Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared
or issued its audit report. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting
and non-voting common equity held by nonaffiliates of the registrant computed by reference to the closing sale price of such stock,
was approximately $37.7 million as of June 30, 2020, the last business day of the registrant’s most recently completed second
fiscal quarter.
As of March 25, 2021, there were 73,167,785 shares of the registrant’s common stock, $0.001 par value per share, and 896 shares of the registrant’s non-voting
common stock, $0.001 par value per share, outstanding.
PART I
Item
1. Business.
Business Overview
We are a leading producer and marketer
of specialty alcohols and essential ingredients, and the largest producer of specialty alcohols in the United States based on
annualized volumes.
We operate seven alcohol production facilities.
Three of our production facilities are located in the Midwestern state of Illinois and four of our facilities are located in the
Western states of California, Oregon and Idaho. We have an annual alcohol production capacity of 450 million gallons. We market
all of the alcohols produced at our facilities as well as fuel-grade ethanol produced by third parties. In 2020, we marketed over
500 million gallons combined of our own alcohols as well as fuel-grade ethanol produced by third parties, and nearly 1.5 million
tons of essential ingredients on a dry matter basis. Our business consists of three reportable segments: two production segments
and a marketing segment.
Our mission is to expand our business as
a leading producer and marketer of specialty alcohols and essential ingredients. We intend to accomplish this goal in part by
investing in our specialized and higher value specialty alcohol production and distribution infrastructure, expanding production
in high-demand essential ingredients, expanding and extending the sale of our products into new regional and international markets,
building efficiencies and economies of scale and by capturing a greater portion of the value stream.
Production Segments
We produce specialty alcohols, fuel-grade
ethanol and essential ingredients, focusing on four key markets: Health, Home & Beauty; Food & Beverage;
Essential Ingredients; and Renewable Fuels. Products for the Health, Home & Beauty market include specialty
alcohols used in mouthwash, cosmetics, pharmaceuticals, hand sanitizers, disinfectants and cleaners. Products for the Food &
Beverage markets include grain neutral spirits used in alcoholic beverages and vinegar as well as corn germ used for corn oils.
Products for Essential Ingredients markets include yeast, corn gluten and distillers grains used in commercial animal feed and
pet foods. Our Renewable Fuels products include fuel-grade ethanol and distillers corn oil used as a feedstock for renewable diesel
fuel.
We produce our alcohols and essential ingredients
at our production facilities described below. Our production facilities located in the Midwest are in the heart of the Corn Belt,
benefit from low-cost and abundant feedstock and enjoy logistical advantages that enable us to provide our products to both domestic
and international markets via truck, rail or barge. Our production facilities located on the West Coast are near their respective
fuel and feed customers, offering significant timing, transportation cost and logistical advantages.
We are currently operating at approximately
64% of our estimated maximum annual production capacity. Our Magic Valley, Stockton and Madera facilities are currently idled.
As market conditions change, we may increase, decrease or idle production at one or more operating facilities or resume operations
at any idled facility.
|
|
|
|
Annual Production Capacity
(estimated, in 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
|
|
|
|
—
|
|
Marketing Segment
We market all of the alcohols and essential
ingredients we produce at our facilities. We also market fuel-grade ethanol produced by third parties.
We have extensive and long-standing customer
relationships, both domestic and international, for our specialty alcohols and essential ingredients. These customers include
producers and distributors of ingredients for cosmetics, sanitizers and related products, distilled spirits producers, food products
manufacturers, producers of personal health/consumer health and personal care hygiene products, and global trading firms.
Our fuel-grade ethanol customers are located
throughout the Western and Midwestern United States and consist of integrated oil companies and gasoline marketers who blend fuel-grade
ethanol into gasoline. Our customers depend on us to provide a reliable supply of fuel-grade ethanol and manage the logistics
and timing of delivery with very little effort on their part. Our customers collectively require fuel-grade ethanol volumes in
excess of the supplies we produce at our facilities. We secure additional fuel-grade ethanol supplies from third-party fuel-grade
ethanol plants in California and other third-party suppliers in the Midwest where a majority of fuel-grade ethanol producers are
located. We arrange for transportation, storage and delivery of fuel-grade ethanol purchased by our customers through our agreements
with third-party service providers in the Western United States as well as in the Midwest from a variety of sources.
We market our essential ingredient feed
products to dairies and feedlots, in many cases located near our production facilities. These customers use our feed products
for livestock as a substitute for corn and other sources of starch and protein. We sell our corn oil to poultry and biodiesel
customers. We do not market essential ingredients from other producers.
See “Note 4 – Segments”
to our Notes to Consolidated Financial Statements included elsewhere in this report for financial information about our business
segments.
Company History
We are a Delaware corporation formed in
February 2005. Our common stock trades on The Nasdaq Capital Market under the symbol “ALTO”. Our Internet website
address is http://www.altoingredients.com. Information contained on our website is not part of this Annual Report on Form
10-K. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such
reports filed with or furnished to the Securities and Exchange Commission and other Securities and Exchange Commission filings
are available free of charge through our website as soon as reasonably practicable after the reports are electronically filed
with, or furnished to, the Securities and Exchange Commission.
Business Strategy
Our goal is to expand our business as a
leading producer and marketer of specialty alcohols and essential ingredients. The key elements of our business and growth strategy
to achieve this objective include:
|
●
|
Focus on our customer relationships. We have repositioned
our business to focus on specialty alcohols and essential ingredients. As a result, our
business is service-oriented and focused on specialty products compared to a price-oriented
business focused on commodity products. We strive to make our business ever more customer-centric
to enable our premium services to support premium prices and new differentiated and higher-margin
products.
|
|
●
|
Expand product offerings. We are pursuing initiatives
to broaden our product offerings to appeal to a wider range of customers and uses in
our key markets. For example, we have secured ISO 9001, ICH Q7 and EXCiPACT certifications.
These certifications appeal to customers with stringent quality demands and enable us
to offer alcohol certified for use as an active pharmaceutical ingredient, or API, and
as an excipient—an inactive component of a drug or medication, such as solvents,
carriers or tinctures—in the pharmaceutical industry. We are reviewing additional
certifications and product positioning within our key markets to expand the range of
customers we serve and the uses our products support.
|
|
●
|
Implement new equipment and technologies. We are
evaluating and plan to implement new equipment and technologies to increase our production
yields, improve our operating efficiencies and reliability, reduce our overall carbon
footprint, diversify our products and revenues, and increase our profitability as financial
resources and market conditions justify these investments.
|
|
●
|
Sell or repurpose underperforming production assets.
We are pursuing the sale of our production facilities located in Stockton and Madera,
California. We are also evaluating the sale or repurposing of other underperforming fuel-grade
ethanol production assets. We have idled certain underperforming production facilities
and intend to restart production at those facilities only when economic prospects indicate
a level of production margins sufficient to justify resuming production. We may repurpose
one or more underperforming production facilities to shift production to specialty alcohols
if market demand justifies the expense. We are also exploring other potential repositioning
activities, including an expansion into new markets such as essential oils and CBD oils,
high protein development and protein pelletizing.
|
|
●
|
Evaluate and pursue strategic opportunities. We
are examining opportunities to expand our business such as joint ventures, strategic
partnerships, synergistic acquisitions and other opportunities. We intend to pursue these
opportunities as financial resources and business prospects make these opportunities
desirable.
|
Competitive Strengths
We are the largest producer of specialty
alcohols in the United States based on annualized volumes. We believe that our competitive strengths include:
|
●
|
Our customer and supplier
relationships. We have extensive and long-standing close customer and supplier
relationships, both domestic and international, for our specialty alcohols and essential
ingredients. We have an excellent reputation for developing specialty alcohols under
stringent quality control standards, particularly at our Pekin, Illinois campus, or Pekin
Campus. Our quality management systems are supported by ISO 9001, ICH Q7 and EXCiPACT
certifications which are viewed by our customers as important attestations of our quality
control standards.
|
|
●
|
Barriers to entry. Our production facilities use
specialized equipment, technologies and processes to achieve stringent quality controls,
lower operating costs, higher yields, and efficient production of alcohols and essential
ingredients. Our specialized equipment, technologies and processes, together with our
quality management certifications, strict regulatory requirements, and close customer
and supplier relationships create significant barriers to entry to new market participants.
|
|
●
|
Our experienced management. Our senior management
team has a proven track record with significant operational and financial expertise and
many years of experience in the alcohol production industry. Our senior executives have
successfully navigated a wide variety of business and industry-specific challenges and
deeply understand the business of successfully producing and marketing specialty alcohols
and essential ingredients.
|
|
●
|
The strategic location of our Midwest production facilities.
We operate three distinct but integrated production facilities at our Pekin Campus in
the Midwest. We are able to participate from that location in the largest regional specialty
alcohol market in the United States as well as international markets. In addition:
|
|
●
|
Our Midwest location enhances our overall hedging opportunities
with a greater correlation to the highly-liquid physical and paper markets in Chicago.
|
|
●
|
Our Midwest location provides excellent logistical access
via rail, truck and barge. In particular, barge access via the Illinois River to the
Mississippi River enables us to efficiently bring our products to international markets.
|
|
●
|
The relatively unique wet milling process at one of our production facilities at our Pekin Campus allows us to extract
the highest use and value from each component of the corn kernel. As a result, the wet milling process generates a higher
level of cost recovery from corn than that produced at a dry mill.
|
|
●
|
Our Midwest location allows us deep market insight and engagement
in major fuel-grade ethanol and feed markets, thereby improving pricing opportunities.
|
We believe that these competitive strengths
will help us attain our goal of expanding our business as a leading producer and marketer of specialty alcohols and essential
ingredients.
Overview of Our Key Markets and Market Opportunity
We produce specialty alcohols, fuel-grade
ethanol and essential ingredients, focusing on four key markets: Health, Home & Beauty; Food & Beverage;
Essential Ingredients; and Renewable Fuels.
Health, Home & Beauty
Our products for the health, home and beauty markets include
specialty alcohols used in mouthwash, cosmetics, pharmaceuticals, hand sanitizers, disinfectants and cleaners. We offer a variety
of specialty alcohols for the health, home and beauty markets, depending on usage and regulatory requirements, including API-grade,
United States Pharmacopeia, or USP, -grade ethyl alcohols, and industrial-grade ethyl alcohol.
In 2020 we expanded our range of available
product offerings within the health, home and beauty markets through quality management systems certifications. We have ISO 9001,
ICH Q7 and EXCiPACT certifications at a key production facility at our Pekin Campus, all of which are viewed as important attestations
of quality control standards. In particular, our ICH Q7 certification qualifies our specialty alcohols for use as an API, and our EXCiPACT certification qualifies our specialty alcohols for use as an excipient in the pharmaceutical industry.
These certifications enable us to offer products to a wider group of customers and generally at more profitable margins.
Food & Beverage
Our products for the food and beverage
market include specialty alcohols used in alcoholic beverages, flavor extracts and vinegar as well as corn germ used for corn
oils and carbon dioxide, or CO2, used for beverage carbonation and dry ice. The principal specialty alcohol we offer
for alcoholic beverages and vinegar is our grain neutral spirits, or GNS, alcohol.
We believe the key drivers in the food
and beverage market include consumer preferences for the social currency of brand authenticity and heritage; consumers seeking
unique and personalized experiences; younger adults drawn to the caché of luxury brands, including super-premium spirits;
improved consumer access to spirits products; the growth of craft distillers; and the ability to meet wide-ranging consumer preferences
through a broad diversity of spirits categories and cocktails.
Essential Ingredients
Our essential ingredients products include
dried yeast, corn gluten meal, corn gluten feed, and distillers grains and liquid feed used in commercial animal feed and pet
foods. The raw materials for our essential ingredients products are generated as co-products from our production of alcohols.
These co-products are further manufactured, altered and refined into our essential ingredients products, including for special
customer applications.
Many of our essential ingredients are used
in a variety of food products to affect their nutrition, including protein and fat content, as well as other product attributes
such as taste, texture, palatability and stability. Our high quality and high purity manufacturing enable our customers to use
some of our essential ingredients in human foods while others are used in pet foods and animal feed. See “—Overview
of Distillers Grains Market”.
We expect the essential ingredients market
to grow significantly due to global demand for higher-grade protein feed, such as feed used in fisheries and other applications.
Renewable Fuels
Our renewable fuels products include fuel-grade
ethanol used as transportation fuel and distillers corn oil used as a biodiesel feedstock. Our renewable fuels business is supported
by our own production of fuel-grade ethanol as well as fuel-grade ethanol produced by third parties.
Renewable fuels, primarily fuel-grade ethanol,
are used for a variety of purposes, including as octane enhancers for premium gasoline and to enable refiners to produce greater
quantities of lower octane blend stock; for fuel blending to extend fuel supplies and reduce reliance on crude oil and refined
products; and to comply with a variety of governmental programs, in particular, the national Renewable Fuel Standard, or RFS,
which was enacted to promote alternatives to fossil fuels. Under the RFS, the mandated use of all renewable fuels rises incrementally
and peaks at 36.0 billion gallons by 2022, of which 15.0 billion gallons are required from conventional, or corn-based, ethanol.
The RFS allows the Environmental Protection Agency, or EPA, to adjust the annual requirement based on certain facts and circumstances.
See “—Governmental Regulation”.
According to the Renewable Fuels Association,
the domestic fuel-grade ethanol industry produced 13.8 billion gallons of ethanol in 2020. According to the United States Department
of Energy, total annual gasoline consumption in the United States is approximately 123.5 billion gallons and total annual fuel-grade
ethanol consumption represented approximately 11% of this amount in 2020. We anticipate that increased transportation and economic
activity as the coronavirus pandemic subsides together with continued limited opportunities for gasoline refinery expansions and
the growing importance of reducing CO2 emissions through the use of renewable fuels will generate additional growth
in the demand for fuel-grade ethanol.
Overview of Alcohol Production Process
Alcohol production from starch- or sugar-based
feedstock is a highly-efficient process. Modern alcohol production requires large amounts of corn, or other high-starch grains,
and water as well as chemicals, enzymes and yeast, and denaturants including unleaded gasoline or liquid natural gas, in addition
to natural gas and electricity.
Dry Milling Process
In the dry milling process, corn or other
high-starch grain is first ground into meal, then slurried with water to form a mash. Enzymes are added to the mash to convert
the starch into dextrose, a simple sugar. Ammonia is added for acidic (pH) control and as a nutrient for the yeast. The mash is
processed through a high temperature cooking procedure, which reduces bacteria levels prior to fermentation. The mash is then
cooled and transferred to fermenters, where yeast is added and the conversion of sugar to alcohol and CO2 begins.
After fermentation, the resulting “beer”
is transferred to distillation, where the alcohol is separated from the residual “stillage”. The resulting alcohol
is concentrated to 190 proof using conventional distillation methods and then is dehydrated to approximately 200 proof, representing
100% alcohol levels, in a molecular sieve system. For fuel-grade ethanol, the resulting anhydrous alcohol is then blended with
approximately 2.5% denaturant, which is usually gasoline, and is then ready for shipment to renewable fuels markets.
The residual stillage is separated into
a coarse grain portion and a liquid portion through a centrifugation process. The soluble liquid portion is concentrated to about
40% dissolved solids by an evaporation process. This intermediate state is called condensed distillers solubles, or syrup. The
coarse grain and syrup portions are then mixed to produce wet distillers grains, or WDG, or can be mixed and dried to produce
dried distillers grains with solubles, or DDGS. Both WDG and DDGS are high-protein animal feed products.
Wet Milling Process
In the wet milling process, corn or other
high-starch grain is first soaked or “steeped” in water for 24 – 48 hours to separate the grain into its many
components. After steeping, the grain slurry is processed first to separate the grain germ, from which the grain oil can be further
separated. The remaining fiber, gluten and starch components are further separated and sold.
The steeping liquor is concentrated in
an evaporator. The concentrated product, called heavy steep water, is co-dried with the fiber component and is then sold as gluten
feed. The gluten component is filtered and dried to produce gluten meal.
The starch and any remaining water from
the mash is then processed into alcohol or dried and processed into corn syrup. The fermentation process for alcohol at this stage
is similar to the dry milling process.
Overview of Distillers Grains Market
Distillers grains are produced as a co-product
of alcohol production and are valuable components of feed rations primarily to dairies and beef cattle markets, both nationally
and internationally. Our plants produce both WDG and DDGS. WDG is sold to customers proximate to the plants and DDGS is delivered
by truck, rail and barge to customers in domestic and international markets. Producing WDG also allows us to use up to one-third
less process energy, thus reducing production costs and lowering the carbon footprint of our production facilities.
Historically, the market price for distillers
grains has generally tracked the value of corn. We believe that the market price of WDG and DDGS is determined by a number of
factors, including the market value of corn, soybean meal and other competitive ingredients, the performance or value of WDG and
DDGS in a particular feed formulation and general market forces of supply and demand, including export markets for these co-products.
The market price of distillers grains is also often influenced by nutritional models that calculate the feed value of distillers
grains by nutritional content, as well as reliability of consistent supply.
Customers
We market and sell through our wholly-owned
subsidiary, Kinergy Marketing LLC, or Kinergy, all of the alcohols we produce. Kinergy also markets fuel-grade ethanol produced
by third parties. We market and sell through our wholly-owned subsidiary, Alto Nutrients, LLC, all of the essential ingredients
we produce.
We have extensive and long-standing customer
relationships, both domestic and international, for our specialty alcohols and essential ingredients. These customers include
producers and distributors of ingredients for cosmetics, sanitizers and related products, distilled spirits producers, food products
manufacturers, producers of personal health/consumer health and personal care hygiene products, and global trading firms.
Our fuel-grade ethanol customers are located
throughout the Western and Midwestern United States and consist of integrated oil companies and gasoline marketers who blend fuel-grade
ethanol into gasoline. Our customers depend on us to provide a reliable supply of fuel-grade ethanol and manage the logistics
and timing of delivery with very little effort on their part. Our customers collectively require fuel-grade ethanol volumes in
excess of the supplies we produce at our facilities. We secure additional fuel-grade ethanol supplies from third-party fuel-grade
ethanol plants in California and other third-party suppliers in the Midwest where a majority of fuel-grade ethanol producers are
located. We arrange for transportation, storage and delivery of fuel-grade ethanol purchased by our customers through our agreements
with third-party service providers in the Western United States as well as in the Midwest from a variety of sources.
We market our essential ingredient feed
products to dairies and feedlots, in many cases located near our production facilities. These customers use our feed products
for livestock as a substitute for corn and other sources of starch and protein. We sell our corn oil to poultry and biodiesel
customers. We do not market essential ingredients from other producers.
