REX AMERICAN RESOURCES CORPORATION Ethanol and By-Products
AtOctober 31, 2020 , investments in our ethanol business include equity investments in three ethanol limited liability companies, in two of which we have a majority ownership interest. The following table is a summary of ethanol gallons shipped at our plants: Trailing 12 REX's Current Effective Months Current Ownership of Ethanol Effective Trailing 12 Gallons Ownership Months Ethanol Entity Shipped Interest Gallons Shipped One Earth Energy, LLC 119.5 M 75.3% 90.0 M NuGen Energy, LLC 95.9 M 99.5% 95.4 MBig River Resources, LLC :
Big River Resources W Burlington, LLC 103.1 M 10.3% 10.6 M Big River Resources Galva, LLC 113.7 M 10.3% 11.7 M Big River United Energy, LLC 117.9 M 5.7% 6.7 M Big River Resources Boyceville, LLC 55.2 M 10.3% 5.7
M Total 605.3 M 220.1 M Our ethanol operations and the results thereof are highly dependent on commodity prices, especially prices for corn, ethanol, distillers grains, non-food grade corn oil and natural gas, and availability of corn. As a result of price volatility for these commodities, our operating results can fluctuate substantially. The price and availability of corn is subject to significant fluctuations due to several factors that affect commodity prices in general, including crop conditions, global health pandemics, the amount of corn stored on farms, weather, federal policy and foreign trade. Because the market prices of ethanol and distillers grains are not always directly related to corn prices (for example, demand for crude and other 23 energy and related prices, the export market demand for ethanol and distillers grains and the results of federal policy decisions and trade negotiations, can impact ethanol and distillers grains prices), at times ethanol and distillers grains prices may not follow movements in corn prices and, in an environment of higher corn prices or lower ethanol or distillers grains prices, reduce the overall margin structure at the plants. As a result, at times, we may operate our plants at negative or minimally positive operating margins. We expect our ethanol plants to produce approximately 2.8 gallons of denatured ethanol for each bushel of grain processed in the production cycle. We refer to the actual gallons of denatured ethanol produced per bushel of grain processed as the realized yield. We refer to the difference between the price per gallon of ethanol and the price per bushel of grain (divided by the realized yield) as the "crush spread". Should the crush spread decline, it is possible that our ethanol plants will generate operating results that do not provide adequate cash flows for sustained periods of time. In such cases, production at the ethanol plants may be reduced or stopped altogether in order to minimize variable costs at individual plants.
We attempt to manage the risk related to the volatility of commodity prices by utilizing forward grain purchase, forward ethanol, distillers grains and corn oil sale contracts and commodity futures and swap agreements, as management deems appropriate. We attempt to match quantities of these sale contracts with an appropriate quantity of grain purchase contracts over a given period of time when we can obtain an adequate gross margin resulting from the crush spread inherent in the contracts we have executed. However, the market for future ethanol sales contracts generally lags the spot market with respect to ethanol price. Consequently, we generally execute fixed price contracts for no more than four months into the future at any given time and we may lock in our corn or ethanol price without having a corresponding locked in ethanol or corn price for short durations of time. As a result of the relatively short period of time our fixed price contracts cover, we generally cannot predict the future movements in our realized crush spread for more than four months; thus, we are unable to predict the likelihood or amounts of future income or loss from the operations of our ethanol facilities. We utilize derivative financial instruments, primarily exchange traded commodity future and swap contracts, in conjunction with certain of our grain procurement activities. Refined Coal
OnAugust 10, 2017 , we purchased the entire ownership interest of an entity that owns a refined coal facility, through a 95.35% owned subsidiary, for approximately$12.0 million . We began operating the refined coal facility immediately after the acquisition. We expect that the revenues from the sale of refined coal produced in the facility will be subsidized by federal production tax credits throughNovember 2021 , subject to meeting qualified emissions reductions as governed by Section 45 of the Internal Revenue Code. In order to maintain compliance with Section 45 of the Internal Revenue Code, we are required to test the effectiveness of our process with respect to emissions reductions every six months through an independent laboratory. Annually, theIRS publishes the amount of federal income tax credit earned per ton of refined coal produced and sold. We expect to earn credits at the rate of approximately$7.30 per ton of refined coal produced and sold during calendar year 2020. The tax credits can be earned for refined coal produced and sold by our facility throughNovember 2021 . The refined coal facility is located at the site of a utility-owned electrical generating power station, which is our refined coal operation's sole customer. Refined coal production and sales vary depending on fluctuations in demand from the site host utility, which generally changes based upon weather conditions in 24 the geographic markets the utility serves and competing energy prices and supplies and the state of the economy. We have contracted with an experienced third party to operate and maintain the refined coal facility and to provide us with management reporting and operating data as required. We do not have any employees on site at the refined coal facility. Future Energy
During fiscal year 2013, we entered into a joint venture withHytken HPGP, LLC ("Hytken") to file and defend patents for eSteam technology relating to heavy oil and oil sands production methods, and to commercially exploit the technology to generate license fees, royalty income and development opportunities. The patented technology is an enhanced method of heavy oil recovery involving zero emissions downhole steam generation. We own 60% and Hytken owns 40% of the entity namedFuture Energy, LLC ("Future Energy"). We have agreed to fund direct patent expenses relating to patent applications and defense, annual annuity fees and maintenance on a country by country basis, with the right to terminate funding and transfer related patent rights to Hytken. We have funded all costs relating to new intellectual property, consultants, research and development, pilot field tests and equipment purchases with respect to the proposed commercialization stage of the technology. To date, we have paid and expensed approximately$2.5 million cumulatively primarily for patents, purchases of certain equipment and other expenses. We have not yet tested or proven the commercial feasibility of the technology.
