The accompanying notes are an integral part of these unaudited
consolidated condensed financial statements.
The accompanying notes are an integral part of these unaudited
consolidated condensed financial statements.
The accompanying notes are an integral part of these unaudited
consolidated condensed financial statements.
The accompanying notes are an integral part of these unaudited
consolidated condensed financial statements.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
October 31, 2019
Note 1. Consolidated Condensed Financial
Statements
References to the Company – References
to “REX” or the “Company” in the consolidated condensed financial statements and in these notes to the
consolidated condensed financial statements refer to REX American Resources Corporation, a Delaware corporation, and its majority
and wholly owned subsidiaries.
The consolidated condensed financial statements
included in this report have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission and include, in the opinion of management, all adjustments necessary to state fairly the information set
forth therein. Any such adjustments were of a normal recurring nature. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have
been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the
information presented not misleading. Financial information as of January 31, 2019 included in these financial statements has been
derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year
ended January 31, 2019 (fiscal year 2018). It is suggested that these unaudited consolidated condensed financial statements be
read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on
Form 10-K for the year ended January 31, 2019. The results of operations for the interim periods are not necessarily indicative
of the results to be expected for the year.
Basis of Consolidation – The consolidated
condensed financial statements in this report include the operating results and financial position of the Company. All intercompany
balances and transactions have been eliminated. The Company consolidates the results of its four majority owned subsidiaries. The
Company includes the results of operations of One Earth Energy, LLC (“One Earth”) in its Consolidated Condensed Statements
of Operations on a delayed basis of one month as One Earth has a fiscal year end of December 31.
Nature of Operations –The Company has
two reportable segments: i) ethanol and by-products; and ii) refined coal. Within the ethanol and by-products segment, the Company
has equity investments in three ethanol limited liability companies, two of which are majority ownership interests. Within the
refined coal segment, the Company has a majority equity interest in one refined coal limited liability company.
Note 2. Accounting Policies
The interim consolidated condensed financial
statements have been prepared in accordance with the accounting policies described in the notes to the consolidated financial statements
included in the Company’s fiscal year 2018 Annual Report on Form 10-K and the adoption of new accounting standards described at
the end of this footnote. While management believes that the procedures followed in the preparation of interim financial information
are reasonable, the accuracy of some estimated amounts is dependent upon facts that will exist or calculations that will be accomplished
at fiscal year-end. Examples
of such estimates include accrued liabilities, such as management
bonuses, and the provision for income taxes. Any adjustments pursuant to such estimates during the quarter were of a normal recurring
nature. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and
cash equivalents includes bank deposits as well as short-term, highly liquid investments with original maturities of three months
or less.
Revenue Recognition
For ethanol and by-products segment sales,
the Company recognizes sales of ethanol, distillers grains and non-food grade corn oil when obligations under the terms of the
respective contracts with customers are satisfied; this occurs with the transfer of control of products, generally upon shipment
from the ethanol plant or upon loading of the rail car used to transport the products. For refined coal segment sales, the Company
recognizes sales of refined coal when obligations under the term of the contract with its customer are satisfied; this occurs when
title and control of the product transfers to its customer, generally upon the coal leaving the refined coal plant. Refined coal
sales are recorded net of the cost of coal as the Company purchases the coal feedstock from the customer to which the processed
refined coal is sold.
Cost of Sales
Cost of sales includes depreciation, costs
of raw materials, inbound freight charges, purchasing and receiving costs, inspection costs, other distribution expenses, warehousing
costs, plant management, certain compensations costs and general facility overhead charges.
Selling, General and Administrative (“SG&A”)
Expenses
The Company includes non-production related
costs such as professional fees, selling charges and certain payroll in SG&A expenses.
Financial Instruments
Certain of the forward grain purchase and
ethanol, distillers grains and non-food grade corn oil sale contracts are accounted for under the “normal purchases and normal
sales” scope exemption of Accounting Standards Codification (“ASC”) 815, “Derivatives and Hedging”
(“ASC 815”) because these arrangements are for purchases of grain that will be delivered in quantities expected to
be used by the Company and sales of ethanol, distillers grains and non-food grade corn oil quantities expected to be produced by
the Company over a reasonable period of time in the normal course of business.
The Company uses derivative financial instruments
(exchange-traded futures contracts) to manage a portion of the risk associated with changes in commodity prices, primarily related
to corn. The Company monitors and manages this exposure as part of its overall risk management policy. As such, the Company seeks
to reduce the potentially adverse effects that the volatility of these markets may have on its operating results. The Company may
take hedging positions in these commodities as one way to mitigate risk. While the Company attempts to link its hedging activities
to purchase and sales activities, there are
situations in which these hedging activities can themselves
result in losses. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. The
changes in fair value of these derivative financial instruments are recognized in current period earnings as the Company does not
use hedge accounting.
