Alto Ingredients(ALTO) - 2020 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements The company reported a significant profit turnaround in Q2 2020 despite lower sales, but faces a working capital deficit Consolidated Balance Sheets The balance sheet reflects a decrease in total assets and a working capital deficit as of June 30, 2020 Financial Position | Financial Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--- | :--- | :--- | | Total Current Assets | $131,790 | $232,064 | | Total Assets | $497,129 | $612,495 | | Total Current Liabilities | $146,954 | $160,398 | | Total Liabilities | $286,388 | $385,450 | | Total Stockholders' Equity | $210,741 | $227,045 | - The company's total assets decreased from $612.5 million at the end of 2019 to $497.1 million as of June 30, 2020, primarily due to the sale of assets previously classified as held-for-sale[4] - As of June 30, 2020, the company had a working capital deficit of $15.2 million, with current liabilities of $147.0 million exceeding current assets of $131.8 million[127] Consolidated Statements of Operations The company achieved a substantial increase in gross profit and net income for Q2 2020 compared to the prior year Three-Month Performance | Metric (in thousands, except per share) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net Sales | $212,074 | $346,301 | | Gross Profit | $31,182 | $3,971 | | Income (Loss) from Operations | $22,553 | $(2,737) | | Net Income (Loss) Attributed to Pacific Ethanol | $14,964 | $(7,646) | | Net Income (Loss) per Share, basic and diluted | $0.27 | $(0.17) | Six-Month Performance | Metric (in thousands, except per share) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net Sales | $523,478 | $702,104 | | Gross Profit | $18,292 | $1,682 | | Income (Loss) from Operations | $(549) | $(13,261) | | Net Income (Loss) Attributed to Pacific Ethanol | $(10,136) | $(20,536) | Consolidated Statements of Cash Flows Operating cash flow turned positive, driven by net income and asset sale proceeds from investing activities Six-Month Cash Flow Summary | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $45,655 | $(25,754) | | Net cash provided by (used in) investing activities | $17,386 | $(1,536) | | Net cash (used in) provided by financing activities | $(52,255) | $17,176 | | Net change in cash and cash equivalents | $10,786 | $(10,114) | - Investing activities were primarily driven by $19.9 million in proceeds from the sale of Pacific Aurora, LLC ("PAL Sale")[10] - Financing activities included net payments on Kinergy's line of credit of $36.9 million and principal payments on borrowings of $25.5 million, partially offset by $9.9 million in proceeds from new borrowings (CARES Act loans)[10] Notes to Consolidated Financial Statements Notes detail the Pacific Aurora sale, debt covenant non-compliance, and CARES Act loans Segment Performance | Segment Performance (in thousands) | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | Production Income (Loss) before taxes | $17,811 | $(7,117) | | Marketing & Distribution Income (Loss) before taxes | $1,664 | $(129) | - On April 15, 2020, the company sold its ownership interest in Pacific Aurora for total consideration of $52.8 million, receiving $19.9 million in cash and $16.5 million in long-term promissory notes[28] - The company is not in compliance with its obligation to obtain lender approval for a comprehensive restructuring plan, which could result in debt acceleration; as a result, related debt has been classified as current[22] - In May 2020, the company and its subsidiary PE Pekin received a total of $9.9 million in loan proceeds under the Paycheck Protection Program of the CARES Act[41] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the strategic shift to high-quality alcohol, which drove Q2 2020 profitability amid the pandemic Current Initiatives and Outlook The company is expanding high-quality alcohol production while focusing on asset sales and debt reduction - The company experienced an excellent margin environment for its high-quality alcohol due to robust demand for products used in sanitizers and disinfectants amid the COVID-19 pandemic[85] - To meet increased demand, the company is expanding its high-quality alcohol production capacity at its Pekin campus by a total of 55 million gallons per year, with a target of 140 million gallons per year total capacity by 2021[85] - Due to a poor margin environment for fuel-grade ethanol, the company does not intend to restart its idled fuel ethanol plants in the Western states until positive forward operating margins can be secured[90][91] - Strategic initiatives remain focused on selling additional