Critical Accounting Policies and Estimates
During the three months endedOctober 31, 2020 , we did not change any of our critical accounting policies as disclosed in our 2019 Annual Report on Form 10-K as filed with theSecurities and Exchange Commission onApril 1, 2020 . Fiscal Year All references in this report to a particular fiscal year are to REX's fiscal year endedJanuary 31 . For example, "fiscal year 2020" means the periodFebruary 1, 2020 toJanuary 31, 2021 . Results of Operations Trends and Uncertainties During fiscal years 2020 and 2019, operating results in our ethanol and by-products segment have been, at times adversely affected by a weak margin environment highlighted by higher costs for corn, lower availability of local corn, lower oil prices resulting from an oversupply of oil, theEPA granting small refiner waivers, and in the first quarter of fiscal year 2020, the outbreak of a new strain of the coronavirus "COVID-19". Weather conditions delayed, and in some cases prevented the planting of corn in much ofthe United States during 2019. Weather also contributed to intermittent logistical delays during fiscal year 2019. Throughout most of fiscal year 2019 and the first six months of fiscal year 2020, we struggled to 25 obtain adequate supplies of corn at our NuGen facility, on a consistent basis, at acceptable price levels. Consequently, we were not able to profitably operate our NuGen ethanol plant at production levels near our historical averages. During the early months of 2020, COVID-19 spread intothe United States and other countries. In an effort to contain the spread of this virus, there have been various government mandated restrictions, in addition to voluntary privately implemented restrictions, including limiting public gatherings, retail store closures, restrictions on employees working, travel restrictions and the quarantining of people who may have been exposed to the virus. This led to reduced demand for gasoline and ethanol, and consequently, historically low ethanol pricing. As a result, we idled our NuGen and One Earth ethanol plants in late March of 2020. In May of 2020, businesses and other activities slowly began to reopen, which led to an increase in demand for gasoline and ethanol, and in related prices. As a result, we resumed production operations at the One Earth ethanol plant in late May of 2020 and at NuGen in late June of 2020. In addition, actions by theFederal Reserve , related to the COVID-19 outbreak, have reduced interest rates. Given the amount of cash and short-term investments we have, this will significantly reduce our interest income in future periods, depending on the length of time interest rates remain at these levels. The impacts of the COVID-19 outbreak on our business operations, including the duration and impact on ethanol demand, cannot be reasonably estimated at this time, although a future prolonged production stoppage at our plants would have a further material adverse impact on our results of operations, financial condition and cash flows in fiscal year 2020.Congress passed the CARES Act inMarch 2020 , which providedthe United States department of Agriculture ("USDA") with additional funding for the "Commodity Credit Corporation ("CCC"). TheUSDA is using this additional funding to provide direct payments to farmers, including corn farmers that we purchase corn from. Such direct payments to farmers could cause them to delay marketing decisions. Consequently, this could reduce the supply of corn and result in a price increase for what we pay for corn. In addition,China has been purchasing large quantities of corn, which could lead to sustained higher prices for corn. Renewable Fuel Standard II ("RFS II"), established inOctober 2010 , has been an important factor in the growth of ethanol usage inthe United States . When it was originally established, RFS II required the volume of "conventional" or corn derived ethanol to be blended with gasoline to increase each year until it reached 15.0 billion gallons in 2015 and was to remain at that level through 2022. There are no established congressional target volumes beginning in 2023. TheEPA has the authority to waive the biofuel mandate, in whole or in part, if there is inadequate domestic renewable fuel supply or the requirement severely harms the domestic economy or environment. OnDecember 19, 2019 , theEPA announced the final 2020 renewable volume obligation for conventional ethanol, which met the 15.0 billion gallons congressional target. TheEPA has missed its deadline and has not yet released a draft renewable volume obligation rule for the 2021 volumes. OnApril 15, 2020 , five Governors sent a letter to theEPA requesting a general waiver from RFS II due to the drop in demand caused by COVID-19 travel restrictions. OnOctober 21, 2020 , 15 Senators sent a letter to theEPA requesting a general waiver from RFS II to reduce the 2021 renewable volume obligation, citing the reduced demand for fuels due to COVID-19. It is unclear when the renewable volume obligation for 2021 will be released. 26 Under the Renewable Fuel Standard "RFS", theEPA assigns individual refiners, blenders and importers the volume of renewable fuels they are obligated to use based on their percentage of total domestic transportation fuel sales. TheEPA can waive the obligation for individual small refineries that are experiencing "disproportionate economic hardship" due to compliance with the RFS. Until recent years, theEPA approved relatively few such waivers. TheEPA approved 31 small refiner waivers related to their 2018 Renewable Fuel Standard compliance obligations, which was estimated to effectively reduce the obligation for ethanol in 2018 by 1.4 billion gallons. TheEPA previously granted waivers for 2016 and 2017 totaling approximately 2.6 billion gallons. These actions affect current year demand as obligated parties such as refiners can use the waivers granted by theEPA to help them meet their obligations in different years. There continues to be uncertainty regarding how theEPA will administer the small refiner waivers. We believe the waivers have resulted in reduced domestic ethanol demand. Throughout fiscal year 2019 and during the first nine months of fiscal year 2020, operating results in our refined coal segment have been adversely affected by lower utility plant demand from our only customer. Projections, provided by the utility plant, for the next twelve months indicate this trend may continue and may be further impacted by the COVID-19 pandemic. While this leads to lower pre-tax losses from this segment, it also leads to lower tax benefits from Section 45 credits being recognized. Ultimately, this results in lower amounts of segment profit.