Our Pekin Campus production segment generated
$330.4 million and $343.6 million in net sales for the years ended December 31, 2020 and 2019, respectively, from the sale of
alcohols. Our Pekin Campus production segment generated $130.3 million and $139.0 million in net sales for the years ended December
31, 2020 and 2019, respectively, from the sale of essential ingredients.
During 2020 and 2019, our Pekin Campus
production segment sold an aggregate of approximately 193.9 million and 218.5 million gallons of alcohols and 829,000 and 913,000
tons of essential ingredients, respectively, on a dry matter basis.
Our other production segment generated
$137.7 million and $455.3 million in net sales for the years ended December 31, 2020 and 2019, respectively, from the sale of
alcohols. Our other production segment generated $40.9 million and $130.0 million in net sales for the years ended December 31,
2020 and 2019, respectively, from the sale of essential ingredients.
During 2020 and 2019, our other production
segment sold an aggregate of approximately 78.0 million and 272.5 million gallons of alcohols and 619,000 and 1,908,000 tons of
essential ingredients, respectively, on a dry matter basis.
Our marketing segment generated $257.7
million and $356.9 million in net sales for the years ended December 31, 2020 and 2019, respectively, from the sale of alcohols.
During 2020 and 2019, we produced or purchased
from third parties and resold an aggregate of 536.3 million and 819.4 million gallons of alcohols to approximately 65 and 109
customers, respectively. For 2020 and 2019, sales to our two largest customers, Chevron Products USA and Valero Energy Corporation
represented an aggregate of approximately 14% and 24%, of our net sales, respectively. For 2020 and 2019, sales to each of our
other customers represented less than 10% of our net sales.
Suppliers
Production Segments
Our production operations depend upon various
raw materials suppliers, including suppliers of corn, natural gas, electricity and water. The cost of corn is the most important
variable cost associated with our alcohol production. We source corn for our plants using standard contracts, including spot purchase,
forward purchase and basis contracts. When resources are available, we seek to limit the exposure of our production operations
to raw material price fluctuations by purchasing forward a portion of our corn requirements on a fixed price basis and by purchasing
corn and other raw materials futures contracts.
During 2020 and 2019, purchases of corn
from our two largest suppliers represented an aggregate of approximately 25% and 40% of our total corn purchases, respectively,
for those periods. Purchases from each of our other corn suppliers represented less than 10% of total corn purchases in each of
2020 and 2019.
Marketing Segment
Our marketing operations cover alcohols
and essential ingredients we produce but also depend upon various third-party producers of fuel-grade ethanol. In addition, we
provide transportation, storage and delivery services through third-party service providers with whom we have contracted to receive
fuel-grade ethanol at agreed upon locations from our third-party suppliers and to store and/or deliver the ethanol to agreed-upon
locations on behalf of our customers. These contracts generally run from year-to-year, subject to termination by either party
upon advance written notice before the end of the then current annual term.
During 2020 and 2019, we purchased and
resold from third parties an aggregate of approximately 163 million and 213 million gallons, respectively, of fuel-grade ethanol.
During 2020 and 2019, purchases of fuel-grade
ethanol from our two largest third-party suppliers represented 54% and 35%, respectively, of our total third-party ethanol purchases
for each of those periods. Purchases from each of our other third-party ethanol suppliers represented less than 10% of total third-party
ethanol purchases in each of 2020 and 2019.
Production Facilities
We operate seven production facilities.
Three of our production facilities are located in the Midwestern state of Illinois and four of our facilities are located in the
Western states of California, Oregon and Idaho. We have a combined annual alcohol production capacity of 450 million gallons.
Our Magic Valley, Stockton and Madera facilities are currently idled. As market conditions change, we may increase, decrease or
idle production at one or more operating facilities or resume operations at any idled facility. The tables below provide an overview
of our seven production facilities.
Pekin Campus Production Facilities
|
|
Pekin
Wet Facility
|
|
Pekin
Dry Facility
|
|
Pekin
ICP Facility
|
Location
|
|
Pekin, IL
|
|
Pekin, IL
|
|
Pekin, IL
|
Operating status
|
|
Operating
|
|
Operating
|
|
Operating
|
Approximate maximum annual alcohol production
capacity (in millions of gallons)
|
|
100
|
|
60
|
|
90
|
Approximate maximum annual specialty alcohol production capacity
(in millions of gallons)*
|
|
74
|
|
—
|
|
66
|
Production milling process
|
|
Wet
|
|
Dry
|
|
Dry
|
Primary energy source
|
|
Natural Gas
|
|
Natural Gas
|
|
Natural Gas
|
* Included in approximate maximum annual
alcohol production capacity.
Western Production Facilities
|
|
Madera
Facility
|
|
Columbia
Facility
|
|
Magic Valley
Facility
|
|
Stockton
Facility
|
Location
|
|
Madera, CA
|
|
Boardman, OR
|
|
Burley, ID
|
|
Stockton, CA
|
Operating status
|
|
Idled
|
|
Operating
|
|
Idled
|
|
Idled
|
Approximate maximum annual fuel-grade ethanol
production capacity (in millions of gallons)
|
|
40
|
|
40
|
|
60
|
|
60
|
Production milling process
|
|
Dry
|
|
Dry
|
|
Dry
|
|
Dry
|
Primary energy source
|
|
Natural Gas
|
|
Natural Gas
|
|
Natural Gas
|
|
Natural Gas
|
Commodity Risk Management
We employ various risk mitigation techniques.
For example, we may seek to mitigate our exposure to commodity price fluctuations by purchasing forward a portion of our corn
and natural gas requirements through fixed-price or variable-price contracts with our suppliers, as well as entering into derivative
contracts for fuel-grade ethanol, corn and natural gas. To mitigate fuel-grade ethanol inventory price risks, we may sell a portion
of our production forward under fixed- or index-price contracts, or both. We may hedge a portion of the price risks by selling
exchange-traded futures contracts. Proper execution of these risk mitigation strategies can reduce the volatility of our gross
profit margins.
Specialty alcohols have relatively low
price volatility and are usually priced at significant premiums to fuel-grade ethanol. The market price of fuel-grade ethanol
is volatile, however, and subject to large fluctuations. Given the nature of our business, we cannot effectively hedge against
extreme volatility or certain market conditions. For example, fuel-grade ethanol prices, as reported by the Chicago Board of Trade,
or CBOT, ranged from $0.81 to $1.62 per gallon during 2020 and from $1.25 to $1.70 per gallon during 2019; and corn prices, as
reported by the CBOT, ranged from $3.03 to $4.84 per bushel during 2020 and from $3.41 to $4.55 per bushel during 2019.
Marketing Arrangements
We market all the alcohols and essential
ingredients produced at our facilities. In addition, we have exclusive fuel-grade ethanol marketing arrangements with two third-party
ethanol producers, Calgren Renewable Fuels, LLC and Aemetis Advanced Fuels Keyes, Inc., to market and sell their entire fuel-grade
ethanol production volumes. Calgren Renewable Fuels, LLC owns and operates a fuel-grade ethanol production facility in Pixley,
California with annual production capacity of 55 million gallons. Aemetis Advanced Fuels Keyes, Inc. owns and operates a fuel-grade
ethanol production facility in Keyes, California with annual production capacity of 60 million gallons.
Competition
We are the largest producer of specialty
alcohols in the United States based on annualized volumes.
Other significant producers of specialty
alcohols in the United States are Archer-Daniels-Midland Company, MGP Ingredients, Inc., Grain Processing Corporation, CIE and
Greenfield Global Inc., which collectively make up a significant majority of the total installed specialty alcohol production
capacity in the United States along with many smaller producers.
The largest producers of fuel-grade ethanol
in the United States are POET, LLC, Valero Renewable Fuels Company, LLC, Archer-Daniels-Midland Company, Green Plains Inc. and
Flint Hills Resources, collectively with approximately 41% of the total installed fuel-grade ethanol production capacity in the
United States. In addition, there are many mid-sized fuel-grade ethanol producers with several plants under ownership, smaller
producers with one or two plants, and several fuel-grade ethanol marketers that create significant competition. Overall, we believe
there are over 200 fuel-grade ethanol production facilities in the United States with a total installed production capacity of
approximately 17.4 billion gallons and many brokers and marketers with whom we compete for sales of fuel-grade ethanol and its
co-products.
Our fuel-grade ethanol also competes on
a global market against production from other countries, such as Brazil, which may have lower production costs than United States
producers. Lower feedstock input costs such as sugarcane used in Brazil as compared to corn used in the Unites States may give
foreign producers a competitive advantage. In addition, fuel-grade ethanol from sugarcane feedstock qualifies as an advanced biofuel,
unlike corn ethanol, allowing required parties to economically satisfy an advanced biofuel standard. Moreover, new products and
production technologies are under continuous development, many of which, if adopted by competitors, could harm ability to compete.
We believe that our competitive strengths include our customer and supplier relationships, the barriers to entry to our most profitable
lines of business—including our modern technologies at our production facilities—our experienced management, and the
strategic location of our Midwest production facilities. We believe that these advantages will help us to attain our goal to expand
our business as a leading producer and marketer of specialty alcohols and essential ingredients. See “—Competitive
Strengths”.
Governmental Regulation
Our business is subject to a wide range
of federal, state and local laws and regulations directed at protecting public health and the environment, including those promulgated
by the Occupational Safety and Health Administration, or OSHA, the U.S. Food and Drug Administration, or FDA, the EPA, and numerous
state and local authorities. These laws, their underlying regulatory requirements and their potential enforcement, some of which
are described below, impact, or may impact, nearly every aspect of our operations, including our production of alcohols (including
distillation), our production of essential ingredients, our storage facilities, and our water usage, waste water discharge, disposal
of hazardous wastes and emissions, and other matters pertaining to our existing and proposed business by imposing:
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restrictions on our existing and proposed operations and/or
the need to install enhanced or additional controls;
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special requirements applicable to food and drug additives;
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the need to obtain and comply with permits and authorizations;
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liability for exceeding applicable permit limits or legal
requirements, in some cases for the remediation of contaminated soil and groundwater
at our production facilities, contiguous and adjacent properties and other properties
owned and/or operated by third parties; and
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other specifications for the specialty alcohols and essential
ingredients we produce and market.
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In addition, some governmental regulations
are helpful to our production and marketing business. The fuel-grade ethanol industry in particular is supported by federal and
state mandates and environmental regulations that favor the use of fuel-grade ethanol in motor fuel blends in North America. Some
of the governmental regulations applicable to our production and marketing business are briefly described below.
Food and Drug Regulation
Our products for the Health, Home &
Beauty, Food & Beverage and some Essential Ingredients markets are subject to regulation by the FDA as well as similar state
agencies. Under the Federal Food, Drug, and Cosmetic Act, or FDCA, the FDA regulates the processing, formulation, safety, manufacture,
packaging, labeling and distribution of food ingredients, vitamins and cosmetics. Many of the FDA’s and FDCA’s rules
and regulations apply directly to us as well as indirectly through their application in our
customers’ products. To be properly marketed and sold in the United States, a relevant product must be generally recognized
as safe, approved and not adulterated or misbranded under the FDCA and relevant regulations issued under the FDCA. The FDA has
broad authority to enforce the provisions of the FDCA. Failure to comply with the laws and regulations of the FDA or similar state
agencies could prevent us from selling certain of our products or subject us to liability.
Renewable Fuels Energy Legislation
Under the RFS, the mandated use of all
renewable fuels, including fuel-grade ethanol, rises incrementally and peaks at 36.0 billion gallons by 2022, of which 15.0 billion
gallons are required from conventional, or corn-based, ethanol. Under the provisions of the Energy Independence and Security Act
of 2007, the EPA has the authority to waive the mandated RFS requirements in whole or in part. To grant a waiver, the EPA administrator
must determine, in consultation with the Secretaries of Agriculture and Energy, that there is inadequate domestic renewable fuel
supply or implementation of the requirement would severely harm the economy or environment of a state, region or the United States
as a whole.
Various bills in Congress introduced from
time to time are also directed at altering existing renewable fuels energy legislation, but none has passed in recent years. Some
legislative bills are directed at halting or reversing expansion of, or even eliminating, the renewable fuel program, while other
bills are directed at bolstering the program or enacting further mandates or grants that would support the renewable fuels industry.
The EPA has allowed fuel and fuel-additive
manufacturers to introduce into commercial gasoline that contains greater than 10% fuel-grade ethanol by volume, up to 15% fuel-grade
ethanol by volume, or E15, for vehicles from model year 2001 and beyond. Commercial sale of E15 has begun in a majority of states,
and the EPA has enacted a rule allowing for year-round use of E15.
Various states including California, Oregon
and Washington, and other regions such as the Canadian province of British Columbia, have implemented low-carbon fuel standards
focused on reducing the carbon intensity of transportation fuels. Blending fuel-grade ethanol into gasoline is one of the primary
means of attaining these goals.
Additional Environmental Regulations
In addition to the governmental regulations
applicable to the alcohol production and marketing industry described above, our business is subject to additional federal, state
and local environmental regulations, including regulations established by the EPA and state regulatory agencies related to water
quality and air pollution control. We cannot predict the manner or extent to which these regulations will harm or help our business
or the alcohol production and marketing industry in general.
Employees
As of March 25, 2021, we had approximately
370 employees, including 369 full-time employees. We believe that our employees are highly-skilled, and our success will depend
in part upon our ability to retain our employees and attract new qualified employees, many of whom are in great demand. Approximately
51% of our employees are presently represented by a labor union and covered by a collective bargaining agreement. We have never
had a work stoppage or strike and we consider our relations with our employees to be good.
Item 1A. Risk
Factors.
Before
deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the
other information contained in this Report and in our other filings with the Securities and Exchange Commission, including subsequent
reports on Forms 10-Q and 8-K. The risks and uncertainties described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known
or unknown risks or uncertainties actually occurs with material adverse effects on Alto Ingredients, our business, financial condition,
results of operations and/or liquidity could be seriously harmed. In that event, the market price for our common stock will likely
decline, and you may lose all or part of your investment.
Risks Related to our Business
The effects of the coronavirus pandemic, or its abatement,
may materially and adversely affect our business, results of operations and liquidity.
The coronavirus pandemic has resulted in
businesses suspending or substantially curtailing operations and travel, quarantines, and an overall substantial slowdown of economic
activity. Federal, state and foreign governments have implemented measures to contain the virus, including social distancing requirements,
travel restrictions, border closures, limitations on public gatherings, work-from-home orders, and closure of non-essential businesses.
Many of these measures remain or have been curtailed only partially. Transportation fuels in particular, including fuel-grade
ethanol, experienced significant price declines and reduced demand. A further or extended ongoing downturn in global economic
activity, or recessionary conditions in general, would likely lead to poor demand for, and negatively affect the prices of, fuel-grade
ethanol, materially and adversely affecting our business, results of operations and liquidity.
Furthermore, to protect the health and
well-being of our employees and customers, we have implemented work-from-home requirements, made substantial modifications to
employee travel policies, and cancelled or shifted marketing and other corporate events to virtual-only formats for the foreseeable
future. While we continue to monitor our circumstances and may adjust our current policies as more information and public health
guidance become available, these precautionary measures could negatively affect our sales and marketing efforts, delay and lengthen
our sales cycles, or create operational or other challenges, any of which could harm our business and results of operations.
In addition, if one or more of our employees
or customers becomes ill from coronavirus and attributes their infection to us, including through exposure at one of our offices
or production facilities, we could be subject to allegations of failure to adequately mitigate the risk of exposure. Such allegations
could harm our reputation and expose us to the risks of litigation and liability.
Our specialty alcohols business has benefitted
significantly from the coronavirus pandemic due to a substantial increase in demand for alcohol-based sanitizers and disinfectants.
As the coronavirus pandemic abates, demand for alcohol-based sanitizers and disinfectants may decline, ultimately exerting downward
pressure on prices for our specialty alcohols used in those products. In addition, higher industry production levels in response
to the coronavirus pandemic and any resulting oversupply of specialty alcohols for sanitizers and disinfectants would also exert
downward pressure on prices. Reduced demand and prices for our specialty alcohols used in sanitizers and disinfectants, or industry
oversupply of those specialty alcohols, may materially and adversely affect our business, results of operations and liquidity.
Our results of operations and our ability to operate
at a profit are largely dependent on our ability to manage the costs of corn, natural gas and other production inputs, with the
prices of our alcohols and essential ingredients, all of which are subject to volatility and uncertainty.
Our results of operations are highly impacted
by commodity prices, including the cost of corn, natural gas and other production inputs that we must purchase, and the prices
of alcohols and essential ingredients that we sell. Prices and supplies are subject to and determined by market and other forces
over which we have no control, such as weather, domestic and global demand, supply shortages, export prices and various governmental
policies in the United States and throughout the world.
Price volatility of corn, natural gas and
other production inputs, and alcohols and essential ingredients, may cause our results of operations to fluctuate substantially.
We may fail to generate expected levels of net sales and profits even under fixed-price and other contracts for the sale of specialty
alcohols used in consumer products. Our customers may not pay us timely or at all, even under longer-term, fixed-price contracts
for our specialty alcohols, and may seek to renegotiate prices under those contracts during periods of falling prices or high
price volatility.
Over the past several years, for example,
the spread between corn and fuel-grade ethanol prices has fluctuated significantly. Fluctuations are likely to continue to occur.
A sustained narrow spread, whether as a result of sustained high or increased corn prices or sustained low or decreased alcohol
or essential ingredient prices, would adversely affect our results of operations and financial position. Revenues from sales of
alcohols, particularly fuel-grade ethanol, and essential ingredients could decline below the marginal cost of production, which
may force us to further suspend production, particularly fuel-grade ethanol production, at some or all of our facilities.
In addition, some of our fuel-grade ethanol
marketing activities will likely be unprofitable in a market of generally declining prices due to the nature of our business.
For example, to satisfy customer demands, we maintain certain quantities of fuel-grade ethanol inventory for subsequent resale.
Moreover, we procure much of our fuel-grade ethanol inventory outside of third-party marketing arrangements and therefore must
buy fuel-grade ethanol at a price established at the time of purchase and sell fuel-grade ethanol at an index price established
later at the time of sale that is generally reflective of movements in the market price of fuel-grade ethanol. As a result, our
margins for fuel-grade ethanol sold in these transactions generally decline and may turn negative as the market price of fuel-grade
ethanol declines.
