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, 2018
Note 1.
Consolidated Condensed Financial Statements
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, 2018 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, 2018 (fiscal year 2017). 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, 2018. 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 REX American Resources Corporation
and its wholly and majority owned subsidiaries. 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 – In the third
quarter of fiscal year 2017, the Company began reporting the results of its refined coal operation as a new segment as a result
of the August 10, 2017 acquisition of an entity that operates a refined coal facility (see Note 4). Prior to the acquisition,
the Company had one reportable segment, ethanol. Beginning with the third quarter of fiscal year 2017, 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 2017 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
Expenses
The Company includes non-production
related costs such as professional fees, selling charges and certain payroll in selling, general and administrative 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
The Company applies an effective tax rate
to interim periods that is consistent with the Company’s estimated annual effective tax rate as adjusted for discrete items
impacting the interim periods. The Company’s estimated annual effective tax rate includes the impact of its refined coal
operation and the expected federal income tax credits to be earned, beginning August 10, 2017, the date of the refined coal acquisition
(see Note 4). 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 income taxes of
approximately $0.9 million and approximately $6.8 million during the nine months ended October 31, 2018 and 2017, respectively.
The Company did not receive any refunds of income taxes during the nine months ended October 31, 2018. The Company received refunds
of state income taxes of approximately $0.5 million during the nine months ended October 31, 2017.
As of October 31, 2018 and January 31, 2018,
total unrecognized tax benefits were approximately $6.6 million and $2.0 million, respectively. Accrued penalties and interest
were approximately $0.4 million at October 31, 2018 and January 31, 2018. If the Company were to prevail on all unrecognized tax
benefits recorded, the provision for income taxes would be reduced by approximately $6.0 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 related to 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. At October 31, 2018, there was a permanent
write-down of inventory of approximately $0.4 million. There was no significant permanent write-down of inventory at January 31,
2018. 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,
2018
|
|
|
January 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Ethanol and other finished goods
|
|
$
|
6,014
|
|
|
$
|
8,402
|
|
Work in process
|
|
|
2,924
|
|
|
|
2,824
|
|
Grain and other raw materials
|
|
|
12,698
|
|
|
|
9,529
|
|
Total
|
|
$
|
21,636
|
|
|
$
|
20,755
|
|
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, based on an analysis of undiscounted future
expected cash flows from the use and ultimate disposition of the asset. There were no impairment charges in the first nine months
of fiscal years 2018 or 2017. Impairment charges have historically resulted from the Company’s management performing cash
flow analysis and have represented management’s estimate of the excess of net book value over fair value.
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 of an asset group 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. The Company generally determines the
fair value of the asset group using a discounted cash flow model based on market participant assumptions (for income producing
asset groups) or by obtaining appraisals based on the market approach and comparable market transactions (for non-income producing
asset groups).
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. Any unallocated
excess is treated as goodwill and is recorded as a component of the carrying value of the equity method investee. 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, 2018, the Company
adopted the amended guidance in ASC Topic 606 “
Revenue from Contracts with Customers
”, which requires revenue
recognition to reflect the transfer of promised goods or services to customers and replaces existing revenue recognition guidance.
See Note 3 for a further discussion of the Company’s adoption of this amended guidance.
Effective February 1, 2018, the Company
prospectively adopted Accounting Standards Update “ASU” 2016-15 “
Statement of Cash Flows (Topic 230), Classification
of Certain Cash Receipts and Cash Payments
”. This standard provides guidance on eight specific cash flow issues. The
cash flow issues covered by this ASU are: 1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon debt instruments
or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the
borrowing; 3) contingent consideration payments made after a business combination; 4) proceeds from the settlement of insurance
claims; 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies;
6) distributions received from equity method investees; 7) beneficial interests in securitization transactions; and 8) separately
identifiable cash flows and application of the predominance principle for distributions received from equity method investees
in the Statement of Cash Flows. The adoption of this standard did not affect the consolidated condensed financial statements and
related disclosures.
Effective February 1, 2018, the Company
adopted ASU 2016-18 “
Statement of Cash Flows (Topic 230), Restricted Cash”.
