Financial Data and Key Metrics Changes - For Q3 2021, net sales were $306 million, an increase from $298 million in Q2 2021, driven by an increase in third-party gallons sold and higher average prices per gallon [15][20] - The company reported a net loss available to common shareholders of $3.5 million or $0.05 per share, compared to income of $8.1 million or $0.11 per diluted share in Q2 2021 [20] - Gross loss was $3.4 million, down from a gross profit of $15.2 million in the previous quarter, primarily due to the wet mill outage and high corn prices [18][20] Business Line Data and Key Metrics Changes - Alcohol sales totaled $253 million, with $53 million in revenue from essential ingredients [15] - Specialty alcohol production was 20 million gallons, down 4 million gallons sequentially, attributed to the wet mill shutdown [16] - The company expects the yeast facility and Pekin dryer upgrades to contribute approximately $5 million in EBITDA annually starting in 2022 [8][24] Market Data and Key Metrics Changes - The average price per gallon of fuel-grade ethanol reflects a high correlation with elevated corn prices [15] - The company anticipates continued volatility in sanitizer and disinfectant demand, with expectations for a more stable demand-supply equilibrium as COVID-19 impacts dissipate [18] - Co-product prices have lagged behind rising corn prices, leading to declining co-product returns [18] Company Strategy and Development Direction - The company is focusing on expanding its essential ingredients business and investing in infrastructure improvements [6] - Plans to enhance protein production at dry mills aim to diversify revenue sources and improve earnings quality [7][24] - The company is exploring opportunities for vertical integration and carbon capture and sequestration programs [13][32] Management's Comments on Operating Environment and Future Outlook - Management noted that the wet mill outage and volatile market conditions negatively impacted revenues and increased operational expenses [9] - The company expects to contract for more gallons in 2022 than in 2021, despite current uncertainties in the market [11] - Management expressed optimism about future EBITDA growth from various projects, estimating an additional $18.5 million in EBITDA in 2022 from completed improvements [24][25] Other Important Information - The company completed the sale of its fuel-grade ethanol production facility for $24 million, which will help retire approximately $150 million in term debt [12][20] - The company has secured utility costs and other variable input costs for the next 12 months to mitigate risks associated with commodity price volatility [22][23] Q&A Session Summary Question: Can you elaborate on the supply-demand imbalance and its normalization? - Management indicated that the supply-demand imbalance is driven by export markets and logistical constraints, with expectations for normalization over the next few quarters [28][30] Question: What is the update on carbon capture opportunities? - Management discussed the potential benefits from the recent infrastructure bill, including increased tax credits for carbon capture, and ongoing discussions with multiple parties regarding carbon sequestration [34][36] Question: How much higher could the gross profit guidance be if things move forward positively? - Management expressed optimism about the $40 million gross profit guidance but noted challenges in the market that could affect upside potential [40][42] Question: Is there potential for acquisitions to diversify the product portfolio? - Management confirmed that they are exploring both acquisitions and internal development to enhance their specialty alcohol portfolio and improve operational capabilities [45][46]

Business Transformation & Focus - Alto Ingredients is transforming corn into specialty alcohol and high-value essential ingredients for consumer and commercial products[3] - The company is focusing on four key areas: Health, Home & Beauty, Food & Beverage, Essential Ingredients, and Renewable Fuels[3] - Approximately 50% of Alto Ingredients' production is specialty alcohols, which are high-margin products with low price volatility[6, 13] Production & Capacity - Alto Ingredients has 5 facilities with a combined alcohol production capacity of 410 MGY (Million Gallons per Year)[3] - The company has 140 MGY capacity in specialty alcohols, with 120 MGY idled[3] - The Pekin campus has a total alcohol production capacity of approximately 250 MGY, with roughly 50% dedicated to specialty alcohols and 50% to fuel-grade ethanol[16] Financial Performance & Visibility - As of June 30, 2021, Alto Ingredients had $508 million in cash and cash equivalents[11] - For the six months ended June 30, 2021, net sales were $516844 million and gross profit was $29070 million[11] - Alto Ingredients is targeting $60 million in gross profit from the production of specialty alcohols in 2021[13] - Over 80% of specialty alcohol sales are contracted annually in advance, providing good visibility on near-term results[13] Debt & Capitalization - Alto Ingredients is net "term debt" free, with $193 million in net proceeds from asset sales used to prepay senior notes[11] - The company has less than $18 million remaining in term and plant debt loan balances[13]

Alto Ingredients, Inc. (NASDAQ:ALTO) Q2 2021 Earnings Conference Call August 3, 2021 5:00 PM ET Company Participants Moriah Shilton - LHA IR Mike Kandris - CEO Bryon McGregor - CFO Conference Call Participants Amit Dayal - H.C. Wainwright Eric Stein - Craig-Hallam Operator Good afternoon, ladies and gentlemen, and welcome to the Alto Ingredients, Incorporated Second Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we’ll conduct question-and-answ ...

[PART I - FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) This section provides the unaudited consolidated financial statements and management's discussion and analysis for Alto Ingredients, Inc [ITEM 1. FINANCIAL STATEMENTS](index=3&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS.) This section presents Alto Ingredients, Inc.'s unaudited consolidated financial statements for Q1 2021, including balance sheets, operations, cash flows, and equity, with detailed notes on accounting policies and financial items [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) The consolidated balance sheets show the company's financial position as of March 31, 2021, compared to December 31, 2020, highlighting changes in assets, liabilities, and stockholders' equity | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :----------------------------- | :---------------------------- | :----------------------------- | | Total Assets | $501,116 | $476,818 | | Total Current Assets | $241,588 | $214,046 | | Total Liabilities | $199,434 | $180,583 | | Total Current Liabilities | $112,750 | $86,927 | | Total Stockholders' Equity | $301,682 | $296,235 | [Consolidated Statements of Operations](index=5&type=section&id=Consolidated%20Statements%20of%20Operations) The consolidated statements of operations detail the company's financial performance for the three months ended March 31, 2021, compared to the same period in 2020, showing a significant shift from net loss to net income | Metric (in thousands, except per share) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Net Sales | $218,734 | $311,404 | | Gross Profit (Loss) | $13,837 | $(12,890) | | Income (Loss) from Operations | $5,623 | $(23,102) | | Consolidated Net Income (Loss) | $4,678 | $(27,156) | | Net Income (Loss) available to common stockholders | $4,366 | $(25,415) | | Net Income (Loss) per share, basic | $0.06 | $(0.47) | [Consolidated Statements of Cash Flows](index=6&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) The consolidated statements of cash flows outline the cash generated from or used in operating, investing, and financing activities for the three months ended March 31, 2021 and 2020, showing a decrease in cash and cash equivalents | Metric (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by (used in) operating activities | $(4,082) | $26,901 | | Net cash used in investing activities | $(4,411) | $(1,245) | | Net cash provided by (used in) financing activities | $4,972 | $(17,874) | | Net increase (decrease) in cash and cash equivalents | $(3,521) | $7,782 | | Cash and cash equivalents at end of period | $44,146 | $26,779 | [Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Stockholders'%20Equity) This statement details the changes in stockholders' equity for the three months ended March 31, 2021 and 2020, reflecting stock-based compensation, stock option exercises, preferred stock dividends, and net income/loss | Metric (in thousands) | March 31, 2021 | December 31, 2020 | | :-------------------- | :------------- | :---------------- | | Total Stockholders' Equity | $301,682 | $296,235 | | Common Stock Shares Outstanding | 73,161 | 72,487 | | Additional Paid-In Capital | $1,037,718 | $1,036,638 | | Accumulated Deficit | $(732,232) | $(736,598) | [Notes to Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes provide detailed explanations and disclosures for the consolidated financial statements, covering the company's organization, significant accounting policies, asset classifications, segment information, debt, commitments, and fair value measurements [1. Organization and Basis of Presentation](index=8&type=section&id=1.%20ORGANIZATION%20AND%20BASIS%20OF%20PRESENTATION.) Alto Ingredients, Inc. is a leading producer and marketer of specialty alcohols and essential ingredients, including fuel-grade ethanol, operating seven production facilities - **Alto Ingredients is a leading producer and marketer of specialty alcohols and essential ingredients, including fuel-grade ethanol**[22](index=22&type=chunk) - The company's production capacity was **450 million gallons per year** as of March 31, 2021, operating at approximately **64% utilization**[23](index=23&type=chunk)[24](index=24&type=chunk) - Key markets include **Health, Home & Beauty; Food & Beverage; Essential Ingredients; and Renewable Fuels**[24](index=24&type=chunk) [2. Assets and Liabilities Held-for-Sale](index=9&type=section&id=2.%20ASSETS%20AND%20LIABILITIES%20HELD-FOR-SALE.) The company classified its Madera and Stockton, California fuel-grade ethanol production facilities as held-for-sale, incurring an additional $1.2 million impairment charge - The company approved a plan to sell its **Madera and Stockton, California fuel-grade ethanol production facilities** in October 2020[32](index=32&type=chunk) - An additional **impairment charge of $1.2 million** was recorded for held-for-sale assets during Q1 2021[32](index=32&type=chunk) - The Madera facility was sold on April 23, 2021, for **$28.3 million** (**$19.5 million cash**, **$8.8 million assumed liabilities**)[32](index=32&type=chunk) Stockton and Madera Facility Performance | Segment | Net Sales (Q1 2021, in millions) | Net Sales (Q1 2020, in millions) | Pre-tax Loss (Q1 2021, in millions) | Pre-tax Loss (Q1 2020, in millions) | | :-------- | :------------------------------- | :------------------------------- | :---------------------------------- | :---------------------------------- | | Stockton | $0.2 | $21.9 | $0.8 | $2.3 | | Madera | < $0.1 | $21.5 | $1.6 | $1.8 | [3. Segments](index=10&type=section&id=3.%20SEGMENTS.) The company reports financial performance across three segments: marketing and distribution, Pekin Campus production, and Other production - The company operates in **three segments: marketing and distribution, Pekin Campus production, and Other production**[36](index=36&type=chunk) Segment Net Sales and Income (Loss) Before Income Taxes | Metric (in thousands) | Marketing and distribution | Pekin Campus production | Other production | Corporate activities | Total | | :-------------------- | :------------------------- | :---------------------- | :--------------- | :------------------- | :---- | | Net Sales (Q1 2021) | $59,706 | $150,145 | $21,417 | | $218,734 | | Net Sales (Q1 2020) | $62,250 | $126,334 | $129,758 | | $311,404 | | Income (loss) before benefit for income taxes (Q1 2021) | $3,973 | $9,691 | $(5,137) | $(2,904) | $5,623 | | Income (loss) before benefit for income taxes (Q1 2020) | $2,930 | $(6,849) | $(16,621) | $(2,562) | $(23,102) | Total Assets by Segment | Total Assets (in thousands) | March 31, 2021 | December 31, 2020 | | :-------------------------- | :------------- | :---------------- | | Marketing and distribution | $119,546 | $89,337 | | Pekin Campus production | $238,370 | $234,439 | | Other production | $120,351 | $102,409 | | Corporate assets | $22,849 | $50,633 | | Total | $501,116 | $476,818 | [4. Inventories](index=12&type=section&id=4.