We can provide no assurance that corn,
natural gas or other production inputs can be purchased at or near current or any particular prices, or that our alcohols or essential
ingredients will sell at or near current or any particular prices. Consequently, our results of operations and financial position
may be adversely affected by increases in the prices of corn, natural gas and other production inputs or decreases in the prices
of our alcohols and essential ingredients.
Increased alcohol or essential ingredient production
or higher inventory levels may cause a decline in prices for those products, and may have other negative effects, adversely impacting
our results of operations, cash flows and financial condition.
The prices of our alcohols and essential
ingredients are impacted by competing third-party supplies of those products. For example, we believe that the most significant
factor influencing the price of fuel-grade ethanol has been the substantial increase in production. According to the Renewable
Fuels Association, domestic fuel-grade ethanol production capacity increased from an annualized rate of 1.5 billion gallons per
year in January 1999 to a record 16.1 billion gallons in 2018. In addition, if fuel-grade ethanol production margins improve,
we anticipate that owners of production facilities operating at below capacity, or owners of idled production facilities, will
increase production levels, thereby resulting in more abundant fuel-grade ethanol supplies and inventories. Increases in the supply
of alcohols and essential ingredients may not be commensurate with increases in demand for alcohols and essential ingredients,
thus leading to lower prices. Moreover, higher industry production levels in response to the coronavirus pandemic and any resulting
oversupply of alcohols for sanitizers and disinfectants, and corresponding oversupply of essential ingredient co-products, may
also exert downward pressure on prices. Any of these outcomes could have a material adverse effect on our results of operations,
cash flows and financial condition.
The prices of our products are volatile and subject to
large fluctuations, which may cause our results of operations to fluctuate significantly.
The prices of our products are volatile
and subject to large fluctuations. For example, the market price of fuel-grade ethanol is dependent upon many factors, including
the supply of ethanol and the price of gasoline, which is in turn dependent upon the price of petroleum which itself is highly
volatile and difficult to forecast. Our fuel-grade ethanol sales are tied to prevailing spot market prices rather than long-term,
fixed-price contracts. Fuel-grade ethanol prices, as reported by the CBOT, ranged from $0.81 to $1.62 per gallon in 2020 and from
$1.25 to $1.70 per gallon in 2019. In addition, even under longer-term, fixed-price contracts for our specialty alcohols, our
customers may seek to renegotiate prices under those contracts during periods of falling prices or high price volatility. Fluctuations
in the prices of our products may cause our results of operations to fluctuate significantly.
Disruptions in our production or distribution may adversely
affect our business, results of operations and financial condition.
Our business depends on the continuing
availability of rail, road, port, storage and distribution infrastructure. In particular, due to limited storage capacity at our
production facilities and other considerations related to production efficiencies, our facilities depend on just-in-time delivery
of corn. The production of alcohols also requires a significant and uninterrupted supply of other raw materials and energy, primarily
water, electricity and natural gas. Local water, electricity and gas utilities may fail to reliably supply the water, electricity
and natural gas that our production facilities need or may fail to supply those resources on acceptable terms. In the past, poor
weather has caused disruptions in rail transportation, which slowed the delivery of fuel-grade ethanol by rail, the principle
manner by which fuel-grade ethanol from our facilities located in the Midwest is transported to market. In addition, we recently
experienced closure of the Illinois River for lock repairs which required greater use of less cost-effective modes of product
transport such as via rail and truck, which resulted in higher costs and negatively affected our results of operations.
Disruptions in production or distribution,
whether caused by labor difficulties, unscheduled downtimes and other operational hazards inherent in the alcohol production industry,
including equipment failures, fires, explosions, abnormal pressures, blowouts, pipeline ruptures, transportation accidents and
natural disasters such as earthquakes, floods and storms, or human error or malfeasance or other reasons, could prevent timely
deliveries of corn or other raw materials and energy, and could delay transport of our products to market, and may require us
to halt production at one or more production facilities, any of which could have a material adverse effect on our business, results
of operations and financial condition.
Some of these operational hazards may also
cause personal injury or loss of life, severe damage to or destruction of property and equipment or environmental damage, and
may result in suspension of operations and the imposition of civil or criminal penalties. Our insurance may not fully cover the
potential hazards described above or we may be unable to renew our insurance on commercially reasonable terms or at all.
We may engage in hedging transactions and other risk
mitigation strategies that could harm our results of operations and financial condition.
In an attempt to partially offset the effects
of volatility of our product prices, in particular fuel-grade ethanol, corn and natural gas costs, we may enter into contracts
to fix the price of a portion of our production or purchase a portion of our corn or natural gas requirements on a forward basis.
In addition, we may engage in other hedging transactions involving exchange-traded futures contracts for corn, natural gas and
unleaded gasoline from time to time. The financial statement impact of these activities is dependent upon, among other things,
the prices involved and our ability to sell sufficient products to use all of the corn and natural gas for which forward commitments
have been made. Hedging arrangements also expose us to the risk of financial loss in situations where the other party to the hedging
contract defaults on its contract or, in the case of exchange-traded contracts, where there is a change in the expected differential
between the underlying price in the hedging agreement and the actual prices paid or received by us. In addition, our open contract
positions may require cash deposits to cover margin calls, negatively impacting our liquidity. As a result, our hedging activities
and fluctuations in the price of corn, natural gas, fuel-grade ethanol and unleaded gasoline may adversely affect our results
of operations, financial condition and liquidity.
The industries in which we operate are extremely competitive.
Many of our significant competitors have greater production and financial resources and could use their greater resources to gain
market share at our expense.
The industries in which we operate are
extremely competitive. Many of our significant competitors have substantially greater production and financial resources than
we do. As a result, our competitors may be able to compete more aggressively and sustain that competition over a longer period
of time. Successful competition will require a continued high level of investment in facility maintenance. We may fail to anticipate
or respond adequately to new industry developments and other competitive pressures due to our limited resources relative to many
significant competitors. This failure could reduce our competitiveness and cause a decline in market share, sales and profitability.
Even if sufficient funds are available, we may not be able to make the modifications and improvements necessary to compete successfully.
We also face competition from international
suppliers, particularly of fuel-grade ethanol, many of whom have cost structures substantially lower than ours. An increase in
domestic or foreign competition could force us to reduce our prices and take other steps to compete effectively, which could adversely
affect our business, financial condition and results of operations.
We incur significant expenses to maintain and upgrade
our production facilities and operating equipment, and any interruption in our operations would harm our operating performance.
We regularly incur significant expenses
to maintain and upgrade our production facilities and operating equipment. The machines and equipment we use to produce our alcohols
and manufacture our essential ingredients are complex, have many parts, and some operate on a continuous basis. We must perform
routine equipment maintenance and must periodically replace a variety of parts such as motors, pumps, pipes and electrical parts.
In addition, our production facilities require periodic shutdowns to perform major maintenance and upgrades. These scheduled shutdowns
result in lower sales and increased costs in the periods during which a shutdown occurs and could result in unexpected operational
issues in future periods as a result of changes to equipment and operational and mechanical processes made during shutdown.
Risks Related to our Finances
We have incurred significant losses and negative operating
cash flow in the past and we may incur losses and negative operating cash flow in the future, which may hamper our operations
and impede us from expanding our business.
We have incurred significant losses and
negative operating cash flow in the past. For the years ended December 31, 2020 and 2019, we incurred consolidated net losses
of approximately $17.3 million and $101.3 million, respectively. For the year ended December 31, 2019, we incurred negative operating
cash flow of approximately $23.4 million. We may incur losses and negative operating cash flow in the future. We expect to rely
on cash on hand, cash, if any, generated from our operations, borrowing availability under our lines of credit and proceeds from
our future financing activities, if any, to fund all of the cash requirements of our business. Additional losses and negative
operating cash flow may hamper our operations and impede us from expanding our business.
Our indebtedness exposes us to many risks that could
negatively impact our business, our business prospects, our liquidity and our cash flows and results of operations.
Our production facilities located in the
Midwest have significant indebtedness. In addition, we have significant indebtedness under our senior secured notes issued at
the parent-company level. The terms of our loans require amortizing payments of principal over the lives of the loans and our
borrowing availability under our revolving credit facilities periodically and automatically declines through the maturity dates
of those facilities. Our indebtedness could:
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make it more difficult to pay or refinance our debts as
they become due during adverse economic and industry conditions because those conditions
could result in insufficient cash flows from operations to make our scheduled debt payments;
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limit our flexibility to pursue strategic opportunities
or react to changes in our business and the industry in which we operate and, consequently,
place us at a competitive disadvantage to our competitors who have less debt;
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require a substantial portion of our cash flow from operations,
if any, to be used for debt service payments, thereby reducing our ability to fund working
capital, capital expenditures, new business ventures, dividend payments and other general
corporate purposes; and/or
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limit our ability to procure additional financing for
working capital or other purposes.
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Our term loans and credit facilities also
require compliance with numerous financial and other covenants, the violation of which could result in an acceleration of our
indebtedness.
Much of our indebtedness bears interest
at variable rates. An increase in prevailing interest rates would likewise increase our debt service obligations and could materially
and adversely affect our cash flows and results of operations.
Our ability to generate sufficient cash
to make all principal and interest payments when due depends on our business performance, which is subject to a variety of factors
beyond our control, including the supply of and demand for our alcohols and other products, product prices, the cost of key production
inputs, and many other factors incident to the alcohol production and marketing industry. We cannot provide any assurance that
we will be able to timely satisfy such obligations.
Our ability to utilize net operating loss carryforwards
and certain other tax attributes may be limited.
Federal and state income tax laws impose
restrictions on our use of net operating loss, or NOL, and tax credit carryforwards in the event that an “ownership change”
occurs for tax purposes, as defined by Section 382 of the Internal Revenue Code, or Code. In general, an ownership change occurs
when stockholders owning 5% or more of a corporation entitled to use NOL or other loss carryforwards have increased their ownership
by more than 50 percentage points during any three-year period. The annual base limitation under Section 382 of the Code is calculated
by multiplying the corporation’s value at the time of the ownership change by the greater of the long-term tax-exempt rate
determined by the Internal Revenue Service in the month of the ownership change or the two preceding months. Our ability to utilize
our NOL and other loss carryforwards may be substantially limited. These limitations could result in increased future tax obligations,
which could have a material adverse effect on our financial condition and results of operations.
Risks Related to Legal and Regulatory
Matters
Future demand for fuel-grade ethanol is uncertain
and may be affected by changes to federal mandates, public perception, consumer acceptance and overall consumer demand for transportation
fuel, any of which could negatively affect demand for fuel-grade ethanol and our results of operations.
Although many trade groups, academics and
governmental agencies have supported fuel-grade ethanol as a fuel additive that promotes a cleaner environment, others have criticized
fuel-grade ethanol production as consuming considerably more energy and emitting more greenhouse gases than other biofuels and
potentially depleting water resources. Some studies have suggested that corn-based ethanol is less efficient than ethanol produced
from other feedstock and that it negatively impacts consumers by causing increased prices for dairy, meat and other food generated
from livestock that consume corn. Additionally, critics of fuel-grade ethanol contend that corn supplies are redirected from international
food markets to domestic fuel markets. If negative views of corn-based ethanol production gain acceptance, support for existing
measures promoting use and domestic production of corn-based ethanol as a fuel additive could decline, leading to reduction or
repeal of federal ethanol usage mandates, which would materially and adversely affect the demand for fuel-grade ethanol. These
views could also negatively impact public perception of the fuel-grade ethanol industry and acceptance of ethanol as an alternative
fuel.
There are limited markets for fuel-grade
ethanol beyond those established by federal mandates. Discretionary blending and E85 blending (i.e., gasoline blended with up
to 85% fuel-grade ethanol by volume) are important secondary markets. Discretionary blending is often determined by the price
of fuel-grade ethanol versus the price of gasoline. In periods when discretionary blending is financially unattractive, the demand
for fuel-grade ethanol may decline. Also, the demand for fuel-grade ethanol is affected by the overall demand for transportation
fuel. Demand for transportation fuel is affected by the number of miles traveled by consumers and vehicle fuel economy. Lower
demand for fuel-grade ethanol and co-products would reduce the value of our ethanol and related products, erode our overall margins
and diminish our ability to generate revenue or to operate profitably. In addition, we believe that consumer acceptance of E15
and E85 fuels is necessary before fuel-grade ethanol can achieve any significant growth in market share relative to other transportation
fuels.
The United States fuel-grade ethanol industry
is highly dependent upon various federal and state laws and any changes in those laws could have a material adverse effect on
our results of operations, cash flows and financial condition.
The EPA has implemented the RFS under the
Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007. The RFS program sets annual quotas for the quantity
of renewable fuels (such as fuel-grade ethanol) that must be blended into motor fuels consumed in the United States. The domestic
market for fuel-grade ethanol is significantly impacted by federal mandates under the RFS program for volumes of renewable fuels
(such as ethanol) required to be blended with gasoline. Future demand for fuel-grade ethanol will largely depend on incentives
to blend ethanol into motor fuels, including the price of ethanol relative to the price of gasoline, the relative octane value
of ethanol, constraints in the ability of vehicles to use higher ethanol blends, the RFS, and other applicable environmental requirements.
Under the provisions of the Clean Air Act,
as amended by the Energy Independence and Security Act of 2007, the EPA has limited authority to waive or reduce the mandated
RFS requirements, which authority is subject to consultation with the Secretaries of Agriculture and Energy, and based on a determination
that there is inadequate domestic renewable fuel supply or implementation of the applicable requirements would severely harm the
economy or environment of a state, region or the United States in general. Our results of operations, cash flows and financial
condition could be adversely impacted if the EPA reduces the RFS requirements from the statutory levels specified in the RFS.
Various bills in Congress introduced from
time to time are also directed at altering existing renewable fuels energy legislation, but none has passed in recent years. Some
legislative bills are directed at halting or reversing expansion of, or even eliminating, the renewable fuel program, while other
bills are directed at bolstering the program or enacting further mandates or grants that would support the renewable fuels industry.
Our results of operations, cash flows and financial condition could be adversely impacted if any legislation is enacted that reduces
the RFS volume requirements.
We may be adversely affected by environmental,
health and safety laws, regulations and liabilities.
We are subject to various federal, state
and local environmental laws and regulations, including those relating to the discharge of materials into the air, water and ground,
the generation, storage, handling, use, transportation and disposal of hazardous materials and wastes, and the health and safety
of our employees. In addition, some of these laws and regulations require us to operate under permits that are subject to renewal
or modification. These laws, regulations and permits often require expensive pollution control equipment or operational changes
to limit actual or potential impacts to the environment. A violation of these laws and regulations or permit conditions can result
in substantial fines, natural resource damages, criminal sanctions, permit revocations and/or production facility shutdowns. In
addition, we have made, and expect to make, significant capital expenditures on an ongoing basis to comply with increasingly stringent
environmental laws, regulations and permits.
We may be liable for the investigation
and cleanup of environmental contamination at each of our production facilities and at off-site locations where we arrange for
the disposal of hazardous substances or wastes. If these substances or wastes have been or are disposed of or released at sites
that undergo investigation and/or remediation by regulatory agencies, we may be responsible under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, or other environmental laws for all or part of the costs of investigation and/or
remediation, and for damages to natural resources. We may also be subject to related claims by private parties alleging property
damage and personal injury due to exposure to hazardous or other materials at or from those properties. Some of these matters
may require us to expend significant amounts for investigation, cleanup or other costs.
In addition, new laws, new interpretations
of existing laws, increased governmental enforcement of environmental laws or other developments could require us to make significant
additional expenditures. Continued government and public emphasis on environmental issues will likely result in increased future
investments for environmental controls at our production facilities. Present and future environmental laws and regulations, and
interpretations of those laws and regulations, applicable to our operations, more vigorous enforcement policies and discovery
of currently unknown conditions may require substantial expenditures that could have a material adverse effect on our results
of operations and financial condition.
The hazards and risks associated with producing
and transporting our products (including fires, natural disasters, explosions and abnormal pressures and blowouts) may also result
in personal injury claims or damage to property and third parties. As protection against operating hazards, we maintain insurance
coverage against some, but not all, potential losses. However, we could sustain losses for uninsurable or uninsured risks, or
in amounts in excess of existing insurance coverages. Events that result in significant personal injury or damage to our property
or third parties or other losses that are not fully covered by insurance could have a material adverse effect on our results of
operations and financial condition.
Risks Related to Ownership of our Common
Stock
Future sales of substantial amounts of our common
stock, or perceptions that those sales could occur, could adversely affect the market price of our common stock and our ability
to raise capital.
Future sales of substantial
amounts of our common stock into the public market, including up to 8.9 million shares of our common stock that may be issued
upon the exercise of outstanding warrants, or perceptions that those sales could occur, could adversely affect the prevailing
market price of our common stock and our ability to raise capital.
Our stock price is highly volatile, which could
result in substantial losses for investors purchasing shares of our common stock and in litigation against us.
The market price of
our common stock has fluctuated significantly in the past and may continue to fluctuate significantly in the future. The market
price of our common stock may continue to fluctuate in response to one or more of the following factors, many of which are beyond
our control:
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fluctuations in the market prices of our products;
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fluctuations in the costs of key production input commodities
such as corn and natural gas;
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the volume and timing of the receipt of orders for our
products from major customers;
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the coronavirus pandemic, including governmental and public
response to the pandemic;
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competitive pricing pressures;
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anticipated trends in our financial condition and results
of operations;
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changes in market valuations of companies similar to us;
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stock market price and volume fluctuations generally;
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regulatory developments or increased enforcement;
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fluctuations in our quarterly or annual operating results;
|
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●
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additions or departures of key personnel;
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●
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our ability to obtain any necessary financing;
|
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●
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our financing activities and future sales of our common
stock or other securities; and
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●
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our ability to maintain contracts that are critical to
our operations.
|
The price at which
you purchase shares of our common stock may not be indicative of the price that will prevail in the trading market. You may be
unable to sell your shares of common stock at or above your purchase price, which may result in substantial losses to you and
which may include the complete loss of your investment. In the past, securities class action litigation has often been brought
against a company following periods of high stock price volatility. We may be the target of similar litigation in the future.
Securities litigation could result in substantial costs and divert management’s attention and our resources away from our
business.
Any of the risks described
above could have a material adverse effect on our results of operations, the price of our common stock, or both.
Because we do not intend to pay any cash dividends
on our shares of common stock in the near future, our stockholders will not be able to receive a return on their shares unless
and until they sell them.