This standard requires that the
statements of cash flows explain the changes in the combined total of restricted and unrestricted cash balances. Amounts generally
described as restricted cash will be combined with unrestricted cash and cash equivalents when reconciling the beginning and end
of period balances on the statements of cash flows. The Company adopted this standard retrospectively. Therefore, the beginning
period balance of cash and cash equivalents as of January 31, 2017 was increased by $130,000, the end of period balance of cash
and cash equivalents as of October 31, 2017 was increased
by $230,000 and the beginning period balance of cash and cash
equivalents as of January 31, 2018 was increased by $354,000 to reflect the respective restricted cash amounts.
In February 2016, the FASB issued ASU 2016-02
“Leases”. This standard requires that virtually all leases will be recognized by lessees on their balance sheet as
a right-of-use asset and a corresponding lease liability, including leases currently accounted for as operating leases. The Company
will be required to adopt this standard effective February 1, 2019. The related leases are currently accounted for as operating
leases (see Note 5). This standard requires a modified retrospective transition approach and allows for early adoption. In July
2018, FASB issued Accounting Standards Update,
Leases (Topic 842): Targeted Improvements
, which provides an option to apply
the transition provisions of the new standard at the adoption date instead of the earliest comparative period presented in the
financial statements. The Company has not completed its analysis of the effect of adopting this guidance but it does expect the
adoption of this guidance to have a material impact on its Consolidated Balance Sheet related to the right-of-use asset and lease
obligation liability to be recognized upon adoption of this guidance in addition to requiring expanded disclosures in the Company’s
consolidated financial statements. The Company expects to complete its analysis of the impact of adopting this guidance during
the fourth quarter of fiscal year 2018.
Note 3.
Net Sales and Revenue
On February 1, 2018, the Company adopted
the amended guidance in ASC Topic 606, “
Revenue from Contracts with Customers
”, and all related amendments
and applied it to all contracts utilizing the modified retrospective method. There were no adjustments to the Consolidated Condensed
Balance Sheet as of February 1, 2018 as a result of the adoption of this accounting guidance. Therefore, comparative information
has not been restated and continues to be reported under the accounting standards in effect for those periods. Furthermore, there
was no impact related to the adoption of this accounting guidance on the Consolidated Condensed Statements of Operations or Balance
Sheets for the three and nine months ended October 31, 2018. The Company expects the impact of adopting this accounting guidance
to be immaterial on an ongoing basis.
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 add 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.
The Company elected, pursuant to the new
accounting guidance, to recognize as fulfillment activities the cost for shipping and handling activities that occur after the
customer obtains control of the
promised goods and not when performance obligations are met.
See Note 17 for disaggregation of net sales and revenue by operating segment and by product.
Note 4.
Business Combinations
On August 10, 2017, the Company, through
a 95.35% owned subsidiary, purchased the entire ownership interest of an entity that owns a refined coal facility. The Company
began operating its refined coal facility immediately after the acquisition. The Company expects that the revenues from the sale
of refined coal produced in the facility will be subsidized by federal production tax credits through November 2021, subject to
meeting qualified emissions reductions as governed by Section 45 of the Internal Revenue Code.
The impact on the combined results of operations
of the Company and the refined coal entity, on a pro forma basis, as though the companies had been combined as of the beginning
of fiscal year 2017, is as follows:
Cost of sales would have increased by approximately
$1,385,000 for the nine months ended October 31, 2017. This pro forma increase is a result of increased depreciation expense as
if the refined coal entity was consolidated since the beginning of the nine months ended October 31, 2017. Selling, general and
administrative expenses would have increased by approximately $370,000 for the nine months ended October 31, 2017. These pro forma
adjustments are a result of transaction costs occurring (on a pro forma basis) during the first quarter of fiscal year 2017. The
provision for income taxes would have decreased by approximately $667,000 for the nine months ended October 31, 2017. Net income
attributable to REX common shareholders would have decreased by approximately $1,037,000 for the nine months ended October 31,
2017. Basic and diluted net income per share attributable to REX common shareholders would have decreased by approximately $0.16
for the nine months ended October 31, 2017.
