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
July 31, 2020
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, 2020 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, 2020 (fiscal year 2019). 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, 2020. 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 2019 Annual Report on Form 10-K. 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. Net sales and revenue also includes net gains or
losses from derivative financial instruments related to products sold.
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, general facility overhead charges and net gains or losses from derivative
financial instruments related to commodities purchased.
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
The Company determined that small changes in
estimated “ordinary” income would result in significant changes in the estimated annual effective tax rate. Thus, the
Company used a discrete effective tax rate method to calculate the provision or benefit for income taxes for the three and six
months ended July 31, 2020 and 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 income taxes of approximately $0.3 million and received refunds of income taxes
of approximately $0.3 million during the six months ended July 31, 2020. The Company paid no income taxes nor received refunds
of income taxes during the six months ended July 31, 2019.
As of July 31, 2020, and January 31, 2020, total
unrecognized tax benefits were approximately $7,298,000 and $7,353,000, respectively. Accrued penalties and interest were approximately
$19,000 and approximately $17,000 at July 31, 2020 and January 31, 2020, respectively. If the Company were to prevail on all unrecognized
tax benefits recorded, the provision for income taxes would be reduced by approximately $7.4 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 net realizable value 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. Inventory is 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. The Company recorded approximately $0.3 million
and approximately $1.3 million of inventory write-downs in cost of sales at July 31, 2020 and January 31, 2020, respectively. Fluctuations
in the write-down of inventory generally relate to the levels and composition of such inventory and changes in commodity prices
at a given point in time. The components of inventory are as follows as of the dates
presented (amounts in thousands):
|
|
July 31,
2020
|
|
|
January 31,
2020
|
|
|
|
|
|
|
|
|
|
|
Ethanol and other finished goods
|
|
|
$
|
7,821
|
|
|
|
$
|
10,864
|
|
Work in process
|
|
|
|
3,774
|
|
|
|
|
3,258
|
|
Grain and other raw materials
|
|
|
|
18,788
|
|
|
|
|
21,512
|
|
Total
|
|
|
$
|
30,383
|
|
|
|
$
|
35,634
|
|
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. The Company concluded that the impact of
the COVID-19 pandemic and other factors are an indicator that impairment may exist related to certain of its long-lived assets.
As a result, the Company performed an impairment analysis and determined that there was no impairment. Although it is not possible
to reliably estimate the duration of the pandemic and its financial impact, a prolonged significant downturn in the economy could
negatively impact the Company’s results of operations and significantly reduce its expectation for future sales, profits
and cash flows. Such a reduction in expected future performance could result in the impairment of long-lived assets in subsequent
events. There were no impairment charges in the first six months of fiscal years 2020 or 2019.
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
In December 2019, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, “Income Taxes (Topic 740):
Simplifying the Accounting for Income Taxes”, which simplifies the accounting for income taxes by removing certain exceptions
to the general principles in Topic 740. The Company will be required to adopt this update effective February 1, 2021. The Company
has not determined the effect of this update on its consolidated financial statements.
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 14 for disaggregation of net sales and
revenue by operating segment and by product.
Note 4. Leases
At July 31, 2020, 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
|
|
Six Months Ended
|
|
|
July 31, 2020
|
|
July 31, 2019
|
|
July 31, 2020
|
|
July 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease expense
|
|
|
$
|
1,548
|
|
|
|
$
|
1,701
|
|
|
|
$
|
3,234
|
|
|
|
$
|
3,310
|
|
Variable lease expense
|
|
|
|
207
|
|
|
|
|
159
|
|
|
|
|
338
|
|
|
|
|
352
|
|
Total lease expense
|
|
|
$
|
1,755
|
|
|
|
$
|
1,860
|
|
|
|
$
|
3,572
|
|
|
|
$
|
3,662
|
|
The following table is a summary of future minimum
rentals on such leases at July 31, 2020 (amounts in thousands):
Years Ended January 31,
|
|
Minimum Rentals
|
|
|
|
|
|
|
Remainder of 2021
|
|
|
$
|
3,024
|
|
2022
|
|
|
|
5,376
|
|
2023
|
|
|
|
3,669
|
|
2024
|
|
|
|
2,503
|
|
2025
|
|
|
|
1,646
|
|
Thereafter
|
|
|
|
49
|
|
Total
|
|
|
|
16,267
|
|
Less: present value discount
|
|
|
|
1,357
|
|
Operating lease liabilities
|
|
|
$
|
14,910
|
|
At July 31, 2020, the weighted average remaining
lease term is 3.3 years and the weighted average discount rate is 5.27% for the above leases.