Should these trends and uncertainties continue, our future operating results are likely to be negatively impacted.
For a detailed analysis of period to period changes, see the segment discussion that follows this section as that discussion reflects how management views
and monitors our business.
Comparison of Three and Nine Months Ended
Net sales and revenue in the quarter endedOctober 31, 2020 were approximately$124.3 million compared to approximately$86.7 million in the prior year's third quarter, representing an increase of approximately$37.6 million , which was primarily caused by higher sales in our ethanol and by-products segment. A poor 2019 harvest caused by weather conditions in that area, prevented us from profitably operating our NuGen ethanol plant at or near historical production levels during the third quarter of fiscal year 2019. Net sales and revenue in the first nine months of fiscal year 2020 were approximately$246.8 million compared to approximately$297.1 million in the first nine months of fiscal year 2019, representing a decrease of approximately$50.3 million , which was primarily caused by lower sales in our ethanol and by-products segment of approximately$50.1 million during fiscal year 2020. The decline in ethanol and by-products segment net sales and revenue reflects significantly lower production volumes during the first half of fiscal year 2020. This relates primarily to diminished local availability of corn, the effects of the COVID-19 outbreak on ethanol demand and lower ethanol pricing which resulted in the idling of the NuGen and One Earth ethanol plants in March of 2020. We resumed production operations at One Earth in late May of 2020 and at NuGen in late
June of 2020. Gross profit for the third quarter of fiscal year 2020 was approximately$17.7 million , compared to gross loss of approximately$1.8 million for the third quarter of fiscal year 2019. Gross profit for the third quarter of fiscal year 2020 increased by approximately$19.4 million compared to the prior year third 27 quarter as a result of operations in the ethanol and by-products segment. Gross loss in the refined coal segment was$1.3 million in the third quarter of fiscal year 2020 compared to a$1.8 million gross loss in the third quarter of fiscal year 2019. Gross profit for the first nine months of fiscal year 2020 was approximately$7.0 million compared to approximately$5.9 million for the first nine months of fiscal year 2019. Gross profit for the first nine months of fiscal year 2020 decreased by approximately$1.1 million compared to the first nine months of fiscal year 2019 as a result of operations in the ethanol and by-products segment and increased by approximately$2.2 million as a result of operations in the refined coal segment. SG&A expenses were approximately$4.3 million for the third quarter of fiscal year 2020, consistent with approximately$4.1 million of expenses for the third quarter of fiscal year 2019. SG&A expenses were approximately$13.3 million for the first nine months of fiscal year 2020, consistent with approximately$13.6 million for the first nine months of fiscal year 2019. During the third quarter of fiscal year 2020, we recognized income of approximately$1,152,000 compared to a loss of approximately$15,000 for the third quarter of fiscal year 2019, from our equity investment inBig River , which is included in our ethanol and by-products segment results. We recognized income of approximately$168,000 for the first nine months of fiscal year 2020 compared to approximately$350,000 for the first nine months of fiscal year 2019. Big River has interests in four ethanol production plants that shipped approximately 390 million gallons in the trailing twelve months endedOctober 31, 2020 and has an effective ownership of ethanol gallons shipped for the same period of approximately 337 million gallons. Big River's operations also include agricultural elevators. Due to the inherent volatility of commodity prices within the ethanol industry, we cannot predict the likelihood of future operating results from Big River being similar to historical results. Interest and other income was approximately$0.5 million for the third quarter of fiscal year 2020 compared to approximately$1.0 million for the third quarter of fiscal year 2019. Interest and other income was approximately$1.4 million for the first nine months of fiscal year 2020 compared to approximately$3.4 million for the first nine months of fiscal year 2019. Interest income has decreased as yields on our excess cash decreased compared to fiscal year 2019 and our excess cash investment balances decreased compared to fiscal year 2019. As a result of the foregoing, income before income taxes was approximately$15.1 million for the third quarter of fiscal year 2020 compared to a loss of approximately$4.9 million for the third quarter of fiscal year 2019. Loss before income taxes was approximately$4.7 million for the first nine months of fiscal year 2020 compared to a loss of approximately$4.0 million for the first nine months of fiscal year 2019. We 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 nine months endedOctober 31, 2020 and 2019. Our tax provision was approximately 26.8% for the three months endedOctober 31, 2020 and our tax benefit was approximately 65.9% for the three months endedOctober 31, 2019 . Our tax benefit was approximately 112.7% and approximately 234.7% for the first nine months of fiscal years 2020 and 2019, respectively. The fluctuation in the rate results primarily from the production tax credits we expect