Alto Ingredients(ALTO) - 2022 Q1 - Quarterly Report

Part I - Financial Information Financial Statements The company reported a net loss of $2.6 million for the three months ended March 31, 2022, a significant downturn from the $4.7 million net income in the same period of 2021 Consolidated Balance Sheet Summary (in thousands) | Balance Sheet Items | March 31, 2022 (unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $36,184 | $50,612 | | Total current assets | $241,213 | $229,526 | | Property and equipment, net | $220,996 | $222,550 | | Total Assets | $497,868 | $484,953 | | Liabilities & Equity | | | | Total current liabilities | $80,181 | $69,602 | | Long-term debt | $53,681 | $50,361 | | Total Liabilities | $154,903 | $139,739 | | Total Stockholders' Equity | $342,965 | $345,214 | Consolidated Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net sales | $308,118 | $218,734 | | Gross profit | $4,773 | $13,837 | | Income (loss) from operations | ($2,856) | $5,623 | | Net income (loss) | ($2,602) | $4,678 | | Net income (loss) per share, diluted | ($0.04) | $0.06 | Consolidated Statement of Cash Flows Summary (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $11,064 | ($4,476) | | Net cash used in investing activities | ($16,989) | ($4,411) | | Net cash provided by financing activities | $3,783 | $4,972 | | Net decrease in cash, cash equivalents and restricted cash | ($2,142) | ($3,915) | Notes to Financial Statements: Organization and Business Alto Ingredients is a leading producer and distributor of specialty alcohols and essential ingredients, with a combined annual alcohol production capacity of 350 million gallons - The company has a combined alcohol production capacity of 350 million gallons per year and produces nearly 1.2 million tons of essential ingredients annually[22] - The company focuses on four key markets: Health, Home & Beauty; Food & Beverage; Essential Ingredients; and Renewable Fuels[23] Notes to Financial Statements: Acquisition of Eagle Alcohol On January 14, 2022, the company acquired 100% of Eagle Alcohol for $14.0 million in cash, plus a $1.3 million working capital adjustment - Acquired Eagle Alcohol on January 14, 2022, for $14.0 million cash plus a $1.3 million working capital adjustment, with up to $14.0 million in additional contingent consideration[32] - The acquisition provides further vertical integration and access to new markets in the specialty alcohol industry[34] Notes to Financial Statements: Segments The company operates in three segments: Marketing and Distribution, Pekin Production, and Other Production Net Sales by Segment (in thousands) | Segment | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Pekin Campus production | $171,586 | $141,633 | | Marketing and distribution | $57,273 | $59,706 | | Other production | $78,755 | $21,417 | Gross Profit (Loss) by Segment (in thousands) | Segment | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Pekin Campus production | $2,705 | $12,769 | | Marketing and distribution | $2,557 | $5,748 | | Other production | $511 | ($2,700) | Notes to Financial Statements: Derivatives The company uses non-designated derivative instruments to manage commodity price risk for corn and ethanol - Recognized net gains of $5,316,000 on non-designated hedge contracts for the three months ended March 31, 2022, compared to gains of $10,543,000 in the same period of 2021[51] Fair Value of Derivative Instruments (in thousands) | Date | Derivative Assets | Derivative Liabilities | | :--- | :--- | :--- | | March 31, 2022 | $19,498 | $27,487 | | December 31, 2021 | $15,839 | $13,582 | Notes to Financial Statements: Commitments and Contingencies As of March 31, 2022, the company had significant sales and purchase commitments - As of March 31, 2022, the company had open fixed-price alcohol sales contracts of $124.7 million and open fixed-price essential ingredient sales contracts of $23.0 million[57] - Purchase commitments included $81.6 million for alcohol, $67.6 million for corn, and $26.8 million for capital projects[58] Management's Discussion and Analysis of Financial Condition and Results of Operations Management reported a net loss of $2.6 million and Adjusted EBITDA of $4.4 million for Q1 2022, citing a challenging market with commodity price volatility and supply chain disruptions - Despite a net loss of $2.6 million, the company generated positive Adjusted EBITDA of $4.4 million for Q1 2022[87] Reconciliation of Net Income (Loss) to Adjusted EBITDA (in thousands) | Line Item | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net income (loss) | ($2,602) | $4,678 | | Adjustments | $7,051 | $8,761 | | Adjusted EBITDA | $4,449 | $13,439 | - The acquisition of Eagle Alcohol is expected to contribute $4.0 million in EBITDA for 2022 and $9.0 million annually starting