distillers 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, export market, 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 and soybean meal. 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.
Pricing of distillers corn oil is primarily
driven by the demand from renewable diesel, biodiesel, and to some extent, synthetic aviation fuel markets. Distillers corn oil
is marketed as a low-carbon feedstock to be used in these markets which may see expanded demand due to the extended blending tax
credit, credits included in the IRA and growing Low Carbon Fuel Standard (“LCFS”) markets, resulting in an impact to
distillers corn oil demand. With a lower CI score, distillers corn oil may see improved pricing compared to heating oil and soybean
oil, which it has traditionally tracked closely in price. Alternatively, other feedstocks such as cooking oil and animal fats,
with lower CI scoring, could be preferred over distillers corn oil. A decrease in the price of or demand for distillers corn oil
could negatively impact our results of operations.
Inflation could impact
the cost and/or availability of material, labor and other input, which could adversely affect our operations.
We have experienced inflationary impacts
on key production inputs, labor costs consisting of both wages and other labor-related costs, services, equipment and other inputs.
These inflationary pressures could continue or worsen in future periods and may be beyond our control. We may not be able to pass
these increased costs along to our customers through the products we sell. As a result, inflation and higher prices could negatively
impact our results of operations.
We are currently working on carbon sequestration
and plant expansion projects at the One Earth plant. We have experienced permitting delays which could lead to inflationary pricing
increases on the construction.
The price of ethanol and distillers
grains may decline as a result of trade restrictions, duties or tariffs on ethanol and distillers grains exports from the United
States or from unfavorable foreign currency exchange rates.
Ethanol and other products that we produce
are sold into various other countries with trade agreements with the United States. 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. In addition, there have been increased threats of tariffs on imports by the current Trump administration.
If tariffs lead to retaliatory actions by countries that are markets for our products, it could have material adverse effect on
our business, financial condition and results of operations.
The United States exported an estimated
1.9 billion gallons of ethanol in 2024, up from approximately 1.4 and 1.3 billion gallons in 2023 and 2022, respectively. 36% of
the 2024 exports of ethanol were sold in Canada. Further, in 2024 and 2023, an estimated 12.2 and 10.8 million metric tons, respectively,
of distillers grains were exported by the United States, which represented approximately 37% and 34% in 2024 and 2023, respectively,
of U.S production. Of the total United States exports of distillers grains in 2024, 21% were exported to Mexico. If producers and
exporters of ethanol and distillers grains are subjected to trade restrictions, or additional duties or tariffs are imposed on
U.S. exports, particularly by Canada and Mexico, 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.
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 distillers corn oil to decrease.
According to the RFA,
domestic ethanol production capacity is approximately 18.3 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 set conventional renewable fuel volumes of 15.0 billion gallons for 2023
through 2025. In addition, for 2023 they restored 250 million gallons previously waived. 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.
A decrease in demand
for ethanol may result in excess capacity, 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 distillers corn oil as by-products, increased ethanol production will also lead
to increased supplies of distillers grains and distillers corn oil. An increase in the supply of distillers grains and distillers
corn oil, without corresponding increases in demand, could lead to lower prices or an inability to sell our ethanol plants’
distillers grains and distillers corn oil production. A decline in the price of distillers grains or distillers corn oil could
have a material adverse effect on the results of our business, financial condition, and results of operations.
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 hybrid and electric vehicles. Numerous automobile manufacturers have announced plans
to phase out internal combustion engine production by the mid-2030s. 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 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 and start-up of this
project requires numerous government 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 significant write off of our commitments and investment, which totals approximately
$55.7 million as of our most recent year-end. Recent delays in permitting could result in increased costs to complete the project.
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
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 IRA.
Carbon capture and sequestration projects
are subject to federal, state, and local regulations.
In addition to our planned carbon sequestration
facility near our One Earth Energy ethanol plant, we have signed an agreement to deliver our carbon from the NuGen Energy facility
to an outside party. These projects may not result in any realized benefit due to delays or suspended operations. Investments being
made in these projects are based on regulatory guidelines, such as modeling for CI reductions, that may be adjusted outside of
our control and could deviate from our current strategy. Federal guidelines within the IRA could be changed to no longer include
corn-based ethanol from being eligible for certain tax incentives. Delays in the issuance or regulations or the elimination of
clean fuel and other incentives at the federal, state or local level could adversely affect our business. New legislation limiting
our ability to sequester carbon could be adopted at the federal, state or local levels.
In July 2024, the governor of Illinois
signed the Safety and Aid for the Environment in Carbon Capture and Sequestration Act. This legislation imposes additional safety,
environmental and other requirements on obtaining permits and approvals for carbon capture and sequestration facilities in Illinois,
including CO2 pipelines. Further, the legislation imposes a moratorium on the issuance of new certificates of authority for the
construction of CO2 pipelines until the earlier of the date federal CO2 pipeline safety standards are finalized by the federal
Pipeline and Hazardous Materials Safety Administration (PHMSA) or, subject to certain other conditions, July 1, 2026. As a result
of this legislation, the ICC dismissed our pipeline application without prejudice, and we will be required to resubmit an application
after rules are finalized or subsequent to July 1, 2026. The delays and additional requirements imposed as a result of this act
could have an adverse impact on the cost and completion of our project.