The results of the Company’s refined
coal operations (approximately $1.0 million of net sales and revenue and approximately $14.2 million of net income attributable
to REX common shareholders, including the income tax benefit of estimated Section 45 credits to be earned) have been included
in the consolidated financial statements subsequent to the acquisition date and are included in the Company’s refined coal
segment.
The purchase price was $12,049,000, which
was paid in cash. The acquisition was recorded by allocating the total purchase price to the assets acquired, based on their estimated
fair values at the acquisition date. The purchase price allocation is based on the final fair value assessment results of a valuation
analysis. The income approach was used to determine the fair values of assets acquired. The following table summarizes the estimated
fair values of the assets acquired at the acquisition date (amounts in thousands):
Inventory
|
|
$
|
49
|
|
Property, plant and equipment
|
|
|
12,000
|
|
Total assets acquired and purchase price
|
|
$
|
12,049
|
|
Transaction costs totaled approximately
$2.5 million during fiscal year 2017. The Company does not expect to incur additional transaction costs from this acquisition.
Note 5.
Leases
At October 31, 2018, the Company has lease
agreements, as lessee, for rail cars and a natural gas pipeline. All of the leases are accounted for as operating leases. The
following table is a summary of future minimum rentals on such leases (amounts in thousands):
Years Ended January 31,
|
|
Minimum
Rentals
|
|
|
|
|
|
|
Remainder of 2019
|
|
$
|
1,982
|
|
2020
|
|
|
7,220
|
|
2021
|
|
|
5,865
|
|
2022
|
|
|
5,182
|
|
2023
|
|
|
3,600
|
|
Thereafter
|
|
|
7,123
|
|
Total
|
|
$
|
30,972
|
|
Note 6.
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, 2018 are summarized below (amounts in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in cooperative (2)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
333
|
|
|
$
|
333
|
|
Commodity futures and options (5)
|
|
|
—
|
|
|
|
72
|
|
|
|
—
|
|
|
|
72
|
|
Total assets
|
|
$
|
—
|
|
|
$
|
72
|
|
|
$
|
333
|
|
|
$
|
405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity futures (3)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Forward purchase contract liability (4)
|
|
|
—
|
|
|
|
528
|
|
|
|
—
|
|
|
|
528
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
528
|
|
|
$
|
—
|
|
|
$
|
528
|
|
Financial assets and liabilities measured at fair value on
a recurring basis at January 31, 2018 are summarized below (amounts in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward purchase contracts asset (1)
|
|
$
|
—
|
|
|
$
|
72
|
|
|
$
|
—
|
|
|
$
|
72
|
|
Investment in cooperative (2)
|
|
|
—
|
|
|
|
—
|
|
|
|
333
|
|
|
|
333
|
|
Total assets
|
|
$
|
—
|
|
|
$
|
72
|
|
|
$
|
333
|
|
|
$
|
405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity futures (3)
|
|
$
|
—
|
|
|
$
|
87
|
|
|
$
|
—
|
|
|
$
|
87
|
|
Forward purchase contract liability (4)
|
|
|
—
|
|
|
|
34
|
|
|
|
—
|
|
|
|
34
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
121
|
|
|
$
|
—
|
|
|
$
|
121
|
|
(1) The forward purchase contract asset
is included in “Prepaid expenses and other current assets” on the accompanying Consolidated Condensed Balance Sheets.
(2) The investment in cooperative is included
in “Other assets” on the accompanying Consolidated Condensed Balance Sheets.
(3) Commodity futures are included in “Accrued
expenses and other current liabilities” on the accompanying Consolidated Condensed Balance Sheets.
(4) The forward purchase contract liability
is included in “Accrued expenses and other current liabilities” on the accompanying Consolidated Condensed Balance
Sheets.
(5) The commodity futures and options asset
is included in “Prepaid expenses and other current assets”.
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, 2018 or January 31, 2018. As discussed in Note 4, the Company estimated the fair values
of refined coal assets acquired using the income approach. This estimated fair value is a level 3 measurement.
Note 7.