Income Taxes
Historically, the Company recorded its interim
tax provision or benefit for income taxes including the three and nine months ended October 31, 2018, by applying an estimate of
the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pre-tax income or loss excluding
unusual or infrequently occurring discrete items) for the reporting period. The Company determined that since small changes in
estimated “ordinary” income would result in significant changes in the estimated annual effective tax rate, the historical
method would not provide a reliable estimate for the three and nine months ended October 31, 2019. Thus, the Company used a discrete
effective tax rate method to calculate the provision or benefit for income taxes for the three and nine months ended October 31,
2019.
The Company provides for deferred tax liabilities
and assets for the future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. The Company provides for
a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized. The Company paid no income taxes nor received refunds of income taxes during the nine months ended
October 31, 2019. The Company paid income taxes of approximately $0.9 million during the nine months ended October 31, 2018. The
Company received no refunds of income taxes during the nine months ended October 31, 2018.
As of October 31, 2019 and January 31, 2019,
total unrecognized tax benefits were approximately $8.6 million and approximately $8.8 million, respectively. Accrued penalties
and interest were approximately $0.5 million and approximately $0.4 million at October 31, 2019 and January 31, 2019, respectively.
If the Company were to prevail on all unrecognized tax benefits recorded, the provision for income taxes would be reduced by approximately
$8.2 million. In addition, the impact of penalties and interest would also benefit the effective tax rate. Interest and penalties
associated with unrecognized tax benefits are recorded within income tax expense. On a quarterly basis, the Company accrues for
the effects of open uncertain tax positions and the related potential penalties and interest.
Inventories
Inventories are carried at the lower of cost
or market on a first-in, first-out basis. Inventory includes direct production costs and certain overhead costs such as depreciation,
property taxes and utilities associated with producing ethanol and related by-products and refined coal. Inventory is permanently
written down for instances when cost exceeds estimated net realizable value; such write-downs are based primarily upon commodity
prices as the market value of inventory is often dependent upon changes in commodity prices. There was no significant permanent
write-down of inventory at October 31, 2019 and January 31, 2019. Fluctuations in the write-down of inventory generally relate
to the levels and
composition of such inventory at a given point in time. The
components of inventory are as follows as of the dates presented (amounts in thousands):
|
|
October 31,
2019
|
|
|
January 31,
2019
|
|
|
|
|
|
|
|
|
Ethanol and other finished goods
|
|
$
|
6,825
|
|
|
$
|
5,767
|
|
Work in process
|
|
|
3,477
|
|
|
|
3,094
|
|
Grain and other raw materials
|
|
|
20,736
|
|
|
|
9,616
|
|
Total
|
|
$
|
31,038
|
|
|
$
|
18,477
|
|
Property and Equipment
Property and equipment is recorded at cost
or the fair value on the date of acquisition (for property and equipment acquired in a business combination). Depreciation is computed
using the straight-line method. Estimated useful lives are 5 to 40 years for buildings and improvements, and 2 to 20 years for
fixtures and equipment.
In accordance with ASC 360-10 “Impairment
or Disposal of Long-Lived Assets”, the carrying value of long-lived assets is assessed for recoverability by management
when changes in circumstances indicate that the carrying amount may not be recoverable. There were no impairment charges in the
first nine months of fiscal years 2019 or 2018.
The Company tests for recoverability
of an asset group by comparing its carrying amount to its estimated undiscounted future cash flows. If the carrying amount exceeds
its estimated undiscounted future cash flows, the Company recognizes an impairment charge for the amount by which the asset group’s
carrying amount exceeds its fair value, if any.
Investments
The method of accounting applied to long-term
investments, whether consolidated, equity or cost, involves an evaluation of the significant terms of each investment that explicitly
grant or suggest evidence of control or influence over the operations of the investee and also includes the identification of any
variable interests in which the Company is the primary beneficiary. The Company accounts for investments in a limited liability
company in which it has a less than 20% ownership interest using the equity method of accounting when the factors discussed in
ASC 323, “Investments-Equity Method and Joint Ventures” are met. The excess of the carrying value over the underlying
equity in the net assets of equity method investees is allocated to specific assets and liabilities. Investments in businesses
that the Company does not control but for which it has the ability to exercise significant influence over operating and financial
matters are accounted for using the equity method. The Company accounts for its investment in Big River Resources, LLC (“Big
River”) using the equity method of accounting and includes the results on a delayed basis of one month as Big River has a
fiscal year end of December 31.
The Company periodically evaluates its
investments for impairment due to declines in market value considered to be other than temporary. Such impairment evaluations
include general economic and company-specific evaluations. If the Company determines that a decline in market value is other
than temporary, then a charge to earnings is recorded in the Consolidated Condensed Statements of Operations and a new cost
basis in the investment is established.
Short-term investments are considered held
to maturity, and, therefore are carried at amortized historical cost.
