Alto Ingredients(ALTO) - 2023 Q4 - Annual Report

Part I Business Alto Ingredients, Inc. is the largest U.S. producer of specialty alcohols, renewable fuel, and essential ingredients, operating five facilities across three segments - The company is the largest producer of specialty alcohols in the U.S. and operates five production facilities with a total annual alcohol production capacity of 350 million gallons, of which up to 110 million gallons can be specialty alcohols[11][12] - The company reports in three segments: Pekin production, marketing and distribution, and Western production[14] - Key business strategies include focusing on customer relationships for specialty products, implementing a Carbon Capture and Storage (CCS) project at the Pekin Campus, expanding product offerings with certifications like ISO 9001 and ICH Q7, and increasing break bulk distribution capabilities through its Eagle Alcohol subsidiary[25][26][27] - The company's key markets are Health, Home & Beauty; Food & Beverage; Industry & Agriculture; Essential Ingredients; and Renewable Fuels[16] Production Facilities The company operates five alcohol production facilities, including three at the Pekin Campus and two in the West, with a total annual capacity of 350 million gallons Production Facility Overview | Facility | Location | Status | Max Annual Alcohol Capacity (million gallons) | Max Annual Specialty Alcohol Capacity (million gallons) | Milling Process | | :--- | :--- | :--- | :--- | :--- | :--- | | Pekin Campus | | | | | | | Pekin Wet | Pekin, IL | Operating | 100 | 74 | Wet | | Pekin Dry | Pekin, IL | Operating | 60 | — | Dry | | Pekin ICP | Pekin, IL | Operating | 90 | 66 | Dry | | Western Facilities | | | | | | | Magic Valley | Burley, ID | Hot-Idled | 60 | N/A | Dry | | Columbia | Boardman, OR | Operating | 40 | N/A | Dry | Customers and Suppliers The company serves diverse customers, with Shell and Chevron accounting for 16% of 2023 net sales, and sources corn from three main suppliers - For 2023, sales to the two largest customers, Shell Trading US Company and Chevron Products USA, represented approximately 16% of net sales[61] - In 2023, purchases of corn from the three largest suppliers represented approximately 26% of total corn purchases[63] - The company purchased and resold approximately 103 million gallons of fuel-grade ethanol from third parties in 2023[66] Competition Alto Ingredients is the largest U.S. specialty alcohol producer, competing with major players and over 200 facilities in the fragmented fuel-grade ethanol market - The company is the largest producer of specialty alcohols in the United States[76] - Significant competitors in specialty alcohols include Archer-Daniels-Midland Company, Grain Processing Corporation, CIE, and Greenfield Global Inc[76] - The U.S. fuel-grade ethanol market has over 200 production facilities with a total capacity of approximately 17.8 billion gallons, with largest producers being POET, LLC, Valero, ADM, and Green Plains Inc[77] Governmental Regulation Operations are subject to extensive FDA, EPA, and OSHA regulations, with the Renewable Fuel Standard mandating 15.0 billion gallons of conventional ethanol annually - Products for Health, Home & Beauty, Food & Beverage, and Essential Ingredients markets are regulated by the FDA under the FDCA[83] - The Renewable Fuel Standard (RFS) mandates the use of renewable fuels, with the EPA setting the conventional ethanol requirement at 15.0 billion gallons for each of 2023, 2024, and 2025[85] - The EPA approved E15 for most modern vehicles, but its sale is restricted in summer months in most states, with a proposal for year-round sales deferred to April 2025[87] Risk Factors The company faces significant risks from commodity price volatility, operational disruptions, historical losses, capital project execution, and regulatory changes, including cybersecurity threats - The business is highly dependent on the spread between the costs of corn and natural gas and the prices of alcohols and essential ingredients, which are volatile and subject to forces beyond the company's control[94] - Hedging activities to mitigate price volatility expose the company to financial loss, counterparty default, and margin calls, with net losses of $8.0 million from hedging in FY 2023[102][103] - The company has incurred significant past losses, including a consolidated net loss of $28.0 million in 2023 and $41.6 million in 2022[119] - Capital improvement projects, such as the Carbon Capture and Storage (CCS) initiative, are subject to significant execution, financing, and regulatory risks, and may not achieve expected results[121][122][123] - The fuel-grade ethanol business is highly dependent on the federal Renewable Fuel Standard (RFS), where changes like reduced volume mandates could materially harm the business[137][139][140] Cybersecurity Alto Ingredients maintains a cybersecurity program