Property and Equipment
The components of property and equipment
are as follows for the periods presented (amounts in thousands):
|
|
October 31,
2018
|
|
|
January 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
$
|
21,095
|
|
|
$
|
21,074
|
|
Buildings and improvements
|
|
|
23,609
|
|
|
|
23,272
|
|
Machinery, equipment and fixtures
|
|
|
295,114
|
|
|
|
288,832
|
|
Construction in progress
|
|
|
3,241
|
|
|
|
3,155
|
|
|
|
|
343,059
|
|
|
|
336,333
|
|
Less: accumulated depreciation
|
|
|
(156,601
|
)
|
|
|
(138,506
|
)
|
Total
|
|
$
|
186,458
|
|
|
$
|
197,827
|
|
Note 8.
Other Assets
The components of other assets are as follows for the periods
presented (amounts in thousands):
|
|
October 31,
2018
|
|
|
January 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Real estate taxes refundable
|
|
$
|
7,290
|
|
|
$
|
6,719
|
|
Deferred income taxes
|
|
|
563
|
|
|
|
—
|
|
Deposits
|
|
|
—
|
|
|
|
5
|
|
Other
|
|
|
709
|
|
|
|
730
|
|
Total
|
|
$
|
8,562
|
|
|
$
|
7,454
|
|
Real estate taxes refundable represent amounts
due One Earth associated with refunds of previously paid taxes in connection with a tax increment financing arrangement with local
taxing authorities.
Note 9.
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,
2018
|
|
|
January 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Accrued payroll and related items
|
|
$
|
2,252
|
|
|
$
|
5,108
|
|
Accrued utility charges
|
|
|
2,167
|
|
|
|
2,639
|
|
Accrued real estate taxes
|
|
|
2,007
|
|
|
|
2,678
|
|
Accrued income taxes
|
|
|
62
|
|
|
|
61
|
|
Other
|
|
|
3,737
|
|
|
|
3,230
|
|
Total
|
|
$
|
10,225
|
|
|
$
|
13,716
|
|
Note 10.
Revolving Lines of Credit
Effective April 1, 2016, One Earth and NuGen
Energy, LLC (“NuGen”) each entered into $10.0 million revolving loan facilities that mature June 1, 2019 as extended.
Neither One Earth nor NuGen had outstanding borrowings on the revolving loans during the nine months ended October 31, 2018 and
2017.
Note 11.
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 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,
2018
|
|
|
January 31,
2018
|
|
|
October 31,
2018
|
|
|
January 31,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity futures (1)
|
|
$
|
72
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
87
|
|
Forward purchase contracts (2)
|
|
|
—
|
|
|
|
72
|
|
|
|
528
|
|
|
|
34
|
|
Total
|
|
$
|
72
|
|
|
$
|
72
|
|
|
$
|
528
|
|
|
$
|
121
|
|
(1) Commodity futures liabilities
are included in accrued expenses and other current liabilities.
Commodity futures assets are included
in prepaid expenses and other current assets. These contracts are short/sell positions for approximately 2.7 million bushels of
corn at October 31, 2018. These contracts are short/sell positions for approximately 2.5 million bushels of corn and approximately
2.8 million gallons of ethanol and long/buy positions for approximately 2.8 million gallons of ethanol at January 31, 2018.
(2) Forward purchase contracts
assets are included in prepaid expenses and other current assets while forward purchase contracts liabilities are included in accrued
expenses and other current liabilities. These contracts are for purchases of approximately 2.6 million and 11.7 million bushels
of corn at October 31, 2018 and January 31, 2018, respectively.
As of October 31, 2018, 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, 2018, 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. As of October 31, 2018, the Company was required to maintain collateral
in the amount of approximately $434,000 to secure the Company’s derivative position.
See Note 6 which contains fair value information
related to derivative financial instruments.
Gains on the Company’s derivative financial
instruments of approximately $2,432,000 and approximately $75,000 for the third quarters of fiscal years 2018 and 2017, respectively,
were included in cost of sales on the Consolidated Condensed Statements of Operations. Gains on the Company’s derivative
financial instruments of approximately $2,273,000 and approximately $1,052,000 for the first nine months of fiscal years 2018 and
2017, respectively, were included in cost of sales on the Consolidated Condensed Statements of Operations. Losses on the Company’s
derivative financial instruments of approximately $64,000 for the third quarter and first nine months of fiscal year 2018 were
included in interest and other income on the Consolidated Condensed Statements of Operations.