Comprehensive Income
The Company has no components of other comprehensive
income, and therefore, comprehensive income equals net income.
Accounting Changes and Recently Issued Accounting Standards
Effective February 1, 2019, the Company adopted
the amended guidance in Accounting Standards Codification “ASC” Topic 842 “Leases” and all related
amendments (“ASC 842”), which requires virtually all leases be recognized by lessees on their balance sheet as right-of-use
assets and corresponding lease liabilities. The adoption of ASC 842 had a material impact on the Company’s Consolidated Condensed
Balance Sheet as total assets and total liabilities increased by approximately $20.9 million upon adoption. The adoption of ASC
842 did not have a material impact on the Company’s Consolidated Condensed Statement of Operations for the three and nine
months ended October 31, 2019. See Note 4 for a further discussion of the Company’s adoption of this amended guidance.
In August 2018, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, “Changes to Disclosure
Requirements for Fair Value Measurements”, which improves the effectiveness of recurring and non-recurring fair value
measurements disclosures. This standard removes, modifies and adds certain disclosure requirements and is effective for the Company
beginning February 1, 2020. The Company has not determined the effect of this standard on its consolidated financial statements
and related disclosures.
Note 3. Net Sales and Revenue
The Company recognizes sales of products
when obligations under the terms of the respective contracts with customers are satisfied. This occurs with the transfer of control
of products, generally upon shipment from the ethanol plant or upon loading of the rail car used to transport the products. Revenue
is measured as the amount of consideration expected to be received in exchange for transferring goods. Sales, value added and other
taxes the Company collects concurrent with revenue producing activities are excluded from net sales and revenue.
The majority of the Company’s sales
have payment terms ranging from 5 to 10 days after transfer of control. The Company has determined that sales contracts do not
generally include a significant financing component. The Company has not historically, and does not intend to, enter into sales
contracts in which payment is due from a customer prior to transferring product to the customer. Thus, the Company does not record
unearned revenue.
See Note 15 for disaggregation of net sales
and revenue by operating segment and by product.
Note 4. Leases
The Company used the optional transition
method in adopting ASC 842, which resulted in applying
ASC 842 at the date of adoption (February 1, 2019). Thus, comparative
information has not been restated and continues to be reported under accounting standards in effect for those periods.
ASC 842 provides for three practical expedients,
which the Company elected as a package. Pursuant to this package, the Company did not reassess: i) whether any expired or existing
contracts are or contain leases; ii) the lease classification for any expired or existing leases that were previously classified
as operating leases; or iii) the initial direct costs for any existing leases.
The Company elected the practical expedient,
available pursuant to ASC 842, for lessees to include both lease and non-lease components as a single component and account for
it as a lease. In general, certain maintenance costs are the responsibility of the Company under its railcar leases. These maintenance
costs are a non-lease component which the Company elected to combine with rental payments and account for the total amount as operating
lease expense.
At October 31, 2019, the Company has lease
agreements, as lessee, for railcars. All of the leases are accounted for as operating leases. The lease agreements do not contain
a specified implicit interest rate; therefore, the Company’s estimated incremental borrowing rate was used to determine the
present value of future minimum lease payments. The exercise of any lease renewal is at the Company’s sole discretion. The
lease term for all of the Company’s leases includes the noncancelable period of the lease and any periods covered by renewal options
that the Company is reasonably certain to exercise. Certain leases include rent escalations pre-set in the agreements, which are
factored into the lease payment stream. The components of lease expense, classified as SG&A expenses on the Consolidated Condensed
Statement of Operations are as follows:
|
|
Three Months
Ended
October
31, 2019
|
|
|
Nine Months
Ended
October
31, 2019
|
|
|
|
|
|
|
|
|
|
|
Operating lease expense
|
|
$
|
|
1,557
|
|
|
$
|
|
4,867
|
|
Variable lease expense
|
|
|
|
139
|
|
|
|
|
491
|
|
Total lease expense
|
|
$
|
|
1,696
|
|
|
$
|
|
5,358
|
|
The following table is a summary of future minimum rentals on
such leases at October 31, 2019 (amounts in thousands):
Years Ended January 31,
|
|
Minimum
Rentals
|
|
|
|
|
|
Remainder of 2020
|
|
$
|
1,620
|
|
2021
|
|
|
5,668
|
|
2022
|
|
|
4,958
|
|
2023
|
|
|
3,251
|
|
2024
|
|
|
2,085
|
|
Thereafter
|
|
|
1,257
|
|
Total
|
|
|
18,839
|
|
Less: present value discount
|
|
1,822
|
|
Operating lease liabilities
|
$
|
17,017
|
|
At October 31, 2019, the weighted average
remaining lease term is 3.7 years and the weighted average discount rate is 5.46% for the above leases.