There is currently legislation being debated in the Illinois General Assembly that would, if eventually
enacted, ban carbon sequestration projects if they overlie, underlie, or pass through as sole-source aquifer, including the aquifer’s
upstream areas that are part of the project review area, as identified by the U.S. EPA. The first well for our proposed carbon
sequestration project is located inside, but near the edge of, the Mahomet Sole Source Aquifer Project Review Area, within the
Sangamon River near Fisher Upstream Area. It is approximately five miles north of the Sangamon River and nearly six miles outside
of the mapped boundary of the Mahomet Aquifer, which has been designated as a sole source or principal aquifer by the U.S. EPA.
We believe our second and third sequestration well sites are outside the Mahomet Sole Source Aquifer Project Review Area. The outcome
of this proposed legislation could impact our ability to complete our project or materially impact the timing and cost of completion.
In March 2025, South Dakota signed a bill
into law that bans the use of eminent domain in connection with carbon dioxide pipelines. This act could make the sequestration
project for the NuGen Energy facility more difficult to materialize.
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 or expansion.
The growth of our ethanol
business depends on our ability to identify and develop new 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. 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 set conventional renewable
fuel volumes of 15.0 billion gallons for 2023 through 2025 Additionally, for 2023, the EPA restored 250 million gallons previously
waived. The EPA was required to propose RVOs for 2026 by November 2024, but the administration, at that time, indicated on July
8, 2024 an intention to propose RVOs for 2026 and beyond in March 2025, and finalize them in December 2025. The new administration
has not yet provided an updated timeline for these rules.
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 SREs for 2016 through 2018 totaling approximately 4.3 billion gallons. In recent years, the EPA had largely
denied small refiner waivers. In July 2024, the U.S. Court of Appeals for the District of Columbia Circuit vacated many of the
EPA’s 2022 SRE denials. The EPA had denied 105 SREs in 2022. As a result of this Court ruling, the EPA has voluntarily moved
to rescind the agency’s 2023 denial of 26 SREs. During the previous Trump administration, the EPA granted more SREs than
under other administrations. These and additional SREs could lead to decreased RIN values and ethanol pricing. As of March 2025,
there were 156 SRE petitions pending.
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 lowered 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, such as on the export market, 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 discharge, 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
at full capacity or 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 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 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 37% of distillers grains produced
in the United States were exported in 2024. 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 distillers corn oil immediately
prior to the production of distillers grains. Several studies are attempting to determine whether distillers corn oil extraction
may impact the nutritional value of the resulting distillers grains. If it is determined that distillers 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 may have greater financial resources 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 mostly 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 and carbon sequestration facility.
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, tariffs, 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 hazardous 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.
There is a risk of a pandemic that could
spread into the United States and other countries.
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. If in the future, this 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.
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. Although this operation has ceased, it remains
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. The federal production tax credits received through ownership of this facility, approximately $58.2 million, remain under IRS
audit, and if we were to lose these tax credits, it could have a material adverse 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 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.
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 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,
● Our carbon sequestration investment may not be successful, and
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. 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.
In recent past years,
certain institutional investors adopted environmental, social and governance guidelines (ESG), and encouraged additional
consideration of ESG practices in a manner that could negatively impact our stock price if continued in the future. 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 2022. 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 1C. Cybersecurity
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 our information technology systems. While we have
taken what we believe are 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, the failure of our personnel
to follow established procedures, 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.
As part of our routine and periodic overall
risk management system or processes, we have incorporated various processes related to cybersecurity. Key cybersecurity controls,
such as access controls, are included within our internal control framework that we assess annually as part of Management’s
Annual Report on Internal Control Over Financial Reporting. Additionally, periodic discussions are held with outsourced IT professionals
for both corporate and consolidated plant environments to determine if appropriate actions are being taken to address potential
risks. Through the assistance of our qualified third-party IT professionals, we have implemented numerous security measures, including,
but not limited to, multi-factor authentication on critical systems, password requirements, access controls, and data encryption.
Our IT policies and procedures include the expectations of all employees and all third parties who may be given access to our IT
systems to maintain the security of our IT systems.
Our commitment to the overall security
of our information technology systems starts at the highest levels of our Company, the Board of Directors and management. Management
and the Board of Directors provide oversight surrounding cybersecurity. Management oversees internal controls and the company-wide
risk assessment process. The Audit Committee is provided with regular updates by management regarding the control framework and
whether any significant deficiencies or material weaknesses exist in the IT control environment. The Audit Committee is also tasked
with determining the appropriate response to any submissions through the corporate whistleblower policy. The whistleblower policy
includes the opportunity for employees of the Company to notify the Audit Committee confidentially and anonymously of any concerns
regarding cybersecurity, in addition to any accounting, internal accounting controls or auditing matters. The audit committee will
report any significant matters to the Board of Directors.
As of January 31, 2025, we had not identified
an indication of a cybersecurity incident that would have a material impact on our business and consolidated financial statements.
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.
Item 4. Mine Safety Disclosures
Not Applicable.
Information About Our Executive Officers
Set forth below is certain information
about each of our executive officers.
Name Age Position
Stuart Rose 70 Executive Chairman of the Board*
Zafar Rizvi 75 Chief Executive Officer and President*
Edward Kress 75 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,
and 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.