The following table is a summary of future minimum
rentals on such leases at January 31, 2020 (amounts in thousands):
Years Ended January 31,
|
|
Minimum
Rentals
|
|
|
|
|
|
|
2021
|
|
|
$
|
5,668
|
|
2022
|
|
|
|
4,958
|
|
2023
|
|
|
|
3,251
|
|
2024
|
|
|
|
2,085
|
|
2025
|
|
|
|
1,228
|
|
Thereafter
|
|
|
|
29
|
|
Total
|
|
|
|
17,219
|
|
Less: present value discount
|
|
|
|
1,596
|
|
Operating lease liabilities
|
|
|
$
|
15,623
|
|
At January 31, 2020, the weighted average remaining
lease term was 3.5 years and the weighted average discount rate was 5.46% for the above leases.
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
July 31, 2020 are summarized below (amounts in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in cooperative (1)
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
341
|
|
|
|
$
|
341
|
|
Forward purchase contracts (2)
|
|
|
|
-
|
|
|
|
|
13
|
|
|
|
|
-
|
|
|
|
|
13
|
|
Commodity futures (2)
|
|
|
|
-
|
|
|
|
|
416
|
|
|
|
|
-
|
|
|
|
|
416
|
|
Total assets
|
|
|
$
|
-
|
|
|
|
$
|
429
|
|
|
|
$
|
341
|
|
|
|
$
|
770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward purchase contracts (3)
|
|
|
$
|
-
|
|
|
|
$
|
558
|
|
|
|
$
|
-
|
|
|
|
$
|
558
|
|
Commodity futures (3)
|
|
|
|
-
|
|
|
|
|
197
|
|
|
|
|
-
|
|
|
|
|
197
|
|
Total liabilities
|
|
|
$
|
-
|
|
|
|
$
|
755
|
|
|
|
$
|
-
|
|
|
|
$
|
755
|
|
Financial assets and liabilities measured at
fair value on a recurring basis at January 31, 2020 are summarized below (amounts in thousands):
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in cooperative (1)
|
|
|
$
|
-
|
|
|
|
$
|
-
|
|
|
|
$
|
341
|
|
|
|
$
|
341
|
|
Commodity futures (2)
|
|
|
|
-
|
|
|
|
|
352
|
|
|
|
|
-
|
|
|
|
|
352
|
|
Total assets
|
|
|
$
|
-
|
|
|
|
$
|
352
|
|
|
|
$
|
341
|
|
|
|
$
|
693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward purchase contract liability (3)
|
|
|
$
|
-
|
|
|
|
$
|
230
|
|
|
|
$
|
-
|
|
|
|
$
|
230
|
|
(1) The investment in cooperative is included
in “Other assets” on the accompanying Consolidated Condensed Balance Sheets.
(2) The forward purchase contract asset and the
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 and
the commodity futures liability are 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 July 31, 2020 or January 31, 2020.
Note 6. Property and Equipment
The components of property and equipment are
as follows for the periods presented (amounts in thousands):
|
|
July 31,
2020
|
|
|
January 31,
2020
|
|
|
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
$
|
26,244
|
|
|
|
$
|
21,957
|
|
Buildings and improvements
|
|
|
23,643
|
|
|
|
|
23,643
|
|
Machinery, equipment and fixtures
|
|
|
301,411
|
|
|
|
|
300,972
|
|
Construction in progress
|
|
|
608
|
|
|
|
|
193
|
|
|
|
|
351,906
|
|
|
|
|
346,765
|
|
Less: accumulated depreciation
|
|
|
(193,393)
|
|
|
|
|
(183,438)
|
|
Total
|
|
$
|
158,513
|
|
|
|
$
|
163,327
|
|
Note 7. 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):
|
|
July 31,
2020
|
|
|
January 31,
2020
|
|
|
|
|
|
|
|
|
|
|
|
Accrued payroll and related items
|
|
$
|
410
|
|
|
|
$
|
1,152
|
|
Accrued utility charges
|
|
|
1,467
|
|
|
|
|
2,398
|
|
Accrued transportation related items
|
|
|
1,500
|
|
|
|
|
1,500
|
|
Accrued real estate taxes
|
|
|
2,377
|
|
|
|
|
1,755
|
|
Commodity futures
|
|
|
197
|
|
|
|
|
-
|
|
Forward purchase contracts
|
|
|
558
|
|
|
|
|
230
|
|
Accrued income taxes
|
|
|
27
|
|
|
|
|
68
|
|
Other
|
|
|
759
|
|
|
|
|
661
|
|
Total
|
|
$
|
7,295
|
|
|
|
$
|
7,764
|
|
Note 8. 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
|
|
|
|
July 31,
2020
|
|
|
January 31,
2020
|
|
|
July 31,
2020
|
|
|
January 31,
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity futures (1)
|
|
$
|
416
|
|
|
$
|
352
|
|
|
$
|
197
|
|
|
$
|
-
|
|
Forward purchase contracts (2)
|
|
|
13
|
|
|
|
-
|
|
|
|
558
|
|
|
|
230
|
|
Total
|
|
$
|
429
|
|
|
$
|
352
|
|
|
$
|
755
|
|
|
$
|
230
|
|
(1) Commodity futures assets
are included in prepaid expenses and other current assets. These contracts are short/sell positions for approximately 4.5
million bushels of corn and approximately 5.5 million gallons of ethanol at July 31, 2020. These contracts are short/sell
positions for approximately 3.7 million bushels of corn and long/buy positions for approximately 2.2 million bushels of corn
at January 31, 2020. Commodity futures liabilities are included in accrued expenses and other current liabilities. These
contracts are short/sell positions for approximately 2.8 million bushels of corn at July 31, 2020.