Note 12.
Investments
The following table summarizes the Company’s
equity method investment at October 31, 2018 and January 31, 2018 (dollars in thousands):
Entity
|
|
Ownership Percentage
|
|
|
Carrying Amount
October 31, 2018
|
|
|
Carrying Amount
January 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Big River
|
|
|
10.3
|
%
|
|
$
|
33,724
|
|
|
$
|
34,549
|
|
Undistributed earnings of the Company’s
equity method investee totaled approximately $13.7 million and $14.5 million at October 31, 2018 and January 31, 2018, respectively.
The Company received dividends from its equity method investee of approximately $3.0 million and approximately $4.0 million during
the first nine months of fiscal years 2018 and 2017, 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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales and revenue
|
|
$
|
196,169
|
|
|
$
|
201,621
|
|
|
$
|
600,204
|
|
|
$
|
606,190
|
|
Gross profit
|
|
$
|
15,150
|
|
|
$
|
18,620
|
|
|
$
|
39,489
|
|
|
$
|
38,363
|
|
Income from continuing operations
|
|
$
|
5,932
|
|
|
$
|
11,010
|
|
|
$
|
21,164
|
|
|
$
|
19,628
|
|
Net income
|
|
$
|
5,932
|
|
|
$
|
11,010
|
|
|
$
|
21,164
|
|
|
$
|
19,628
|
|
The following table summarizes the Company’s
held-to-maturity security at October 31, 2018 (dollars in thousands):
|
|
Amortized
Cost
|
|
|
Gross Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Treasury Bill
|
|
$
|
14,891
|
|
|
$
|
5
|
|
|
$
|
14,886
|
|
As of October 31, 2018, the contractual maturity
of this investment was less than one year. The yield to maturity rate is 2.34%.
The Company had no held-to-maturity investments
as of January 31, 2018.
Note 13.
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, 2018, 489,430 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 predetermined 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 predetermined grant date.
At October 31, 2018
and January 31, 2018, unrecognized compensation cost related to nonvested restricted stock was approximately $237,000 and $233,000,
respectively. The following tables summarize
non-vested restricted
stock award activity for the nine months ended October 31, 2018 and 2017:
|
|
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
|
|
|
|
Nine Months Ended October 31, 2017
|
|
|
|
|
|
Non-Vested
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
(000’s)
|
|
|
Weighted
Average Remaining
VestingTerm
(in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Vested at January 31, 2017
|
|
|
23,350
|
|
|
$
|
1,386
|
|
|
|
2
|
|
Granted
|
|
|
14,156
|
|
|
|
1,370
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Vested
|
|
|
8,091
|
|
|
|
481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Vested at October 31, 2017
|
|
|
29,415
|
|
|
|
2,275
|
|
|
|
2
|
|
The above tables include 34,148 and 24,711 non-vested shares at
October 31, 2018 and 2017, 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 14
. Income Taxes
The effective tax rate on consolidated pre-tax
income was (266.7)% and (61.9)% for the three months ended October 31, 2018 and 2017, respectively and was (112.8)% and (4.4)%
for the nine months ended October 31, 2018 and 2017, respectively. The fluctuation in the rate results primarily from the production
tax credits the Company expects to receive associated with its refined coal segment, lower tax rates as a result of the Tax Cuts
and Jobs Act of 2017 (“the Tax Act”) and expected research and experimentation federal tax credits to be claimed and
earned in fiscal year 2018. The Company records its
tax provision/benefit based on an estimated annual effective rate
adjusted for items recorded discretely. The estimated annual effective tax rate includes the impact of the refined coal operation
and the expected federal income tax credits to be earned in fiscal year 2018.
The Tax Act signed into law on December 22, 2017,
reduced the federal corporate income tax rate to 21% effective January 1, 2018. The Tax Act also made numerous other changes to
the U.S. tax code, including, but not limited to, permitting full expensing of qualified property acquired after September 27,
2017, expanding prior limitations of the deductibility of certain executive compensation and eliminating the corporate alternative
minimum tax.