We intend to retain
a significant portion of any future earnings to finance the development, operation and expansion of our business. We do not anticipate
paying any cash dividends on our common stock in the near future. The declaration, payment, and amount of any future dividends
will be made at the discretion of our board of directors, and will depend upon, among other things, our results of operations,
cash flows, and financial condition, operating and capital requirements, and other factors as our board of directors considers
relevant. There is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect
to the amount of any such dividend. Unless our board of directors determines to pay dividends, our stockholders will be required
to look to appreciation of our common stock to realize a gain on their investment. There can be no assurance that this appreciation
will occur. See “Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities—Dividend Policy”.
Our bylaws contain an exclusive forum provision,
which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors,
officers, employees or agents.
Our bylaws provide that, unless we consent
in writing to the selection of an alternative forum, the Delaware Court of Chancery shall be the sole and exclusive forum for
(a) any derivative action or proceeding brought on behalf of us, (b) any action asserting a claim of breach of a fiduciary duty
owed by any director, officer or other employee of us to us or our stockholders, (c) any action asserting a claim arising pursuant
to any provision of the Delaware General Corporation Law, or (d) any action asserting a claim governed by the internal affairs
doctrine.
For the avoidance of doubt, the exclusive
forum provision described above does not apply to any claims arising under the Securities Act of 1933, as amended, or the Securities
Act, or the Securities Exchange Act of 1934, as amended, or the Exchange Act. Section 27 of the Exchange Act creates exclusive
federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations
thereunder, and Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought
to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder.
The choice of forum provision in our bylaws
may limit our stockholders’ ability to bring a claim in a judicial forum that they find favorable for disputes with us or
our directors, officers, employees or agents, which may discourage such lawsuits against us and our directors, officers, employees
and agents even though an action, if successful, might benefit our stockholders. The applicable courts may also reach different
judgments or results than would other courts, including courts where a stockholder considering an action may be located or would
otherwise choose to bring the action, and such judgments or results may be more favorable to us than to our stockholders. With
respect to the provision making the Delaware Court of Chancery the sole and exclusive forum for certain types of actions, stockholders
who do bring a claim in the Delaware Court of Chancery could face additional litigation costs in pursuing any such claim, particularly
if they do not reside in or near Delaware. Finally, if a court were to find this provision of our bylaws inapplicable to, or unenforceable
in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving
such matters in other jurisdictions, which could have a material adverse effect on us.
General Risk Factors
Cyberattacks through security vulnerabilities
could lead to disruption of business, reduced revenue, increased costs, liability claims, or harm to our reputation or competitive
position.
Security vulnerabilities may arise from
our hardware, software, employees, contractors or policies we have deployed, which may result in external parties gaining access
to our networks, data centers, cloud data centers, corporate computers, manufacturing systems, and/or access to accounts we have
at our suppliers, vendors, and customers. External parties may gain access to our data or our customers’ data, or attack
the networks causing denial of service or attempt to hold our data or systems in ransom. The vulnerability could be caused
by inadequate account security practices such as failure to timely remove employee access when terminated. To mitigate these security
issues, we have implemented measures throughout our organization, including firewalls, backups, encryption, employee information
technology policies and user account policies. However, there can be no assurance these measures will be sufficient to avoid cyberattacks.
If any of these types of security breaches were to occur and we were unable to protect sensitive data, our relationships with
our business partners and customers could be materially damaged, our reputation could be materially harmed, and we could be exposed
to a risk of litigation and possible significant liability.
Further, if we fail to adequately maintain
our information technology infrastructure, we may have outages and data loss. Excessive outages may affect our ability to timely
and efficiently deliver products to customers or develop new products. Such disruptions and data loss may adversely impact our
ability to fulfill orders and interrupt other processes. Delayed sales or lost customers resulting from these disruptions could
adversely affect our financial results, stock price and reputation.
The State of California enacted the California
Consumer Privacy Act of 2018, or CCPA, effective on January 1, 2020. Our and our business partners’ or contractors’
failure to fully comply with the CCPA and other laws could lead to significant fines and require onerous corrective action. In
addition, data security breaches experienced by us or our business partners or contractors could result in the loss of trade secrets
or other intellectual property, public disclosure of sensitive commercial data, and the exposure of personally identifiable information
(including sensitive personal information) of our employees, customers, suppliers, contractors and others.
Unauthorized use or disclosure of, or access
to, any personal information maintained by us or on our behalf, whether through breach of our systems, breach of the systems of
our suppliers or vendors by an unauthorized party, or through employee or contractor error, theft or misuse, or otherwise, could
harm our business. If any such unauthorized use or disclosure of, or access to, such personal information was to occur, our operations
could be seriously disrupted, and we could be subject to demands, claims and litigation by private parties, and investigations,
related actions, and penalties by regulatory authorities. In addition, we could incur significant costs in notifying affected
persons and entities and otherwise complying with the multitude of foreign, federal, state and local laws and regulations relating
to the unauthorized access to, or use or disclosure of, personal information. Finally, any perceived or actual unauthorized access
to, or use or disclosure of, such information could harm our reputation, substantially impair our ability to attract and retain
customers and have an adverse impact on our business, financial condition and results of operations.
Item
1B. Unresolved Staff Comments.
We have received
no written comments regarding our periodic or current reports from the staff of the Securities and Exchange Commission that were
issued 180 days or more preceding the end of our 2020 fiscal year and that remain unresolved.
Item
2. Properties.
Our corporate headquarters,
located in Pekin, Illinois, consists of plants and facilities totaling 145 acres on land we own. In Sacramento, California, we
lease office space totaling 10,000 square feet under a lease expiring in 2029. We have plants located in Madera, California, at
a 137 acre facility; Boardman, Oregon, at a 25 acre facility; Burley, Idaho, at a 25 acre facility; and Stockton, California,
at a 30 acre facility. We own the land in Madera, California and Burley, Idaho. The land in Boardman, Oregon and Stockton, California
are leased under leases expiring in 2026 and 2022, respectively. We also own an idled ethanol production facility in Canton, Illinois
on a 110 acre facility, of which a significant portion is farmland. Our production segments include our ethanol production facilities.
See “Business—Production Facilities”.
Item
3. Legal Proceedings.
We are subject to legal proceedings, claims
and litigation arising in the ordinary course of business. While the amounts claimed may be substantial, the ultimate liability
cannot presently be determined because of considerable uncertainties that exist. Therefore, it is possible that the outcome of
those legal proceedings, claims and litigation could adversely affect our quarterly or annual operating results or cash flows
when resolved in a future period. However, based on facts currently available, management believes such matters will not adversely
affect in any material respect our financial position, results of operations or cash flows.
Item
4. Mine Safety Disclosures.
Not applicable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES.
|
Organization and
Business – The consolidated financial statements include, for all periods presented, the accounts of Alto Ingredients,
Inc. (formerly known as Pacific Ethanol, Inc.), a Delaware corporation (“Alto Ingredients”), and its direct and indirect
subsidiaries (collectively, the “Company”), including its wholly-owned subsidiaries, Kinergy Marketing LLC, an Oregon
limited liability company (“Kinergy”), Alto Nutrients, LLC (formerly known as Pacific Ag. Products, LLC), a California
limited liability company (“Alto Nutrients”), Alto Op Co. (formerly known as PE Op Co.), a Delaware corporation (“Alto
Op Co.”), Alto Pekin, LLC (formerly known as Pacific Ethanol Pekin, LLC), a Delaware limited liability company (“Alto
Pekin”) and Alto ICP, LLC (formerly known as Illinois Corn Processing, LLC), a Delaware limited liability company (“ICP”).
On December 15, 2016, the Company and Aurora
Cooperative Elevator Company, a Nebraska cooperative corporation (“ACEC”), closed a transaction under a contribution
agreement under which the Company contributed its Aurora, Nebraska ethanol production facilities and ACEC contributed its Aurora
grain elevator and related grain handling assets to Pacific Aurora, LLC (“Pacific Aurora”) in exchange for equity interests
in Pacific Aurora. As a result, the Company owned 73.93% of Pacific Aurora and ACEC owned 26.07% of Pacific Aurora. As discussed
further in Note 2, the Company sold its interest in Pacific Aurora on April 15, 2020. Therefore, from December 15, 2016 through
April 15, 2020, the Company consolidated 100% of the results of Pacific Aurora and recorded ACEC’s 26.07% equity interest
as noncontrolling interests in the accompanying financial statements.
The Company is a leading
producer and marketer of specialty alcohols and essential ingredients. The Company also produces and markets fuel-grade ethanol.
The Company’s production facilities in Pekin, Illinois are located in the heart of the Corn Belt, benefit from low-cost and
abundant feedstock and allow for access to many additional domestic markets. In addition, the Company’s ability to load unit
trains and barges from these facilities allows for greater access to international markets. The Company’s four production
facilities in California, Oregon and Idaho are located in close proximity to both feed and fuel-grade ethanol customers and thus
enjoy unique advantages in efficiency, logistics and product pricing.
The Company has a combined
production capacity of 450 million gallons per year, markets, on an annualized basis, over 500 million gallons of alcohols, and
produces, on an annualized basis, nearly 1.5 million tons of essential ingredients on a dry matter basis, such as dried yeast,
corn gluten meal, corn gluten feed, and distillers grains and liquid feed used in commercial animal feed and pet foods.
The Company focuses on
four key markets: Health, Home & Beauty; Food & Beverage; Essential Ingredients; and Renewable
Fuels. Products for the Health, Home & Beauty market include specialty alcohols used in mouthwash, cosmetics, pharmaceuticals,
hand sanitizers, disinfectants and cleaners. Products for the Food & Beverage markets include grain neutral spirits used in
alcoholic beverages and vinegar as well as corn germ used for corn oils. Products for Essential Ingredients markets include yeast,
corn gluten and distillers grains used in commercial animal feed and pet foods. Renewable Fuels includes fuel-grade ethanol and
distillers corn oil used as a feedstock for renewable diesel fuel.
As of December 31, 2020,
the Company was operating at approximately 64% of its 450 million gallon annual production capacity. As market conditions change,
the Company may increase, decrease or idle production at one or more operating facilities or resume operations at any idled facility.
Basis of Presentation –
The consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted
in the United States (“GAAP”) and include the accounts of the Company. All significant
intercompany accounts and transactions have been eliminated in consolidation.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liquidity – During
the year ended December 31, 2020, the Company experienced significant adverse conditions in the fuel-grade ethanol market as demand
and pricing reached record lows due to reduced domestic transportation and resulting lower gasoline demand resulting from stay-at-home
orders issued in response to the coronavirus pandemic. In response, the Company reduced fuel-grade ethanol production at its production
facilities by more than 50% in an effort to conserve capital. The Company continued producing and selling its specialty alcohols,
but also converted a portion of its fuel-grade ethanol production to specialty alcohol production to respond to substantial increased
demand from the sanitizer and disinfectant markets. Sales of specialty alcohols were at a mix of fixed and spot prices, both of
which resulted in significant cash flow from operations during the year.
As of December 31, 2020, the Company had
$47.7 million in cash and $16.0 million available for borrowing under Kinergy’s operating line of credit. During 2020, the
Company generated $71.8 million in cash from its operations. The Company also realized $19.9 million in net cash proceeds from
the sale of its interest in Pacific Aurora and $10.0 million from its sale of certain real property and related assets at its Magic
Valley production facility. In addition, the Company received net proceeds of approximately $75.8 million from issuances of common
stock and warrants and $5.5 million from warrant exercises. These sources of cash enabled the Company to make principal payments
totaling $157.6 million on its debt during 2020, resulting in the Company’s return to compliance with its lenders. Given
the Company’s current liquidity and outlook for the rest of 2021, it believes it has sufficient liquidity to meet its anticipated
working capital, debt service and other liquidity needs for the next twelve months from the date of this report.
Segments – A segment
is a component of an enterprise whose operating results are regularly reviewed by the enterprise’s chief operating decision
maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial
information is available. The Company determines and discloses its segments in accordance with the Financial Accounting Standards
Board’s (“FASB”) Accounting Standards Codification Section 280, Segment Reporting, which defines how to
determine segments. In 2020, with the Company’s strategic shift to an increased focus on specialty alcohol sales, the Company
now reports financial and operating performance in three reportable segments (1) marketing and distribution, which includes marketing
and merchant trading for Company-produced specialty alcohols, fuel-grade ethanol and essential ingredients, and third-party fuel-grade
ethanol, (2) Pekin production, which includes the entire campus in Pekin, Illinois (“Pekin Campus”), and (3) other
production, which includes all of the Company’s other production facilities on an aggregated basis (“Other production”).
Cash and Cash Equivalents
– The Company considers all highly-liquid investments with an original maturity of three months or less to be cash equivalents.
The Company maintains its accounts at several financial institutions. These cash balances regularly exceed amounts insured by the
Federal Deposit Insurance Corporation; however, the Company does not believe it is exposed to any significant credit risk on these
balances.
Accounts Receivable and Allowance
for Doubtful Accounts – Trade accounts receivable are presented at face value, net of the allowance for doubtful
accounts. The Company sells specialty alcohols to large consumer product companies, sells fuel-grade ethanol to gasoline refining
and distribution companies, sells essential ingredients to animal feed customers, including distillers grains and other feed co-products
to dairy operators and animal feedlots and corn oil to poultry and biodiesel customers, in each case generally without requiring
collateral. Due to a limited number of customers, the Company had significant concentrations of credit risk from sales as of December
31, 2020 and 2019, as described below.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company maintains an allowance for
doubtful accounts for balances that appear to have specific collection issues. The collection process is based on the age of the
invoice and requires attempted contacts with the customer at specified intervals. If, after a specified number of days, the Company
has been unsuccessful in its collection efforts, a bad debt allowance is recorded for the balance in question. Delinquent accounts
receivable are charged against the allowance for doubtful accounts once uncollectibility has been determined. The factors considered
in reaching this determination are the apparent financial condition of the customer and the Company’s success in contacting
and negotiating with the customer. If the financial condition of a Company customer deteriorates, resulting in an impairment of
ability to make payments, additional allowances may be required.
Of the accounts receivable balance, approximately
$35,839,000 and $63,736,000 at December 31, 2020 and 2019, respectively, were used as collateral under Kinergy’s operating
line of credit. The allowance for doubtful accounts was $260,000 and $39,000 as of December 31, 2020 and 2019, respectively. The
Company recorded a bad debt expense of $245,000 and $27,000 for the years ended December 31, 2020 and 2019, respectively. The Company
does not have any off-balance sheet credit exposure related to its customers.
Concentration Risks –
Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to
perform as contracted. Concentrations of credit risk, whether on- or off-balance sheet, that arise from financial instruments exist
for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other conditions described below. Financial instruments
that subject the Company to credit risk consist of cash balances maintained in excess of federal depository insurance limits and
accounts receivable which have no collateral or security. The Company has not experienced any significant losses in such accounts
and believes that it is not exposed to any significant risk of loss of cash.
The Company sells specialty alcohols to
consumer product companies and fuel-grade ethanol to gasoline refining and distribution companies. The Company sold to customers
representing 10% or more of the Company’s total net sales, as follows.
|
|
Years
Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Customer A
|
|
|
9
|
%
|
|
|
11
|
%
|
Customer B
|
|
|
5
|
%
|
|
|
13
|
%
|
The Company had accounts receivable due
from these customers totaling $4,421,000 and $15,624,000, representing 10% and 21% of total accounts receivable, as of December
31, 2020 and 2019, respectively.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company purchases corn, its largest
cost component in producing alcohols, from its suppliers. The Company purchased corn from suppliers representing 10% or more of
the Company’s total corn purchases, as follows:
|
|
Years
Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Supplier A
|
|
|
9
|
%
|
|
|
25
|
%
|
Supplier B
|
|
|
16
|
%
|
|
|
16
|
%
|
As of December 31, 2020, approximately
51% of the Company’s employees were covered by a collective bargaining agreement.
Inventories – Inventories
consisted primarily of alcohols, corn, essential ingredients, carbon and Renewable Identification Number (“RIN”) credits
and unleaded fuel, and are valued at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis.
Inventory is net of a $1,033,000 and $1,290,000 valuation adjustment as of December 31, 2020 and 2019, respectively. Inventory
balances consisted of the following (in thousands):
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
Finished goods
|
|
$
|
25,154
|
|
|
$
|
38,194
|
|
Work in progress
|
|
|
4,333
|
|
|
|
7,426
|
|
Raw materials
|
|
|
7,074
|
|
|
|
7,890
|
|
Carbon and RIN credits
|
|
|
3,842
|
|
|
|
5,690
|
|
Other
|
|
|
1,364
|
|
|
|
1,400
|
|
Total
|
|
$
|
41,767
|
|
|
$
|
60,600
|
|
Property and Equipment –
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the following estimated
useful lives:
Buildings
|
|
|
40 years
|
|
Facilities and plant equipment
|
|
|
10 – 25 years
|
|
Other equipment, vehicles and furniture
|
|
|
5 – 10 years
|
|
The cost of normal maintenance and repairs
is charged to operations as incurred. Significant capital expenditures that increase the life of an asset are capitalized and depreciated
over the estimated remaining useful life of the asset. The cost of property and equipment sold, or otherwise disposed of, and the
related accumulated depreciation or amortization are removed from the accounts, and any resulting gains or losses are reflected
in current operations.
Intangible Asset –
The Company assesses indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment
may have occurred. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is
recognized in an amount equal to that excess. If the Company determines that an impairment charge is needed, the charge will be
recorded as an asset impairment in the consolidated statements of operations.
Leases – The Company
accounts for leases under ASC 842, whereby, lessees are required to recognize the following for all leases (with the exception
of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments
arising from a lease, measured on a discounted cash flow basis; and (2) a “right of use” asset, which is an asset that
represents the lessee’s right to use the specified asset for the lease term. See Note 9 for further information.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative Instruments and Hedging
Activities – Derivative transactions, which can include exchange-traded forward contracts and futures positions on
the New York Mercantile Exchange or the Chicago Board of Trade, are recorded on the balance sheet as assets and liabilities based
on the derivative’s fair value. Changes in the fair value of derivative contracts are recognized currently in income unless
specific hedge accounting criteria are met. If derivatives meet those criteria, and hedge accounting is elected, effective gains
and losses are deferred in accumulated other comprehensive income (loss) and later recorded together with the hedged item in consolidated
income (loss). For derivatives designated as a cash flow hedge, the Company formally documents the hedge and assesses the effectiveness
with associated transactions. The Company has designated and documented contracts for the physical delivery of commodity products
to and from counterparties as normal purchases and normal sales.