At January 31, 2019, the Company had operating
lease agreements (pursuant to ASC 840, “Leases”), as lessee, for railcars and other equipment. At January 31,
2019, future minimum annual rentals on such leases were as follows (amounts in thousands):
Years Ended January 31,
|
|
Minimum
Rentals
|
|
|
|
|
|
2020
|
|
$
|
6,767
|
|
2021
|
|
|
5,487
|
|
2022
|
|
|
4,791
|
|
2023
|
|
|
3,208
|
|
2024
|
|
|
2,041
|
|
Thereafter
|
|
|
1,221
|
|
Total
|
|
$
|
23,515
|
|
Note 5. Fair Value
The Company applies
ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), which provides a framework for measuring
fair value under accounting principles generally accepted in the United States of America. This
accounting standard defines fair value as the exchange price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date.
The Company determines the fair market values
of its financial instruments based on the fair value hierarchy established by ASC 820 which requires an entity to maximize the
use of observable inputs and
minimize the use of unobservable inputs when measuring fair
value. The standard describes three levels of inputs that may be used to measure fair values which are provided below. The Company
carries certain cash equivalents, investments and derivative instruments at fair value.
The fair values of derivative assets and
liabilities traded in the over-the-counter market are determined using quantitative models that require the use of multiple market
inputs including interest rates, prices and indices to generate pricing and volatility factors, which are used to value the position.
The predominance of market inputs are actively quoted and can be validated through external sources, including brokers, market
transactions and third-party pricing services. Estimation risk is greater for derivative asset and liability positions that are
either option-based or have longer maturity dates where observable market inputs are less readily available or are unobservable,
in which case interest rate, price or index scenarios are extrapolated in order to determine the fair value. The fair values of
derivative assets and liabilities include adjustments for market liquidity, counterparty credit quality, the Company’s own
credit standing and other specific factors, where appropriate.
To ensure the prudent application of estimates
and management judgment in determining the fair value of derivative assets and liabilities, investments and property and equipment,
various processes and controls have been adopted, which include: (i) model validation that requires a review and approval for pricing,
financial statement fair value determination and risk quantification; and (ii) periodic review and substantiation of profit and
loss reporting for all derivative instruments. Financial assets and liabilities measured at fair value on a recurring basis at
October 31, 2019 are summarized below (amounts in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in cooperative (1)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
341
|
|
|
$
|
341
|
|
Forward purchase contract asset (2)
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
100
|
|
Commodity futures (2)
|
|
|
-
|
|
|
|
150
|
|
|
|
-
|
|
|
|
150
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
250
|
|
|
$
|
341
|
|
|
$
|
591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity futures liability (4)
|
|
$
|
-
|
|
|
$
|
165
|
|
|
$
|
-
|
|
|
$
|
165
|
|
Financial assets and liabilities measured at fair value on a
recurring basis at January 31, 2019 are summarized below (amounts in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in cooperative (1)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
333
|
|
|
$
|
333
|
|
Commodity futures (2)
|
|
|
-
|
|
|
|
44
|
|
|
|
-
|
|
|
|
44
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
44
|
|
|
$
|
333
|
|
|
$
|
377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward purchase contract liability (3)
|
|
$
|
-
|
|
|
$
|
22
|
|
|
$
|
-
|
|
|
$
|
22
|
|
(1) The investment in cooperative is included
in “Other assets” on the accompanying Consolidated Condensed Balance Sheets.
(2) The forward purchase contract asset and
commodity futures asset are included in “Prepaid expenses and other current assets” on the accompanying Consolidated
Condensed Balance Sheets.
(3) The forward purchase contract liability
is included in “Accrued expenses and other current liabilities” on the accompanying Consolidated Condensed Balance
Sheets.
(4) The commodity futures liability is included
in “Accrued expenses and other current liabilities” on the accompanying Consolidated Condensed Balance Sheets.
The Company determined the fair value of
the investment in cooperative by using a discounted cash flow analysis on the expected cash flows. Inputs used in the analysis
include the face value of the allocated equity amount, the projected term for repayment based upon a historical trend and a risk
adjusted discount rate based on the expected compensation participants would demand because of the uncertainty of the future cash
flows. The inherent risk and uncertainty associated with unobservable inputs could have a significant effect on the actual fair
value of the investment.
There were no assets measured at fair value
on a non-recurring basis at October 31, 2019 or January 31, 2019.