%20INVENTORIES.) Inventories, primarily consisting of bulk ethanol, specialty alcohols, corn, and essential ingredients, are valued at the lower of cost or net realizable value using a first-in, first-out basis Inventory Breakdown | Inventory Category (in thousands) | March 31, 2021 | December 31, 2020 | | :-------------------------------- | :------------- | :---------------- | | Finished goods | $39,654 | $25,154 | | Work in progress | $4,965 | $4,333 | | Raw materials | $9,233 | $7,074 | | Other | $1,364 | $1,364 | | Total | $55,216 | $37,925 | [5. Derivatives](index=12&type=section&id=5.%20DERIVATIVES.) The company uses derivative instruments to manage commodity price risk, primarily for non-designated hedges on corn and alcohols - The company uses derivative instruments to **protect cash flows from commodity price volatility** and to **lock in prices for corn and alcohols**[49](index=49&type=chunk)[50](index=50&type=chunk) - **Net gains of $10,543,000** were recognized from non-designated derivative instruments for the three months ended March 31, 2021, compared to $0 in the prior year[50](index=50&type=chunk) Derivative Financial Instruments Fair Value | Derivative Type (in thousands) | March 31, 2021 (Assets) | March 31, 2021 (Liabilities) | December 31, 2020 (Assets) | December 31, 2020 (Liabilities) | | :----------------------------- | :---------------------- | :--------------------------- | :------------------------- | :------------------------------ | | Commodity contracts | $22,355 | $4,741 | $17,149 | $0 | [6. Debt](index=14&type=section&id=6.%20DEBT.) The company's long-term borrowings include Kinergy's line of credit, Pekin and ICP revolving loans, parent notes payable, and CARES Act loans Long-term Debt Breakdown | Debt Category (in thousands) | March 31, 2021 | December 31, 2020 | | :--------------------------- | :------------- | :---------------- | | Kinergy line of credit | $45,554 | $32,512 | | Pekin revolving loan | $17,580 | $20,580 | | ICP revolving loan | $9,384 | $9,384 | | Parent notes payable | $20,001 | $25,533 | | CARES Act loans | $9,860 | $9,860 | | Total Long-term Debt | $64,396 | $71,807 | - On May 14, 2021, the company repaid **$19.3 million of principal** on its parent notes payable using proceeds from the Madera facility sale[53](index=53&type=chunk) - Approximately **$231.9 million of net assets at subsidiaries were restricted** from transfer to Alto Ingredients, Inc. due to credit facility restrictions as of March 31, 2021[55](index=55&type=chunk) [7. Commitments and Contingencies](index=14&type=section&id=7.%20COMMITMENTS%20AND%20CONTINGENCIES.) The company has various sales and purchase commitments for alcohol and essential ingredients scheduled for completion throughout 2021 - As of March 31, 2021, the company had open fixed-price alcohol sales contracts totaling **$207,687,000** and essential ingredients sales contracts totaling **$18,170,000**[56](index=56&type=chunk) - Purchase commitments included **$1,238,000 of fixed-price alcohol** and **$33,883,000 of fixed-price corn**[57](index=57&type=chunk) - Management believes pending legal proceedings will **not materially impact the company's financial condition or results of operations**[59](index=59&type=chunk) [8. Pension Plans](index=15&type=section&id=8.%20PENSION%20PLANS.) The company sponsors a defined benefit Retirement Plan and a Postretirement Plan for certain unionized employees at its Pekin, Illinois facility - The Retirement Plan covers **'grandfathered' unionized employees** at the Pekin, Illinois facility[60](index=60&type=chunk) - As of December 31, 2020, the Retirement Plan was **underfunded by $7.0 million**[61](index=61&type=chunk) - The Postretirement Plan provides medical and life insurance benefits to certain 'grandfathered' unionized employees, with an **accumulated projected benefit obligation of $5.3 million** as of December 31, 2020[62](index=62&type=chunk) [9. Fair Value Measurements](index=16&type=section&id=9.%20FAIR%20VALUE%20MEASUREMENTS.) The company categorizes fair value measurements into a three-level hierarchy, with derivative financial instruments primarily Level 1 and held-for-sale assets Level 3 - Fair value hierarchy includes **Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs)**[64](index=64&type=chunk) - **Derivative financial instruments are valued using Level 1 inputs** (quoted prices on commodity exchanges)[66](index=66&type=chunk) - **Long-lived assets held-for-sale are valued using Level 3 inputs** (observable values corroborated with market data)[65](index=65&type=chunk) Fair Value Measurements by Level | Asset/Liability (in thousands) | March 31, 2021 Fair Value | Level 1 | Level 2 | Level 3 | | :----------------------------- | :------------------------ | :------ | :------ | :------ | | Derivative financial instruments (Assets) | $22,355 | $22,355 | $— | $— | | Long-lived assets held-for-sale | $57,053 | $— | $— | $57,053 | | Derivative financial instruments (Liabilities) | $(4,741) | $(4,741)| $— | $— | [10. Earnings Per Share](index=17&type=section&id=10.%20EARNINGS%20PER%20SHARE.) The company reported basic and diluted net income per share of $0.06 for Q1 2021, a significant improvement from a net loss per share of $(0.47) in the prior year period Earnings Per Share Data | Metric (in thousands, except per share) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (loss) available to common stockholders | $4,366 | $(25,415) | | Basic income (loss) per share | $0.06 | $(0.47) | | Diluted income (loss) per share | $0.06 | $(0.47) | | Weighted-average shares outstanding, basic | 70,351 | 53,828 | | Weighted-average shares outstanding, diluted | 72,464 | 53,828 | [11. Parent Company Financials](index=18&type=section&id=11.%20PARENT%20COMPANY%20FINANCIALS.) This section provides separate financial statements for the parent company, Alto Ingredients, Inc., highlighting its assets, liabilities, equity, and income/cash flow activities - Approximately **$231.9 million of net assets at subsidiaries were restricted** from transfer to Alto Ingredients, Inc. as of March 31, 2021[76](index=76&type=chunk) Parent Company Balance Sheet | Parent Company Metric (in thousands) | March 31, 2021 | December 31, 2020 | | :----------------------------------- | :------------- | :---------------- | | Total Assets | $339,457 | $336,398 | | Total Liabilities | $37,775 | $40,163 | | Total Stockholders' Equity | $301,682 | $296,235 | Parent Company Operations and Cash Flows | Parent Company Metric (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Loss from operations | $(2,125) | $(2,124) | | Consolidated net income (loss) | $4,678 | $(27,156) | | Net cash used in operating activities | $(4,028) | $(1,359) | | Net cash provided by (used in) financing activities | $(5,070) | $6,095 | [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=20&type=section&id=ITEM%202.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS.) This section provides management's perspective on the company's financial condition and results of operations, emphasizing the shift towards specialty alcohols and essential ingredients for improved profitability [Recent Developments](index=20&type=section&id=Recent%20Developments) The company recently completed the sale of its Madera, California production facility for $28.3 million, using the net proceeds to repay $19.3 million in principal on its senior notes - On April 23, 2021, the company entered into an agreement to sell its Madera, California production facility for **$28.3 million**[83](index=83&type=chunk) - The sale closed on May 14, 2021, with **$19.3 million of net proceeds** used to repay senior notes[83](index=83&type=chunk) [Overview](index=20&type=section&id=Overview) Alto Ingredients is a leading producer and marketer of specialty alcohols and essential ingredients, with 410 million gallons of annual alcohol production capacity, strategically focusing on higher-value products - **Alto Ingredients is the largest producer of specialty alcohols** in the United States based on annualized volumes[84](index=84&type=chunk) - The company has an annual alcohol production capacity of **410 million gallons** and markets over **500 million gallons of alcohols** and nearly **1.5 million tons of essential ingredients**[86](index=86&type=chunk) - Business segments include **marketing and distribution, Pekin production, and Other production**[87](index=87&type=chunk) - Strategic goals include **investing in specialty alcohol infrastructure, expanding high-demand essential ingredients, and entering new markets**[88](index=88&type=chunk) [Production Segments](index=21&type=section&id=Production%20Segments) The production segments focus on specialty alcohols, fuel-grade ethanol, and essential ingredients for various markets, operating at approximately 64% of maximum annual capacity - Production facilities are strategically located in the **Midwest (low-cost feedstock)** and **West Coast (proximity to customers)**[90](index=90&type=chunk) - Current operating capacity is approximately **64% of estimated maximum annual production capacity**[90](index=90&type=chunk) Production Facility Capacities | Production Facility | Location | Fuel-Grade Ethanol (gallons) | Specialty Alcohol (gallons) | | :------------------ | :--------- | :--------------------------- | :-------------------------- | | Pekin Campus | Pekin, IL | 110,000,000 | 140,000,000 | | Magic Valley | Burley, ID | 60,000,000 | — | | Columbia | Boardman, OR | 40,000,000 | — | | Stockton | Stockton, CA | 60,000,000 | — | [Marketing Segment](index=21&type=section&id=Marketing%20Segment) The marketing segment handles sales of company-produced alcohols and essential ingredients, as well as third-party fuel-grade ethanol, leveraging extensive customer relationships and managing logistics - The marketing segment sells **company-produced alcohols and essential ingredients, and third-party fuel-grade ethanol**[91](index=91&type=chunk) - Customers include **producers of cosmetics, sanitizers, distilled spirits, food products, and global trading firms**[92](index=92&type=chunk) - Essential ingredient feed products are marketed to **dairies and feedlots**, and corn oil to **poultry and biodiesel customers**[96](index=96&type=chunk) [Current Initiatives and Outlook](index=23&type=section&id=Current%20Initiatives%20and%20Outlook) The company achieved its fourth consecutive quarter of gross profit, driven by a new focus on specialty alcohols and essential ingredients, with ongoing capital improvement projects and strategic explorations - The first quarter marked the **fourth consecutive quarter of gross profit**, reflecting the benefits of the new business focus on specialty alcohols and essential ingredients[97](index=97&type=chunk) - Specialty alcohols are expected to contribute a minimum of **$60 million in gross profit** for the full year 2021[99](index=99&type=chunk) - Capital improvement projects totaling **$18.0 million are in process for 2021**, including increasing yeast facility capacity by **15%** and upgrading feed dryers at Pekin Campus[101](index=101&type=chunk) - The company is actively engaged in developing a **carbon capture and sequestration program** at its Pekin site and plans to **expand protein production** at dry-mill facilities[102](index=102&type=chunk) [Critical Accounting Policies](index=23&type=section&id=Critical%20Accounting%20Policies) The preparation of financial statements requires significant judgments and estimates, particularly in revenue recognition, impairment of long-lived assets, deferred taxes, and derivative instruments - Significant estimates are required for **revenue recognition, impairment of long-lived assets, valuation of allowance for deferred