Revenue Recognition –
The Company recognizes revenue under ASC 606. The provisions of ASC 606 include a five-step process by which an entity will determine
revenue recognition, depicting the transfer of goods or services to customers in amounts reflecting the payment to which an entity
expects to be entitled in exchange for those goods or services. ASC 606 requires the Company to apply the following steps: (1)
identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction
price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as,
the Company satisfies the performance obligation.
The Company recognizes revenue primarily
from sales of alcohols and essential ingredients.
The Company has seven production facilities
from which it produces and sells alcohols to its customers through Kinergy. Kinergy enters into sales contracts with its customers
under exclusive intercompany sales agreements with each of the Company’s seven production facilities. Kinergy also acts as
a principal when it purchases third party fuel-grade ethanol which it resells to its customers. Finally, Kinergy has exclusive
sales agreements with other third-party owned fuel-grade ethanol production facilities under which it sells their fuel-grade ethanol
for a fee plus the costs to deliver the ethanol to Kinergy’s customers. These sales are referred to as third-party agent
sales. Revenue from these third-party agent sales is recorded on a net basis, with Kinergy recognizing its predetermined fees and
any associated delivery costs.
The Company has seven production facilities
from which it produces and sells essential ingredients to its customers through Alto Nutrients. Alto Nutrients enters into sales
contracts with essential ingredient customers under exclusive intercompany sales agreements with each of the Company’s seven
production facilities.
The Company recognizes revenue from sales
of alcohols and essential ingredients at the point in time when the customer obtains control of the products, which typically occurs
upon delivery depending on the terms of the underlying contracts. In some instances, the Company enters into contracts with customers
that contain multiple performance obligations to deliver volumes of alcohols or essential ingredients over a contractual period
of less than 12 months. The Company allocates the transaction price to each performance obligation identified in the contract based
on relative standalone selling prices and recognizes the related revenue as control of each individual product is transferred to
the customer in satisfaction of the corresponding performance obligations.
When the Company is the agent, the supplier
controls the products before they are transferred to the customer because the supplier is primarily responsible for fulfilling
the promise to provide the product, has inventory risk before the product has been transferred to a customer and has discretion
in establishing the price for the product. When the Company is the principal, the Company controls the products before they are
transferred to the customer because the Company is primarily responsible for fulfilling the promise to provide the products, has
inventory risk before the product has been transferred to a customer and has discretion in establishing the price for the product.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
See Note 4 for the Company’s revenue
by type of contracts.
Shipping and Handling Costs
– The Company accounts for shipping and handling costs relating to contracts with customers as costs to fulfill its promise
to transfer its products. Accordingly, the costs are classified as a component of cost of goods sold in the accompanying consolidated
statements of operations.
Selling Costs – Selling
costs associated with the Company’s product sales are classified as a component of selling, general and administrative expenses
in the accompanying consolidated statements of operations.
Stock-Based Compensation
– The Company accounts for the cost of employee services received in exchange for the award of equity instruments based on
the fair value of the award, determined on the date of grant. The expense is recognized over the period during which an employee
is required to provide services in exchange for the award. The Company accounts for forfeitures as they occur. The Company recognizes
stock-based compensation expense as a component of either cost of goods sold or selling, general and administrative expenses in
the consolidated statements of operations.
Impairment of Long-Lived Assets
– The Company assesses the impairment of long-lived assets, including property and equipment, internally developed software
and purchased intangibles subject to amortization, when events or changes in circumstances indicate that the fair value of assets
could be less than their net book value. In such event, the Company assesses long-lived assets for impairment by first determining
the forecasted, undiscounted cash flows the asset group is expected to generate plus the net proceeds expected from the sale of
the asset group. If this amount is less than the carrying value of the asset, the Company will then determine the fair value of
the asset group. An impairment loss would be recognized when the fair value is less than the related asset group’s net book
value, and an impairment expense would be recorded in the amount of the difference. Forecasts of future cash flows are judgments
based on the Company’s experience and knowledge of its operations and the industries in which it operates. These forecasts
could be significantly affected by future changes in market conditions, the economic environment, including inflation, and purchasing
decisions of the Company’s customers. The Company performed an undiscounted cash flow analysis for its long-lived assets
held-for-use, exclusive of the Company’s assets held-for-sale, and for those that failed step 1, the Company performed a
further fair value assessment, resulting in an impairment of $2.1 million for the year ended December 31, 2020.
Deferred Financing Costs
– Deferred financing costs are costs incurred to obtain debt financing, including all related fees, and are amortized as
interest expense over the term of the related financing using the straight-line method, which approximates the effective interest
rate method. Amortization of deferred financing costs was approximately $1,394,000 and $511,000 for the years ended December 31,
2020 and 2019, respectively. Amortization was accelerated in 2020 to reflect increased payments of principal and the reduction
of outstanding debt balances. Unamortized deferred financing costs were approximately $759,000 and $2,153,000 as of December 31,
2020 and 2019, respectively, and are recorded net of long-term debt in the consolidated balance sheets.
Provision for Income Taxes
– Income taxes are accounted for under the asset and liability approach, where deferred tax assets and liabilities are determined
based on differences between financial reporting and tax basis of assets and liabilities, and are measured using enacted tax rates
and laws that are expected to be in effect when the differences reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company accounts for uncertainty in
income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the
tax position for recognition by determining whether it is more likely than not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount
which is more than 50% likely of being realized upon ultimate settlement. An uncertain tax position is considered effectively settled
on completion of an examination by a taxing authority if certain other conditions are satisfied. Should the Company incur interest
and penalties relating to tax uncertainties, such amounts would be classified as a component of interest expense and other income
(expense), net, respectively. Deferred tax assets and liabilities are classified as noncurrent in the Company’s consolidated
balance sheets.
The Company files a consolidated federal
income tax return. This return includes all wholly-owned subsidiaries as well as the Company’s pro-rata share of taxable
income from pass-through entities in which the Company owns less than 100%. State tax returns are filed on a consolidated, combined
or separate basis depending on the applicable laws relating to the Company and its subsidiaries.
Income (Loss) Per Share –
Basic income (loss) per share is computed on the basis of the weighted-average number of shares of common stock outstanding during
the period. Preferred dividends are deducted from net income (loss) attributed to Alto Ingredients, Inc. and are considered in
the calculation of income (loss) available to common stockholders in computing basic income (loss) per share. Common stock equivalents
to preferred stock are considered participating securities and are also included in this calculation when dilutive.
The following tables compute basic and
diluted earnings per share (in thousands, except per share data):
|
|
Year
Ended December 31, 2020
|
|
|
|
Loss
Numerator
|
|
|
Shares
Denominator
|
|
|
Per-Share
Amount
|
|
Net loss attributed to Alto Ingredients, Inc.
|
|
$
|
(15,116
|
)
|
|
|
|
|
|
|
|
|
Less: Preferred stock dividends
|
|
|
(1,268
|
)
|
|
|
|
|
|
|
|
|
Basic and Diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders
|
|
$
|
(16,384
|
)
|
|
|
58,609
|
|
|
$
|
(0.28
|
)
|
|
|
Year
Ended December 31, 2019
|
|
|
|
Loss
Numerator
|
|
|
Shares
Denominator
|
|
|
Per-Share
Amount
|
|
Net loss attributed to Alto Ingredients, Inc.
|
|
$
|
(88,949
|
)
|
|
|
|
|
|
|
|
|
Less: Preferred stock dividends
|
|
|
(1,265
|
)
|
|
|
|
|
|
|
|
|
Basic and Diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders
|
|
$
|
(90,214
|
)
|
|
|
47,384
|
|
|
$
|
(1.90
|
)
|
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were an aggregate 2,463,000 and 635,000
potentially dilutive shares from convertible securities outstanding as of December 31, 2020 and 2019, respectively. These convertible
securities were not considered in calculating diluted loss per common share for the years ended December 31, 2020 and 2019 as their
effect would be anti-dilutive.
Financial Instruments –
The carrying values of cash and cash equivalents, accounts receivable, derivative assets, accounts payable, accrued liabilities
and derivative liabilities are reasonable estimates of their fair values because of the short maturity of these items. The carrying
value of the Company’s senior secured notes are recorded at fair value and are considered Level 2 fair value measurements.
The Company believes the carrying value of its notes receivable are not considered materially different than fair value due to
their recent issuances, and other long-term debt instruments are not considered materially different than fair value because the
interest rates on these instruments are variable, and are considered Level 2 fair value measurements.
Employment-related Benefits
– Employment-related benefits associated with pensions and postretirement health care are expensed based on actuarial analysis.
The recognition of expense is affected by estimates made by management, such as discount rates used to value certain liabilities,
investment rates of return on plan assets, increases in future wage amounts and future health care costs. Discount rates are determined
based on a spot yield curve that includes bonds with maturities that match expected benefit payments under the plan.
Estimates and Assumptions
– The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant
estimates are required as part of determining the allowance for doubtful accounts, net realizable value of inventory, estimated
lives of property and equipment, long-lived asset impairments, fair value of warrants, valuation allowances on deferred income
taxes and the potential outcome of future tax consequences of events recognized in the Company’s financial statements or
tax returns, and the valuation of assets acquired and liabilities assumed as a result of business combinations. Actual results
and outcomes may materially differ from management’s estimates and assumptions.
Uncertainty – As previously
mentioned, the impact of the coronavirus pandemic has negatively impacted the Company’s operations and demand for fuel-grade
ethanol. Any future quarantines, labor shortages or other disruptions to the Company’s operations, or those of its customers,
may adversely impact the Company’s revenues, ability to provide its services and operating results. In addition, a significant
outbreak of epidemic, pandemic or contagious diseases in the human population could result in a widespread health crisis that could
adversely affect the economies and financial markets of many countries, including the geographical area in which the Company operates,
resulting in an economic downturn that could further affect demand for its goods and services. The extent to which the coronavirus
impacts the Company’s long-term results will depend on future developments, which are highly uncertain and cannot be predicted,
including new information which may emerge concerning the severity of the coronavirus and actions taken to contain the coronavirus
or its impact, among others.
Subsequent Events –
Management evaluates, as of each reporting period, events or transactions that occur after the balance sheet date through the date
that the financial statements are issued for either disclosure or adjustment to the consolidated financial results.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications –
Certain prior year amounts have been reclassified to conform to the current presentation. Such reclassifications had no effect
on the consolidated net loss, working capital or stockholders’ equity reported in the consolidated statements of operations
and consolidated balance sheets.
2.
|
ASSET SALES AND HELD-FOR-SALE CLASSIFICATION.
|
Pacific Aurora
On December 19, 2019, the Company entered
into a term sheet covering the proposed sale of its 73.93% ownership interest in Pacific Aurora to ACEC for $52.8 million, and
as a result, the Company determined that as of December 31, 2019, the long-lived assets of Pacific Aurora should be classified
as held-for-sale.
On April 15, 2020, the Company closed
the sale of its ownership interest in Pacific Aurora and preliminarily received total consideration of $52.8 million, subject
to working capital adjustments of approximately $35.3 million, resulting in cash proceeds of $19.9 million and the balance of
$16.5 million in long-term ACEC promissory notes, resulting in a net loss on sale of approximately $1.4 million, recorded as
gain (loss) on sale of assets in the Company’s consolidated statements of operations. Approximately $14.5 million of
the cash proceeds were used to repay a portion of the Company’s term debt. In September 2020, the Company and ACEC
agreed to certain post-closing adjustments to the purchase price, resulting in a decrease of $0.9 million, and a
corresponding reduction in the aggregate principal amount owed under the long-term ACEC promissory notes.
The Company received two promissory notes,
as adjusted, in the amounts of $8.6 million and $7.0 million as part consideration for the sale, both maturing on April 15, 2025.
The $8.6 million note accrues interest at an annual rate of 5.00%. Interest payments are due quarterly beginning July 1, 2020 and
principal payments of $0.4 million are due quarterly beginning July 1, 2021. The $7.0 million note accrues interest at an annual
rate of 4.50%. Interest payments are due quarterly beginning July 1, 2020 and principal payments of $0.4 million are due quarterly
beginning January 3, 2022.
In addition, upon the sale, the Company
no longer had noncontrolling interests on its balance sheet and no longer records income (loss) of noncontrolling interests for
future periods.
For the years ended December 31, 2020 and
2019, Pacific Aurora contributed $39.6 million and $163.5 million in net sales, $8.4 million and $43.4 million in pre-tax loss,
and $2.2 million and $12.3 million in net loss attributed to noncontrolling interests, respectively.
Magic Valley
On November 30, 2020, the Company sold
134 acres, the related rail loop and grain handling assets at its Magic Valley facility located in Burley, Idaho for $10.0 million
in cash. The Company retained the fuel-grade ethanol production facility and terminal on the remaining 25 acres and has entered
into certain agreements with the buyer for delivery of grain to the plant. Upon the sale, the Company recognized a gain on sale
of $3.2 million in gain (loss) on sale of assets in the accompanying consolidated statements of operations.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stockton and Madera
In October 2020, the Company’s Board
of Directors approved a plan to sell the Company’s fuel-grade ethanol production facilities located in Madera and Stockton,
California. As a result, the Company determined the related long-lived asset groups should be classified as held-for-sale at December
31, 2020. The analysis of these potential sales resulted in an aggregate asset impairment of $22.3 million in the Company’s
other production segment.
The Company classified the following assets
and liabilities as held-for-sale as of December 31, 2020 (in thousands):
|
|
Stockton
|
|
|
Madera
|
|
Property and equipment, net
|
|
$
|
19,535
|
|
|
$
|
29,013
|
|
Right of use operating lease assets, net
|
|
|
9,747
|
|
|
|
—
|
|
Assets held-for-sale
|
|
$
|
29,282
|
|
|
$
|
29,013
|
|
|
|
Stockton
|
|
|
Madera
|
|
Operating lease obligations
|
|
$
|
10,435
|
|
|
$
|
—
|
|
Assessment financing
|
|
|
—
|
|
|
|
9,107
|
|
Liabilities held-for-sale
|
|
$
|
10,435
|
|
|
$
|
9,107
|
|
For the year ended December 31, 2020, net
sales attributed to the results of operations for Stockton and Madera were $21.9 million and $22.7 million, respectively. For the
year ended December 31, 2019, net sales attributed to the results of operations for Stockton and Madera were $132.9 million and
$82.7 million, respectively. For the year ended December 31, 2020, pre-tax loss attributed to the results of operations for Stockton
and Madera was $6.5 million and $6.1 million, respectively. For the year ended December 31, 2019, pre-tax loss attributed to the
results of operations for Stockton and Madera was $3.9 million and $2.7 million, respectively. In addition, asset impairments
associated with Stockton and Madera recorded for the year ended December 31, 2020 were $17.9 million and $4.4 million, respectively.
3.
|
INTERCOMPANY AGREEMENTS.
|
The Company, directly or through one of
its subsidiaries, has entered into the following management and marketing agreements:
Affiliate Management Agreement
– Alto Ingredients entered into an Affiliate Management Agreement (“AMA”) with its operating subsidiaries, under
which Alto Ingredients agreed to provide operational and administrative and staff support services. These services generally include,
but are not limited to, administering the subsidiaries’ compliance with their credit agreements and performing billing, collection,
record keeping and other administrative and ministerial tasks. Alto Ingredients agreed to supply all labor and personnel required
to perform its services under the AMA, including the labor and personnel required to operate and maintain the production facilities
and marketing activities. These services are billed at a predetermined amount per subsidiary each month plus out of pocket costs
such as employee wages and benefits.
The AMAs have an initial term of one year
and automatic successive one year renewal periods. Alto Ingredients may terminate the AMA, and any subsidiary may terminate the
AMA, at any time by providing at least 90 days prior notice of such termination.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alto Ingredients recorded
revenues of approximately $11,724,000 and $12,682,000 related to the AMAs in place for the years ended December 31, 2020 and 2019,
respectively. These amounts have been eliminated upon consolidation.
Ethanol Marketing
Agreements – Kinergy entered into separate marketing agreements with each of the Company’s production facilities,
which granted it the exclusive right to purchase, market and sell the alcohols produced at those facilities. Under the terms of
the marketing agreements, within ten days after delivering alcohol to Kinergy, an amount is paid to Kinergy equal to (i) the estimated
purchase price payable by the third-party purchaser of the alcohol, minus (ii) the estimated amount of transportation costs to
be incurred, minus (iii) the estimated incentive fee payable to Kinergy, which equals 1% of the aggregate third-party purchase
price, provided that the marketing fee shall not be less than $0.015 per gallon and not more than $0.0225 per gallon. Each of the
marketing agreements had an initial term of one year and successive one year renewal periods at the option of the individual plant.
Kinergy recorded revenues
of approximately $4,275,000 and $7,900,800 related to the marketing agreements for the years ended December 31, 2020 and 2019,
respectively. These amounts have been eliminated upon consolidation.
Corn Procurement and Handling Agreements
– Alto Nutrients entered into separate corn procurement and handling agreements with each of the Company’s production
facilities, with the exception of the Pacific Aurora facilities. Under the terms of the corn procurement and handling agreements,
each facility appointed Alto Nutrients as its exclusive agent to solicit, negotiate, enter into and administer, on its behalf,
corn supply arrangements to procure the corn necessary to operate the facility. Alto Nutrients also provides grain handling services
including, but not limited to, receiving, unloading and conveying corn into the facility’s storage and, in the case of whole
corn delivered, processing and hammering the whole corn.
Under these agreements,
Alto Nutrients receives a fee of $0.03 per bushel of corn delivered to each production facility as consideration for its procurement
and handling services, payable monthly. Each corn procurement and handling agreement had an initial term of one year and successive
one year renewal periods at the option of the individual facility. Alto Nutrients recorded revenues of approximately $2,595,000
and $4,288,000 related to the corn procurement and handling agreements for the years ended December 31, 2020 and 2019, respectively.
These amounts have been eliminated upon consolidation.