aligned with NIST and ISO standards, overseen by the Audit Committee, and does not believe threats have materially affected the company - The company's cybersecurity framework is based on the National Institute of Standards and Technology (NIST) Cybersecurity Framework and ISO/IEC 27001[160] - Oversight is provided by the Audit Committee of the Board of Directors, with the Chief Financial Officer and Director of Information Technology leading management's efforts[161][168] - The company utilizes third-party solutions including a managed security service provider, an endpoint detection and response (EDR) system, and a security information and event management (SIEM) system[166] - As of the filing date, the company does not believe that risks from cybersecurity threats have materially affected or are reasonably likely to materially affect its business[167] Properties The company owns its Pekin, IL and Burley, ID production facilities and leases its Boardman, OR facility, along with other office and warehouse spaces - The company owns its Pekin, IL (145 acres) and Burley, ID (25 acres) facilities[172] - The Boardman, OR facility (25 acres) is on land leased under an agreement expiring in 2076[172] Part II Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Alto Ingredients' common stock trades on Nasdaq under 'ALTO', with 75,697,150 shares outstanding, and the company repurchased 436,000 shares in Q4 2023 under its $50 million program - The company's common stock trades on The Nasdaq Capital Market under the symbol 'ALTO'[176] - The company has a share repurchase program of up to $50 million, announced on September 12, 2022, with lenders limiting the initial purchase authorization to $5 million[185] Share Repurchases in Q4 2023 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 2023 | — | $ — | | Nov 2023 | 436,000 | $2.27 | | Dec 2023 | — | $ — | | Q4 2023 Total | 436,000 | $2.27 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, Alto Ingredients reported a $28.0 million net loss on $1.2 billion net sales, an improvement from 2022, driven by better margins and positive Adjusted EBITDA, with a focus on the CCS project Financial Review, Current Initiatives and Outlook FY2023 saw significant financial improvement with increased gross profit and Adjusted EBITDA, driven by strategic initiatives including the top-priority Carbon Capture and Storage (CCS) project - Gross profit for FY2023 was $16 million, a $43 million improvement over 2022, and Adjusted EBITDA was approximately $21 million, a $27 million increase from the prior year[199][200] - The Carbon Capture and Storage (CCS) project is the company's top priority, projected to generate over $30 million in annual EBITDA, excluding additional benefits from low-carbon ethanol attributes[209][211] - Capital expenditures were $30.0 million in 2023, with approximately $25.0 million planned for 2024 for equipment upgrades and process improvements[208] - The Magic Valley facility was temporarily hot-idled in January 2024 to expedite the installation of its corn oil and high protein system and to minimize losses from negative regional crush margins[195][217] Results of Operations (FY 2023 vs. FY 2022) Consolidated net sales decreased by 8.4% to $1.22 billion in 2023, but gross profit significantly improved to $15.7 million due to better commodity crush margins, resulting in a reduced net loss of $28.0 million Consolidated Statement of Operations Summary (in thousands) | Metric | FY 2023 | FY 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,222,940 | $1,335,621 | ($112,681) | | Gross Profit (Loss) | $15,653 | ($27,550) | $43,203 | | Loss from Operations | ($23,848) | ($61,359) | $37,511 | | Income from Cash Grant | $2,812 | $22,652 | ($19,840) | | Consolidated Net Loss | ($28,005) | ($41,597) | $13,592 | - Net sales declined due to a 9% decrease in total alcohol gallons sold (382.5 million vs 418.9 million) and a 6% decrease in the average sales price per gallon ($2.47 vs $2.64)[224] - Gross profit improved by $43.2 million, primarily due to improved commodity crush margins from lower corn prices, with the average cost of corn declining 15% year-over-year[228][230] - The company recorded a $6.5 million asset impairment charge in 2023, primarily related to goodwill from the Eagle Alcohol acquisition[253] Liquidity and Capital Resources As of December 31, 2023, Alto Ingredients had $30.0 million in cash and $33.3 million available on its credit line, with $22.0 million cash from operations and $60.0 million outstanding on its Orion term loan Liquidity Status (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Balance Sheet | | | | Cash and cash equivalents | $30,014 | $36,456 | | Working capital | $103,482 | $121,104 | | Long-term debt, noncurrent | $82,097 | $68,356 | - The company has access to a $100.0 million operating line of credit for its Kinergy subsidiary, with $33.3 million available at