(2) Forward purchase
contracts assets are included in prepaid expenses and other current assets. These contracts are for purchases of
approximately 1.3 million bushels of corn at July 31, 2020. Forward purchase contracts liabilities are included in accrued
expenses and other current liabilities. These contracts are for purchases of approximately 1.9 million bushels of corn at
July 31, 2020 and 1.6 million bushels of corn at January 31, 2020.
As of July 31, 2020, and January 31, 2020,
all 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 July 31,
2020, and January 31, 2020, 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 $950,000 and approximately $1,113,000 to secure
the Company’s derivative position at July 31, 2020 and January 31, 2020, respectively.
See Note 5 which contains fair value information
related to derivative financial instruments.
(Losses) gains on the Company’s
derivative financial instruments of approximately $(4,613,000) and approximately $537,000 for the second quarter of fiscal
years 2020 and 2019, respectively, were included in cost of sales on the Consolidated Condensed Statements of
Operations. (Losses) gains on the Company’s derivative financial instruments of approximately $(1,758,000) and
approximately $1,230,000 for the first six months of fiscal years 2020 and 2019, respectively, were included in cost of sales
on the Consolidated Condensed Statements of Operations.
Losses on the Company’s derivative financial
instruments of approximately $298,000 for the second quarter and first six months of fiscal year 2020 were included in net sales
and revenue on the Consolidated Condensed Statements of Operations.
Note 9. Investments
The following table summarizes the Company’s
equity method investment at July 31, 2020 and January 31, 2020 (dollars in thousands):
|
|
|
|
Carrying Amount
|
Entity
|
|
Ownership Percentage
|
|
July 31, 2020
|
|
January 31, 2020
|
|
|
|
|
|
|
|
Big River
|
|
10.3%
|
|
$29,475
|
|
$32,464
|
Undistributed earnings of the
Company’s equity method investee totaled approximately $9.5 million and approximately $12.4 million at July 31, 2020
and January 31, 2020, respectively. The Company received dividends from its equity method investee of approximately $2.0
million in the first six months of fiscal year 2020. The company received no dividends from its equity method investee in the
first six months of fiscal year 2019.
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
July 31,
|
|
|
Six Months Ended
July 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales and revenue
|
|
$
|
130,126
|
|
|
$
|
193,731
|
|
|
$
|
327,758
|
|
|
$
|
377,800
|
|
Gross profit (loss)
|
|
$
|
3,565
|
|
|
$
|
7,026
|
|
|
$
|
(2,378
|
)
|
|
$
|
8,595
|
|
(Loss) income from continuing operations
|
|
$
|
(4,914
|
)
|
|
$
|
2,320
|
|
|
$
|
(9,540
|
)
|
|
$
|
3,546
|
|
Net (loss) income
|
|
$
|
(4,914
|
)
|
|
$
|
2,320
|
|
|
$
|
(9,540
|
)
|
|
$
|
3,546
|
|
At July 31, 2020, the Company owned certificates
of deposit that had an amortized cost, or carrying value, of approximately $32,656,000. The contractual maturity of these investments
was less than one year. The yield to maturity rate was approximately 0.3%. Unrealized gains or losses were insignificant.
At January 31, 2020, the Company owned certificates
of deposit that had an amortized cost, or carrying value, of approximately $26,073,000. The contractual maturity of these investments
was less than one year. The yield to maturity rate was approximately 1.8%. Unrealized gains or losses were insignificant.