in 2023[88] - The CoPromax protein system installation at Magic Valley is expected to generate $4.0 million of EBITDA annually from corn oil extraction in H2 2022, and an additional $5.0 million annually from protein enhancement by early 2023[91] Results of Operations For Q1 2022, net sales increased 40.9% to $308.1 million, driven by a 26.8% increase in the average sales price per gallon Key Performance Metrics | Metric | Q1 2022 | Q1 2021 | % Change | | :--- | :--- | :--- | :--- | | Total gallons sold (millions) | 103.2 | 112.0 | (7.9)% | | Average sales price per gallon | $2.46 | $1.94 | 26.8% | | Delivered cost of corn per bushel | $6.86 | $5.27 | 30.2% | | Total essential ingredients tons sold (thousands) | 398.8 | 276.9 | 44.0% | Consolidated Results Summary (in thousands) | Metric | Q1 2022 | Q1 2021 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $308,118 | $218,734 | 40.9% | | Cost of goods sold | $303,345 | $204,897 | 48.0% | | Gross profit | $4,773 | $13,837 | (65.5)% | | Gross profit margin | 1.5% | 6.3% | - | - Consolidated gross profit declined due to extreme commodity price volatility, supply chain disruptions, rising transportation costs, weak renewable fuel crush margins, and $7.0 million in non-cash mark-to-market inventory adjustments and unrealized losses on forward derivative positions[114] Liquidity and Capital Resources As of March 31, 2022, the company had $60.0 million in cash, cash equivalents, and restricted cash, with an additional $15.2 million available under its Kinergy operating line of credit - As of March 31, 2022, the company had $60.0 million in cash, cash equivalents, and restricted cash, and $15.2 million available for borrowing under its line of credit[121] - Cash from operations was $11.1 million in Q1 2022, a significant improvement from the $4.5 million used in Q1 2021[124] - The company used $14.7 million of cash to acquire Eagle Alcohol and $2.3 million for capital expenditures during the quarter[125] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to market risks from changes in commodity prices, specifically ethanol and corn - The business is sensitive to changes in the prices of ethanol and corn[132] - The company recognized net gains of $5.3 million and $10.5 million from changes in fair values of non-designated derivative contracts for the three months ended March 31, 2022 and 2021, respectively[136] Commodity Price Sensitivity Analysis (in millions) | Commodity | Volume | Unit of Measure | Approximate Pre-Tax Income Change from 10% Adverse Price Change | | :--- | :--- | :--- | :--- | | Ethanol | 103.2 | Gallons | ($15.7) | | Corn | 25.9 | Bushels | ($17.4) | Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective at a reasonable assurance level as of March 31, 2022 - The CEO and CFO concluded that as of March 31, 2022, the company's disclosure controls and procedures were effective at a reasonable assurance level[140] - No changes in internal control over financial reporting occurred during the most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, internal controls[141] Part II - Other Information Legal Proceedings The company is subject to various legal proceedings and claims arising in the ordinary course of business - The company is subject to legal proceedings in the ordinary course of business but does not expect them to have a material adverse effect on its financial condition or results of operations[145] Risk Factors The company faces significant risks, primarily related to commodity price volatility for corn, natural gas, and its end products (alcohols, essential ingredients) - Business operations are highly dependent on managing volatile commodity prices for inputs (corn, natural gas) and outputs (alcohols, essential ingredients)[147] - Inflation, exacerbated by supply chain constraints and the war in Ukraine, may adversely impact results by increasing costs of key inputs like grain and energy[151][152] - Future demand for fuel-grade ethanol is uncertain and depends on federal mandates (RFS), which are subject to change and could materially affect results[174][179] - The company has a history of significant losses and may incur them in the future, which could impede operations and expansion[165] - The company's stock price is highly volatile, and it does not intend to pay cash dividends on common stock in the near future, meaning returns depend on stock appreciation[182][186] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities and no purchases of its equity securities during the period - The company has never declared or paid cash dividends on its common stock and does not intend to in the foreseeable future[199] - For Q1 2022, the company accrued and paid in cash an aggregate of $0.3 million in dividends on its Series B Cumulative Convertible Preferred Stock[198]