taxes, and derivative instruments**[104](index=104&type=chunk) [Results of Operations](index=25&type=section&id=Results%20of%20Operations) The company's results of operations for Q1 2021 show a significant improvement in gross profit and net income compared to Q1 2020, driven by higher specialty alcohol margins and reduced fuel-grade ethanol production Key Operating Metrics | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Percentage Change | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | :---------------- | | Fuel-grade ethanol production gallons sold (in millions) | 39.0 | 100.2 | (61.1)% | | Specialty alcohol production gallons sold (in millions) | 19.0 | 22.3 | (14.8)% | | Total gallons sold (in millions) | 112.0 | 184.9 | (39.4)% | | Total gallons produced (in millions) | 58.0 | 116.2 | (50.1)% | | Production capacity utilization | 52% | 77% | (32.5)% | | Average sales price per gallon | $1.94 | $1.51 | 28.5% | | Delivered cost of corn | $5.27 | $4.23 | 24.6% | | Total essential ingredients tons sold (in thousands) | 276.9 | 671.9 | (58.8)% | [Net Sales, Cost of Goods Sold and Gross Profit (Loss)](index=25&type=section&id=Net%20Sales,%20Cost%20of%20Goods%20Sold%20and%20Gross%20Profit%20(Loss)) Consolidated net sales decreased by 29.8% due to lower total gallons sold, but gross profit significantly improved from a loss of $12.9 million in Q1 2020 to a profit of $13.8 million in Q1 2021 Consolidated Sales and Profitability | Metric (in thousands, except percentages) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change in Dollars | Change in Percent | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | :---------------- | :---------------- | | Net sales | $218,734 | $311,404 | $(92,670) | (29.8)% | | Cost of goods sold | $204,897 | $324,294 | $(119,397) | (36.8)% | | Gross profit (loss) | $13,837 | $(12,890) | $26,727 | NM* | | Percentage of net sales | 6.3% | (4.1)% | | | - The decrease in net sales was primarily due to a decrease in total gallons sold, partially offset by a **28.5% increase in average sales price per gallon**[109](index=109&type=chunk)[110](index=110&type=chunk) - Gross profit improved due to **significantly higher margin sales of specialty alcohols** and a **substantial reduction in negative margin fuel-grade ethanol sales**[118](index=118&type=chunk) [Marketing Segment (Sales & Gross Profit)](index=26&type=section&id=Marketing%20Segment%20(Sales%20%26%20Gross%20Profit)) Net sales from the marketing segment decreased slightly by 1% to $57.4 million, primarily due to a 21% decrease in third-party fuel-grade ethanol gallons sold, yet gross profit improved - Marketing segment net sales decreased by **$0.5 million (1%) to $57.4 million** in Q1 2021[111](index=111&type=chunk) - Volume of third-party fuel-grade ethanol gallons sold decreased by **7.2 million gallons (21%)**[111](index=111&type=chunk) - Gross profit improved by **$2.0 million to $3.5 million**, primarily due to higher margins from third-party fuel-grade ethanol sales[119](index=119&type=chunk) [Pekin Campus Production Segment (Sales & Gross Profit)](index=26&type=section&id=Pekin%20Campus%20Production%20Segment%20(Sales%20%26%20Gross%20Profit)) The Pekin Campus production segment saw alcohol sales increase by 13% to $95.1 million, despite a 13% decrease in volume, due to a 30% increase in average sales price per gallon - Pekin Campus alcohol sales increased by **$11.0 million (13%) to $95.1 million** in Q1 2021[113](index=113&type=chunk) - Average sales price per gallon for Pekin Campus alcohol increased by **$0.43 (30%)**[113](index=113&type=chunk) - Gross profit improved by **$15.2 million to $13.2 million**, primarily due to increased margins from specialty alcohols[120](index=120&type=chunk) [Other Production Segment (Sales & Gross Profit)](index=27&type=section&id=Other%20Production%20Segment%20(Sales%20%26%20Gross%20Profit)) The Other production segment experienced a substantial decrease in alcohol sales by 84% to $16.0 million and essential ingredient sales by 83% to $5.1 million, primarily due to an 89% reduction in gallons sold - Other production segment alcohol sales decreased by **$83.3 million (84%) to $16.0 million** in Q1 2021[116](index=116&type=chunk) - Total volume of gallons sold decreased by **57.1 million gallons (89%)**[116](index=116&type=chunk) - Gross profit improved by **$9.5 million**, resulting in a gross loss of **$2.9 million**, primarily due to lower sales volumes at negative margins[121](index=121&type=chunk) [Selling, General and Administrative Expenses](index=28&type=section&id=Selling,%20General%20and%20Administrative%20Expenses) Selling, general and administrative (SG&A) expenses decreased by $3.2 million (31.3%) to $7.0 million for Q1 2021, primarily due to lower professional fees related to debt restructuring and asset sale efforts Selling, General and Administrative Expenses | Metric (in thousands, except percentages) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change in Dollars | Change in Percent | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | :---------------- | :---------------- | | Selling, general and administrative expenses | $7,014 | $10,212 | $(3,198) | (31.3)% | | Percentage of net sales | 3.2% | 3.3% | | | - The decrease in SG&A was primarily due to **higher professional fees incurred in the prior period for debt restructuring and asset sales**[123](index=123&type=chunk) - Anticipated SG&A expenses for 2021 are **$20.0 million to $25.0 million**[123](index=123&type=chunk) [Interest Expense, net](index=28&type=section&id=Interest%20Expense,%20net) Net interest expense decreased by $3.4 million (64.5%) to $1.9 million for Q1 2021, primarily due to lower average borrowings outstanding resulting from significant principal payments on debt Interest Expense, Net | Metric (in thousands, except percentages) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change in Dollars | Change in Percent | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | :---------------- | :---------------- | | Interest expense, net | $1,885 | $5,307 | $(3,422) | (64.5)% | | Percentage of net sales | 0.9% | 1.7% | | | - The decrease in interest expense was primarily due to **lower average borrowings outstanding**[125](index=125&type=chunk) [Net Income (Loss) Available to Common Stockholders](index=29&type=section&id=Net%20Income%20(Loss)%20Available%20to%20Common%20Stockholders) Net income available to common stockholders significantly increased to $4.4 million for Q1 2021, a $29.8 million improvement from a loss of $25.4 million in Q1 2020 Net Income (Loss) Available to Common Stockholders | Metric (in thousands, except percentages) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change in Dollars | Change in Percent | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | :---------------- | :---------------- | | Net income (loss) available to Common Stockholders | $4,366 | $(25,415) | $29,781 | NM | | Percentage of net sales | 2.0% | (8.2)% | | | - The increase in net income was primarily due to **higher gross profit and lower SG&A and interest expenses**[128](index=128&type=chunk) [Liquidity and Capital Resources](index=29&type=section&id=Liquidity%20and%20Capital%20Resources) The company's liquidity is supported by cash on hand, operating cash flow, and credit lines, with $44.1 million in cash and $4.7 million available under Kinergy's line of credit as of March 31, 2021 - As of March 31, 2021, the company had **$44.1 million in cash and cash equivalents** and **$4.7 million available under Kinergy's operating line of credit**[129](index=129&type=chunk) - Management believes it has **sufficient liquidity for the next twelve months**[129](index=129&type=chunk) [Quantitative Year-End Liquidity Status](index=29&type=section&id=Quantitative%20Year-End%20Liquidity%20Status) Key liquidity metrics show a decrease in cash and cash equivalents but an increase in current assets and working capital from December 31, 2020, to March 31, 2021 Liquidity Metrics | Metric (in thousands) | March 31, 2021 | December 31, 2020 | Change (%) | | :-------------------- | :------------- | :---------------- | :--------- | | Cash and cash equivalents | $44,146 | $47,667 | (7.4)% | | Current assets | $241,588 | $214,046 | 12.9% | | Current liabilities | $112,750 | $86,927 | 29.7% | | Working capital | $128,838 | $127,119 | 1.4% | | Working capital ratio | 2.14 | 2.46 | (13.0)% | [Restricted Net Assets](index=30&type=section&id=Restricted%20Net%20Assets) As of March 31, 2021, approximately $231.9 million of net assets at the company's subsidiaries were restricted and not available for transfer to Alto Ingredients, Inc. due to credit facility covenants - Approximately **$231.9 million of subsidiary net assets were restricted** from transfer to the parent company as of March 31, 2021[133](index=133&type=chunk) [Changes in Working Capital and Cash Flows](index=30&type=section&id=Changes%20in%20Working%20Capital%20and%20Cash%20Flows) Working capital increased by $1.7 million, driven by higher current assets partially offset by increased current liabilities, while cash declined due to operating and investing activities - Working capital increased to **$128.8 million from $127.1 million**, primarily due to increased accounts receivable and higher inventory values[133](index=133&type=chunk) - Cash and cash equivalents declined by **$3.5 million**, with **$4.1 million used in operating activities** and **$4.4 million in investing activities**, partially offset by **$5.0 million from financing activities**[134](index=134&type=chunk)[135](index=135&type=chunk) - Cash used in operating activities was **$4.1 million in Q1 2021**, a decrease from **$26.9 million provided in Q1 2020**, mainly due to higher accounts receivable and inventory balances, and losses on derivative instruments[134](index=134&type=chunk) [Kinergy's Operating Line of Credit](index=31&type=section&id=Kinergy's%20Operating%20Line%20of%20Credit) Kinergy maintains a $100.0 million operating line of credit maturing in August 2022, with interest accruing at LIBOR plus 1.50% to 2.00%, and is in compliance with financial covenants - Kinergy has a **$100.0 million operating line of credit** maturing on August 2, 2022[137](index=137&type=chunk) - Interest accrues at **LIBOR plus 1.50% to 2.00%**[137](index=137&type=chunk) - Kinergy and Alto Nutrients must maintain a **fixed-charge coverage ratio of at least 2.0** when borrowing availability falls below a specified level[138](index=138&type=chunk) Fixed-Charge Coverage Ratio | Fixed-Charge Coverage Ratio | Q1 2021 | Q1 2020 | FY 2020 | FY 2019 | | :-------------------------- | :------ | :------ | :------ | :------ | | Requirement | 2.00 | 2.00 | 2.00 | 2.00 | | Actual | 7.71 | 4.05 | 5.35 | 5.71 | [Alto Pekin Credit Facilities](index=31&type=section&id=Alto%20Pekin%20Credit%20Facilities) Alto Pekin has a $64.0 million term loan and a $32.0 million revolving loan, both secured by its assets and maturing in 2021 and 2022, respectively, subject to specific financial covenants - Alto Pekin has a **$64.0 million term loan** (matures August 20, 2021) and a **$32.0 million revolving loan** (matures February 1, 2022)[141](index=141&type=chunk) - Interest accrues at **30-day LIBOR plus 5.00%**[143](index=143&type=chunk) - Alto Pekin and ICP are required to maintain **working capital of not less than 50% of combined outstanding revolving lines of credit ($27.0 million at March 31, 2021)** and an **annual debt service coverage ratio of not less than 1.25 to 1.00**[143](index=143&type=chunk) [ICP Credit Facilities](index=32&type=section&id=ICP%20Credit%20Facilities) ICP has a $24.0 million term loan and an $18.0 million revolving loan, secured by its assets and maturing in 2021 and 2022, respectively, subject to collective working capital and debt service coverage ratio covenants - ICP has a **$24.0 million term loan** (matures September 20, 2021) and an **$18.0 million revolving loan** (matures September 1, 2022)[145](index=145&type=chunk) - Interest accrues at **30-day LIBOR plus 3.75%**[145](index=145&type=chunk) - ICP and Alto Pekin are required to maintain **working capital of not less than 50% of combined outstanding revolving lines of credit ($27.0 million at