Through April 15, 2020,
each Pacific Aurora production facility operated under a grain procurement agreement with ACEC. Under this agreement, ACEC received
a fee of $0.03 per bushel of corn delivered to each facility as consideration for ACEC’s procurement and handling services,
payable monthly. The grain procurement agreement had an initial term of one year and successive one year renewal periods at the
option of the individual facility. Pacific Aurora recorded expenses of approximately $210,000 and $1,103,000 for the years ended
December 31, 2020 and 2019, respectively, associated with these agreements. These amounts have not been eliminated upon consolidation
as they were with a related but unconsolidated third-party.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Essential Ingredients Marketing
Agreements – Alto Nutrients entered into separate marketing agreements with each of the
Company’s production facilities which grant Alto Nutrients the exclusive right to market, purchase and sell the various
essential ingredients produced at each facility. Under the terms of the marketing agreements, within ten days after a
facility delivers essential ingredients to Alto Nutrients, the production facility is paid an amount equal to (i) the
estimated purchase price payable by the third-party purchaser of the essential ingredients, minus (ii) the estimated amount
of transportation costs to be incurred, minus (iii) the estimated amount of fees and taxes payable to governmental
authorities in connection with the tonnage of the essential ingredients produced or marketed, minus (iv) the estimated
incentive fee payable to the Company, which equals (a) 5% of the aggregate third-party purchase price for wet corn gluten
feed, wet distillers grains, corn condensed distillers solubles and distillers grains with solubles, or (b) 1% of the
aggregate third-party purchase price for corn gluten meal, dry corn gluten feed, dry distillers grains, corn germ and corn
oil. Each marketing agreement had an initial term of one year and successive one year renewal periods at the option of the
individual facility.
Alto Nutrients recorded
revenues of approximately $2,778,000 and $6,029,000 related to the marketing agreements for the years ended December 31, 2020 and
2019, respectively. These amounts have been eliminated upon consolidation.
The Company reports its financial and operating
performance in three segments: (1) marketing and distribution, which includes marketing and merchant trading for Company-produced
alcohols and essential ingredients, on an aggregated basis, and third-party fuel-grade ethanol (2) Pekin Campus production, which
includes the production and sale of alcohols and essential ingredients produced at the Company’s Pekin, Illinois campus, and
(3) Other production, which includes the production and sale of fuel-grade ethanol and essential ingredients produced at all of the
Company’s other production facilities on an aggregated basis, none of which are individually significant to be considered a
reportable segment.
Income before provision for income taxes
includes management fees charged by Alto Ingredients to the segments. The Pekin Campus production segment incurred $4,344,000 and
$4,014,000 in management fees for the years ended December 31, 2020 and 2019, respectively. The marketing and distribution segment
incurred $3,480,000 in management fees for each of the years ended December 31, 2020 and 2019, respectively. The Other production
segment incurred $3,893,000 and $5,188,000 in management fees for the years ended December 31, 2020 and 2019, respectively. Corporate
activities include selling, general and administrative expenses, consisting primarily of corporate employee compensation, professional
fees and overhead costs not directly related to a specific operating segment.
During the normal course of business, the
segments do business with each other. The preponderance of this activity occurs when the Company’s marketing segment markets
alcohol produced by the production segments for a marketing fee, as discussed in Note 3. These intersegment activities are considered
arms’-length transactions. Consequently, although these transactions impact segment performance, they do not impact the Company’s
consolidated results since all revenues and corresponding costs are eliminated in consolidation.
Capital expenditures are substantially
all incurred at the Company’s Pekin Campus production segment.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables set forth certain
financial data for the Company’s operating segments (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net Sales
|
|
|
|
|
|
|
Marketing and distribution:
|
|
|
|
|
|
|
Alcohol sales, gross
|
|
$
|
256,209
|
|
|
$
|
355,101
|
|
Alcohol sales, net
|
|
|
1,529
|
|
|
|
1,831
|
|
Intersegment sales
|
|
|
9,648
|
|
|
|
18,219
|
|
Total marketing and distribution sales
|
|
|
267,386
|
|
|
|
375,151
|
|
|
|
|
|
|
|
|
|
|
Pekin Campus production, recorded as gross:
|
|
|
|
|
|
|
|
|
Alcohol sales
|
|
$
|
330,432
|
|
|
$
|
343,610
|
|
Essential ingredient sales
|
|
|
130,270
|
|
|
|
138,987
|
|
Intersegment sales
|
|
|
645
|
|
|
|
1,110
|
|
Total Pekin Campus sales
|
|
|
461,347
|
|
|
|
483,707
|
|
|
|
|
|
|
|
|
|
|
Other Production, recorded as gross:
|
|
|
|
|
|
|
|
|
Alcohol sales
|
|
$
|
137,703
|
|
|
$
|
455,343
|
|
Essential ingredient sales
|
|
|
40,880
|
|
|
|
130,009
|
|
Intersegment sales
|
|
|
1,309
|
|
|
|
509
|
|
Total Other production sales
|
|
|
179,892
|
|
|
|
585,861
|
|
|
|
|
|
|
|
|
|
|
Intersegment eliminations
|
|
|
(11,602
|
)
|
|
|
(19,838
|
)
|
Net sales as reported
|
|
$
|
897,023
|
|
|
$
|
1,424,881
|
|
Cost of goods sold:
|
|
|
|
|
|
|
|
|
Marketing and distribution
|
|
$
|
253,465
|
|
|
$
|
347,185
|
|
Pekin Campus production
|
|
|
389,125
|
|
|
|
481,262
|
|
Other production
|
|
|
206,412
|
|
|
|
612,040
|
|
Intersegment eliminations
|
|
|
(4,838
|
)
|
|
|
(5,668
|
)
|
Cost of goods sold as reported
|
|
$
|
844,164
|
|
|
$
|
1,434,819
|
|
Income (loss) before benefit for income taxes:
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
$
|
(17,299
|
)
|
|
$
|
(101,302
|
)
|
Depreciation:
|
|
|
|
|
|
|
|
|
Pekin Campus production
|
|
$
|
17,450
|
|
|
$
|
17,535
|
|
Other production
|
|
|
12,691
|
|
|
|
30,107
|
|
Corporate activities
|
|
|
127
|
|
|
|
267
|
|
|
|
$
|
30,268
|
|
|
$
|
47,909
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
Marketing and distribution
|
|
$
|
1,574
|
|
|
$
|
3,053
|
|
Pekin Campus production
|
|
|
6,038
|
|
|
|
7,556
|
|
Other production
|
|
|
334
|
|
|
|
13
|
|
Corporate activities
|
|
|
9,997
|
|
|
|
9,584
|
|
|
|
$
|
17,943
|
|
|
$
|
20,206
|
|
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the Company’s
total assets by operating segment (in thousands):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Total
assets:
|
|
|
|
|
|
|
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
|
|
|
|
$
|
476,818
|
|
|
$
|
612,495
|
|
5.
|
PROPERTY AND EQUIPMENT.
|
Property and equipment consisted of the following (in thousands):
|
|
December 31,
|
|
|
|
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
|
|
|
|
|
382,263
|
|
|
|
529,754
|
|
Accumulated depreciation
|
|
|
(152,777
|
)
|
|
|
(197,228
|
)
|
|
|
$
|
229,486
|
|
|
$
|
332,526
|
|
Depreciation expense
was $30,268,000 and $40,931,000 for the years ended December 31, 2020 and 2019, respectively.
For the years ended December
31, 2020 and 2019, the Company capitalized interest of $224,000 and $563,000, respectively, related to its capital investment activities.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recorded a tradename valued
at $2,678,000 in 2006 as part of its acquisition of Kinergy. The Company determined that the Kinergy tradename has an indefinite
life and, therefore, rather than being amortized, will be tested annually for impairment. The Company did not record any impairment
of the Kinergy tradename for the years ended December 31, 2020 and 2019.
The business and activities of the Company
expose it to a variety of market risks, including risks related to changes in commodity prices. The Company monitors and manages
these financial exposures as an integral part of its risk management program. This program recognizes the unpredictability of financial
markets and seeks to reduce the potentially adverse effects that market volatility could have on operating results.
Commodity Risk –
Cash Flow Hedges – The Company uses derivative instruments to protect cash flows from fluctuations caused by volatility
in commodity prices for periods of up to twelve months in order to protect gross profit margins from potentially adverse effects
of market and price volatility on alcohol sales and purchase commitments where the prices are set at a future date and/or if the
contracts specify a floating or index-based price. In addition, the Company hedges anticipated sales of alcohol to minimize its
exposure to the potentially adverse effects of price volatility. These derivatives may be designated and documented as cash flow
hedges and effectiveness is evaluated by assessing the probability of the anticipated transactions and regressing commodity futures
prices against the Company’s purchase and sales prices. Ineffectiveness, which is defined as the degree to which the derivative
does not offset the underlying exposure, is recognized immediately in cost of goods sold. For the years ended December 31, 2020
and 2019, the Company did not designate any of its derivatives as cash flow hedges.
Commodity Risk – Non-Designated
Hedges – The Company uses derivative instruments to lock in prices for certain amounts of corn and alcohols by entering
into exchange-traded forward contracts or options for those commodities. These derivatives are not designated for hedge accounting
treatment. The changes in fair value of these contracts are recorded on the balance sheet and recognized immediately in cost of
goods sold. The Company recognized net gains of $14,780,000 and $555,000 as the change in the fair value of these contracts for
the years ended December 31, 2020 and 2019, respectively.
Non Designated Derivative Instruments
– The classification and amounts of the Company’s derivatives not designated as hedging instruments, and related cash
collateral balances, are as follows (in thousands):
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
As of December 31, 2020
|
|
|
|
Assets
|
|
|
Liabilities
|
|
Type of Instrument
|
|
Balance Sheet Location
|
|
Fair
Value
|
|
|
Balance Sheet Location
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash collateral balance
|
|
Other current assets
|
|
$
|
520
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Derivative assets
|
|
$
|
17,149
|
|
|
Derivative liabilities
|
|
$
|
—
|
|
|
|
As of December 31, 2019
|
|
|
|
Assets
|
|
|
Liabilities
|
|
Type of Instrument
|
|
Balance Sheet Location
|
|
Fair
Value
|
|
|
Balance Sheet Location
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash collateral balance
|
|
Other current assets
|
|
$
|
615
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Derivative assets
|
|
$
|
2,438
|
|
|
Derivative liabilities
|
|
$
|
1,860
|
|
The above amounts represent the gross balances
of the contracts, however, the Company does have a right of offset with each of its derivative brokers.
The classification and amounts of the Company’s
recognized gains (losses) for its derivatives not designated as hedging instruments are as follows (in thousands):
|
|
|
|
Realized
Gains (Losses)
|
|
|
|
|
|
For
the Years Ended December 31,
|
|
Type of Instrument
|
|
Statements of Operations
Location
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
2,102
|
|
|
$
|
(4,568
|
)
|
|
|
|
|
$
|
2,102
|
|
|
$
|
(4,568
|
)
|
|
|
|
|
Unrealized
Gains
|
|
|
|
|
|
For
the Years Ended December 31,
|
|
Type of Instrument
|
|
Statements of Operations Location
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Cost of goods sold
|
|
$
|
12,678
|
|
|
$
|
5,123
|
|
|
|
|
|
$
|
12,679
|
|
|
$
|
5,123
|
|
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term borrowings are summarized as
follows (in thousands):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Kinergy
line of credit
|
|
$
|
32,512
|
|
|
$
|
78,338
|
|
Pekin
term loan
|
|
|
—
|
|
|
|
39,500
|
|
Pekin
revolving loan
|
|
|
20,580
|
|
|
|
32,000
|
|
ICP
term loan
|
|
|
—
|
|
|
|
12,000
|
|
ICP
revolving loan
|
|
|
9,384
|
|
|
|
18,000
|
|
CARES
Act loans
|
|
|
9,860
|
|
|
|
—
|
|
Parent
notes payable
|
|
|
25,533
|
|
|
|
65,649
|
|
|
|
|
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 Line of
Credit – Kinergy has an operating line of credit for an aggregate amount of up to $100,000,000. The line of credit
matures on August 2, 2022. The credit facility is based on Kinergy’s eligible accounts receivable and inventory levels, subject
to certain concentration reserves. The credit facility is subject to certain other sublimits, including inventory loan limits.
Interest accrues under the line of credit at a rate equal to (i) the three-month London Interbank Offered Rate (“LIBOR”),
plus (ii) a specified applicable margin ranging between 1.50% and 2.00%. The applicable margin was 2.00%, for a total rate of 2.24%
at December 31, 2020. The credit facility’s monthly unused line fee is an annual rate equal to 0.25% to 0.375% depending
on the average daily principal balance during the immediately preceding month. Payments that may be made by Kinergy to the Company
as reimbursement for management and other services provided by the Company to Kinergy are limited under the terms of the credit
facility to $1,500,000 per fiscal quarter. The credit facility also includes the accounts receivable of Alto Nutrients as additional
collateral. Payments that may be made by Alto Nutrients to the Company as reimbursement for management and other services provided
by the Company to Alto Nutrients are limited under the terms of the credit facility to $500,000 per fiscal quarter.
If the monthly excess borrowing availability of Kinergy and
Alto Nutrients falls below certain thresholds, they are collectively required to maintain a fixed-charge coverage ratio (calculated
as a twelve-month rolling earnings before interest, taxes, depreciation and amortization divided by the sum of interest expense,
capital expenditures, principal payments of indebtedness, indebtedness from capital leases and taxes paid during such twelve-month
rolling period) of at least 2.0 and are prohibited from incurring certain additional indebtedness (other than specific intercompany
indebtedness).
The obligations of Kinergy
and Alto Nutrients under the credit facility are secured by a first-priority security interest in all of their assets in favor
of the lender. Alto Ingredients has guaranteed all of Kinergy’s obligations under the line of credit. As of December 31,
2020, Kinergy had $16.0 million in unused borrowing availability under the credit facility.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pekin Credit Facilities
– On December 15, 2016, Alto Pekin entered into a Credit Agreement (“Pekin Credit Agreement”) with 1st
Farm Credit Services, PCA and CoBank, ACB, (“CoBank”). Under the terms of the Pekin Credit Agreement, Alto Pekin borrowed
from 1st Farm Credit Services $64.0 million under a term loan facility that matures on August 20, 2021 (the “Pekin
Term Loan”) and up to $32.0 million under a revolving term loan facility that matures on February 1, 2022 (the “Pekin
Revolving Loan”), and together with the Pekin Term Loan (the “Pekin Credit Facility”). The Pekin Credit Facility
is secured by a first-priority security interest in all of Alto Pekin’s assets.
The Pekin Credit
Facility and related agreements contain a variety of representations, warranties, covenants and events of default. Following
a series of amendments and waivers among Alto Pekin, its lenders and their agent, certain terms of the agreements are as
follows:
|
●
|
Interest accrues under the Pekin Credit Facility at an annual rate equal to the 30-day LIBOR plus
5.00%.
|
|
|
|
|
●
|
Alto Pekin is required to pay a monthly fee on any unused portion of the Pekin Revolving Loan at
a rate of 0.75% per annum.
|
|
|
|
|
●
|
Alto Pekin and ICP are collectively required to maintain working capital of not less than 50% of
the combined outstanding revolving lines of credit, which was $30.0 million at December 31, 2020; and an annual debt service coverage
ratio of not less than 1.25 to 1.00, in addition to various other affirmative and negative covenants.
|
Alto Pekin and ICP collectively
agreed to pay Alto Pekin’s and ICP’s lenders an aggregate of $40.0 million on or before September 30, 2020 (the “September
Paydown Amount”) to reduce the outstanding balances of Alto Pekin’s and ICP’s respective term loans, to be allocated
between them. Alto Pekin, ICP and their lenders contemplated funding the September Paydown Amount through asset sales, proceeds
of any award, judgment or settlement of litigation, or, at our election, from funds contributed by Alto Ingredients to Alto Pekin
or ICP.
In March 2020, the Company
granted to Alto Pekin’s lender a security interest in all of its equity interests in Alto Op Co. The Company and certain
subsidiaries also entered into intercreditor agreements with the Alto Pekin’s and ICP’s lenders, and the agent for
the Company’s senior secured noteholders, to address issues of priority and the allocation of proceeds from asset sales.
On December 18, 2020,
Alto Pekin and its lender further amended the Pekin Credit Facility to waive certain covenant defaults, including the covenant
requiring Alto Pekin and ICP to pay the September Paydown Amount from an approved source of funds on or before September 30, 2020.
The effect of this amendment was, in part, to deem the September Paydown Amount to have been timely paid. The parties also agreed
to amend the Pekin Credit Facility to provide for a payment to Alto Pekin’s and ICP’s lenders of an aggregate of $24.9
million (the “December Paydown Amount”), on or prior to December 21, 2020, with $19.9 million allocated to Alto Pekin’s
lenders and $5.0 million allocated to ICP’s lenders. On December 18, 2020, Alto Pekin and ICP paid the December Paydown Amount
in full.
Following receipt of
the December Paydown Amount, any additional proceeds arising from the sale of any of the Company’s midwestern production
facility assets will be allocated 33/34/33% among Alto Pekin’s and ICP’s lenders, collectively, the Company’s
senior secured noteholders, and the Company, respectively; and any additional proceeds arising from the sale of any of the Company’s
western production facility assets will be allocated first to the senior secured noteholders up to $20.0 million and then
allocated 33/34/33% among Alto Pekin’s and ICP’s lenders, collectively, the Company’s senior
secured noteholders, and the Company, respectively.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of the filing of this
report, the Company believes it is in compliance with the terms and conditions of the Pekin Credit Facility.
ICP Credit Facilities —
On September 15, 2017, ICP, Compeer Financial, PCA, or Compeer, and CoBank as agent, entered into a Credit Agreement (the “ICP
Credit Agreement”). Under the terms of the ICP Credit Agreement, ICP borrowed from Compeer $24.0 million under a term loan
facility that matures on September 20, 2021 (the “ICP Term Loan”), and up to $18.0 million under a revolving term loan
facility that matures on September 1, 2022 (the “ICP Revolving Loan”), and together with the ICP Term Loan (the “ICP
Credit Facility”). The ICP Credit Facility is secured by a first-priority security interest in all of ICP’s assets.
The ICP Credit Facility
and related agreements contain a variety of representations, warranties, covenants and events of default. Following a series of
amendments and waivers among ICP, its lenders and their agent, certain terms of the agreements are as follows:
|
●
|
Interest accrues under the ICP Credit Facility at an annual rate equal to the 30-day LIBOR plus
3.75%.
|
|
|
|
|
●
|
ICP is required to pay an annual nonrefundable commitment fee, calculated as 0.75% multiplied by
the average daily positive difference between (i) the ICP Revolving Loan commitment (which may be reduced by ICP from time to time
in increments of $0.5 million), minus (ii) the aggregate principal amounts outstanding under the ICP Revolving Loan.
|
|
|
|
|
●
|
ICP and Alto Pekin are collectively required to maintain working capital of not less than 50% of
the combined outstanding revolving lines of credit, which was $30.0 million at December 31, 2020; and an annual debt service coverage
ratio of not less than 1.50 to 1.00, in addition to various other affirmative and negative covenants.
|
ICP and Alto Pekin collectively
agreed to pay ICP’s and Alto Pekin’s lenders an aggregate of $40.0 million on or before September 30, 2020, the same
amount referred to above as the September Paydown Amount, to reduce the outstanding balances of ICP’s and Alto Pekin’s
respective term loans, to be allocated between them. ICP, Alto Pekin, and their lenders contemplated funding the September Paydown
Amount through asset sales, proceeds of any award, judgment or settlement of litigation, or, at our election, from funds contributed
by the Company to ICP or Alto Pekin.