to receive associated with our refined coal segment relative to pre-tax income or loss. Our income 28 tax provision for the third quarter of fiscal year 2020 includes approximately$1.8 million related to reversing previously recognized tax benefits associated with the lengthening of a net operating loss carryback allowed by the CARES Act as we no longer have a year to date estimated taxable loss. As a result of the foregoing, net income was approximately$11.1 million for the third quarter of fiscal year 2020 compared to net loss of approximately$1.7 million for the third quarter of fiscal year 2019. Net income was approximately$0.6 million for the first nine months of fiscal year 2020 compared to approximately$5.4 million for the first nine months of fiscal year 2019. Income related to noncontrolling interests was approximately$2.2 million and approximately$0.4 million during the third quarters of fiscal years 2020 and 2019, respectively, and was approximately$1.1 million and approximately$2.4 million during the first nine months of fiscal years 2020 and 2019, respectively. These amounts represent the other owners' share of the income or loss of NuGen, One Earth and the refined coal entity. As a result of the foregoing, net income attributable to REX common shareholders for the third quarter of fiscal year 2020 was approximately$8.8 million , an increase of approximately$10.9 million from net loss attributable to REX common shareholders of approximately$2.1 million for the third quarter of fiscal year 2019. Net loss attributable to REX common shareholders for the first nine months of fiscal year 2020 was approximately$0.5 million , a decrease of approximately$3.6 million from net income attributable to REX common shareholders of approximately$3.0 million for the first nine months of fiscal year 2019. Business Segment Results We have two reportable segments: i) ethanol and by-products; and ii) refined coal. We evaluate the performance of each reportable segment based on segment profit. Segment profit excludes indirect interest income and certain other items that are included in net income determined in accordance with accounting principles generally accepted inthe United States of America . Segment profit includes realized and unrealized gains and losses on derivative financial instruments and the provision/benefit for income taxes. 29 The following sections discuss the results of operations for each of our business segments and corporate and other. Amounts in the corporate and other category include activities that are not separately reportable or related to a segment. The following tables summarizes segment and other results (amounts
in
thousands):
Three Months Ended Nine Months Ended
October 31, October 31,
2020 2019 2020 2019
Net sales and revenue:
Ethanol and by-products $ 124,217 $ 86,603 $ 246,694 $ 296,826
Refined coal 1 34 68 134 288
Total net sales and revenue $ 124,251 $ 86,671 $ 246,828 $ 297,114 1 We record sales in the refined coal segment net of the cost of coal as we
purchase the coal feedstock from the customer to which refined coal is sold. Segment gross profit (loss): Ethanol and by-products$ 18,929 $ 28 $ 11,259 $ 12,312 Refined coal (1,250) (1,786) (4,241) (6,420) Total gross profit (loss)$ 17,679 $ (1,758) $ 7,018 $ 5,892 Income (loss) before income taxes: Ethanol and by-products$ 17,007 $ (2,822) $ 1,397 $ 3,491 Refined coal (1,270) (1,648) (4,235) (6,351) Corporate and other (626) (434) (1,873) (1,146) Total income (loss) before income taxes$ 15,111 $ (4,904)
(Provision) benefit for income taxes: Ethanol and by-products$ (5,071) $ 945 $ (17) $ (160) Refined coal 985 2,181 4,863 9,282 Corporate and other 34 105 461 279 Total (provision) benefit for income taxes$ (4,052) $ 3,231
Segment profit (loss) (net of noncontrolling interests): Ethanol and by-products$ 9,660 $ (2,330) $ 49 $ 684 Refined coal (227) 607 821 3,209 Corporate and other (592) (329) (1,412) (868) Net income (loss) attributable to REX common shareholders$ 8,841 $ (2,052) $ (542) $ 3,025 30 Ethanol and by-Products The ethanol and by-products segment includes the consolidated financial results of One Earth and NuGen, our equity investment inBig River and certain administrative expenses. The following table summarizes net sales and revenue from One Earth and NuGen by product group (amounts in thousands): Three Months Ended Nine Months Ended October 31, October 31, Sales of products, ethanol and by-products segment: 2020 2019 2020 2019 Ethanol$ 98,850 $ 66,149 $ 191,971 $ 226,986 Dried distillers grains 20,916 16,627 45,314 51,188 Non-food grade corn oil 4,661 3,099 9,162 12,681 Modified distillers grains 562 702 1,228 5,846 Derivative financial instruments losses (777) - (1,075) - Other 5 26 94 125 Total$ 124,217 $ 86,603 $ 246,694 $ 296,826 The following table summarizes selected operating data from One Earth and NuGen: Three Months Ended Nine Months Ended October 31, October 31, 2020 2019 2020 2019 Average selling price per gallon of ethanol$ 1.31 $ 1.39 $ 1.28 $ 1.34 Gallons of ethanol sold (in millions) 74.6 47.6 149.4 169.4 Average selling price per ton of dried distillers grains$ 129.38 $ 134.57 $ 136.49 $ 137.48 Tons of dried distillers grains sold 161,666 123,557 331,990 372,327 Average selling price per pound of non-food grade corn oil$ 0.24 $ 0.26 $ 0.25 $ 0.25 Pounds of non-food grade corn oil sold (in millions) 19.0 11.9 37.2 49.8 Average selling price per ton of modified distillers grains$ 56.68 $ 56.56 $ 52.44 $ 59.67 Tons of modified distillers grains sold 9,924 12,420 23,431 97,975 Average cost