year-end 2023[258][268] - A senior secured term loan with Orion Infrastructure Capital has up to $125.0 million available, with $60.0 million drawn as of December 31, 2023[272][276] - For the year ended December 31, 2023, the company repurchased 1,685,000 shares of its common stock for an aggregate of $3.7 million[275] Critical Accounting Policies and Estimates The company's critical accounting policies involve significant judgment in business combinations, revenue recognition, impairment of long-lived assets and goodwill, and deferred tax valuation allowances - Key critical accounting estimates include: accounting for business combinations, revenue recognition, impairment of long-lived assets and goodwill, and the valuation allowance for deferred taxes[277] - The company assesses long-lived assets for impairment when events indicate their carrying value may not be recoverable, using forecasted, undiscounted cash flows, and recognized an impairment loss of $6.0 million against goodwill in FY2023[286][287] - Due to a history of pre-tax losses, the company has recorded a valuation allowance against its net deferred tax assets, concluding it is more likely than not that they will not be realized[292] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is commodity price volatility for ethanol and corn, managed with derivatives that resulted in $8.0 million net losses in 2023, with a 10% adverse price change impacting pre-tax income by $45.5 million for ethanol and $41.0 million for corn - The company's primary market risk is from the price volatility of ethanol and corn[297] - The company uses derivative instruments for risk management, which are not designated as hedges for accounting purposes, resulting in recognized net losses of $8.0 million related to the change in fair values of these contracts for FY2023[301] Market Risk Sensitivity Analysis (FY 2023) | Commodity | Approximate Change to Pre-Tax Income (in millions) from a 10% Adverse Price Change | | :--- | :--- | | Ethanol | $45.5 | | Corn | $41.0 | Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, a conclusion attested to by the independent auditor - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[306] - Based on the COSO 2013 framework, management concluded that internal control over financial reporting was effective as of December 31, 2023[310] - The independent auditor, RSM US LLP, issued an unqualified attestation report on the company's internal control over financial reporting[310] Part III Directors, Executive Compensation, Security Ownership, and Principal Accountant Fees Information for Items 10 through 14 is incorporated by reference from the company's definitive Proxy Statement for the 2024 Annual Meeting of Stockholders - Information for Part III, Items 10 through 14, is incorporated by reference from the registrant's Proxy Statement for the 2024 Annual Meeting of Stockholders[315][316][317] Part IV Exhibits and Financial Statement Schedules This section includes the consolidated financial statements and exhibits, audited by RSM US LLP, with an unqualified opinion on both financial statements and internal control effectiveness Consolidated Financial Statements The consolidated financial statements show total assets of $454.2 million and liabilities of $174.7 million as of December 31, 2023, with $1.22 billion in net sales and a $28.0 million net loss for the year Key Financial Data (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Balance Sheet | | | | Total Assets | $454,241 | $478,321 | | Total Liabilities | $174,684 | $170,232 | | Total Stockholders' Equity | $279,557 | $308,089 | | Statement of Operations (FY) | FY 2023 | FY 2022 | | Net Sales | $1,222,940 | $1,335,621 | | Gross Profit (Loss) | $15,653 | ($27,550) | | Consolidated Net Loss | ($28,005) | ($41,597) | | Cash Flow (FY) | FY 2023 | FY 2022 | | Net Cash from Operations | $22,025 | $6,049 | Notes to Consolidated Financial Statements The notes provide detailed segment information, debt details including the $100 million Kinergy credit line and $125 million Orion term loan, lease liabilities, and income tax details with a significant valuation allowance against deferred tax assets - The company reports in three segments: Pekin Campus production, marketing and distribution, and Western production; for FY2023, Pekin Campus had an income before tax of ($1.6 million), Marketing had $7.6 million, and Western had ($13.5 million)[429][433] - As of Dec 31, 2023, the company had $90.7 million in total long-term borrowings, primarily consisting of a $30.7 million balance on the Kinergy line of credit and a $60.0 million balance on the Orion term loan[455] - The company has significant net operating loss (NOL) carryforwards of approximately $207.5 million for federal and $227.8 million for state purposes, though their use is subject to limitations and a large valuation allowance has been recorded against them[489][492]