In March 2020, the Company granted to Alto
Pekin’s lender a security interest in all of its equity interests in Alto Op Co. The Company and certain subsidiaries also
entered into intercreditor agreements with the ICP’s and Alto Pekin’s lenders, and the agent for the Company’s
senior secured noteholders, to address issues of priority and the allocation of proceeds from asset sales.
On December 18, 2020,
ICP and its lender further amended the ICP Credit Facility to waive certain covenant defaults, including the covenant requiring
ICP and Alto Pekin to pay the September Paydown Amount from an approved source of funds on or before September 30, 2020. The effect
of this amendment was, in part, to deem the September Paydown Amount to have been timely paid. The parties also agreed to amend
the ICP Credit Facility to provide for a payment to ICP’s and Alto Pekin’s lenders of an aggregate of $24.9
million, the same amount referred to above as the December Paydown Amount, on or prior to December 21, 2020, with $5.0 million
allocated to ICP’s lenders and $19.9 million allocated to Alto Pekin’s lenders. On December 18, 2020, ICP
and Alto Pekin paid the December Paydown Amount in full.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following receipt of
the December Paydown Amount, any additional proceeds arising from the sale of any of the Company’s midwestern production
facility assets will be allocated 33/34/33% among Alto Pekin’s and ICP’s lenders, collectively, the Company’s
senior secured noteholders, and the Company, respectively; and any additional proceeds arising from the sale of any of the Company’s
western production facility assets will be allocated first to the senior secured noteholders up to $20.0 million and then allocated
33/34/33% among Alto Pekin’s and ICP’s lenders, collectively, the Company’s senior secured noteholders, and the
Company, respectively.
As of the filing of this report, the Company
believes it is in compliance with the terms and conditions of the ICP Credit Facility.
Alto Ingredients, Inc. Senior Secured
Notes – On December 12, 2016, the Company entered into a Note Purchase Agreement with five accredited investors and
sold $55.0 million in aggregate principal amount of senior secured notes to the investors in a private offering for aggregate gross
proceeds of 97% of the principal amount of the notes sold. On June 26, 2017, the Company entered into a second Note Purchase Agreement
with five accredited investors and sold an additional $13.9 million in aggregate principal amount of senior secured notes to the
investors in a private offering for aggregate gross proceeds of 97% of the principal amount of the notes sold, and collectively
with the notes previously sold, (the “Notes”). The Notes are secured by a first-priority security interest in all of
the Company’s equity interests in Alto Op Co.
The Notes and related
agreements contain a variety of representations, warranties, covenants and events of default. Following a series of amendments
and waivers with the senior secured note holders and their agent, certain terms of the agreements are as follows:
|
●
|
The Notes mature on December 15, 2021.
|
|
|
|
|
●
|
Payments due under the Notes rank senior to all other indebtedness of Alto Ingredients, Inc. other
than permitted senior indebtedness.
|
|
|
|
|
●
|
Interest on the Notes accrues at a rate of 15% per annum.
|
|
|
|
|
●
|
Any voluntary prepayments must made at 102% of the principal amount prepaid.
|
The Notes also contain a variety of limitations,
including a prohibition on parent company indebtedness; restrictions on redemption, repurchase or payment of any dividend or distribution
in respect of our or our subsidiaries’ equity interests; restrictions on asset sales and other dispositions; and restrictions
on our or our subsidiaries’ ability to issue equity for purposes other than to pay down a portion of the outstanding balance
of the Notes.
In March 2020, ICP granted to the
senior secured noteholders a security interest in certain of its personal property. In addition, Alto Central granted to the
senior secured noteholders a security interest in certain of its personal property. Alto Central also pledged its equity
interests in Alto Pekin and ICP in favor of the senior secured noteholders as additional collateral securing our obligations
to the noteholders. Alto Op. Co also granted to the senior secured noteholders a security interest in certain of its personal
property. The Company and certain subsidiaries also entered into intercreditor agreements with the ICP’s and Alto
Pekin’s lenders, and the agent for the Company’s senior secured noteholders, to address issues of priority
and the allocation of proceeds from asset sales.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 2020, the Company repaid $35.3
million in principal under the Notes using a portion of the net proceeds of its then-recent offerings of common stock and warrants
and the sale of certain real property assets at our Magic Valley production facility.
As of the filing of this report, the Company
believes it is in compliance with the terms and conditions of the Notes.
CARES Act Loans – On
May 4, 2020, Alto Ingredients and Alto Pekin received loan proceeds from Bank of America, NA under the Coronavirus Aid, Relief,
and Economic Security Act (“CARES Act”), through the Paycheck Protection Program administered by the U.S. Small Business
Administration. Alto Ingredients received $6.0 million and Alto Pekin received $3.9 million in loan proceeds. The loans mature
in two years and bear interest at a rate of 1.00% per annum. Under the terms of the loans, certain amounts may be forgiven if they
are used for qualifying expenses as described in the CARES Act, but the Company can provide no assurance that it will be able to
obtain forgiveness of all or any portion of the loans. The Company is in the process of applying for loan forgiveness.
Maturities of Long-term Debt
– The Company’s long-term debt matures as follows (in thousands):
December 31:
|
|
|
|
2021
|
|
$
|
25,533
|
|
2022
|
|
|
72,336
|
|
|
|
$
|
97,869
|
|
The Company leases railcar equipment, office
equipment and land for certain of its facilities. Operating lease right of use assets and liabilities are recognized at commencement
date based on the present value of lease payments over the lease term. The Company uses its estimated incremental borrowing rate,
unless an implicit rate is readily determinable, as the discount rate for each lease in determining the present value of lease
payments. For the years ended December 31, 2020 and 2019, the Company’s weighted average discount rate was 6.00%. Operating
lease expense is recognized on a straight-line basis over the lease term.
Upon the adoption of ASC 842, the Company
elected the following practical expedients allowable under the guidance: not to reassess whether any expired or existing contracts
are or contain leases; not to reassess the lease classification for any expired or existing leases; not to reassess initial direct
costs for any existing leases; not to separately identify lease and non-lease components; and not to evaluate historical land easements.
Additionally, the Company elected the short-term lease exemption policy, applying the requirements of ASC 842 to only long-term
(greater than 1 year) leases.
The Company determines if an arrangement
is a lease or contains a lease at inception. The Company’s leases have remaining lease terms of approximately 1 year to 55
years, which may include options to extend the lease when it is reasonably certain the Company will exercise those options. For
the year ended December 31, 2020, the weighted average remaining lease terms of equipment and land-related leases were 1.10
years and 4.73 years, respectively. The Company does not have lease arrangements with residual value guarantees, sale
leaseback terms or material restrictive covenants. The Company does not have any material finance lease obligations nor
sublease agreements.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the remaining
maturities of the Company’s operating lease liabilities, assuming all land lease extensions are taken, as of 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
|
)
|
|
|
$
|
6,491
|
|
|
$
|
4,404
|
|
For the years ended December 31, 2020 and
2019, the Company recorded operating lease costs of $5,461,000 and $9,948,000, respectively, in cost of goods sold and $482,000
and $472,000, respectively, in selling, general and administrative expenses, in the Company’s statements of operations.
Retirement Plan - The Company
sponsors a defined benefit pension plan (the “Retirement Plan”) that is noncontributory, and covers only “grandfathered”
unionized employees at its Alto Pekin production facilities. Benefits are based on a prescribed formula based upon the employee’s
years of service. Employees hired after November 1, 2010, are not eligible to participate in the Retirement Plan. The Company uses
a December 31st measurement date for its Retirement Plan. The Company’s funding policy is to make the minimum annual
contribution required by applicable regulations.
Information related to the Retirement Plan
as of and for the years ended December 31, 2020 and 2019 is presented below (dollars in thousands):
|
|
2020
|
|
|
2019
|
|
Changes in plan assets:
|
|
|
|
|
|
|
Fair value of plan assets, beginning
|
|
$
|
15,654
|
|
|
$
|
13,257
|
|
Actual gains
|
|
|
1,969
|
|
|
|
2,692
|
|
Benefits paid
|
|
|
(721
|
)
|
|
|
(698
|
)
|
Company contributions
|
|
|
686
|
|
|
|
403
|
|
Participant contributions
|
|
|
—
|
|
|
|
—
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
(7,041
|
)
|
|
$
|
(5,989
|
)
|
Accumulated other comprehensive loss
|
|
$
|
3,199
|
|
|
$
|
1,654
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic benefit costs are as follows:
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
405
|
|
|
$
|
374
|
|
Interest cost
|
|
|
690
|
|
|
|
760
|
|
Expected return on plan assets
|
|
|
(903
|
)
|
|
|
(760
|
)
|
Net periodic benefit cost
|
|
$
|
192
|
|
|
$
|
374
|
|
Loss recognized in other comprehensive expense
|
|
$
|
1,545
|
|
|
$
|
585
|
|
|
|
|
|
|
|
|
|
|
Assumptions used in computation of benefit obligations:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
2.50
|
%
|
|
|
3.25
|
%
|
Expected long-term return on plan assets
|
|
|
6.25
|
%
|
|
|
6.25
|
%
|
Rate of compensation increase
|
|
|
—
|
|
|
|
—
|
|
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company expects to make contributions
in the year ending December 31, 2021 of approximately $0.8 million. Net periodic benefit cost for 2021 is estimated at approximately
$0.2 million.
The following table summarizes the expected
benefit payments for the Company’s Retirement Plan for each of the next five fiscal years and in the aggregate for the five
fiscal years thereafter (in thousands):
December 31:
|
|
|
|
|
2021
|
|
|
$
|
830
|
|
2022
|
|
|
|
860
|
|
2023
|
|
|
|
900
|
|
2024
|
|
|
|
930
|
|
2025
|
|
|
|
990
|
|
2026-30
|
|
|
|
5,510
|
|
|
|
|
$
|
10,020
|
|
See Note 15 for discussion of the Retirement Plan’s fair
value disclosures.
Historical and future expected returns
of multiple asset classes were analyzed to develop a risk-free real rate of return and risk premiums for each asset class. The
overall rate for each asset class was developed by combining a long-term inflation component, the risk-free real rate of return,
and the associated risk premium. A weighted average rate was developed based on those overall rates and the target asset allocation
of the Retirement Plan.
The Company’s pension committee is
responsible for overseeing the investment of pension plan assets. The pension committee is responsible for determining and monitoring
the appropriate asset allocations and for selecting or replacing investment managers, trustees, and custodians. The Retirement
Plan’s current investment target allocations are 50% equities and 50% debt. The pension committee reviews the actual asset
allocation in light of these targets periodically and rebalances investments as necessary. The pension committee also evaluates
the performance of investment managers as compared to the performance of specified benchmarks and peers and monitors the investment
managers to ensure adherence to their stated investment style and to the Retirement Plan’s investment guidelines.
Postretirement Plan - The
Company also sponsors a health care plan and life insurance plan (the “Postretirement Plan”) that provides postretirement
medical benefits and life insurance to certain “grandfathered” unionized employees at its Alto Pekin production facilities.
Employees hired after December 31, 2000, are not eligible to participate in the Postretirement Plan. The plan is contributory,
with contributions required at the same rate as active employees. Benefit eligibility under the plan reduces at age 65 from a defined
benefit to a defined dollar cap based upon years of service.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information related to the Postretirement Plan as of December
31, 2020 and 2019 is presented below (dollars in thousands):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Amounts at the end of
the year:
|
|
|
|
|
|
|
Accumulated/projected
benefit obligation
|
|
$
|
5,296
|
|
|
$
|
5,274
|
|
Fair
value of plan assets
|
|
|
—
|
|
|
|
—
|
|
Funded
status, (underfunded)/overfunded
|
|
$
|
(5,296
|
)
|
|
$
|
(5,274
|
)
|
|
|
|
|
|
|
|
|
|
Amounts
recognized in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
Accrued
liabilities
|
|
$
|
(300
|
)
|
|
$
|
(280
|
)
|
Other
liabilities
|
|
$
|
(4,996
|
)
|
|
$
|
(4,994
|
)
|
Accumulated
other comprehensive loss
|
|
$
|
679
|
|
|
$
|
716
|
|
Information related to the Postretirement Plan for the years
ended December 31, 2020 and 2019 is presented below (dollars in thousands):
|
|
Years
Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Amounts recognized in the plan for the year:
|
|
$
|
174
|
|
|
$
|
171
|
|
Participant contributions
|
|
$
|
26
|
|
|
$
|
24
|
|
Benefits paid
|
|
$
|
(200
|
)
|
|
$
|
(195
|
)
|
|
|
|
|
|
|
|
|
|
Components of net periodic benefit costs are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
54
|
|
|
$
|
67
|
|
Interest cost
|
|
|
151
|
|
|
|
219
|
|
Amortization of prior service costs
|
|
|
30
|
|
|
|
122
|
|
Net periodic benefit cost
|
|
$
|
235
|
|
|
$
|
408
|
|
Gain recognized in other comprehensive income
|
|
$
|
(37
|
)
|
|
$
|
(674
|
)
|
|
|
|
|
|
|
|
|
|
Discount rate used in computation of benefit obligations
|
|
|
2.05
|
%
|
|
|
2.95
|
%
|
The Company does not expect to recognize
any amortization of net actuarial loss during the year ended December 31, 2021.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the expected
benefit payments for the Company’s Postretirement Plan for each of the next five fiscal years and in the aggregate for the
five fiscal years thereafter (in thousands):
December 31:
|
|
|
|
2021
|
|
$
|
300
|
|
2022
|
|
|
270
|
|
2023
|
|
|
290
|
|
2024
|
|
|
330
|
|
2025
|
|
|
330
|
|
2026-2030
|
|
|
2,040
|
|
|
|
$
|
3,560
|
|
For purposes of determining the cost and
obligation for pre-Medicare postretirement medical benefits, a 7.00% annual rate of increase in the per capita cost of covered
benefits (i.e., health care trend rate) was assumed for the Postretirement Plan in 2022, adjusted to a rate of 4.50% in 2031. Assumed
health care cost trend rates have a significant effect on the amounts reported for health care plans.
The Company recorded a provision (benefit)
for income taxes as follows (in thousands):
|
|
Years
Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Current provision (benefit)
|
|
$
|
—
|
|
|
$
|
(22
|
)
|
Deferred provision (benefit)
|
|
|
(17
|
)
|
|
|
2
|
|
Total
|
|
$
|
(17
|
)
|
|
$
|
(20
|
)
|
A reconciliation of the differences between
the United States statutory federal income tax rate and the effective tax rate as provided in the consolidated statements of operations
is as follows:
|
|
Years
Ended December 31,
|
|
|
|
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
|
)%
|
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes are provided using
the asset and liability method to reflect temporary differences between the financial statement carrying amounts and the tax bases
of assets and liabilities using presently enacted tax rates and laws. The components of deferred income taxes included in the consolidated
balance sheets were as follows (in thousands):
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
61,208
|
|
|
$
|
61,775
|
|
Capital loss
|
|
|
29,684
|
|
|
|
—
|
|
Disallowed interest
|
|
|
6,255
|
|
|
|
8,242
|
|
R&D, Energy and AMT credits
|
|
|
3,864
|
|
|
|
3,864
|
|
Pension liability
|
|
|
3,235
|
|
|
|
2,979
|
|
Railcar contracts
|
|
|
302
|
|
|
|
379
|
|
Stock-based compensation
|
|
|
441
|
|
|
|
551
|
|
Allowance for doubtful accounts and other assets
|
|
|
461
|
|
|
|
578
|
|
Property and equipment
|
|
|
—
|
|
|
|
3,325
|
|
Other
|
|
|
1,963
|
|
|
|
3,458
|
|
Total deferred tax assets
|
|
|
107,413
|
|
|
|
85,151
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(16,243
|
)
|
|
|
—
|
|
Intangibles
|
|
|
(749
|
)
|
|
|
(749
|
)
|
Derivatives
|
|
|
(4,497
|
)
|
|
|
(153
|
)
|
Other
|
|
|
(472
|
)
|
|
|
(437
|
)
|
Total deferred tax liabilities
|
|
|
(21,961
|
)
|
|
|
(1,339
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(85,688
|
)
|
|
|
(84,065
|
)
|
Net deferred tax liabilities, included in other liabilities
|
|
$
|
(236
|
)
|
|
$
|
(253
|
)
|
A portion of the Company’s net operating
loss carryforwards are subject to provisions of the tax law that limit the use of losses incurred by a corporation prior to the
date certain ownership changes occur. These limitations also apply to certain depreciation deductions associated with assets on
hand at the time of the ownership change and otherwise allowable during the five-year period following the ownership change. As
the five-year limitation period lapsed in 2019, these disallowed deductions are reflected in property and equipment in the schedule
above but continue to be subject to the annual limitation that applies to the pre-change net operating losses. Due to the limitation
on the use of net operating losses and depreciation deductions, a significant portion of these carryforwards will expire regardless
of whether the Company generates future taxable income. After reducing these net operating loss carryforwards for the amount which
will expire due to this limitation, the Company had remaining federal net operating loss carryforwards of approximately $227,817,000
and state net operating loss carryforwards of approximately $211,680,000 at December 31, 2020. These net operating loss carryforwards
expire as follows (in thousands):
Tax Years
|
|
Federal
|
|
|
State
|
|
2021–2025
|
|
$
|
4,103
|
|
|
$
|
—
|
|
2026–2030
|
|
|
9,678
|
|
|
|
56,174
|
|
2031–2035
|
|
|
106,886
|
|
|
|
57,567
|
|
2036 and after*
|
|
|
107,150
|
|
|
|
97,940
|
|
Total NOLs
|
|
$
|
227,817
|
|
|
$
|
211,681
|
|
* Includes indefinite life federal
net operating losses of $77.5 million generated after 2017.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain of these net operating losses are
not immediately available, but become available to be utilized in each of the years ended December 31, as follows (in thousands):
Year
|
|
Federal
|
|
|
State
|
|
2021
|
|
$
|
152,026
|
|
|
$
|
135,458
|
|
2022
|
|
|
6,308
|
|
|
|
5,318
|
|
2023
|
|
|
6,308
|
|
|
|
5,318
|
|
2024
|
|
|
6,308
|
|
|
|
5,135
|
|
2025
|
|
|
6,308
|
|
|
|
5,089
|
|
Beyond 2025
|
|
|
50,559
|
|
|
|
55,363
|
|
Total
|
|
$
|
227,817
|
|
|
$
|
211,681
|
|
To the extent amounts are not utilized
in any year, they may be carried forward to the next year until expiration. These amounts may change if there are future additional
limitations on their utilization.