per bushel of grain$ 3.28 $ 4.15 $ 3.57 $ 3.79 Average cost of natural gas (per MmBtu)$ 2.09 $ 2.51 $ 2.87 $ 2.98 Ethanol sales increased from approximately$66.1 million in the third quarter of fiscal year 2019 to approximately$98.9 million in the third quarter of fiscal year 2020, primarily as a result of a 57% increase in gallons sold compared to the third quarter of fiscal year 2019. Dried distillers grains sales increased from approximately$16.6 million in the third quarter of fiscal year 2019 to approximately$20.9 million in the third quarter of fiscal year 2020, primarily as a result of a 31% increase in tons sold compared to the third quarter of fiscal year 2019. Non-food grade corn oil sales increased from approximately$3.1 million in the third quarter of fiscal year 2019 to approximately$4.7 million in the third quarter of fiscal year 2020. The increase was primarily a result of a 60% increase in pounds sold compared to the third quarter of fiscal year 2019. Modified distillers grains sales were approximately$0.7 million in the third quarter of fiscal year 2019 compared to approximately$0.6 million in the third quarter of fiscal year 2020. The decrease was primarily a result of a 20% decrease in tons sold compared to the third quarter of fiscal year 2019. 31
Losses on derivative financial instruments were approximately$0.8 million during the third quarter of fiscal year 2020 and were insignificant during the third quarter of fiscal year 2019. The above noted volume increases were primarily a result of diminished local supplies of corn from a poor 2019 harvest caused by weather conditions in that area, which prevented us from operating our NuGen ethanol plant at or near historical production levels during the third quarter of fiscal year 2019. Ethanol sales decreased from approximately$227.0 million in the first nine months of fiscal year 2019 to approximately$192.0 million in the first nine months of fiscal year 2020, primarily a result of a decrease of 20.0 million gallons sold. Dried distillers grains sales decreased from approximately$51.2 million in the first nine months of fiscal year 2019 to approximately$45.3 million in the first nine months of fiscal year 2020, primarily a result of a 11% decrease in tons sold compared to the first nine months of fiscal year 2019. Non-food grade corn oil sales decreased from approximately$12.7 million in the first nine months of fiscal year 2019 to approximately$9.2 million in the first nine months of fiscal year 2020, primarily a result of a 25% decrease in pounds sold. Modified distillers grains sales decreased from approximately$5.8 million in the first nine months of fiscal year 2019 to approximately$1.2 million in the first nine months of fiscal year 2020, primarily a result of an 76% decrease in tons sold compared to the first nine months of fiscal year 2019. Losses on derivative financial instruments were approximately$1.1 million during the first nine months of fiscal year 2020 and were insignificant during the first nine months of fiscal year 2019. The volume decreases for the nine months endedOctober 31, 2020 were primarily a result of the impact of the COVID-19 outbreak on ethanol demand, lower ethanol pricing, an oversupply of oil and diminished local supplies of corn from a poor 2019 harvest caused by localized weather conditions. These factors resulted in idling both of our consolidated ethanol plants in March of 2020. In May of 2020, businesses and other activities slowly began to reopen, which led to an increase in demand for gasoline and ethanol, and in related prices. As a result, we resumed production operations at the One Earth ethanol plant in May of 2020 and at the NuGen ethanol plant in June of 2020. Gross profit for the third quarter of fiscal year 2020 was approximately$18.9 million compared to approximately$28,000 of gross profit for the third quarter of fiscal year 2019. The crush spread for the third quarter of fiscal year 2020 was approximately$0.19 per gallon of ethanol sold compared to approximately$(0.04) per gallon of ethanol sold during the third quarter of fiscal year 2019. In addition, there were weather related logistical delays and diminished local availability of corn which negatively impacted production levels at NuGen during the third quarter of fiscal year 2019. Corn accounted for approximately 79% ($83.4 million ) of our cost of sales during the third quarter of fiscal year 2020 compared to approximately 78% ($67.7 million ) during the third quarter of fiscal year 2019. Natural gas accounted for approximately 4% ($4.0 million ) of our cost of sales during the third quarter of fiscal year 2020 compared to approximately 4% ($3.2 million ) during the third quarter of fiscal year 2019. Both the corn and natural gas dollar increases were primarily attributable to the higher production levels incurred in the third quarter of fiscal year 2020 compared to the third quarter of fiscal year 2019 levels. Gross profit for the first nine months of fiscal year 2020 was approximately$11.3 million , which was approximately$1.1 million lower compared to approximately$12.3 million of gross profit for the first nine months of fiscal year 2019. The crush spread for the first nine months of fiscal year 2020 was approximately$0.05 per gallon of ethanol sold compared to the first nine months of fiscal year 2019 which was approximately$0.03 per gallon of ethanol sold. Both of our consolidated ethanol plants were idled for portions of the first nine months of fiscal year 2020. Consequently, lower production and resulting sales volumes reduced gross profit for the first nine months of fiscal year