Note 6. Property and Equipment
The components of property and equipment
are as follows for the periods presented (amounts in thousands):
|
|
October 31,
2019
|
|
|
January 31,
2019
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
$
|
21,481
|
|
|
$
|
21,469
|
|
Buildings and improvements
|
|
|
23,642
|
|
|
|
23,608
|
|
Machinery, equipment and fixtures
|
|
|
299,801
|
|
|
|
297,807
|
|
Construction in progress
|
|
|
1,014
|
|
|
|
708
|
|
|
|
|
345,938
|
|
|
|
343,592
|
|
Less: accumulated depreciation
|
|
|
(178,184)
|
|
|
|
(161,071)
|
|
Total
|
|
$
|
167,754
|
|
|
$
|
182,521
|
|
Note 7. Other Assets
The components of other assets are as follows
for the periods presented (amounts in thousands):
|
|
October 31,
2019
|
|
|
January 31,
2019
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
$
|
15,449
|
|
|
$
|
5,843
|
|
Other
|
|
|
814
|
|
|
|
333
|
|
Total
|
|
$
|
16,263
|
|
|
$
|
6,176
|
|
Note 8. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other
current liabilities are as follows for the periods presented (amounts in thousands):
|
|
October 31,
2019
|
|
|
January 31,
2019
|
|
|
|
|
|
|
|
|
Accrued payroll and related items
|
|
$
|
691
|
|
|
$
|
2,041
|
|
Accrued utility charges
|
|
|
1,287
|
|
|
|
2,924
|
|
Accrued transportation related items
|
|
|
1,500
|
|
|
|
1,567
|
|
Accrued real estate taxes
|
|
|
1,305
|
|
|
|
1,680
|
|
Accrued income taxes
|
|
|
54
|
|
|
|
71
|
|
Other
|
|
|
1,394
|
|
|
|
1,263
|
|
Total
|
|
$
|
6,231
|
|
|
$
|
9,546
|
|
Note 9. Derivative Financial Instruments
The Company is exposed to various market
risks, including changes in commodity prices (raw materials and finished goods). To manage risks associated with the volatility
of these natural business exposures, the Company enters into commodity agreements and forward purchase (corn and natural gas) and
sale (ethanol, distillers grains and non-food grade corn oil) contracts. The Company does not purchase or sell derivative financial
instruments for trading or speculative purposes. The Company does not purchase or sell derivative financial instruments for which
a lack of marketplace quotations would require the use of fair value estimation techniques.
The following table provides information
about the fair values of the Company’s derivative financial instruments (that are not accounted for under the “normal
purchases and normal sales” scope exemption of ASC 815) and the line items on the Consolidated Condensed Balance Sheets in
which the fair values are reflected (in thousands):
|
|
Asset Derivatives
Fair Value
|
|
|
Liability Derivatives
Fair Value
|
|
|
|
October 31,
2019
|
|
|
January 31,
2019
|
|
|
October 31,
2019
|
|
|
January 31,
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity futures (1)
|
|
$
|
150
|
|
|
$
|
44
|
|
|
$
|
165
|
|
|
$
|
-
|
|
Forward purchase contracts (2)
|
|
|
100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
Total
|
|
$
|
250
|
|
|
$
|
44
|
|
|
$
|
165
|
|
|
$
|
22
|
|
(1) Commodity futures
assets are included in prepaid expenses and other current assets. These contracts are short/sell positions for approximately
3.6 million bushels of corn, long/buy positions for approximately 2.7 million bushels of corn and short/sell positions for
approximately 2.1 million gallons of ethanol at October 31, 2019. These contracts are short/sell positions for approximately
2.0 million bushels of corn at January 31, 2019. Commodity futures liabilities are included in accrued expenses and other
current liabilities. These contracts are short/sell positions for approximately 2.6 million
bushels of corn.
(2) Forward purchase contracts
assets are included in prepaid expenses and other current assets. These contracts are for purchases of approximately 0.8 million
bushels of corn at October 31, 2019. Forward purchase contracts liabilities are included in accrued expenses and other current
liabilities. These contracts are for purchases of approximately 1.3 million bushels of corn at January 31, 2019.
As of October 31, 2019, and January 31, 2019,
all of the derivative financial instruments held by the Company were subject to enforceable master netting arrangements. The Company’s
accounting policy is to offset positions and amounts owed or owing with the same counterparty. As of October 31, 2019, and January
31, 2019, the gross positions of the enforceable master netting agreements are not significantly different from the net positions
presented in the table above. Depending on the amount of an unrealized loss on a derivative contract held by the Company, the counterparty
may require collateral to secure the Company’s derivative contract position. The Company was required to maintain collateral
in the amount of approximately $523,000 and approximately $281,000 to secure the Company’s derivative position at October
31, 2019 and January 31, 2019, respectively.
See Note 5 which contains fair value information
related to derivative financial instruments.
Gains on the Company’s derivative financial
instruments of approximately $248,000 and approximately $2,432,000 for the third quarter of fiscal years 2019 and 2018, respectively,
were included in cost of sales on the Consolidated Condensed Statements of Operations. Gains on the Company’s derivative
financial instruments of approximately $1,478,000 and approximately $2,273,000 for the first nine months of fiscal years 2019 and
2018, respectively, were included in cost of sales on the Consolidated Condensed Statements of Operations.