production assets, reducing debt, strengthening liquidity, and exploring strategic partnerships and capital raising[92] Results of Operations Q2 2020 saw a significant gross profit increase despite lower sales, driven by higher-margin alcohol products Q2 Operational Performance | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net Sales | $212.1M | $346.3M | | Cost of Goods Sold | $180.9M | $342.3M | | Gross Profit | $31.2M | $4.0M | | Gross Margin | 14.7% | 1.1% | - The decline in net sales for Q2 2020 was primarily due to a 52% decrease in production gallons sold, driven by reduced transportation fuel demand from COVID-19 stay-at-home orders[99][100] - The significant improvement in gross profit and margin was primarily due to significantly higher margins from sales of high-quality alcohol, which commanded a premium price over fuel ethanol[112] - Selling, general and administrative (SG&A) expenses increased by 28.6% to $8.6 million in Q2 2020, mainly due to higher professional fees associated with the sale of Pacific Aurora and other strategic initiatives[118] Liquidity and Capital Resources The company faces a working capital deficit and debt covenant non-compliance but believes it has sufficient liquidity Key Liquidity Metrics | Metric (in thousands) | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Working capital (deficit) | $(15,164) | $71,666 | | Long-term debt, net of current portion | $95,888 | $180,795 | - As of June 30, 2020, the company had $29.8 million in cash and $10.0 million available under its Kinergy operating line of credit[123] - The company is not in compliance with its obligation to obtain lender approval of a comprehensive restructuring plan, which could result in debt acceleration[128] - Despite the covenant issue and a working capital deficit of $15.2 million, management believes it has alleviated substantial doubt about its ability to continue as a going concern and has sufficient liquidity for the next twelve months[128] Quantitative and Qualitative Disclosures About Market Risk The company has indicated that this section is not applicable for this reporting period - This item is marked as 'Not applicable' in the report[177] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of the end of the quarter - Management, including the Co-CEOs and CFO, concluded that as of June 30, 2020, the company's disclosure controls and procedures were effective at a reasonable assurance level[178] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls[180] PART II - OTHER INFORMATION Legal Proceedings Ongoing legal matters are not expected to have a material adverse effect on the company's financial condition - The company states that while it is subject to legal proceedings in the ordinary course of business, management does not expect them to have a material adverse impact on its financial condition[184] Risk Factors Key risks include the COVID-19 pandemic's impact, significant debt, historical losses, and commodity price volatility - The COVID-19 pandemic may continue to materially and adversely affect business operations and liquidity due to reduced demand for transportation fuels like ethanol[186][187] - The company is not in compliance with its obligation to obtain lender approval for a restructuring plan, which could result in debt acceleration, and it lacks sufficient liquidity to immediately repay its debt if accelerated[190] - The company's profitability is highly dependent on the volatile and uncertain prices of corn, natural gas, high-quality alcohol, and ethanol, which are subject to market forces beyond its control[195][196] - The independent auditor's report for fiscal year 2019 included an explanatory note expressing substantial doubt about the company's ability to continue as a going concern[225][226] Unregistered Sales of Equity Securities and Use of Proceeds The report details shares withheld for tax obligations and the accrual of unpaid preferred stock dividends - In April 2020, the company effectively repurchased 357,239 shares of its common stock by withholding them from employees to cover minimum tax obligations on vested restricted stock for an aggregate value of $89,489[262] - For the six months ended June 30, 2020, the company accrued dividends of $0.6 million on its Series B Preferred Stock but did not pay them in cash to preserve liquidity[264] Other Items (Defaults, Mine Safety, Other Info, Exhibits) The company reports no defaults, mine safety issues, or other information, and lists filed exhibits - The company reports 'Not applicable' for Item 3 (Defaults Upon Senior Securities), Item 4 (Mine Safety Disclosures), and Item 5 (Other Information)[267][268]