2020. 32
Grain accounted for approximately 76% ($178.3 million ) of our cost of sales during the first nine months of fiscal year 2020 compared to approximately 78% ($221.3 million ) during the first nine months of fiscal year 2019. Natural gas accounted for approximately 5% ($11.3 million ) of our cost of sales during the first nine months of fiscal year 2020 compared to approximately 5% ($13.5 million ) during the first nine months of fiscal year 2019. Both the grain and natural gas dollar decreases were primarily attributable to the lower production levels incurred in the first nine months of fiscal year 2020 compared to the first nine months of fiscal year 2019 levels. We attempt to match quantities of ethanol, distillers grains and non-food grade corn oil sales contracts with an appropriate quantity of grain purchase contracts over a given time period when we can obtain a satisfactory margin resulting from the crush spread inherent in the contracts we have executed. However, the market for future ethanol sales contracts generally lags the spot market with respect to ethanol price. Consequently, we generally execute fixed price sales contracts for no more than four months into the future at any given time and we may lock in our corn or ethanol price without having a corresponding locked in ethanol or corn price for short durations of time. As a result of the relatively short period of time our contracts cover, we generally cannot predict the future movements in our realized crush spread for more than four months. SG&A expenses for the third quarter of fiscal year 2020 were approximately$3.5 million , consistent with the third quarter of fiscal year 2019 amount of approximately$3.6 million . SG&A expenses were approximately$11.1 million for the first nine months of fiscal year 2020, consistent with the first nine months of fiscal year 2019 amount of$11.6 million . During the third quarter of fiscal year 2020 we recognized income of approximately$1,152,000 compared to a loss of approximately$15,000 for the third quarter of fiscal year 2019, from our equity investment inBig River . We recognized income of approximately$168,000 during the first nine months of fiscal year 2020 compared to approximately$350,000 during the first nine months of fiscal year 2019. Big River's results for the nine months endedOctober 31, 2020 were negatively impacted by the COVID-19 outbreak. Big River has interests in four ethanol production plants that shipped approximately 390 million gallons in the trailing twelve months endedOctober 31, 2020 and has an effective ownership of ethanol gallons shipped for the same period of approximately 337 million gallons. Big River's operations also include agricultural elevators. Due to the inherent volatility of commodity prices within the ethanol industry, we cannot predict the likelihood of future operating results from Big River being similar to historical results. Interest and other income was approximately$0.5 million for the third quarter of fiscal year 2020 compared to approximately$0.7 million for the third quarter of fiscal year 2019. Interest and other income was approximately$1.1 million for the first nine months of fiscal year 2020 compared to approximately$2.4 million for the first nine months of fiscal year 2019. Interest income has decreased as yields on our excess cash decreased compared to fiscal year 2019 and our excess cash investment balances decreased compared to fiscal year 2019. 33
The provision for income taxes was approximately$5.1 million in the third quarter of fiscal year 2020 compared to a benefit of approximately$0.9 million in the third quarter of fiscal year 2019. The provision for income taxes was approximately$17,000 in the first nine months of fiscal year 2020 compared to approximately$160,000 in the first nine months of fiscal year 2019. The fluctuation in segment income tax benefit or provision is primarily related to the fluctuation in pre-tax income or loss. Income related to noncontrolling interests was approximately$2.3 million and approximately$0.5 million during the third quarters of fiscal years 2020 and 2019, respectively. Income related to noncontrolling interests was approximately$1.3 million and approximately$2.6 million during the first nine months of fiscal years 2020 and 2019, respectively. These amounts represent the other owners' share of the income or loss of NuGen and One Earth. Segment profit for the third quarter of fiscal year 2020 was approximately$9.7 million , which was an increase of approximately$12.0 million compared to the prior year third quarter segment loss of approximately$2.3 million . Segment profit for the first nine months of fiscal year 2020 was approximately$49,000 , which was approximately$635,000 lower compared to the first nine months of fiscal year 2019 segment profit of approximately$684,000 . Refined Coal
The refined coal segment includes the consolidated financial results of our refined coal entity and certain administrative expenses. We acquired the refined coal entity during the third quarter of fiscal year 2017. The following table summarizes sales from refined coal operations by product group (amounts in
thousands):
Three Months Ended Nine Months Ended
October 31 , October 31 ,Sales of products, refined coal segment: 2020 2019
2020 2019
Refined coal 1 $ 34 $ 68 $ 134 $ 288 1 We record sales in the refined coal segment net of the cost of coal as we purchase the coal feedstock from the customer to which refined coal is sold.