March 31, 2021)** and an **annual debt service coverage ratio of not less than 1.50 to 1.00**[146](index=146&type=chunk) [Senior Secured Notes](index=33&type=section&id=Senior%20Secured%20Notes) The company issued $68.9 million in aggregate principal amount of senior secured notes, maturing on December 15, 2021, with an interest rate of 15% per annum, with a $19.3 million principal payment made in May 2021 - The company sold **$68.9 million in aggregate principal amount of senior secured notes**[149](index=149&type=chunk) - The notes mature on **December 15, 2021**, and accrue interest at **15% per annum**[150](index=150&type=chunk) - On May 14, 2021, **$19.3 million in principal was repaid** on these notes from the Madera facility sale proceeds[152](index=152&type=chunk) [CARES Act Loans](index=34&type=section&id=CARES%20Act%20Loans) Alto Ingredients, Inc. and Alto Pekin received $9.9 million in total loan proceeds under the CARES Act's Paycheck Protection Program, maturing in two years with 1.00% interest, and have applied for forgiveness - Alto Ingredients, Inc. received **$6.0 million** and Alto Pekin received **$3.9 million in CARES Act loan proceeds**[154](index=154&type=chunk) - The loans mature in **two years** and bear interest at **1.00% per annum**[154](index=154&type=chunk) - The company has **applied for loan forgiveness**[154](index=154&type=chunk) [Effects of Inflation](index=34&type=section&id=Effects%20of%20Inflation) The impact of inflation on the company's financial condition or results of operations was not significant for the three months ended March 31, 2021, and 2020 - The impact of inflation was **not significant** for the three months ended March 31, 2021 and 2020[155](index=155&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=34&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK.) This section is marked as 'Not applicable,' indicating that the company does not have material quantitative and qualitative disclosures about market risk beyond what is already discussed [ITEM 4. CONTROLS AND PROCEDURES](index=34&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES.) Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2021, with no material changes in internal control [Evaluation of Disclosure Controls and Procedures](index=34&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) The CEO and CFO concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2021 - **Disclosure controls and procedures were evaluated and deemed effective** at a reasonable assurance level as of March 31, 2021[156](index=156&type=chunk) [Changes in Internal Control over Financial Reporting](index=34&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) There were no material changes in the company's internal control over financial reporting during the most recently completed fiscal quarter - **No material changes in internal control over financial reporting** occurred during the quarter[157](index=157&type=chunk) [Inherent Limitations on the Effectiveness of Controls](index=34&type=section&id=Inherent%20Limitations%20on%20the%20Effectiveness%20of%20Controls) Management acknowledges that control systems provide only reasonable, not absolute, assurance against errors and fraud due to inherent limitations such as human judgment, resource constraints, and the possibility of circumvention - Control systems provide only **reasonable assurance** and may not prevent or detect all errors and fraud due to inherent limitations[157](index=157&type=chunk) [PART II - OTHER INFORMATION](index=35&type=section&id=PART%20II%20-%20OTHER%20INFORMATION) This section covers legal proceedings, risk factors, equity security sales, defaults, mine safety, other information, and exhibits [ITEM 1. LEGAL PROCEEDINGS](index=35&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS.) The company is involved in various legal proceedings in the ordinary course of business, but management believes these matters will not have a material adverse effect on its financial position - The company is subject to **various claims and litigation in the ordinary course of business**[159](index=159&type=chunk) - Management does not expect pending legal proceedings to **materially impact financial condition or results of operations**[159](index=159&type=chunk) [ITEM 1A. RISK FACTORS](index=35&type=section&id=ITEM%201A.%20RISK%20FACTORS.) This section outlines significant risks that could materially affect the company's business, financial condition, results of operations, and liquidity, categorized into business, financial, legal, and general risks [Risks Related to our Business](index=35&type=section&id=Risks%20Related%20to%20our%20Business) Business risks include the adverse effects of the coronavirus pandemic, volatility in commodity prices, potential oversupply of products, disruptions in production or distribution, and intense competition - The coronavirus pandemic may **materially and adversely affect business, results of operations, and liquidity** due to reduced demand for transportation fuels and potential decline in specialty alcohol demand post-pandemic[161](index=161&type=chunk)[162](index=162&type=chunk)[166](index=166&type=chunk) - Results are highly impacted by **volatility in commodity prices (corn, natural gas, alcohols, essential ingredients)**, which can cause substantial fluctuations in operations[167](index=167&type=chunk)[168](index=168&type=chunk) - **Increased alcohol or essential ingredient production or higher inventory levels could lead to price declines**[171](index=171&type=chunk)[173](index=173&type=chunk) - **Disruptions in production or distribution** (e.g., rail, raw material supply, equipment failures, natural disasters) could harm business[175](index=175&type=chunk)[176](index=176&type=chunk) - The industries are **highly competitive**, with many competitors having greater production and financial resources[180](index=180&type=chunk)[181](index=181&type=chunk) [Risks Related to our Finances](index=39&type=section&id=Risks%20Related%20to%20our%20Finances) Financial risks include a history of significant losses and negative operating cash flow, substantial indebtedness that could limit flexibility, and potential limitations on net operating loss carryforwards - The company incurred consolidated net losses of **$17.3 million in 2020** and **$101.3 million in 2019**, and **negative operating cash flow of $4.1 million in Q1 2021**[186](index=186&type=chunk) - **Significant indebtedness** exposes the company to risks such as difficulty in debt repayment, limited strategic flexibility, and substantial cash flow allocation to debt service[187](index=187&type=chunk) - The ability to utilize **net operating loss carryforwards and other tax attributes may be limited** by federal and state income tax laws, potentially increasing future tax obligations[190](index=190&type=chunk) [Risks Related to Legal and Regulatory Matters](index=40&type=section&id=Risks%20Related%20to%20Legal%20and%20Regulatory%20Matters) Legal and regulatory risks involve uncertainty in future demand for fuel-grade ethanol due to changes in federal mandates and public perception, alongside extensive environmental, health, and safety laws - Future demand for fuel-grade ethanol is uncertain and may be negatively affected by **changes to federal mandates (e.g., RFS program), public perception, and overall consumer demand for transportation fuel**[191](index=191&type=chunk)[196](index=196&type=chunk)[197](index=197&type=chunk)[198](index=198&type=chunk) - The company is subject to various **federal, state, and local environmental, health, and safety laws and regulations**, which may require expensive pollution control equipment, operational changes, or result in substantial fines and liabilities[199](index=199&type=chunk)[200](index=200&type=chunk)[202](index=202&type=chunk) [Risks Related to Ownership of our Common Stock](index=42&type=section&id=Risks%20Related%20to%20Ownership%20of%20our%20Common%20Stock) Risks related to common stock ownership include potential adverse effects on market price from future sales, high stock price volatility, and the company's intention not to pay cash dividends in the near future - **Future sales of substantial amounts of common stock**, including shares from outstanding warrants, could adversely affect the market price and ability to raise capital[204](index=204&type=chunk) - The company's stock price is **highly volatile** and may fluctuate significantly due to various factors, potentially leading to substantial losses for investors and litigation[205](index=205&type=chunk)[207](index=207&type=chunk) - The company does not intend to pay **cash dividends on common stock in the near future**, requiring stockholders to rely on stock appreciation for returns[208](index=208&type=chunk)[209](index=209&type=chunk) - Bylaws contain an **exclusive forum provision (Delaware Court of Chancery)** for certain disputes, which could limit stockholders' ability to choose a favorable judicial forum[210](index=210&type=chunk)[213](index=213&type=chunk) [General Risk Factors](index=44&type=section&id=General%20Risk%20Factors) General risks include potential business disruption, revenue loss, increased costs, and reputational harm from cyberattacks and security vulnerabilities, alongside non-compliance with data privacy laws - **Cyberattacks and security vulnerabilities** could lead to business disruption, reduced revenue, increased costs, liability claims, or harm to reputation[214](index=214&type=chunk)[215](index=215&type=chunk)[216](index=216&type=chunk) - **Failure to comply with data privacy laws (e.g., CCPA) or data security breaches** could result in significant fines, loss of trade secrets, and harm to business relationships[217](index=217&type=chunk)[218](index=218&type=chunk) [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=45&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS.) This section states that there were no unregistered sales of equity securities or purchases of equity securities by the issuer, and details the company's dividend policy - **No unregistered sales of equity securities or purchases of equity securities by the issuer** occurred[219](index=219&type=chunk) - The company accrued **$0.3 million in Series B Preferred Stock dividends** for Q1 2021 and 2020 but did not pay cash dividends to preserve liquidity[219](index=219&type=chunk) - The company does not currently intend to pay **cash dividends on its common stock in the foreseeable future**[220](index=220&type=chunk) [ITEM 3. DEFAULTS UPON SENIOR SECURITIES](index=45&type=section&id=ITEM%203.%20DEFAULTS%20UPON%20SENIOR%20SECURITIES.) This item is marked as 'Not applicable,' indicating no defaults upon senior securities [ITEM 4. MINE SAFETY DISCLOSURES](index=45&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES.) This item is marked as 'Not applicable,' indicating no mine safety disclosures [ITEM 5. OTHER INFORMATION](index=45&type=section&id=ITEM%205.%20OTHER%20INFORMATION.) This item is marked as 'Not applicable,' indicating no other information to disclose [ITEM 6. EXHIBITS](index=46&type=section&id=ITEM%206.%20EXHIBITS.) This section lists all exhibits filed with the Form 10-Q, including organizational documents, certifications, and XBRL-related documents - Exhibits include **Certificate of Incorporation, Bylaws, Certifications Required by Rule 13a-14(a), and XBRL documents**[222](index=222&type=chunk) [SIGNATURES](index=47&type=section&id=SIGNATURES) The report is duly signed on behalf of Alto Ingredients, Inc. by Bryon T. McGregor, Chief Financial Officer, on May 17, 2021 - The report was signed by **Bryon T. McGregor, Chief Financial Officer**, on May 17, 2021[224](index=224&type=chunk)

Alto Ingredients, Inc. (NASDAQ:ALTO) Q1 2021 Earnings Conference Call May 12, 2021 5:00 PM ET Company Participants Moriah Shilton - LHA Investor Relations Mike Kandris - Chief Executive Officer Bryon McGregor - Chief Financial Officer Conference Call Participants Aaron Spychalla - Craig-Hallum Amit Dayal - H. C. Wainwright Constantine Lednev - Guggenheim Partners Operator Ladies and gentlemen, thank you for standing by. And welcome to the Alto Ingredients Incorporated First Quarter 2021 Financial Results. A ...