Note 10. Investments
The following table summarizes the Company’s
equity method investment at October 31, 2019 and January 31, 2019 (dollars in thousands):
|
|
Ownership
|
|
|
Carrying Amount
|
|
|
Carrying Amount
|
|
Entity
|
|
Percentage
|
|
|
October 31, 2019
|
|
|
January 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Big River
|
|
|
10.3
|
%
|
|
|
$31,422
|
|
|
|
$32,075
|
|
Undistributed earnings of the Company’s
equity method investee totaled approximately $11.4 million and approximately $12.0 million at October 31, 2019 and January 31,
2019, respectively. The Company received dividends from its equity method investee of approximately $1.0 million and approximately
$3.0 million during the first nine months of fiscal years 2019 and 2018, respectively.
Summarized financial information for the
Company’s equity method investee is presented in the following table for the periods presented (amounts in thousands):
|
|
Three Months Ended
October 31,
|
|
|
Nine Months Ended
October 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales and revenue
|
|
$
|
220,387
|
|
|
$
|
196,169
|
|
|
$
|
598,187
|
|
|
$
|
600,204
|
|
Gross profit
|
|
$
|
10,269
|
|
|
$
|
15,150
|
|
|
$
|
18,864
|
|
|
$
|
39,489
|
|
(Loss) income from continuing operations
|
|
$
|
(149)
|
|
|
$
|
5,932
|
|
|
$
|
3,397
|
|
|
$
|
21,164
|
|
Net (loss) income
|
|
$
|
(149)
|
|
|
$
|
5,932
|
|
|
$
|
3,397
|
|
|
$
|
21,164
|
|
The following table summarizes the Company’s held-to-maturity
security at January 31, 2019 (amounts in thousands):
|
|
Amortized
Cost
|
|
|
Gross Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
United States Treasury Bill
|
|
|
$14,975
|
|
|
|
$2
|
|
|
|
$14,973
|
|
As of January 31, 2019, the contractual maturity
of this investment was less than one year and the yield to maturity rate was 2.29%.
Note 11. Employee Benefits
The Company maintains
the REX 2015 Incentive Plan, approved by its shareholders, which reserves a total of 550,000 shares of common stock for issuance
pursuant to its terms. The plan provides for the granting of shares of stock, including options to purchase shares of common stock,
stock appreciation rights tied to the value of common stock, restricted stock, and restricted stock unit awards to eligible employees,
non-employee directors and consultants. Since plan inception, the Company has only granted restricted stock awards. The Company
measures share-based compensation grants at fair value on the grant date, adjusted for estimated forfeitures. The Company records
noncash compensation expense related to liability and equity awards in its consolidated financial statements over the requisite
service period on a straight-line basis. At October 31, 2019, 479,988 shares remain available for issuance under the Plan. As a
component of their compensation, restricted stock has been granted to directors at the closing market price of REX common stock
on the grant date. In addition, one third of executives’ incentive compensation is payable by an award of restricted stock
based on the then closing market price of REX common stock on the grant date. The Company’s board of directors has determined
that the grant date will be June 15th, or the next business day if June 15th is not a business day, for all
grants of restricted stock.
At October 31, 2019
and January 31, 2019, unrecognized compensation cost related to nonvested restricted stock was approximately $259,000 and $200,000,
respectively. The following tables summarize
non-vested restricted
stock award activity for the periods presented:
|
|
Nine Months Ended October 31, 2019
|
|
|
|
|
|
|
|
Non-Vested
Shares
|
|
|
Weighted
Average
Grant
Date Fair Value
(000’s)
|
|
|
Weighted
Average Remaining
VestingTerm
(in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Vested at January 31, 2019
|
|
|
38,036
|
|
|
$
|
2,935
|
|
|
|
2
|
|
Granted
|
|
|
9,442
|
|
|
|
662
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Vested
|
|
|
18,902
|
|
|
|
1,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Vested at October 31, 2019
|
|
|
28,576
|
|
|
$
|
2,193
|
|
|
|
2
|
|
|
|
Nine Months Ended October 31, 2018
|
|
|
|
|
|
|
|
Non-Vested
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
(000’s)
|
|
|
Weighted
Average Remaining
VestingTerm
(in
years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Vested at January 31, 2018
|
|
|
29,415
|
|
|
$
|
2,275
|
|
|
|
2
|
|
Granted
|
|
|
21,745
|
|
|
|
1,622
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Vested
|
|
|
13,124
|
|
|
|
963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Vested at October 31, 2018
|
|
|
38,036
|
|
|
$
|
2,934
|
|
|
|
2
|
|
The above tables include
24,219 and 34,148 non-vested shares at October 31, 2019 and 2018, respectively, which are included in the number of weighted average
shares outstanding used to determine basic and diluted earnings per share attributable to REX common shareholders. Such shares
are treated, for accounting purposes, as being fully vested at the grant date as they were granted to recipients who were retirement
eligible at the time of grant.
