Alto Ingredients(ALTO) - 2020 Q4 - Annual Report

PART I Item 1. Business 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] - The company operates seven alcohol production facilities with an annual alcohol production capacity of 450 million gallons[7] - In 2020, the company marketed over 500 million gallons of alcohols and nearly 1.5 million tons of essential ingredients[7] - Business segments focus on Health, Home & Beauty; Food & Beverage; Essential Ingredients; and Renewable Fuels markets[7][9] - 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][17][18][19][20] - 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][21][23][24] 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 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][79] - 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][83][85] - 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] - Disruptions in production or distribution (e.g., raw material supply, energy, transportation, equipment failures, natural disasters) can harm business operations and financial condition[91][92] - 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] - 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][105] - 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][109][110] - 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][124] Item 1B. Unresolved Staff Comments 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] Item 2. Properties 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] - Leases office space in Sacramento, California (10,000 sq ft, expiring 2029)[138] - Owns land for plants in Madera, California (137 acres) and Burley, Idaho (25 acres)[138] - Leases land for plants in Boardman, Oregon (25 acres, expiring 2026) and Stockton, California (30 acres, expiring 2022)[138] - Owns an idled ethanol production facility in Canton, Illinois (110 acres)[138] Item 3. Legal Proceedings 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] - Management believes current legal matters will not materially affect financial position, results of operations, or cash flows[139] Item 4. Mine Safety Disclosures This item is not applicable to Alto Ingredients, Inc - Not applicable[140] PART II Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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] 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][142] - 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] Item 6. Selected Financial Data This item is not applicable to Alto Ingredients, Inc - Not applicable[144] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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] - 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][159] - All operating facilities are running at break-even or better on an EBITDA basis[159] - 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] - 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][163] - Selling Stockton and Madera, California fuel-grade ethanol production facilities to strengthen the balance sheet and improve profitability by eliminating fixed carrying costs[166] - 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] - 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 $1.4 million in annual EBITDA[169] - Actively engaged in discussions to develop a carbon capture and sequestration program at its Pekin site[170] Consolidated Financial Performance Summary (2020 vs. 2019) | Metric | 2020 ($ 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 This item is not applicable to Alto Ingredients, Inc - Not applicable[257] Item 8. Financial Statements and Supplementary Data 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] Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with accountants on accounting and financial disclosure - No changes in or disagreements with accountants[258] Item 9A. Controls and Procedures 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] - Management concluded that internal control over financial reporting was effective as of December 31, 2020, based on the COSO framework[263] - Control systems, due to inherent limitations and resource constraints, provide only reasonable, not absolute, assurance against errors and fraud[264][266] - No material changes in internal control over financial reporting occurred during the most recently completed fiscal quarter[267] Item 9B. Other Information There is no other information to report under this item - No other information to report[267] PART III Item 10. Directors, Executive Officers and Corporate Governance 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] Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the Proxy Statement - Information incorporated by reference from the Proxy Statement[270] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 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] Item 13. Certain Relationships and Related Transactions, and Director Independence 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] Item 14. Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the Proxy Statement - Information incorporated by reference from the Proxy Statement[273] PART IV Item 15. Exhibits, Financial Statement Schedules 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] - No financial statement schedules are included[275] - Exhibits are referenced in the Index to Exhibits[275] Item 16. Form 10-K Summary No Form 10-K Summary is provided in this report - No Form 10-K Summary is included[275] Financial Statements INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 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] REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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] - The financial statements present fairly the financial position and results of operations in conformity with GAAP[279] - 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] CONSOLIDATED BALANCE SHEETS 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 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 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 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] CONSOLIDATED STATEMENTS OF CASH FLOWS 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][212] - 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] - 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][214] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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][309] - 