PART I [Item 1. Business](index=5&type=section&id=Item%201.%20Business) Alto Ingredients is a leading producer of specialty alcohols and essential ingredients, strategically shifting from fuel-grade ethanol to higher-margin products - Alto Ingredients is the **largest producer of specialty alcohols** in the United States based on annualized volumes[7](index=7&type=chunk) - The company operates seven alcohol production facilities with an annual alcohol production capacity of **450 million gallons**[7](index=7&type=chunk) - In 2020, the company marketed over **500 million gallons** of alcohols and nearly **1.5 million tons** of essential ingredients[7](index=7&type=chunk) - Business segments focus on Health, Home & Beauty; Food & Beverage; Essential Ingredients; and Renewable Fuels markets[7](index=7&type=chunk)[9](index=9&type=chunk) - Key business strategies include focusing on customer relationships, expanding product offerings (e.g., ISO 9001, ICH Q7, EXCiPACT certifications), implementing new equipment/technologies, selling or repurposing underperforming assets, and pursuing strategic opportunities[16](index=16&type=chunk)[17](index=17&type=chunk)[18](index=18&type=chunk)[19](index=19&type=chunk)[20](index=20&type=chunk) - Competitive strengths include extensive customer/supplier relationships, stringent quality control (especially at Pekin Campus), significant barriers to entry, experienced management, and strategic location of Midwest facilities offering logistical advantages[20](index=20&type=chunk)[21](index=21&type=chunk)[23](index=23&type=chunk)[24](index=24&type=chunk) Production Facility Capacity (Millions of Gallons) | Production Facility | Location | Fuel-Grade Ethanol | Specialty Alcohol | | :------------------ | :------- | :----------------- | :---------------- | | Pekin Campus | Pekin, IL | 110,000,000 | 140,000,000 | | Magic Valley | Burley, ID | 60,000,000 | — | | Columbia | Boardman, OR | 40,000,000 | — | | Stockton | Stockton, CA | 60,000,000 | — | | Madera | Madera, CA | 40,000,000 | — | [Item 1A. Risk Factors](index=17&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from commodity price volatility, pandemic impacts, potential oversupply, production disruptions, and financial and regulatory challenges - The coronavirus pandemic has significantly reduced demand and prices for transportation fuels, including fuel-grade ethanol, while temporarily increasing demand for specialty alcohols in sanitizers[76](index=76&type=chunk)[79](index=79&type=chunk) - Profitability is highly dependent on managing volatile commodity prices for corn, natural gas, and product sales, with sustained narrow spreads potentially forcing production suspension[81](index=81&type=chunk)[83](index=83&type=chunk)[85](index=85&type=chunk) - Increased production or higher inventory levels of alcohols and essential ingredients, especially fuel-grade ethanol, can lead to price declines and adverse effects on financial results[88](index=88&type=chunk) - Disruptions in production or distribution (e.g., raw material supply, energy, transportation, equipment failures, natural disasters) can harm business operations and financial condition[91](index=91&type=chunk)[92](index=92&type=chunk) - The company has incurred significant net losses (**$17.3 million** in 2020, **$101.3 million** in 2019) and negative operating cash flow in the past, which may continue and impede business expansion[103](index=103&type=chunk) - Significant indebtedness exposes the company to risks, including difficulty in debt repayment, limited flexibility for strategic opportunities, and substantial cash flow allocation to debt service[104](index=104&type=chunk)[105](index=105&type=chunk) - Future demand for fuel-grade ethanol is uncertain due to potential changes in federal mandates (RFS), negative public perception, and overall consumer demand for transportation fuel[108](index=108&type=chunk)[109](index=109&type=chunk)[110](index=110&type=chunk) - The company's stock price is highly volatile, influenced by product prices, input costs, customer orders, the pandemic, competitive pressures, and regulatory developments, potentially leading to substantial investor losses and litigation[122](index=122&type=chunk)[124](index=124&type=chunk) [Item 1B. Unresolved Staff Comments](index=27&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company has not received any unresolved written comments from the SEC staff regarding its periodic or current reports - No unresolved staff comments from the SEC as of the 2020 fiscal year-end[137](index=137&type=chunk) [Item 2. Properties](index=27&type=section&id=Item%202.%20Properties) The company' owns and leases various properties for its corporate headquarters and production facilities across Midwest and Western states - Corporate headquarters and three production facilities are in Pekin, Illinois (**145 acres**, owned)[138](index=138&type=chunk) - Leases office space in Sacramento, California (**10,000 sq ft**, expiring 2029)[138](index=138&type=chunk) - Owns land for plants in Madera, California (**137 acres**) and Burley, Idaho (**25 acres**)[138](index=138&type=chunk) - Leases land for plants in Boardman, Oregon (**25 acres**, expiring 2026) and Stockton, California (**30 acres**, expiring 2022)[138](index=138&type=chunk) - Owns an idled ethanol production facility in Canton, Illinois (**110 acres**)[138](index=138&type=chunk) [Item 3. Legal Proceedings](index=27&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in ordinary course legal proceedings, which management believes will not materially affect its financial position - Subject to ordinary course legal proceedings, claims, and litigation[139](index=139&type=chunk) - Management believes current legal matters will not materially affect financial position, results of operations, or cash flows[139](index=139&type=chunk) [Item 4. Mine Safety Disclosures](index=27&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to Alto Ingredients, Inc - Not applicable[140](index=140&type=chunk) PART II [Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=28&type=section&id=Item%205.%20Market%20For%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Alto Ingredients' common stock trades on Nasdaq, with no cash dividends paid on common stock, and preferred stock dividends accrued but unpaid to preserve liquidity - Common stock trades on The Nasdaq Capital Market under symbol '**ALTO**' (changed from 'PEIX' on Feb 1, 2021)[142](index=142&type=chunk) Stock Information as of March 25, 2021 | Metric | Value | | :----------------------------------- | :------------ | | Common Stock Outstanding | 73,167,785 | | Non-Voting Common Stock Outstanding | 896 | | Common Stock Holders of Record | ~290 | | Non-Voting Common Stock Holders | 1 | | Closing Sale Price (Common Stock) | $5.36 per share | - The company has never paid cash dividends on common stock and does not intend to in the foreseeable future, retaining earnings for business development[126](index=126&type=chunk)[142](index=142&type=chunk) - Dividends on Series B Preferred Stock (**7% per annum**) were accrued but not paid in cash for Q4 2019 and all of 2020 to preserve liquidity[143](index=143&type=chunk) [Item 6. Selected Financial Data](index=28&type=section&id=Item%206.%20Selected%20Financial%20Data) This item is not applicable to Alto Ingredients, Inc - Not applicable[144](index=144&type=chunk) [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=29&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) The company transformed in 2020, shifting to specialty alcohols, improving gross profit despite lower sales, and pursuing growth initiatives while managing commodity and debt risks - In 2020, the company reduced fuel-grade ethanol production capacity by **55%** by idling unprofitable facilities and selling underperforming assets[157](index=157&type=chunk) - Specialty alcohol production capacity expanded from **85 million gallons** annually to **140 million gallons** annually by early 2021, now representing **31%** of total annual production capacity[157](index=157&type=chunk)[159](index=159&type=chunk) - All operating facilities are running at break-even or better on an EBITDA basis[159](index=159&type=chunk) - Strong demand for hand sanitizer contributed to 2020 results, but prices tempered in Q4 2020 and Q1 2021 due to abundant supplies; the company is diversifying sales away from sanitizers, with over **90%** of contracted volumes for food, beverage, home, and beauty products[161](index=161&type=chunk) - Contracted approximately **65%** of **110 million gallons** of specialty alcohol production capacity for 2021, expecting at least **$60.0 million** in gross profit from these sales[162](index=162&type=chunk)[163](index=163&type=chunk) - Selling Stockton and Madera, California fuel-grade ethanol production facilities to strengthen the balance sheet and improve profitability by eliminating fixed carrying costs[166](index=166&type=chunk) - Investing **$5.5 million** to increase yeast facility's annual production capacity by **~15%** by Q3 2021, with an expected payback in less than two years (over **$3.0 million** annually in EBITDA)[168](index=168&type=chunk) - Earmarked an additional **$14.0 million** for projects to expand revenue, increase efficiencies, or improve plant reliability, including a **$3.5 million** feed dryer upgrade at Pekin Campus expected to add **$1.4 million** in annual EBITDA[169](index=169&type=chunk) - Actively engaged in discussions to develop a carbon capture and sequestration program at its Pekin site[170](index=170&type=chunk) Consolidated Financial Performance Summary (2020 vs. 2019) | Metric | 2020 ($ thousands) | 2019 ($ thousands) | Dollar Change | Percentage Change | | :-------------------------------------- | :----------------- | :----------------- | :------------ | :------------------ | | Net sales | $897,023 | $1,424,881 | $(527,858) | (37.0)% | | Cost of goods sold | $844,164 | $1,434,819 | $590,655 | 41.2% | | Gross profit (loss) | $52,859 | $(9,938) | $62,797 | NM | | Selling, general and administrative expenses | $(31,980) | $(35,453) | $3,473 | 9.8% | | Asset impairments | $(24,356) | $(29,292) | $4,936 | 16.9% | | Loss before benefit for income taxes | $(17,299) | $(101,302) | $84,003 | 82.9% | | Consolidated net loss | $(17,282) | $(101,282) | $84,000 | 82.9% | | Net loss attributed to Alto Ingredients, Inc. | $(15,116) | $(88,949) | $73,833 | 83.0% | | Loss available to common stockholders | $(16,384) | $(90,214) | $73,830 | 81.8% | Key Performance Metrics (2020 vs. 2019) | Metric | 2020 | 2019 | Percentage Change | | :-------------------------------------- | :-------- | :-------- | :---------------- | | Production gallons sold (in millions) | 271.9 | 491.0 | (44.6)% | | Third-party gallons sold (in millions) | 264.4 | 328.4 | (19.5)% | | Total gallons sold (in millions) | 536.3 | 819.4 | (34.5)% | | Total gallons produced (in millions) | 262.1 | 494.6 | (47.0)% | | Production capacity utilization | 53% | 82% | (35.4)% | | Average sales price per gallon | $1.63 | $1.61 | 1.2% | | Delivered cost of corn | $3.84 | $4.26 | (9.9)% | | Total co-product tons sold (in thousands) | 1,447.5 | 2,821.7 | (48.7)% | | Co-product revenues as % of delivered cost of corn | 44.1% | 35.1% | 25.6% | | Average CBOT ethanol price per gallon | $1.25 | $1.39 | (10.1)% | | Average CBOT corn price per bushel | $3.63 | $3.83 | (5.2)% | [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=48&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This item is not applicable to Alto Ingredients, Inc - Not applicable[257](index=257&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=48&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section refers to the consolidated financial statements and supplementary data, beginning on page F-1 - Financial statements and supplementary data are referenced starting on page F-1[257](index=257&type=chunk) [Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=48&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) There have been no changes in or disagreements with accountants on accounting and financial disclosure - No changes in or disagreements with accountants[258](index=258&type=chunk) [Item 9A. Controls and Procedures](index=48&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020, acknowledging inherent limitations - Disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2020[259](index=259&type=chunk) - Management concluded that internal control over financial reporting was effective as of December 31, 2020, based on the COSO framework[263](index=263&type=chunk) - Control systems, due to inherent limitations and resource constraints, provide only reasonable, not absolute, assurance against errors and fraud[264](index=264&type=chunk)[266](index=266&type=chunk) - No material changes in internal control over financial reporting occurred during the most recently completed fiscal quarter[267](index=267&type=chunk) [Item 9B. Other Information](index=50&type=section&id=Item%209B.