Refined coal sales were approximately$34,000 and approximately$68,000 in the third quarters of fiscal years 2020 and 2019, respectively. Refined coal sales were approximately$134,000 and approximately$288,000 in the first nine months of fiscal years 2020 and 2019, respectively. During fiscal year 2020, operating results have been adversely affected by lower utility plant demand (our only customer). Refined coal sales vary depending on fluctuations in demand from the site host utility, which generally changes based upon weather conditions in the geographic markets the utility serves and competing energy prices and supplies and the state of the economy. Based upon current year operations and projections from the site host utility, we expect varying and intermittent demand for refined coal in future periods compared to historical results. 34
Gross loss was approximately$1.3 million and approximately$1.8 million in the third quarters of fiscal years 2020 and 2019, respectively. Gross loss was approximately$4.2 million and approximately$6.4 million in the first nine months of fiscal years 2020 and 2019, respectively. We expect future period gross losses to vary like the sales fluctuations described above. Based upon the agreements in place that govern the operation, sales and purchasing activities of the refined coal plant, we expect the refined coal operation to continue operating at a gross loss. We expect that the ongoing losses will be subsidized by federal production income tax credits.
SG&A expenses were insignificant during the third quarters and first nine months of fiscal years 2020 and 2019. We expect future period expenses to also be insignificant.
Loss related to noncontrolling interests was approximately$0.1 million for each of the third quarters of fiscal years 2020 and 2019. Loss related to noncontrolling interests was approximately$0.2 million and approximately$0.3 million in the first nine months of fiscal years 2020 and 2019, respectively. This amount represents the other owner's share of the pre-tax loss of refined coal operations. The benefit for income taxes was approximately$1.0 million and approximately$2.2 million in the third quarters of fiscal years 2020 and 2019, respectively. The benefit for income taxes was approximately$4.9 million and approximately$9.3 million in the first nine months of fiscal years 2020 and 2019, respectively. The refined coal segment tax benefit is comprised of an estimated statutory benefit of its pre-tax losses and an estimated benefit from the federal production tax credits we expect to earn from producing and selling refined coal. The amount of benefit we recognize during interim periods will fluctuate based on actual production and profitability levels. As a result of the foregoing, including the benefit of federal production tax credits attributable to refined coal production and sales, segment loss for the third quarter of fiscal year 2020 was approximately$0.2 million compared to segment profit of approximately$0.6 million for the third quarter of fiscal year 2019. Segment profit was approximately$0.8 million and approximately$3.2 million for the first nine months of fiscal years 2020 and 2019, respectively. Corporate and Other
SG&A expenses were approximately$0.7 million for both the third quarter of fiscal years 2020 and 2019. These expenses were approximately$2.2 million and approximately$2.1 million for the first nine months of fiscal years 2020 and 2019, respectively.
Interest and other income was approximately$0.1 million and approximately$0.3 million for the third quarters of fiscal years 2020 and 2019, respectively. Interest and other income was approximately$0.3 million and approximately$0.9 million for the first nine months of fiscal years 2020 and 2019, respectively. Interest income has decreased as yields on our excess cash decreased compared to fiscal year 2019 and our excess cash investment balances decreased compared
to fiscal year 2019. 35
Liquidity and Capital Resources
Net cash provided by operating activities was approximately$21.5 million for the first nine months of fiscal year 2020, compared to cash used of approximately$2.3 million for the first nine months of fiscal year 2019. For the first nine months of fiscal year 2020, cash was provided by net income of approximately$0.6 million , adjusted for non-cash items of approximately$14.0 million , which consisted of depreciation, amortization of operating lease right-of-use assets, income from equity method investments, interest income from short-term investments, the deferred income tax provision and stock based compensation expense. We received dividends from Big River of approximately$2.5 million during the first nine months of fiscal year 2020. A decrease in the balance of accounts receivable provided cash of approximately$0.5 million , which was primarily a result of the timing of customer shipments and payments. Inventories decreased by approximately$14.0 million , which was primarily a result of the timing of receipt of raw materials, shipments of finished goods and lower commodity prices. A decrease in the balance of accounts payable used cash of approximately$4.3 million , which was primarily a result of the timing of inventory receipts and vendor payments. A decrease in the balance of other liabilities used cash of approximately$5.3 million , which was primarily a result of payments of operating leases and incentive compensation. Net cash used in operating activities was approximately$2.3 million for the first nine months of fiscal year 2019. For the first nine months of fiscal year 2019, cash was provided by net income of approximately$5.4 million , adjusted for non-cash items of approximately$12.3 million , which consisted of depreciation, amortization of operating lease right-of-use assets, income from equity method investments, interest income from short-term investments, the deferred income tax provision and stock based compensation expense. We received dividends from Big River of approximately$1.0 million during the first nine months of fiscal year 2019. An increase in the balance of accounts receivable used cash of approximately$5.0 million , which was primarily