The SEC issued Staff Accounting Bulletin 118
(“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. In recognition of the inherent
complexities associated with accounting for the effects of the Tax Act, SAB 118 provides a measurement period of up to one year
from enactment of the Tax Act for companies to complete the accounting for the tax effects of the Tax Act. Although the Company’s
accounting for the tax effects of the Tax Act are not yet complete, at January 31, 2018, the Company made a preliminary estimate
of the effect of the tax rate reduction on the existing deferred tax balances and recorded a tax benefit of approximately $14,362,000
to remeasure the deferred tax liability at the new 21% rate. The Company will continue to refine the calculation as additional
analysis is completed, which will include a final determination of the deferred tax balances at January 31, 2018 after the Company’s
federal income tax return is filed, and as further guidance is provided by the Internal Revenue Service.
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, 2013 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,
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits, beginning of period
|
|
$
|
2,325
|
|
|
$
|
2,096
|
|
Changes for prior years’ tax positions
|
|
|
4,666
|
|
|
|
247
|
|
Changes for current year tax positions
|
|
|
—
|
|
|
|
—
|
|
Unrecognized tax benefits, end of period
|
|
$
|
6,991
|
|
|
$
|
2,343
|
|
The Company expects to claim research and experimentation
credits in the current year and certain prior years. In connection with this, the Company has increased the amount of unrecognized
tax benefits.
Note 15.
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 6.5 million bushels of corn, the principal raw material for their ethanol plants. They expect to take
delivery of the grain through March 2019.
One Earth and NuGen have combined forward purchase
contracts for approximately 2,732,000 Mmbtu (million british thermal units) of natural gas. They expect to take delivery of the
natural gas through May 2019.
One Earth and NuGen have combined sales commitments
for approximately 37.9 million gallons of ethanol, approximately 109,000 tons of distillers grains and approximately 19.1 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 January 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 $7.7 million in the first nine months of fiscal year 2018.
Note 16.
Related-Party Transactions
During the third quarters of fiscal years 2018
and 2017, One Earth and NuGen purchased approximately $47.3 million and approximately $43.4 million, respectively, of corn from
minority equity investors and board members of those subsidiaries. Such purchases totaled approximately $138.6 million and approximately
$121.8 million for the nine months ended October 31, 2018 and 2017, respectively. One Earth purchases all of its corn from an equity
investor which acts as a grain origination agent for One Earth. The Company had amounts payable to related parties for corn purchases
of approximately $2.0 million and $0.9 million at October 31, 2018 and January 31, 2018, respectively.
During the three months ended October 31, 2018
and 2017, the Company recognized commission expense of approximately $0.4 million and approximately $1.6 million, respectively,
payable to the minority investor in the refined coal entity. The Company recognized commission expense of approximately $0.7 million
and approximately $1.6 million during the first nine months of fiscal years 2018 and 2017, respectively. The commission expense
is associated with the refined coal acquisition. The Company had accrued liabilities and accounts payable related to the commission
expense of approximately $1.6 million and $1.5 million at October 31, 2018 and January 31, 2018, respectively.
Note 17. Segment Reporting
In the third quarter of fiscal year 2017, the
Company began reporting the results of its refined coal operations as a new segment as a result of the refined coal acquisition
(see Note 4.) The Company has two segments: ethanol and by-products and refined coal. The Company evaluates the performance of
each reportable segment based on net income attributable to REX common shareholders. The following table
summarizes segment and other results and assets (amounts in thousands):
|
|
Three Months Ended
October 31,
|
|
|
Nine Months Ended
October 31,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net sales and revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol and by-products
|
|
$
|
123,546
|
|
|
$
|
120,971
|
|
|
$
|
372,717
|
|
|
$
|
342,858
|
|
Refined coal
1
|
|
|
204
|
|
|
|
193
|
|
|
|
610
|
|
|
|
193
|
|
Total net sales and revenue
|
|
$
|
123,750
|
|
|
$
|
121,164
|
|
|
$
|
373,327
|
|
|
$
|
343,051
|
|
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.
