Alto Ingredients(ALTO) - 2021 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION This section provides the unaudited consolidated financial statements and management's discussion and analysis for Alto Ingredients, Inc ITEM 1. FINANCIAL STATEMENTS 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 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 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 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 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 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 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] - The company's production capacity was 450 million gallons per year as of March 31, 2021, operating at approximately 64% utilization[23][24] - Key markets include Health, Home & Beauty; Food & Beverage; Essential Ingredients; and Renewable Fuels[24] 2. Assets and Liabilities Held-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] - An additional impairment charge of $1.2 million was recorded for held-for-sale assets during Q1 2021[32] - The Madera facility was sold on April 23, 2021, for $28.3 million ($19.5 million cash, $8.8 million assumed liabilities)[32] 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 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] 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 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 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][50] - 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] 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 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] - 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] 7. Commitments and Contingencies 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] - Purchase commitments included $1,238,000 of fixed-price alcohol and $33,883,000 of fixed-price corn[57] - Management believes pending legal proceedings will not materially impact the company's financial condition or results of operations[59] 8. Pension Plans 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] - As of December 31, 2020, the Retirement Plan was underfunded by $7.0 million[61] - 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] 9. Fair Value Measurements 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] - Derivative financial instruments are valued using Level 1 inputs (quoted prices on commodity exchanges)[66] - Long-lived assets held-for-sale are valued using Level 3 inputs (observable values corroborated with market data)[65] 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 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 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] 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 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 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] - The sale closed on May 14, 2021, with $19.3 million of net proceeds used to repay senior notes[83] 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] - 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] - Business segments include marketing and distribution, Pekin production, and Other production[87] - Strategic goals include investing in specialty alcohol infrastructure, expanding high-demand essential ingredients, and entering new markets[88] Production Segments 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] - Current operating capacity is approximately 64% of estimated maximum annual production capacity[90] 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 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] - Customers include producers of cosmetics, sanitizers, distilled spirits, food products, and global trading firms[92] - Essential ingredient feed products are marketed to dairies and feedlots, and corn oil to poultry and biodiesel customers[96] Current Initiatives and Outlook 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] - Specialty alcohols are expected to contribute a minimum of $60 million in gross profit for the full year 2021[99] - 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] - 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] Critical Accounting Policies 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] Results of Operations 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) 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][110] - Gross profit improved due to significantly higher margin sales of specialty alcohols and a substantial reduction in negative margin fuel-grade ethanol sales[118] Marketing Segment (Sales & Gross Profit) 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] - Volume of third-party fuel-grade ethanol gallons sold decreased by 7.2 million gallons (21%)[111] - Gross profit improved by $2.0 million to $3.5 million, primarily due to higher margins from third-party fuel-grade ethanol sales[119] Pekin Campus Production Segment (Sales & Gross Profit) 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] - Average sales price per gallon for Pekin Campus alcohol increased by $0.43 (30%)[113] - Gross profit improved by $15.2 million to $13.2 million, primarily due to increased margins from specialty alcohols[120] Other Production Segment (Sales & Gross Profit) 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] - Total volume of gallons sold decreased by 57.1 million gallons (89%)[116] - 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] Selling, General and Administrative Expenses 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] - Anticipated SG&A expenses for 2021 are $20.0 million to $25.0 million[123] Interest Expense, net 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] Net Income (Loss) Available to Common Stockholders 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] Liquidity and Capital Resources 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] - Management believes it has sufficient liquidity for the next twelve months[129] Quantitative Year-End Liquidity Status 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 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] Changes in Working Capital and Cash Flows 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] - 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][135] - 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] Kinergy's Operating Line of Credit 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] - Interest accrues at LIBOR plus 1.50% to 2.00%[137] - 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] 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 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] - Interest accrues at 30-day LIBOR plus 5.00%[143] - 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] ICP Credit Facilities 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] - Interest accrues at 30-day LIBOR plus 3.75%[145] - 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] Senior Secured Notes 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] - The notes mature on December 15, 2021, and accrue interest at 15% per annum[150] - On May 14, 2021, $19.3 million in principal was repaid on these notes from the Madera facility sale proceeds[152] CARES Act Loans 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] - The loans mature in two years and bear interest at 1.00% per annum[154] - The company has applied for loan forgiveness[154] Effects of Inflation 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] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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 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 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] Changes in Internal Control over Financial Reporting 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] Inherent Limitations on the Effectiveness of Controls 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] PART II - OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, defaults, mine safety, other information, and exhibits ITEM 1. LEGAL PROCEEDINGS 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] - Management does not expect pending legal proceedings to materially impact financial condition or results of operations[159] ITEM 1A. RISK FACTORS 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 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][162][166] - Results are highly impacted by volatility in commodity prices (corn, natural gas, alcohols, essential ingredients), which can cause substantial fluctuations in operations[167][168] - Increased alcohol or essential ingredient production or higher inventory levels could lead to price declines[171][173] - Disruptions in production or distribution (e.g., rail, raw material supply, equipment failures, natural disasters) could harm business[175][176] - The industries are highly competitive, with many competitors having greater production and financial resources[180][181] Risks Related to our Finances 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] - 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] - 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] Risks Related to Legal and Regulatory Matters 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][196][197][198] - 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][200][202] Risks Related to Ownership of our Common Stock 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] - 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][207] - 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][209] - 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][213] General Risk Factors 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][215][216] - 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][218] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 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] - 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] - The company does not currently intend to pay cash dividends on its common stock in the foreseeable future[220] ITEM 3. DEFAULTS UPON SENIOR SECURITIES This item is marked as 'Not applicable,' indicating no defaults upon senior securities ITEM 4. MINE SAFETY DISCLOSURES This item is marked as 'Not applicable,' indicating no mine safety disclosures ITEM 5. OTHER INFORMATION This item is marked as 'Not applicable,' indicating no other information to disclose ITEM 6. EXHIBITS 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] 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]