Note 10. 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, with no
adjustments 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 July 31, 2020, 473,830 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 July 31, 2020 and
January 31, 2020, unrecognized compensation cost related to nonvested restricted stock was approximately $314,000 and
$220,000, respectively. The following tables summarize non-vested restricted stock award activity for the periods
presented:
|
|
Six Months Ended July 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Vested
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
(000’s)
|
|
Weighted
Average Remaining
Vesting Term
(in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Vested at January 31, 2020
|
|
|
28,576
|
|
|
|
$
|
2,193
|
|
|
|
2
|
|
Granted
|
|
|
6,158
|
|
|
|
|
416
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
Vested
|
|
|
15,029
|
|
|
|
|
1,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Vested at July 31, 2020
|
|
|
19,705
|
|
|
|
$
|
1,398
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended July 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Vested
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
(000’s)
|
|
Weighted
Average Remaining
Vesting Term
(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 July 31, 2019
|
|
|
28,576
|
|
|
|
$
|
2,193
|
|
|
|
2
|
|
The above tables include
14,777 and 24,219 non-vested shares at July 31, 2020 and 2019, 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 11. Income Taxes
The Company determined that small changes
in estimated “ordinary” income would result in significant changes in the estimated annual effective tax rate.
Thus, the Company used a discrete effective tax rate method to calculate the provision or benefit for income taxes for the
three and six months ended July 31, 2020 and 2019.
The Company’s income tax benefit was
approximately 66.6% and approximately 358.7% for the three months ended July 31, 2020 and 2019, respectively. The
Company’s income tax benefit was approximately 47.2% and approximately 687.1% for the six months ended July 31, 2020
and 2019, 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 consolidated 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’s income tax benefit for the first six months of fiscal year
2020 includes approximately $1.8 million related to the lengthening of a net operating loss carryback allowed by the recently
passed CARES Act.
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):
|
|
Six Months Ended
July 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits, beginning of period
|
|
$
|
7,370
|
|
|
$
|
9,232
|
|
Changes for prior years’ tax positions
|
|
|
(53
|
)
|
|
|
102
|
|
Changes for current year tax positions
|
|
|
-
|
|
|
|
-
|
|
Unrecognized tax benefits, end of period
|
|
$
|
7,317
|
|
|
$
|
9,334
|
|
Note 12. 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.
As of July 31, 2020, One Earth and NuGen
have combined forward purchase contracts for approximately 6.8 million bushels of corn, the principal raw material for their
ethanol plants, and they have combined forward purchase contracts for approximately 1,647,000 MmBtu (million british thermal
units) of natural gas.
As of July 31, 2020, One Earth and NuGen have
combined sales commitments for approximately 21.8 million gallons of ethanol, approximately 32,000 tons of distillers grains and
approximately 5.2 million pounds of non-food grade corn oil.
As of July 31, 2020, 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 $1.1 million and approximately $1.2 million
in the second quarter of fiscal years 2020 and 2019, respectively. Such fees totaled approximately $1.4 million and approximately
$2.8 million for the six months ended July 31, 2020 and 2019, respectively.
Note 13. Related-Party Transactions
During the second quarters of fiscal years 2020
and 2019, One Earth and NuGen purchased approximately $4.9 million and approximately $43.5 million, respectively, of corn (and
other supplies) from minority equity investors and board members of those subsidiaries. Such purchases totaled approximately $17.2
million and approximately $90.2 million for the six months ended July 31, 2020 and 2019, respectively. The Company had amounts
payable to related parties of approximately $0.6 million and approximately $0.7 million at July 31, 2020 and January 31, 2020,
respectively.
During the second quarters of fiscal years 2020
and 2019, the Company recognized commission expense of approximately $0.2 million and income of approximately $0.3 million, respectively,
payable to the minority investor in the refined coal entity. During the first six months of fiscal years 2020 and 2019, the company
recognized commission income of approximately $0.1 million and income of approximately $0.3 million, respectively. The commission
income or expense is associated with the refined coal acquisition. The Company had accrued liabilities related to the commission
income or expense of approximately $0.2 million and approximately $0.5 million at July 31, 2020 and January 31, 2020, respectively.