Note 12. Income Taxes
Historically, the Company recorded its interim
tax provision or benefit for income taxes including the three and nine months ended October 31, 2018, by applying an estimate of
the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pre-tax income or loss excluding
unusual or infrequently occurring discrete items) for the reporting period. The Company determined that since small changes in
estimated “ordinary” income would result in significant changes in the estimated annual effective tax rate, the historical
method would not provide a reliable estimate for the three and nine months
ended October 31, 2019. Thus, the Company used a discrete effective
tax rate method to calculate the provision or benefit for income taxes for the three and nine months ended October 31, 2019.
The Company’s tax benefit was approximately
65.9% and approximately 266.7% for the three months ended October 31, 2019 and 2018, respectively. The Company’s tax benefit
was approximately 234.7% and approximately 112.8% for the nine months ended October 31, 2019 and 2018, respectively. The fluctuation
in the rate results primarily from the production tax credits the Company expects to receive associated with its refined coal segment
relative to pre-tax income or loss. Through its refined coal operation, the Company earns production tax credits pursuant to IRC
Section 45. The credits can be used to reduce future income tax liabilities for up to 20 years.
The Company files a U.S. federal
income tax return and various state income tax returns. In general, the Company is no longer subject to U.S. federal, state
or local income tax examinations by tax authorities for years ended January 31, 2014 and prior. A reconciliation of the
beginning and ending amount of unrecognized tax benefits, including interest and penalties, is as follows (amounts in
thousands):
|
|
Nine Months Ended
October 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits, beginning of period
|
|
$
|
9,232
|
|
|
$
|
2,325
|
|
Changes for prior years’ tax positions
|
|
|
(77)
|
|
|
|
4,666
|
|
Changes for current year tax positions
|
|
|
-
|
|
|
|
-
|
|
Unrecognized tax benefits, end of period
|
|
$
|
9,155
|
|
|
$
|
6,991
|
|
Note 13. Commitments and Contingencies
The Company is involved in various legal
actions arising in the normal course of business. After taking into consideration legal counsels’ evaluations of such actions,
management is of the opinion that their outcome will not have a material adverse effect on the Company’s Consolidated Condensed
Financial Statements.
One Earth and NuGen have combined forward
purchase contracts for approximately 4.4 million bushels of corn, the principal raw material for their ethanol plants. They expect
to take delivery of the grain through January 2020.
One Earth and NuGen have combined forward
purchase contracts for approximately 1,067,000 MmBtu (million british thermal units) of natural gas. They expect to take delivery
of the natural gas through February 2020.
One Earth and NuGen have combined sales commitments
for approximately 18.9 million gallons of ethanol, approximately 48,500 tons of distillers grains and approximately 6.1 million
pounds of non-food grade corn oil. They expect to deliver a majority of the ethanol, distillers grains and non-food grade corn
oil through December 2019.
The refined coal entity has various agreements
(site license, operating agreements, etc.) containing payment terms based upon production of refined coal under which the Company
is required to pay various fees. These fees totaled approximately $0.9 million and approximately $2.6 million in the third quarter
of fiscal year 2019 and 2018, respectively. Such fees totaled approximately $3.6 million and approximately $7.7 million for the
nine months ended October 31, 2019 and 2018, respectively.
Note 14. Related-Party Transactions
During the third quarters of fiscal years
2019 and 2018, One Earth and NuGen purchased approximately $58.5 million and approximately $47.3 million, respectively, of corn
from minority equity investors and board members of those subsidiaries. Such purchases totaled approximately $148.7 million and
approximately $138.6 million for the nine months ended October 31, 2019 and 2018, respectively. The Company had amounts payable
to related parties for corn purchases of approximately $0.1 million and approximately $1.9 million at October 31, 2019 and January
31, 2019, respectively.
One Earth terminated its agreement with its
corn origination agent at the end of the third quarter of fiscal year 2019. In connection with this, the Company had amounts receivable
from related parties of approximately $6.7 million at October 31, 2019.
During the third quarters of fiscal years
2019 and 2018, the Company recognized commission income of approximately $0.2 million and expense of approximately $0.4 million,
respectively, payable to the minority investor in the refined coal entity. During the first nine months of fiscal years 2019 and
2018, the Company recognized commission income of approximately $0.6 million and expense of approximately $0.7 million, respectively.
The commission income or expense is associated with the refined coal acquisition. The Company had accrued liabilities and accounts
payable related to the commission income or expense of approximately $0.7 million and approximately $1.6 million at October 31,
2019 and January 31, 2019, respectively.