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] - Focuses on four key markets: Health, Home & Beauty; Food & Beverage; Essential Ingredients; and Renewable Fuels[311] - Operating at approximately 64% of annual production capacity as of December 31, 2020, with Magic Valley, Stockton, and Madera facilities idled[311] - 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][315] - Segments include marketing and distribution, Pekin Campus production, and Other production[316] - Revenue recognition follows ASC 606, recognizing revenue when customers obtain control of products, typically upon delivery[333][336] - Assesses impairment of long-lived assets by comparing forecasted undiscounted cash flows to carrying value, then fair value if impairment is indicated[341] - 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] 2. ASSET SALES AND HELD-FOR-SALE CLASSIFICATION 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] - Pacific Aurora contributed $39.6 million in net sales and $8.4 million in pre-tax loss for 2020 (until sale date)[360] - 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] - 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] 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] 3. INTERCOMPANY AGREEMENTS 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][367] - 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][369] - 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][370] - 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][374] 4. SEGMENTS 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] - Management fees charged by Alto Ingredients to segments are included in income before provision for income taxes[376] - Intersegment activities, mainly marketing alcohol for a fee, are eliminated in consolidation[377] 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 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] - Capitalized interest related to capital investment activities was $0.2 million in 2020, down from $0.6 million in 2019[390] 6. INTANGIBLE ASSET 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] - No impairment of the Kinergy tradename was recorded for the years ended December 31, 2020 and 2019[392] 7. DERIVATIVES 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][395] - No derivatives were designated as cash flow hedges in 2020 or 2019[394] - 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] 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 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][403] - 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][413] - 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][419][423] - Received $9.9 million in CARES Act loans (1.00% interest, two-year maturity) in May 2020, with forgiveness application in process[424] - The company believes it is in compliance with all credit facility and note terms as of the report filing[411][417][423] Maturities of Long-term Debt (in thousands) | Year | Amount | | :--- | :----- | | 2021 | $25,533 | | 2022 | $72,336 | | Total | $97,869 | 9. LEASES 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] - Weighted average discount rate was 6.00% for 2020 and 2019[426] - Operating lease costs were $5.461 million in 2020, down from $9.948 million in 2019[431] 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 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] 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] - Expected contributions to the Retirement Plan for 2021 are approximately $0.8 million[434] - Sponsors a contributory Postretirement Plan for health care and life insurance for 'grandfathered' unionized employees at Pekin facilities[437] 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] 11. INCOME TAXES 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] - Total deferred tax liabilities were $22.0 million in 2020, primarily from property and equipment ($16.2 million) and derivatives ($4.5 million)[450] - 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] - 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][451] 12. PREFERRED STOCK 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] - 1,580,790 shares of Series B Preferred Stock authorized, with 926,942 shares outstanding as of December 31, 2020 and 2019[465] - Series B Preferred Stock ranks senior in liquidation and dividend preferences to common stock, with 7.00% cumulative annual cash dividends[466] - 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][473] - Series B Preferred Stock was convertible into 964,230 shares of common stock as of December 31, 2020[467] 13. COMMON STOCK AND WARRANTS 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] - 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][478] - 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] 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] 14. STOCK-BASED COMPENSATION 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][484] - The 2016 Stock Incentive Plan authorized 7.4 million shares as of November 18, 2020[484] 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] 15. COMMITMENTS AND CONTINGENCIES 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] - 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] - 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] - Subject to various claims and litigation in the ordinary course of business, but management does not expect a material financial impact[496][497] 16. FAIR VALUE MEASUREMENTS 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] - Defined benefit plan assets (pooled separate accounts) are classified as Level 2[500] - Long-lived assets held-for-sale ($58.3 million in 2020) are valued based on observable market data and classified as Level 3[500] - Warrants issued to Senior Noteholders (exercised in Aug 2020) were valued using the Black-Scholes Valuation Model and classified as Level 3[501] - Warrants issued in Equity Offering (pre-funded and other warrants) were valued using the Binomial valuation methodology and classified as Level 3[503][504] - Other derivative instruments (commodity positions) are based on quoted prices on commodity exchanges and classified as Level 1[505] 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 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][510] 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) |