a result of amounts owed by One Earth's sole corn provider until the end of the third quarter and the timing of customer payments and shipments. Beginning in the fourth quarter of fiscal year 2019, One Earth began sourcing its own corn and in conjunction with this change One Earth was owed approximately$6.7 million at the end of the third quarter from the previous corn originator. An increase in the balance of inventories used cash of approximately$12.6 million , which was primarily a result of the timing of receipt of raw materials, plant shutdowns and the shipment of finished goods. An increase in the balance of accounts payable provided cash of approximately$5.6 million , which was primarily a result of the timing of inventory receipts and vendor payments. A decrease in the balance of other liabilities used cash of approximately$9.0 million , which was primarily a result of payments of operating leases and incentive compensation as well as lower accruals for utilities. AtOctober 31, 2020 , working capital was approximately$226.3 million , compared to approximately$239.5 million atJanuary 31, 2020 . The ratio of current assets to current liabilities was 9.5 to 1 atOctober 31, 2020 and 8.6 to 1 atJanuary 31, 2020 . Cash of approximately$10.0 million was used in investing activities for the first nine months of fiscal year 2020, compared to cash provided of approximately$12.7 million during the first nine months of fiscal year 2019. During the first nine months of fiscal year 2020, we had capital expenditures of approximately$6.6 million , primarily for the purchase of land at One Earth Energy. We expect our capital expenditures to be in the range of$3 million to$5 million for the remainder of fiscal year 2020. During the first nine months of fiscal year 2020, we purchased certificates of deposit (classified as short-term investments) of approximately$68.2 million . During the first nine months of fiscal year 2020, we sold certificates of deposit (classified as short-term investments) of approximately$65.3 million . The certificates of deposit, both purchased and sold, had maturities of less than one year. Depending on investment options available, we may elect to retain the funds, or a portion thereof, in cash investments, short-term investments or long-term
investments. 36 Cash of approximately$12.7 million was provided by investing activities for the first nine months of fiscal year 2019. During the first nine months of fiscal year 2019, we had capital expenditures of approximately$2.6 million . During the first nine months of fiscal year 2019, we soldUnited States treasury bills (classified as short-term investments) of approximately$15.0 million . Cash of approximately$18.3 million was used in financing activities for the first nine months of fiscal year 2020, compared to approximately$2.3 million during the first nine months of fiscal year 2019. During the first nine months of fiscal year 2020, we used cash of approximately$18.1 million to purchase approximately 295,000 shares of our common stock in open market transactions. Cash of approximately$2.3 million was used in financing activities for the first nine months of fiscal year 2019. During the first nine months of fiscal year 2019, we used cash of approximately$2.6 million to pay dividends to and to purchase shares from noncontrolling members. During the first nine months of fiscal year 2019, we received approximately$0.3 million in capital contributions from the minority investor in the refined coal entity. We are investigating various uses for our excess cash and short-term investments. We have a stock buyback program, and given our current authorization level, can repurchase a total of approximately 43,000 shares atOctober 31, 2020 . We also plan to seek and evaluate investment opportunities including carbon sequestration, energy related, agricultural or other ventures we believe fit our investment criteria in addition to investing in highly liquid short-term securities. We are working with theUniversity of Illinois to explore the development of a carbon sequestration project to be located near the One Earth ethanol plant. TheUniversity of Illinois has received aUnited States Department of Energy award through the CarbonSAFE program and will evaluate the greenhouse gas storage potential beneath the site by drilling a test well and performing seismic surveys. Further work and research are needed to determine if this will be
a feasible project. Forward-Looking Statements This Form 10-Q contains or may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such statements can be identified by use of forward-looking terminology such as "may," "expect," "believe," "estimate," "anticipate" or "continue" or the negative thereof or other variations thereon or comparable terminology. Readers are cautioned that there are risks and uncertainties that could cause actual events or results to differ materially from those referred to in such forward-looking statements. These risks and uncertainties include the risk factors set forth from time to time in the Company's filings with theSecurities and Exchange Commission and include among other things: the effect of pandemics such as COVID-19 on the Company's business operations, including impacts on supplies, demand, personnel and other factors, the impact of legislative and regulatory changes, the price volatility and availability of corn, distillers grains, ethanol, non-food grade corn oil, gasoline, natural gas, logistical delays, our ethanol and refined coal plants operating efficiently and according to forecasts and projections, changes in the international, national or regional economies, weather, results of income tax audits, changes in income tax laws or regulations and the effects of terrorism or acts of war. The Company does not intend to update publicly any forward-looking statements except as required by law. Other factors that could cause actual results to differ materially from those in the forward-looking statements are set forth in Item 1A of the Company's Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2020 (File No. 001-09097).
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