Note 15. Segment Reporting
The Company has two reportable segments:
i) ethanol and by-products; and ii) refined coal. The Company evaluates the performance of each reportable segment based on segment
profit. The following tables summarize segment and other results and assets (amounts in thousands):
|
|
Three Months Ended
October 31
|
|
|
Nine Months Ended
October 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net sales and revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol and by-products
|
|
$
|
86,603
|
|
|
$
|
123,546
|
|
|
$
|
296,826
|
|
|
$
|
372,717
|
|
Refined coal 1
|
|
|
68
|
|
|
|
204
|
|
|
|
288
|
|
|
|
610
|
|
Total net sales and revenue
|
|
$
|
86,671
|
|
|
$
|
123,750
|
|
|
$
|
297,114
|
|
|
$
|
373,327
|
|
1 The Company records sales in
the refined coal segment net of the cost of coal as the Company purchases the coal feedstock from the customer to which refined
coal is sold.
|
|
Three Months Ended
October 31,
|
|
|
Nine Months Ended
October 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Segment gross (loss) profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol and by-products
|
|
$
|
28
|
|
|
$
|
11,260
|
|
|
$
|
12,312
|
|
|
$
|
38,475
|
|
Refined coal
|
|
|
(1,786)
|
|
|
|
(3,513)
|
|
|
|
(6,420)
|
|
|
|
(10,478)
|
|
Total gross (loss) profit
|
|
$
|
(1,758)
|
|
|
$
|
7,747
|
|
|
$
|
5,892
|
|
|
$
|
27,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol and by-products
|
|
$
|
(2,822)
|
|
|
$
|
8,405
|
|
|
$
|
3,491
|
|
|
$
|
29,491
|
|
Refined coal
|
|
|
(1,648)
|
|
|
|
(4,240)
|
|
|
|
(6,351)
|
|
|
|
(11,887)
|
|
Corporate and other
|
|
|
(434)
|
|
|
|
(410)
|
|
|
|
(1,146)
|
|
|
|
(1,341)
|
|
Total (loss) income before income taxes
|
|
$
|
(4,904)
|
|
|
$
|
3,755
|
|
|
$
|
(4,006)
|
|
|
$
|
16,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit (provision) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol and by-products
|
|
$
|
945
|
|
|
$
|
1,643
|
|
|
$
|
(160)
|
|
|
$
|
(1,806)
|
|
Refined coal
|
|
|
2,181
|
|
|
|
8,318
|
|
|
|
9,282
|
|
|
|
19,914
|
|
Corporate and other
|
|
|
105
|
|
|
|
53
|
|
|
|
279
|
|
|
|
240
|
|
Total benefit for income taxes
|
|
$
|
3,231
|
|
|
$
|
10,014
|
|
|
$
|
9,401
|
|
|
$
|
18,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment (loss) profit (net of noncontrolling interests):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol and by-products
|
|
$
|
(2,330)
|
|
|
$
|
7,946
|
|
|
$
|
684
|
|
|
$
|
23,096
|
|
Refined coal
|
|
|
607
|
|
|
|
4,260
|
|
|
|
3,209
|
|
|
|
8,549
|
|
Corporate and other
|
|
|
(329)
|
|
|
|
(331)
|
|
|
|
(868)
|
|
|
|
(1,057)
|
|
Net (loss) income attributable to REX common shareholders
|
|
$
|
(2,052)
|
|
|
$
|
11,875
|
|
|
$
|
3,025
|
|
|
$
|
30,588
|
|
Assets:
|
|
October 31,
2019
|
|
January 31,
2019
|
|
|
|
|
|
|
|
Ethanol and by-products
|
|
$
|
404,733
|
|
$
|
393,691
|
|
Refined coal
|
|
|
6,554
|
|
|
8,625
|
|
Corporate and other
|
|
|
82,285
|
|
|
69,077
|
|
Total assets
|
|
$
|
493,572
|
|
$
|
471,393
|
|
|
|
Three Months Ended
October 31,
|
|
|
Nine Months Ended
October 31,
|
|
Sales of products, ethanol and by-products segment:
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Ethanol
|
|
$
|
66,149
|
|
|
$
|
91,538
|
|
|
$
|
226,986
|
|
|
$
|
283,720
|
|
Dried distillers grains
|
|
|
16,627
|
|
|
|
24,683
|
|
|
|
51,188
|
|
|
|
65,826
|
|
Non-food grade corn oil
|
|
|
3,099
|
|
|
|
4,964
|
|
|
|
12,681
|
|
|
|
15,019
|
|
Modified distillers grains
|
|
|
702
|
|
|
|
2,340
|
|
|
|
5,846
|
|
|
|
8,100
|
|
Other
|
|
|
26
|
|
|
|
21
|
|
|
|
125
|
|
|
|
52
|
|
Total
|
|
$
|
86,603
|
|
|
$
|
123,546
|
|
|
$
|
296,826
|
|
|
$
|
372,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of products, refined coal segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined coal
|
|
$
|
68
|
|
|
$
|
204
|
|
|
$
|
288
|
|
|
$
|
610
|
|