%20Other%20Information) There is no other information to report under this item - No other information to report[267](index=267&type=chunk) PART III [Item 10. Directors, Executive Officers and Corporate Governance](index=51&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement - Information incorporated by reference from the 2021 Proxy Statement[269](index=269&type=chunk) [Item 11. Executive Compensation](index=51&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the Proxy Statement - Information incorporated by reference from the Proxy Statement[270](index=270&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=51&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information on security ownership and equity compensation plans is incorporated by reference from the Proxy Statement - Information incorporated by reference from the Proxy Statement[271](index=271&type=chunk) [Item 13. Certain Relationships and Related Transactions, and Director Independence](index=51&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information on certain relationships, related transactions, and director independence is incorporated by reference from the Proxy Statement - Information incorporated by reference from the Proxy Statement[272](index=272&type=chunk) [Item 14. Principal Accounting Fees and Services](index=51&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information regarding principal accounting fees and services is incorporated by reference from the Proxy Statement - Information incorporated by reference from the Proxy Statement[273](index=273&type=chunk) PART IV [Item 15. Exhibits, Financial Statement Schedules](index=52&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists the financial statements and exhibits filed as part of the 10-K report, with no financial statement schedules included - Financial statements are listed following the Index to Consolidated Financial Statements on page F-1[275](index=275&type=chunk) - No financial statement schedules are included[275](index=275&type=chunk) - Exhibits are referenced in the Index to Exhibits[275](index=275&type=chunk) [Item 16. Form 10-K Summary](index=52&type=section&id=Item%2016.%20Form%2010-K%20Summary) No Form 10-K Summary is provided in this report - No Form 10-K Summary is included[275](index=275&type=chunk) Financial Statements [INDEX TO CONSOLIDATED FINANCIAL STATEMENTS](index=53&type=section&id=INDEX%20TO%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) This section provides an index to the consolidated financial statements, including the auditor's report, balance sheets, statements of operations, and cash flows - Index lists key financial statements and notes[277](index=277&type=chunk) [REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM](index=54&type=section&id=REPORT%20OF%20INDEPENDENT%20REGISTERED%20PUBLIC%20ACCOUNTING%20FIRM) RSM US LLP issued an unqualified opinion on the consolidated financial statements for 2020 and 2019, with long-lived asset impairment as a critical audit matter - RSM US LLP issued an **unqualified opinion** on the consolidated financial statements for 2020 and 2019[279](index=279&type=chunk) - The financial statements present fairly the financial position and results of operations in conformity with GAAP[279](index=279&type=chunk) - A critical audit matter was the assessment of long-lived asset impairment, due to significant auditor judgment required in evaluating assumptions like estimated residual value[284](index=284&type=chunk) [CONSOLIDATED BALANCE SHEETS](index=56&type=section&id=CONSOLIDATED%20BALANCE%20SHEETS) Total assets decreased to **$476.8 million** in 2020, while total liabilities significantly reduced to **$180.6 million**, and stockholders' equity increased to **$296.2 million** Consolidated Balance Sheet Highlights (in thousands) | Item | December 31, 2020 | December 31, 2019 | Change ($) | Change (%) | | :------------------------ | :---------------- | :---------------- | :--------- | :--------- | | Cash and cash equivalents | $47,667 | $18,997 | $28,670 | 150.9% | | Total current assets | $214,046 | $232,064 | $(18,018) | (7.8)% | | Property and equipment, net | $229,486 | $332,526 | $(103,040) | (31.0)% | | Total Assets | $476,818 | $612,495 | $(135,677) | (22.1)% | | Total current liabilities | $86,927 | $160,398 | $(73,471) | (45.8)% | | Long-term debt, net | $71,807 | $180,795 | $(108,988) | (60.3)% | | Total Liabilities | $180,583 | $385,450 | $(204,867) | (53.1)% | | Total stockholders' equity | $296,235 | $227,045 | $69,190 | 30.5% | [CONSOLIDATED STATEMENTS OF OPERATIONS](index=58&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20OPERATIONS) Consolidated net loss significantly improved by **82.9%** to **$17.3 million** in 2020, driven by a shift to gross profit despite a **37.0%** decrease in net sales Consolidated Statements of Operations Highlights (in thousands) | Item | 2020 | 2019 | Dollar Change | Percentage Change | | :------------------------------------ | :-------- | :---------- | :------------ | :------------------ | | Net sales | $897,023 | $1,424,881 | $(527,858) | (37.0)% | | Cost of goods sold | $844,164 | $1,434,819 | $(590,655) | (41.2)% | | Gross profit (loss) | $52,859 | $(9,938) | $62,797 | NM | | Selling, general and administrative expenses | $(31,980) | $(35,453) | $3,473 | 9.8% | | Income (loss) from operations | $9,853 | $(74,683) | $84,536 | NM | | Loss before benefit for income taxes | $(17,299) | $(101,302) | $84,003 | 82.9% | | Consolidated net loss | $(17,282) | $(101,282) | $84,000 | 82.9% | | Net loss attributed to Alto Ingredients, Inc. | $(15,116) | $(88,949) | $73,833 | 83.0% | | Loss available to common stockholders | $(16,384) | $(90,214) | $73,830 | 81.8% | | Loss per share, basic and diluted | $(0.28) | $(1.90) | $1.62 | 85.3% | | Weighted-average shares outstanding | 58,609 | 47,384 | 11,225 | 23.7% | [CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS](index=59&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20COMPREHENSIVE%20LOSS) Total comprehensive loss significantly improved to **$18.8 million** in 2020, primarily due to reduced net loss, partially offset by pension plan adjustments Consolidated Statements of Comprehensive Loss (in thousands) | Item | 2020 | 2019 | | :---------------------------------------------------------------- | :---------- | :----------- | | Consolidated net loss | $(17,282) | $(101,282) | | Other comprehensive income (expense) – net gain (loss) arising during the period on defined benefit pension plans | $(1,508) | $89 | | Total comprehensive loss | $(18,790) | $(101,193) | | Comprehensive loss attributed to Alto Ingredients, Inc. | $(16,624) | $(88,860) | [CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY](index=60&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20STOCKHOLDERS%27%20EQUITY) Total stockholders' equity increased to **$296.2 million** in 2020, driven by common stock issuances and warrant exercises, and a reduced net loss Consolidated Statements of Stockholders' Equity Highlights (in thousands) | Item | December 31, 2020 | December 31, 2019 | | :------------------------------------ | :---------------- | :---------------- | | Preferred Stock Amount | $1 | $1 | | Common and Non-Voting Stock Amount | $72 | $56 | | Additional Paid-In Capital | $1,036,638 | $942,307 | | Accumulated Other Comprehensive Loss | $(3,878) | $(2,370) | | Accumulated Deficit | $(736,598) | $(720,214) | | Total Alto Ingredients, Inc. Stockholders' Equity | $296,235 | $219,780 | | Noncontrolling Interests | $0 | $7,265 | | Total Stockholders' Equity | $296,235 | $227,045 | - Key changes in 2020 include: Common stock issuances from warrant exercises and ATM program (**$70.5 million** and **$5.3 million** respectively), stock-based compensation expense (**$2.1 million**), and a reduction in noncontrolling interests due to asset sales[301](index=301&type=chunk) [CONSOLIDATED STATEMENTS OF CASH FLOWS](index=61&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20CASH%20FLOWS) Operating activities generated **$71.8 million** cash in 2020, a significant improvement, with investing activities providing **$23.3 million** and financing activities using **$66.4 million** Consolidated Statements of Cash Flows Highlights (in thousands) | Item | 2020 | 2019 | | :-------------------------------------------- | :-------- | :---------- | | Net cash provided by (used in) operating activities | $71,776 | $(23,363) | | Net cash provided by (used in) investing activities | $23,316 | $(3,281) | | Net cash provided by (used in) financing activities | $(66,422) | $19,014 | | Net increase (decrease) in cash and cash equivalents | $28,670 | $(7,630) | | Cash and cash equivalents at end of period | $47,667 | $18,997 | - Operating cash flow improved by **$95.1 million** YoY, driven by reduced net loss and favorable changes in accounts receivable and inventory[211](index=211&type=chunk)[212](index=212&type=chunk) - Investing cash flow was positive due to **$19.9 million** from the sale of Nebraska facilities and **$10.0 million** from Magic Valley asset sale, partially offset by **$6.6 million** in capital expenditures[213](index=213&type=chunk) - Financing cash flow used **$66.4 million**, primarily for **$157.6 million** in debt principal payments, partially offset by **$75.8 million** from common stock/warrant issuances and **$9.9 million** from CARES Act loans[204](index=204&type=chunk)[214](index=214&type=chunk) [NOTES TO CONSOLIDATED FINANCIAL STATEMENTS](index=63&type=section&id=NOTES%20TO%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) The Notes provide detailed information on the company's organization, accounting policies, asset sales, segment reporting, debt, equity, and other financial disclosures [1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES](index=63&type=section&id=1.%20ORGANIZATION%20AND%20SIGNIFICANT%20ACCOUNTING%20POLICIES) Alto Ingredients, Inc., a Delaware corporation, focuses on specialty alcohols and essential ingredients, with improved liquidity in 2020 due to asset sales and equity raises - Alto Ingredients, Inc. (formerly Pacific Ethanol, Inc.) is a Delaware corporation, a leading producer and marketer of specialty alcohols and essential ingredients, also producing fuel-grade ethanol[307](index=307&type=chunk)[309](index=309&type=chunk) - The company's production capacity is **450 million gallons** per year, marketing over **500 million gallons** of alcohols and nearly **1.5 million tons** of essential ingredients annually[310](index=310&type=chunk) - Focuses on four key markets: Health, Home & Beauty; Food & Beverage; Essential Ingredients; and Renewable Fuels[311](index=311&type=chunk) - Operating at approximately **64%** of annual production capacity as of December 31, 2020, with Magic Valley, Stockton, and Madera facilities idled[311](index=311&type=chunk) - Liquidity improved significantly in 2020, with **$47.7 million** cash and **$16.0 million** available under Kinergy's credit line, driven by **$71.8 million** cash from operations, **$19.9 million** from Pacific Aurora sale, **$10.0 million** from Magic Valley asset sale, and **$75.8 million** from equity/warrant issuances, enabling **$157.6 million** in debt payments[314](index=314&type=chunk)[315](index=315&type=chunk) - Segments include marketing and distribution, Pekin Campus production, and Other production[316](index=316&type=chunk) - Revenue recognition follows ASC 606, recognizing revenue when customers obtain control of products, typically upon delivery[333](index=333&type=chunk)[336](index=336&type=chunk) - Assesses impairment of long-lived assets by comparing forecasted undiscounted cash flows to carrying value, then fair value if impairment is indicated[341](index=341&type=chunk) - Uses derivative instruments for commodity risk management (corn, natural gas, ethanol sales), with changes in fair value recognized in net income for non-designated hedges[395](index=395&type=chunk) [2. ASSET SALES AND HELD-FOR-SALE CLASSIFICATION](index=71&type=section&id=2.