Note 14. 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
July 31,
|
|
|
Six Months Ended
July 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net sales and revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol and by-products
|
|
$
|
39,242
|
|
|
$
|
105,770
|
|
|
$
|
122,477
|
|
|
$
|
210,223
|
|
Refined coal 1
|
|
|
85
|
|
|
|
98
|
|
|
|
100
|
|
|
|
220
|
|
Total net sales and revenue
|
|
$
|
39,327
|
|
|
$
|
105,868
|
|
|
$
|
122,577
|
|
|
$
|
210,443
|
|
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
July 31,
|
|
|
Six Months Ended
July 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Segment gross (loss) profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol and by-products
|
|
$
|
553
|
|
|
$
|
6,169
|
|
|
$
|
(7,670)
|
|
|
$
|
12,284
|
|
Refined coal
|
|
|
(1,884)
|
|
|
|
(2,165)
|
|
|
|
(2,991)
|
|
|
|
(4,634)
|
|
Total gross (loss) profit
|
|
$
|
(1,331)
|
|
|
$
|
4,004
|
|
|
$
|
(10,661)
|
|
|
$
|
7,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol and by-products
|
|
$
|
(3,259)
|
|
|
$
|
3,111
|
|
|
$
|
(15,610)
|
|
|
$
|
6,313
|
|
Refined coal
|
|
|
(2,118)
|
|
|
|
(2,028)
|
|
|
|
(2,965)
|
|
|
|
(4,703)
|
|
Corporate and other
|
|
|
(702)
|
|
|
|
(352)
|
|
|
|
(1,247)
|
|
|
|
(712)
|
|
Total (loss) income before income taxes
|
|
$
|
(6,079)
|
|
|
$
|
731
|
|
|
$
|
(19,822)
|
|
|
$
|
898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit (provision) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol and by-products
|
|
$
|
893
|
|
|
$
|
(619)
|
|
|
$
|
5,054
|
|
|
$
|
(1,105)
|
|
Refined coal
|
|
|
2,919
|
|
|
|
3,155
|
|
|
|
3,878
|
|
|
|
7,101
|
|
Corporate and other
|
|
|
234
|
|
|
|
86
|
|
|
|
427
|
|
|
|
174
|
|
Total benefit for income taxes
|
|
$
|
4,046
|
|
|
$
|
2,622
|
|
|
$
|
9,359
|
|
|
$
|
6,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment (loss) profit (net of noncontrolling interests):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol and by-products
|
|
$
|
(2,178)
|
|
|
$
|
1,305
|
|
|
$
|
(9,611)
|
|
|
$
|
3,014
|
|
Refined coal
|
|
|
898
|
|
|
|
1,216
|
|
|
|
1,048
|
|
|
|
2,602
|
|
Corporate and other
|
|
|
(468)
|
|
|
|
(265)
|
|
|
|
(820)
|
|
|
|
(539)
|
|
Net (loss) income attributable to REX common shareholders
|
|
$
|
(1,748)
|
|
|
$
|
2,256
|
|
|
$
|
(9,383)
|
|
|
$
|
5,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
July 31,
2020
|
|
|
January 31,
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol and by-products
|
|
$
|
379,399
|
|
|
$
|
408,746
|
|
|
|
|
|
|
|
|
|
Refined coal
|
|
|
4,868
|
|
|
|
6,101
|
|
|
|
|
|
|
|
|
|
Corporate and other
|
|
|
88,071
|
|
|
|
85,655
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
472,338
|
|
|
$
|
500,502
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
July 31,
|
|
|
Six Months Ended
July 31,
|
|
Sales of products, ethanol and by-products segment:
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Ethanol
|
|
$
|
32,524
|
|
|
$
|
83,219
|
|
|
$
|
93,121
|
|
|
$
|
160,837
|
|
Dried distillers grains
|
|
|
5,480
|
|
|
|
15,887
|
|
|
|
24,398
|
|
|
|
34,561
|
|
Non-food grade corn oil
|
|
|
1,313
|
|
|
|
4,599
|
|
|
|
4,501
|
|
|
|
9,582
|
|
Modified distillers grains
|
|
|
209
|
|
|
|
2,004
|
|
|
|
666
|
|
|
|
5,144
|
|
Derivative financial instruments losses
|
|
|
(298)
|
|
|
|
-
|
|
|
|
(298)
|
|
|
|
-
|
|
Other
|
|
|
14
|
|
|
|
61
|
|
|
|
89
|
|
|
|
99
|
|
Total
|
|
$
|
39,242
|
|
|
$
|
105,770
|
|
|
$
|
122,477
|
|
|
$
|
210,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of products, refined coal segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined coal
|
|
$
|
85
|
|
|
$
|
98
|
|
|
$
|
100
|
|
|
$
|
220
|
|