Segment gross profit (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol and by-products
|
|
$
|
11,260
|
|
|
$
|
18,257
|
|
|
$
|
38,475
|
|
|
$
|
41,527
|
|
Refined coal
|
|
|
(3,513
|
)
|
|
|
(3,390
|
)
|
|
|
(10,478
|
)
|
|
|
(3,390
|
)
|
Total gross profit
|
|
$
|
7,747
|
|
|
$
|
14,867
|
|
|
$
|
27,997
|
|
|
$
|
38,137
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol and by-products
|
|
$
|
8,405
|
|
|
$
|
15,554
|
|
|
$
|
29,491
|
|
|
$
|
31,807
|
|
Refined coal
|
|
|
(4,240
|
)
|
|
|
(5,684
|
)
|
|
|
(11,887
|
)
|
|
|
(5,684
|
)
|
Corporate and other
|
|
|
(410
|
)
|
|
|
(611
|
)
|
|
|
(1,341
|
)
|
|
|
(2,389
|
)
|
Total income (loss) before income taxes
|
|
$
|
3,755
|
|
|
$
|
9,259
|
|
|
$
|
16,263
|
|
|
$
|
23,734
|
|
Benefit (provision) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol and by-products
|
|
$
|
1,643
|
|
|
$
|
(4,379
|
)
|
|
$
|
(1,806
|
)
|
|
$
|
(9,712
|
)
|
Refined coal
|
|
|
8,318
|
|
|
|
9,918
|
|
|
|
19,914
|
|
|
|
9,918
|
|
Corporate and other
|
|
|
53
|
|
|
|
196
|
|
|
|
240
|
|
|
|
837
|
|
Total benefit (provision) for income taxes
|
|
$
|
10,014
|
|
|
$
|
5,735
|
|
|
$
|
18,348
|
|
|
$
|
1,043
|
|
Segment profit (loss) (net of noncontrolling interests):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol and by-products
|
|
$
|
7,946
|
|
|
$
|
9,058
|
|
|
$
|
23,096
|
|
|
$
|
17,665
|
|
Refined coal
|
|
|
4,260
|
|
|
|
4,520
|
|
|
|
8,549
|
|
|
|
4,520
|
|
Corporate and other
|
|
|
(331
|
)
|
|
|
(410
|
)
|
|
|
(1,057
|
)
|
|
|
(1,532
|
)
|
Net income attributable to REX common shareholders
|
|
$
|
11,875
|
|
|
$
|
13,168
|
|
|
$
|
30,588
|
|
|
$
|
20,653
|
|
|
|
October 31,
2018
|
|
|
January 31,
2018
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol and by-products
|
|
$
|
407,094
|
|
|
$
|
384,997
|
|
|
|
|
|
|
|
|
|
Refined coal
|
|
|
9,330
|
|
|
|
12,165
|
|
|
|
|
|
|
|
|
|
Corporate and other
|
|
|
59,692
|
|
|
|
81,702
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
476,116
|
|
|
$
|
478,864
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
October 31,
|
|
|
Nine Months Ended
October 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Sales of products, ethanol and by-products segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol
|
|
$
|
91,538
|
|
|
$
|
96,296
|
|
|
$
|
283,720
|
|
|
$
|
276,553
|
|
Dried distillers grains
|
|
|
24,683
|
|
|
|
16,703
|
|
|
|
65,826
|
|
|
|
45,325
|
|
Non-food grade corn oil
|
|
|
4,964
|
|
|
|
6,041
|
|
|
|
15,019
|
|
|
|
15,359
|
|
Modified distillers grains
|
|
|
2,340
|
|
|
|
1,889
|
|
|
|
8,100
|
|
|
|
5,557
|
|
Other
|
|
|
21
|
|
|
|
42
|
|
|
|
52
|
|
|
|
64
|
|
Total
|
|
$
|
123,546
|
|
|
$
|
120,971
|
|
|
$
|
372,717
|
|
|
$
|
342,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of products, refined coal segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined coal
|
|
$
|
204
|
|
|
$
|
193
|
|
|
$
|
610
|
|
|
$
|
193
|
|