%20ASSET%20SALES%20AND%20HELD-FOR-SALE%20CLASSIFICATION) In 2020, the company sold Pacific Aurora and Magic Valley assets, and classified Madera and Stockton facilities as held-for-sale, incurring a **$22.3 million** impairment charge - Sold **73.93%** ownership in Pacific Aurora on April 15, 2020, for **$52.8 million** consideration (including **$19.9 million** cash and **$16.5 million** in promissory notes), resulting in a net loss on sale of approximately **$1.4 million**[358](index=358&type=chunk) - Pacific Aurora contributed **$39.6 million** in net sales and **$8.4 million** in pre-tax loss for 2020 (until sale date)[360](index=360&type=chunk) - Sold **134 acres**, rail loop, and grain handling assets at Magic Valley facility for **$10.0 million** cash on November 30, 2020, recognizing a **$3.2 million** gain[361](index=361&type=chunk) - Classified Madera and Stockton fuel-grade ethanol production facilities as held-for-sale at December 31, 2020, resulting in an aggregate asset impairment of **$22.3 million**[362](index=362&type=chunk) Assets and Liabilities Held-for-Sale (December 31, 2020, in thousands) | Item | Stockton | Madera | | :--------------------------------- | :------- | :----- | | Property and equipment, net | $19,535 | $29,013 | | Right of use operating lease assets, net | $9,747 | — | | **Total Assets held-for-sale** | **$29,282** | **$29,013** | | Operating lease obligations | $10,435 | — | | Assessment financing | — | $9,107 | | **Total Liabilities held-for-sale** | **$10,435** | **$9,107** | - Net sales from Stockton and Madera facilities were **$21.9 million** and **$22.7 million** respectively in 2020, significantly down from **$132.9 million** and **$82.7 million** in 2019[363](index=363&type=chunk) [3. INTERCOMPANY AGREEMENTS](index=72&type=section&id=3.%20INTERCOMPANY%20AGREEMENTS) The company maintains various intercompany agreements with subsidiaries for management, marketing, and procurement, which are eliminated upon consolidation - Affiliate Management Agreements (AMA): Alto Ingredients provides operational and administrative services to subsidiaries, billed at predetermined amounts plus out-of-pocket costs; revenues of **$11.7 million** (2020) and **$12.7 million** (2019) were eliminated in consolidation[364](index=364&type=chunk)[367](index=367&type=chunk) - Ethanol Marketing Agreements: Kinergy has exclusive rights to market and sell alcohols produced by company facilities for a fee (**1%** of purchase price, min **$0.015/gallon**, max **$0.0225/gallon**); revenues of **$4.3 million** (2020) and **$7.9 million** (2019) were eliminated in consolidation[368](index=368&type=chunk)[369](index=369&type=chunk) - Corn Procurement and Handling Agreements: Alto Nutrients acts as exclusive agent for corn procurement and handling for production facilities (except Pacific Aurora), receiving a fee of **$0.03 per bushel**; revenues of **$2.6 million** (2020) and **$4.3 million** (2019) were eliminated in consolidation[369](index=369&type=chunk)[370](index=370&type=chunk) - Essential Ingredients Marketing Agreements: Alto Nutrients has exclusive rights to market and sell essential ingredients produced by facilities for an incentive fee (**5%** for wet products, **1%** for dry products); revenues of **$2.8 million** (2020) and **$6.0 million** (2019) were eliminated in consolidation[373](index=373&type=chunk)[374](index=374&type=chunk) [4. SEGMENTS](index=74&type=section&id=4.%20SEGMENTS) The company reports in three segments: marketing and distribution, Pekin Campus production, and Other production, with intersegment activities eliminated in consolidation - Three reportable segments: Marketing and distribution, Pekin Campus production, and Other production[375](index=375&type=chunk) - Management fees charged by Alto Ingredients to segments are included in income before provision for income taxes[376](index=376&type=chunk) - Intersegment activities, mainly marketing alcohol for a fee, are eliminated in consolidation[377](index=377&type=chunk) Segment Net Sales (in thousands) | Segment | 2020 | 2019 | | :--------------------------- | :-------- | :---------- | | Marketing and distribution | $267,386 | $375,151 | | Pekin Campus production | $461,347 | $483,707 | | Other Production | $179,892 | $585,861 | | Intersegment eliminations | $(11,602) | $(19,838) | | **Net sales as reported** | **$897,023** | **$1,424,881** | Segment Income (Loss) Before Income Taxes (in thousands) | Segment | 2020 | 2019 | | :--------------------------- | :---------- | :----------- | | Marketing and distribution | $4,889 | $12,533 | | Pekin Campus production | $53,898 | $(21,441) | | Other production | $(54,677) | $(77,019) | | Corporate activities | $(21,409) | $(15,375) | | **Total** | **$(17,299)** | **$(101,302)** | Segment Total Assets (in thousands) | Segment | December 31, 2020 | December 31, 2019 | | :--------------------------- | :---------------- | :---------------- | | Marketing and distribution | $89,337 | $129,664 | | Pekin Campus production | $234,439 | $229,050 | | Other production | $102,409 | $229,748 | | Corporate assets | $50,633 | $24,033 | | **Total assets** | **$476,818** | **$612,495** | [5. PROPERTY AND EQUIPMENT](index=76&type=section&id=5.%20PROPERTY%20AND%20EQUIPMENT) Net property and equipment decreased by **31.0%** to **$229.5 million** in 2020, primarily due to asset sales and **$30.3 million** in depreciation expense Property and Equipment (in thousands) | Item | 2020 | 2019 | | :---------------------------------- | :---------- | :---------- | | Facilities and plant equipment | $357,740 | $495,513 | | Land | $4,837 | $7,219 | | Other equipment, vehicles and furniture | $7,858 | $11,229 | | Construction in progress | $11,828 | $15,793 | | **Total Gross Property and Equipment** | **$382,263** | **$529,754** | | Accumulated depreciation | $(152,777) | $(197,228) | | **Property and equipment, net** | **$229,486** | **$332,526** | - Depreciation expense was **$30.3 million** in 2020, down from **$40.9 million** in 2019[389](index=389&type=chunk) - Capitalized interest related to capital investment activities was **$0.2 million** in 2020, down from **$0.6 million** in 2019[390](index=390&type=chunk) [6. INTANGIBLE ASSET](index=77&type=section&id=6.%20INTANGIBLE%20ASSET) The company holds an indefinite-lived tradename asset valued at **$2.7 million**, acquired in 2006, with no impairment recorded in 2020 or 2019 - A tradename asset valued at **$2.678 million**, acquired in 2006 (Kinergy acquisition), is classified as an indefinite-lived intangible asset[392](index=392&type=chunk) - No impairment of the Kinergy tradename was recorded for the years ended December 31, 2020 and 2019[392](index=392&type=chunk) [7. DERIVATIVES](index=77&type=section&id=7.%20DERIVATIVES) The company uses derivative instruments to manage commodity price risks, recognizing **$14.8 million** in net gains from non-designated hedges in 2020 - Uses derivative instruments (exchange-traded forward contracts and options) to manage commodity price risks for corn, natural gas, and alcohol sales[393](index=393&type=chunk)[395](index=395&type=chunk) - No derivatives were designated as cash flow hedges in 2020 or 2019[394](index=394&type=chunk) - Net gains from non-designated derivative instruments were **$14.8 million** in 2020, compared to **$0.6 million** in 2019, recognized in cost of goods sold[395](index=395&type=chunk) Non-Designated Derivative Instruments (in thousands) | Type of Instrument | Balance Sheet Location | Fair Value (2020) | Fair Value (2019) | | :----------------- | :--------------------- | :---------------- | :---------------- | | Cash collateral | Other current assets | $520 | $615 | | Commodity contracts | Derivative assets | $17,149 | $2,438 | | Commodity contracts | Derivative liabilities | $0 | $1,860 | Recognized Gains (Losses) from Non-Designated Derivatives (in thousands) | Type of Instrument | Statements of Operations Location | Realized Gains (2020) | Realized Gains (2019) | Unrealized Gains (2020) | Unrealized Gains (2019) | | :----------------- | :-------------------------------- | :-------------------- | :-------------------- | :---------------------- | :---------------------- | | Commodity contracts | Cost of goods sold | $2,102 | $(4,568) | $12,678 | $5,123 | [8. DEBT](index=79&type=section&id=8.%20DEBT) Long-term debt significantly reduced to **$71.8 million** in 2020 through principal payments and asset sales, with the company in compliance with all credit facility terms Long-term Borrowings (in thousands) | Item | December 31, 2020 | December 31, 2019 | | :------------------------------------ | :---------------- | :---------------- | | Kinergy line of credit | $32,512 | $78,338 | | Pekin term loan | $0 | $39,500 | | Pekin revolving loan | $20,580 | $32,000 | | ICP term loan | $0 | $12,000 | | ICP revolving loan | $9,384 | $18,000 | | CARES Act loans | $9,860 | $0 | | Parent notes payable | $25,533 | $65,649 | | **Total Gross Debt** | **$97,869** | **$245,487** | | Less unamortized debt premium | $230 | $461 | | Less unamortized debt financing costs | $(759) | $(2,153) | | Less short-term portion | $(25,533) | $(63,000) | | **Long-term debt** | **$71,807** | **$180,795** | - Kinergy's operating line of credit (up to **$100 million**, matures Aug 2022) had **$32.5 million** outstanding and **$16.0 million** unused availability as of Dec 31, 2020; it requires a fixed-charge coverage ratio of at least **2.0** if borrowing availability falls below certain thresholds[402](index=402&type=chunk)[403](index=403&type=chunk) - Pekin Credit Facility (term loan matures Aug 2021, revolving loan matures Feb 2022) and ICP Credit Facility (term loan matures Sep 2021, revolving loan matures Sep 2022) require collective working capital of not less than **50%** of combined revolving lines (**$30.0 million** at Dec 31, 2020) and annual debt service coverage ratios[406](index=406&type=chunk)[413](index=413&type=chunk) - Senior Secured Notes (**$55.0 million** + **$13.9 million**, mature Dec 2021) bear **15%** annual interest and rank senior to other parent company indebtedness; **$35.3 million** in principal was repaid in Nov 2020[418](index=418&type=chunk)[419](index=419&type=chunk)[423](index=423&type=chunk) - Received **$9.9 million** in CARES Act loans (**1.00%** interest, two-year maturity) in May 2020, with forgiveness application in process[424](index=424&type=chunk) - The company believes it is in compliance with all credit facility and note terms as of the report filing[411](index=411&type=chunk)[417](index=417&type=chunk)[423](index=423&type=chunk) Maturities of Long-term Debt (in thousands) | Year | Amount | | :--- | :----- | | 2021 | $25,533 | | 2022 | $72,336 | | Total | $97,869 | [9. LEASES](index=83&type=section&id=9.%20LEASES) The company accounts for leases under ASC 842, with operating lease costs of **$5.5 million** in 2020 and a weighted-average discount rate of **6.00%** - Accounts for leases under ASC 842, recognizing right-of-use assets and lease liabilities for long-term leases[426](index=426&type=chunk) - Weighted average discount rate was **6.00%** for 2020 and 2019[426](index=426&type=chunk) - Operating lease costs were **$5.461 million** in 2020, down from **$9.948 million** in 2019[431](index=431&type=chunk) Remaining Maturities of Operating Lease Liabilities (December 31, 2020, in thousands) | Year Ended | Equipment | Land Related | | :--------- | :-------- | :----------- | | 2021 | $2,263 | $547 | | 2022 | $2,144 | $559 | | 2023 | $1,504 | $461 | | 2024 | $858 | $436 | | 2025 | $578 | $436 | | 2026-76 | $315 | $6,150 | | Less Interest | $(1,171) | $(4,185) | | **Total** | **$6,491** | **$4,404** | [10. PENSION PLANS](index=84&type=section&id=10.%20PENSION%20PLANS) The company sponsors defined benefit Retirement and Postretirement Plans for Pekin employees, underfunded by **$7.0 million** and **$5.3 million** respectively in 2020 - Sponsors a noncontributory defined benefit Retirement Plan for 'grandfathered' unionized employees at Pekin facilities[432](index=432&type=chunk) Retirement Plan Funded Status (in thousands) | Item | 2020 | 2019 | | :------------------------------------ | :-------- | :-------- | | Fair value of plan assets, ending | $17,588 | $15,654 | | Less: projected accumulated benefit obligation | $24,629 | $21,643 | | **Funded status, (underfunded)/overfunded** | **$(7,041)** | **$(5,989)** | - Net periodic benefit cost for the Retirement Plan was **$0.192 million** in 2020, down from **$0.374 million** in 2019[433](index=433&type=chunk) - Expected contributions to the Retirement Plan for 2021 are approximately **$0.8 million**[434](index=434&type=chunk) - Sponsors a contributory Postretirement Plan for health care and life insurance for 'grandfathered' unionized employees at Pekin facilities[437](index=437&type=chunk) Postretirement Plan Funded Status (in thousands) | Item | 2020 | 2019 | | :------------------------------------ | :-------- | :-------- | | Accumulated/projected benefit obligation | $5,296 | $5,274 | | Fair value of plan assets | $0 | $0 | | **Funded status, (underfunded)/overfunded** | **$(5,296)** | **$(5,274)** | - Net periodic benefit cost for the Postretirement Plan was **$0.235 million** in 2020, down from **$0.408 million** in 2019[441](index=441&type=chunk) [11. INCOME TAXES](index=87&type=section&id=11.%20INCOME%20TAXES) The company recorded a **$17,000** deferred income tax benefit in 2020, maintaining an **$85.7 million** valuation allowance against deferred tax assets due to future taxable income uncertainty Provision (Benefit) for Income Taxes (in thousands) | Item | 2020 | 2019 | | :----------------------- | :------ | :------ | | Current provision (benefit) | $0 | $(22) | | Deferred provision (benefit) | $(17) | $2 | | **Total** | **$(17)** | **$(20)** | Effective Tax Rate Reconciliation | Item | 2020 | 2019 | | :------------------------------------ | :------ | :------ | | Statutory rate | 21.0% | 21.0% | | State income taxes, net of federal benefit | 5.7% | 5.7% | | Change in valuation allowance | (9.4)% | (22.4)% | | Fair value adjustments | (12.7)% | — | | Noncontrolling interest | (3.4)% | (3.3)% | | Non-deductible items | (0.4)% | (0.1)% | | Other | (0.8)% | (1.0)% | | **Effective rate** | **(0.0)%** | **(0.1)%** | - Total deferred tax assets were **$107.4 million** in 2020, primarily from net operating loss carryforwards (**$61.2 million**) and capital loss (**$29.7 million**)[450](index=450&type=chunk) - Total deferred tax liabilities were **$22.0 million** in 2020, primarily from property and equipment (**$16.2 million**) and derivatives (**$4.5 million**)[450](index=450&type=chunk) - A valuation allowance of **$85.7 million** was established as of December 31, 2020, due to uncertainty regarding the realizability of deferred tax assets[456](index=456&type=chunk) - Remaining federal NOL carryforwards were **$227.8 million** and state NOL carryforwards were **$211.7 million** at December 31, 2020, with some subject to limitations and expiration dates[450](index=450&type=chunk)[451](index=451&type=chunk) [12. PREFERRED STOCK](index=90&type=section&id=12.%20PREFERRED%20STOCK) The company has **926,942** shares of Series B Preferred Stock outstanding, with **7.00%** cumulative dividends accrued but unpaid to preserve liquidity - **1,684,375 shares** of Series A Preferred Stock authorized, none outstanding as of December 31, 2020 and 2019[461](index=461&type=chunk) - **1,580,790 shares** of Series B Preferred Stock authorized, with **926,942 shares** outstanding as of December 31, 2020 and 2019[465](index=465&type=chunk) - Series B Preferred Stock ranks senior in liquidation and dividend preferences to common stock, with **7.00%** cumulative annual cash dividends[466](index=466&type=chunk) - Accrued but unpaid dividends on Series B Preferred Stock were **$1.268 million** in 2020 and **$0.319 million** in 2019, as payment was waived by holders to preserve liquidity[471](index=471&type=chunk)[473](index=473&type=chunk) - Series B Preferred Stock was convertible into **964,230 shares** of common stock as of December 31, 2020[467](index=467&type=chunk) [13. COMMON STOCK AND WARRANTS](index=93&type=section&id=13.%20COMMON%20STOCK%20AND%20WARRANTS) In 2020, the company issued warrants and completed an equity offering, generating **$70.5 million** in net proceeds, and terminated its 'at-the-market' equity program - Warrants issued to Senior Noteholders (**5.5 million shares** at **$1.00** exercise price) were fully exercised in August 2020[475](index=475&type=chunk) - In October 2020, completed an underwritten public offering of **5.075 million** common shares and **3.825 million** pre-funded warrants, generating approximately **$75.0 million** gross proceeds (**$70.5 million** net)[476](index=476&type=chunk)[478](index=478&type=chunk) - Issued additional warrants to purchase **8.9 million** common shares at **$9.757** exercise price, which were reclassified to equity upon amendment in November 2020[477](index=477&type=chunk) Warrant Activity (shares in thousands) | Item | Number of Shares (2020) | Average Exercise Price (2020) | | :--------------------------------- | :---------------------- | :---------------------------- | | Balance at December 31, 2019 | 5,500 | $1.00 | | Warrants exercised | (5,500) | $1.00 | | Pre-funded warrants issued | 3,825 | $0.00 | | Pre-funded warrants exercised | (3,825) | $0.00 | | Series A warrants issued | 8,900 | $9.76 | | **Balance at December 31, 2020** | **8,900** | **$9.76** | - Terminated its 'at-the-market' equity distribution program in October 2020, which had issued **1.421 million shares** for **$5.3 million** net proceeds in 2020[482](index=482&type=chunk) [14. STOCK-BASED COMPENSATION](index=94&type=section&id=14.%20STOCK-BASED%20COMPENSATION) Total stock-based compensation expense was **$2.7 million** in 2020, with **2.26 million** unvested restricted stock awards and **$0.87 million** in unrecognized expense - Operates under 2006 (terminated except for unvested awards) and 2016 Stock Incentive Plans[483](index=483&type=chunk)[484](index=484&type=chunk) - The 2016 Stock Incentive Plan authorized **7.4 million shares** as of November 18, 2020[484](index=484&type=chunk) Stock Options Activity (shares in thousands) | Item | 2020 Number of Shares | 2020 Weighted Average Exercise Price | | :--------------------------------- | :-------------------- | :----------------------------------- | | Outstanding at beginning of year | 229 | $4.15 | | Options exercised | (22) | $3.74 | | **Outstanding at end of year** | **207** | **$4.16** | | **Options exercisable at end of year** | **207** | **$4.16** | Restricted Stock Activity (shares in thousands) | Item | Number of Shares (2020) | Weighted Average Grant Date Fair Value Per Share (2020) | | :--------------------------------- | :---------------------- | :------------------------------------------------------ | | Unvested at December 31, 2019 | 2,201 | $1.84 | | Issued | 1,663 | $1.25 | | Vested | (1,290) | $2.08 | | Canceled | (314) | $1.33 | | **Unvested at December 31, 2020** | **2,260** | **$1.34** | Total Stock-Based Compensation Expense (in thousands) | Item | 2020 | 2019 | | :--------------------------------- | :------ | :------ | | Employees | $2,025 | $2,422 | | Non-employees | $654 | $387 | | **Total stock-based compensation expense** | **$2,679** | **$2,809** | - Unrecognized compensation expense related to unvested awards was **$0.865 million** at December 31, 2020, to be recognized over approximately **1.37 years**[493](index=493&type=chunk) [15. COMMITMENTS AND CONTINGENCIES](index=96&type=section&id=15.%20COMMITMENTS%20AND%20CONTINGENCIES) The company has various sales and purchase commitments for 2021, **$9.1 million** in assessment financing, and ongoing litigation not expected to materially impact financials - Sales commitments as of December 31, 2020: **84.7 million gallons** of indexed-price fuel-grade ethanol, **$257.3 million** in fixed-price fuel-grade ethanol and specialty alcohol, **$16.7 million** in fixed-price essential ingredients, and **161,000 tons** of indexed-price essential ingredients[494](index=494&type=chunk) - Purchase commitments as of December 31, 2020: **5.8 million gallons** of indexed-price fuel-grade ethanol, **$4.0 million** in fixed-price fuel-grade ethanol, and **$22.8 million** in fixed-price corn[495](index=495&type=chunk) - Assessment financing for a solar project at Madera facility totaled **$9.1 million** outstanding at December 31, 2020, with expected annual payments of **$0.9 million**[496](index=496&type=chunk) - Subject to various claims and litigation in the ordinary course of business, but management does not expect a material financial impact[496](index=496&type=chunk)[497](index=497&type=chunk) [16. FAIR VALUE MEASUREMENTS](index=97&type=section&id=16.%20FAIR%20VALUE%20MEASUREMENTS) Fair value measurements are categorized into Level 1, 2, and 3, with derivatives primarily Level 1 and held-for-sale assets and warrants as Level 3 - Fair value hierarchy includes Level 1 (unadjusted quoted prices), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs)[499](index=499&type=chunk) - Defined benefit plan assets (pooled separate accounts) are classified as Level 2[500](index=500&type=chunk) - Long-lived assets held-for-sale (**$58.3 million** in 2020) are valued based on observable market data and classified as Level 3[500](index=500&type=chunk) - Warrants issued to Senior Noteholders (exercised in Aug 2020) were valued using the Black-Scholes Valuation Model and classified as Level 3[501](index=501&type=chunk) - Warrants issued in Equity Offering (pre-funded and other warrants) were valued using the Binomial valuation methodology and classified as Level 3[503](index=503&type=chunk)[504](index=504&type=chunk) - Other derivative instruments (commodity positions) are based on quoted prices on commodity exchanges and classified as Level 1[505](index=505&type=chunk) Fair Value Measurements (December 31, 2020, in thousands) | Assets | Fair Value | Level 1 | Level 2 | Level 3 | | :-------------------------------------- | :--------- | :------ | :------ | :------ | | Derivative financial instruments | $17,149 | $17,149 | — | — | | Long-lived assets held-for-sale | $58,295 | — | — | $58,295 | | Defined benefit plan assets (pooled separate accounts) | $17,588 | — | $17,588 | — | | **Total Assets** | **$93,032** | **$17,149** | **$17,588** | **$58,295** | [17. PARENT COMPANY FINANCIALS](index=100&type=section&id=17.%20PARENT%20COMPANY%20FINANCIALS) Parent company financials show **$262.2 million** in restricted subsidiary net assets, total assets of **$336.4 million**, and a net loss of **$15.1 million** in 2020 - As of December 31, 2020, **$262.2 million** of net assets at subsidiaries were restricted and unavailable for transfer to Alto Ingredients, Inc[208](index=208&type=chunk)[510](index=510&type=chunk) Parent Company Balance Sheet Highlights (in thousands) | Item | December 31, 2020 | December 31, 2019 | | :------------------------------------ | :---------------- | :---------------- | | Cash and cash equivalents | $25,632 | $4,985 | | Total current assets | $43,016 | $20,391 | | Investments in subsidiaries | $246,518 | $218,464 | | Total Assets | $336,398 | $299,579 | | Total current liabilities | $31,836 | $20,395 | | Long-term debt, net | $5,564 | $56,110 | | Total Liabilities | $40,163 | $79,799 | | Total Alto Ingredients, Inc. stockholders' equity | $296,235 | $219,780 | Parent Company Statements of Operations Highlights (in thousands) | Item | 2020 | 2019 | | :------------------------------------ | :---------- | :---------- | | Management fees from subsidiaries | $11,724 | $12,682 | | Selling, general and administrative expenses | $16,990 | $16,007 | | Loss from operations | $(5,266) | $(3,325) | | Loss before equity in earnings of subsidiaries | $(21,512) | $(14,945) | | Equity in income (losses) of subsidiaries | $6,396 | $(74,004) | | **Consolidated net loss** | **$(15,116)** | **$(88,949)** |