Federal capital loss of $113,928,000 may
be carried forward for 5 years and will expire in 2025. State capital loss of $110,279,000 may be carried forward for 5 years for
most of the states in which the Company files returns and will expire in 2025.
In assessing whether the deferred tax assets
are realizable, a more likely than not standard is applied. If it is determined that it is more likely than not that deferred tax
assets will not be realized, a valuation allowance must be established against the deferred tax assets. The ultimate realization
of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the associated temporary
differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies in making this assessment.
A valuation allowance was established in
the amount of $85,688,000 and $84,065,000 as of December 31, 2020 and 2019, respectively, based on the Company’s assessment
of the future realizability of certain deferred tax assets. The valuation allowance on deferred tax assets is related to future
deductible temporary differences and net operating loss carryforwards for which the Company has concluded it is more likely than
not that these items will not be realized in the ordinary course of operations.
For the year ended December 31, 2020, the
Company recorded an increase in valuation allowance of $1,623,000. This was primarily the offsetting impact of an increase in deferred
tax assets associated with the capital loss carryforward offset by changes in depreciation and other adjustments associated with
property plant and equipment, and mark-to-market adjustment related to derivatives in 2020. For the year ended December 31, 2019,
the Company recorded an increase in the valuation allowance of $43,477,000. Of this increase, $22,641,000 was primarily the offsetting
impact of an increase in deferred tax assets associated with additional net operating losses in 2019. The remaining increase of
$20,836,000 relates to a deferred asset related to previously disallowed depreciation discussed above.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is subject
to income tax in the United States federal jurisdiction and various state jurisdictions and has identified its federal tax return
and tax returns in state jurisdictions below as “major” tax filings. These jurisdictions, along with the years still
open to audit under the applicable statutes of limitation, are as follows:
Jurisdiction
|
|
Tax Years
|
Federal
|
|
2017 – 2019
|
Alabama
|
|
2017 – 2019
|
Arizona
|
|
2016 – 2019
|
Arkansas
|
|
2017 – 2019
|
California
|
|
2016 – 2019
|
Colorado
|
|
2015 – 2019
|
Connecticut
|
|
2017 – 2019
|
Georgia
|
|
2017 – 2019
|
Idaho
|
|
2017 – 2019
|
Illinois
|
|
2017 – 2019
|
Indiana
|
|
2017 – 2019
|
Iowa
|
|
2017 – 2019
|
Kansas
|
|
2017 – 2019
|
Louisiana
|
|
2017 – 2019
|
Michigan
|
|
2017 – 2019
|
Minnesota
|
|
2017 – 2019
|
Mississippi
|
|
2017 – 2019
|
Missouri
|
|
2017 – 2019
|
Nebraska
|
|
2017 – 2019
|
New Mexico
|
|
2017 – 2019
|
Oklahoma
|
|
2017 – 2019
|
Oregon
|
|
2017 – 2019
|
Pennsylvania
|
|
2017 – 2019
|
Rhode Island
|
|
2017 – 2019
|
South Carolina
|
|
2017 – 2019
|
Tennessee
|
|
2017 – 2019
|
Texas
|
|
2016 – 2019
|
However, because the Company had net operating
losses and credits carried forward in several of the jurisdictions, including the United States federal and California jurisdictions,
certain items attributable to closed tax years are still subject to adjustment by applicable taxing authorities through an adjustment
to tax attributes carried forward to open years.
The Company has 6,734,835 undesignated
shares of authorized and unissued preferred stock, which may be designated and issued in the future on the authority of the Company’s
Board of Directors. As of December 31, 2020, the Company had the following designated classes of preferred stock:
Series A Preferred Stock
– The Company has authorized 1,684,375 shares of Series A Cumulative Redeemable Convertible Preferred Stock (“Series
A Preferred Stock”), with none outstanding at December 31, 2020 and 2019. Shares of Series A Preferred Stock that are converted
into shares of the Company’s common stock revert to undesignated shares of authorized and unissued preferred stock.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Upon any issuance, the Series A Preferred
Stock would rank senior in liquidation and dividend preferences to the Company’s common stock. Holders of Series A Preferred
Stock would be entitled to quarterly cumulative dividends payable in arrears in cash in an amount equal to 5% per annum of the purchase price per share of the Series A Preferred Stock. The holders of the Series A Preferred Stock would have conversion rights
initially equivalent to two shares of common stock for each share of Series A Preferred Stock, subject to customary antidilution
adjustments. Certain specified issuances will not result in antidilution adjustments. The shares of Series A Preferred Stock would
also be subject to forced conversion upon the occurrence of a transaction that would result in an internal rate of return to the
holders of the Series A Preferred Stock of 25% or more. Accrued but unpaid dividends on the Series A Preferred Stock are to be
paid in cash upon any conversion of the Series A Preferred Stock.
The holders of Series A Preferred Stock
would have a liquidation preference over the holders of the Company’s common stock equivalent to the purchase price per share
of the Series A Preferred Stock plus any accrued and unpaid dividends on the Series A Preferred Stock. A liquidation would be deemed
to occur upon the happening of customary events, including transfer of all or substantially all of the Company’s capital
stock or assets or a merger, consolidation, share exchange, reorganization or other transaction or series of related transactions,
unless holders of 66 2/3% of the Series A Preferred Stock vote affirmatively in favor of or otherwise consent to such transaction.
Series B Preferred Stock
– The Company has authorized 1,580,790 shares of Series B Cumulative Convertible Preferred Stock (“Series B Preferred
Stock”), with 926,942 shares outstanding at December 31, 2020 and 2019. Shares of Series B Preferred Stock that are converted
into shares of the Company’s common stock revert to undesignated shares of authorized and unissued preferred stock.
The Series B Preferred
Stock ranks senior in liquidation and dividend preferences to the Company’s common stock. Holders of Series B Preferred Stock
are entitled to quarterly cumulative dividends payable in arrears in cash in an amount equal to 7.00% per annum of the purchase
price per share of the Series B Preferred Stock; however, subject to the provisions of the Letter Agreement described below, such
dividends may, at the option of the Company, be paid in additional shares of Series B Preferred Stock based initially on the liquidation
value of the Series B Preferred Stock. In addition to the quarterly cumulative dividends, holders of the Series B Preferred Stock
are entitled to participate in any common stock dividends declared by the Company to its common stockholders. The holders of Series
B Preferred Stock have a liquidation preference over the holders of the Company’s common stock initially equivalent to $19.50
per share of the Series B Preferred Stock plus any accrued and unpaid dividends on the Series B Preferred Stock. A liquidation
will be deemed to occur upon the happening of customary events, including the transfer of all or substantially all of the capital
stock or assets of the Company or a merger, consolidation, share exchange, reorganization or other transaction or series of related
transaction, unless holders of 66 2/3% of the Series B Preferred Stock vote affirmatively in favor of or otherwise consent that
such transaction shall not be treated as a liquidation. The Company believes that such liquidation events are within its control
and therefore has classified the Series B Preferred Stock in stockholders’ equity.
As of December 31, 2020,
the Series B Preferred Stock was convertible into 964,230 shares of the Company’s common stock. The conversion ratio is subject
to customary antidilution adjustments. In addition, antidilution adjustments are to occur in the event that the Company issues
equity securities, including derivative securities convertible into equity securities (on an as-converted or as-exercised basis),
at a price less than the conversion price then in effect. The shares of Series B Preferred Stock are also subject to forced conversion
upon the occurrence of a transaction that would result in an internal rate of return to the holders of the Series B Preferred Stock
of 25% or more. The forced conversion is to be based upon the conversion ratio as last adjusted. Accrued but unpaid dividends on
the Series B Preferred Stock are to be paid in cash upon any conversion of the Series B Preferred Stock.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The holders of Series
B Preferred Stock vote together as a single class with the holders of the Company’s common stock on all actions to be taken
by the Company’s stockholders. Each share of Series B Preferred Stock entitles the holder to approximately 0.03 votes per
share on all matters to be voted on by the stockholders of the Company. Notwithstanding the foregoing, the holders of Series B
Preferred Stock are afforded numerous customary protective provisions with respect to certain actions that may only be approved
by holders of a majority of the shares of Series B Preferred Stock.
In 2008, the Company
entered into Letter Agreements with Lyles United LLC (“Lyles United”) and other purchasers under which the Company
expressly waived its rights under the Certificate of Designations relating to the Series B Preferred Stock to make dividend payments
in additional shares of Series B Preferred Stock in lieu of cash dividend payments without the prior written consent of Lyles United
and the other purchasers.
On or about December
19, 2019, the Company and the holders of its Series B Preferred Stock entered into letter agreements under which the holders agreed
that until the earlier of (i) the Company’s repayment of its obligations in respect of its senior secured notes and thereafter
until the next scheduled quarterly installment of Series B Preferred Stock dividends, or (ii) the occurrence of a specified event
of default under the letter agreement, or (iii) two years from the date of the letter agreement (collectively, the “Waiver
Period”), the holders waive any rights and remedies against the Company with respect to any unpaid dividends. Cumulative
dividends on the Series B Preferred Stock will continue to accrue during the Waiver Period and remain owing to the holders of the
Series B Preferred Stock.
Registration Rights
Agreement – In connection with the sale of its Series B Preferred Stock, the Company entered into a registration
rights agreement with Lyles United. The registration rights agreement is to be effective until the holders of the Series B Preferred
Stock, and their affiliates, as a group, own less than 10% for each of the series issued, including common stock into which such
Series B Preferred Stock has been converted. The registration rights agreement provides that holders of a majority of the Series
B Preferred Stock, including common stock into which such Series B Preferred Stock has been converted, may demand and cause the
Company to register on their behalf the shares of common stock issued, issuable or that may be issuable upon conversion of the
Preferred Stock and as payment of dividends thereon, and upon exercise of the related warrants (collectively, the “Registrable
Securities”). The Company is required to keep such registration statement effective until such time as all of the Registrable
Securities are sold or until such holders may avail themselves of Rule 144 for sales of Registrable Securities without registration
under the Securities Act of 1933, as amended. The holders are entitled to two demand registrations on Form S-1 and unlimited demand
registrations on Form S-3; provided, however, that the Company is not obligated to effect more than one demand registration on
Form S-3 in any calendar year. In addition to the demand registration rights afforded the holders under the registration rights
agreement, the holders are entitled to unlimited “piggyback” registration rights. These rights entitle the holders
who so elect to be included in registration statements to be filed by the Company with respect to other registrations of equity
securities. The Company is responsible for all costs of registration, plus reasonable fees of one legal counsel for the holders,
which fees are not to exceed $25,000 per registration. The registration rights agreement includes customary representations and
warranties on the part of both the Company and the holders and other customary terms and conditions.
The Company accrued and paid in cash preferred
stock dividends of $946,000 for the year ended December 31, 2019. The Company accrued but did not pay in cash preferred stock dividends
of $1,268,000 and $319,000 for the years ended December 31, 2020 and 2019, respectively.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13.
|
COMMON STOCK AND WARRANTS.
|
Warrants issued
to Senior Noteholders – On December 22, 2019, in connection with an extension of the Company’s Notes, the Company
issued warrants to purchase an aggregate of 5,500,000 shares of the Company’s common stock. The warrants had an exercise
price of $1.00 per share and were exercisable commencing June 22, 2020 and were to expire on December 22, 2020. The Company had
determined that the warrants issued in this transaction did not meet the conditions for classification in stockholders’ equity
and as such, the Company recorded them as a liability at fair value. In August 2020, these warrants were fully exercised for $1.00
per share. For the period they were outstanding in 2020, the Company revalued them at each reporting period. These warrants were
valued at $977,000 as of December 31, 2019 and are included in other assets on the accompanying consolidated balance sheets. See
Note 16 for the Company’s fair value assumptions.
Warrants issued
in Equity Offering – On October 28, 2020, the Company closed an underwritten public offering of 5,075,000 shares
of its common stock at a public offering price of $8.42 per share and 5-year pre-funded warrants to purchase 3,825,493 shares of
common stock at a public offering price of $8.42 per pre-funded warrant. The Company had determined that the warrants issued in
this transaction did not meet the conditions for classification in stockholders’ equity and as such, the Company recorded
them as a liability at fair value. In November 2020, these warrants were fully exercised. For the period they were outstanding
in 2020, the Company revalued them at each reporting period. See Note 16 for the Company’s fair value assumptions.
In addition, in a concurrent private placement,
the Company also issued to the investor, for a nominal price, warrants to purchase an additional 8,900,493 shares of common stock
at an exercise price of $9.757 per share. The warrants became exercisable after the six-month anniversary of the offering and will
expire on the 18-month anniversary of the offering. The Company had determined that when initially issued, these warrants did not
meet the conditions for classification in stockholders’ equity, however, in November 2020, the Company amended these warrants
which then met the conditions of classification in stockholders’ equity and as such, the Company recorded them initially
as a liability at fair value and upon their amendment, reclassified their then fair value to equity. See Note 16 for the Company’s
fair value assumptions.
The aggregate gross proceeds from the offerings
of common stock, pre-funded warrants and warrants was approximately $75.0 million. The net offering proceeds were approximately
$70.5 million after deducting underwriting discounts and commissions and other estimated offering expenses.
The following table summarizes warrant
activity for the years ended December 31, 2020 and 2019 (number of shares in thousands):
|
|
Number
of
Shares
|
|
|
Price
per
Share
|
|
|
Weighted
Average
Exercise
Price
|
|
Balance at December 31, 2018
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Warrants issued
|
|
|
5,500
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
Balance at December 31, 2019
|
|
|
5,500
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
Warrants exercised
|
|
|
(5,500
|
)
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
Pre-funded warrants issued
|
|
|
3,825
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
Pre-funded warrants exercised
|
|
|
(3,825
|
)
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
Series A warrants issued
|
|
|
8,900
|
|
|
$
|
9.76
|
|
|
$
|
9.76
|
|
Balance at December 31, 2020
|
|
|
8,900
|
|
|
$
|
9.76
|
|
|
$
|
9.76
|
|
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nonvoting Common Stock –
In 2015, the Company issued nonvoting common shares exercisable at the holders’ election. As of December 31, 2020, an aggregate
of 3,539,236 shares of nonvoting common stock had been exchanged for an equal number of shares of the Company’s common stock
upon the holders’ request. As of December 31, 2020, 896 shares of nonvoting common stock were outstanding.
At-the-Market Program –
In October 2018, the Company established an “at-the-market” equity distribution program under which it could offer
and sell shares of common stock to, or through, sales agents by means of ordinary brokers’ transactions on The Nasdaq Stock
Market, in block transactions, or as otherwise agreed to between the Company and its sales agent at prices deemed appropriate.
For the years ended December 31, 2020 and 2019, the Company issued 1,421,000 and 3,137,000 shares of common stock through its “at-the-market”
equity program that resulted in net proceeds of $5,296,000 and $3,670,000 and fees paid to its sales agent of $171,000 and $66,000,
respectively. The Company terminated its “at-the-market” program in October 2020.
14.
|
STOCK-BASED COMPENSATION.
|
The Company has two equity incentive compensation
plans: a 2006 Stock Incentive Plan and a 2016 Stock Incentive Plan.
2006 Stock Incentive Plan
– The 2006 Stock Incentive Plan authorized the issuance of incentive stock options (“ISOs”) and non-qualified
stock options (“NQOs”), restricted stock, restricted stock units, stock appreciation rights, direct stock issuances
and other stock-based awards to the Company’s officers, directors or key employees or to consultants that do business with
the Company for up to an aggregate of 1,715,000 shares of common stock. In June 2016, the 2006 Stock Incentive plan was terminated,
except to the extent of issued and outstanding unvested stock awards and options.
2016 Stock Incentive Plan
– On June 16, 2016, the Company’s shareholders approved the 2016 Stock Incentive Plan, which authorizes the issuance
of ISOs, NQOs, restricted stock, restricted stock units, stock appreciation rights, direct stock issuances and other stock-based
awards to the Company’s officers, directors or key employees or to consultants that do business with the Company initially
for up to an aggregate of 1,150,000 shares of common stock. On June 14, 2018, the Company’s shareholders approved an increase
to the aggregate number of shares authorized under the 2016 Stock Incentive Plan to 3,650,000 shares. On November 7, 2019, the
Company’s shareholders approved an increase to the aggregate number of shares authorized under the 2016 Stock Incentive Plan
to 5,650,000 shares. On November 18, 2020, the Company’s shareholders approved an increase to the aggregate number of shares
authorized under the 2016 Stock Incentive Plan to 7,400,000 shares.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options – Summaries
of the status of Company’s stock option plans as of December 31, 2020 and 2019 and of changes in options outstanding under
the Company’s plans during those years are as follows (number of shares in thousands):
|
|
Years
Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at beginning of year
|
|
|
229
|
|
|
$
|
4.15
|
|
|
|
229
|
|
|
$
|
4.15
|
|
Options exercised
|
|
|
(22
|
)
|
|
|
3.74
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at end of year
|
|
|
207
|
|
|
$
|
4.16
|
|
|
|
229
|
|
|
$
|
4.15
|
|
Options exercisable at end of year
|
|
|
207
|
|
|
$
|
4.16
|
|
|
|
229
|
|
|
$
|
4.15
|
|
Stock options outstanding as of December 31,
2020 were as follows (number of shares in thousands):
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
Range
of
Exercise
Prices
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life (yrs.)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3.74
|
|
|
|
197
|
|
|
|
2.47
|
|
|
$
|
3.74
|
|
|
|
197
|
|
|
$
|
3.74
|
|
$
|
12.90
|
|
|
|
10
|
|
|
|
0.59
|
|
|
$
|
12.90
|
|
|
|
10
|
|
|
$
|
12.90
|
|
The aggregate intrinsic value of the options
outstanding was $262,000 and $0 as of December 31, 2020 and 2019, respectively.
Restricted Stock
– A summary of unvested restricted stock activity is as follows (shares in thousands):
|
|
Number
of
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
Per Share
|
|
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
|
|
The fair value of the common stock at vesting
aggregated $1,639,000 and $599,000 for the years ended December 31, 2020 and 2019, respectively. Stock-based compensation expense
related to employee and non-employee restricted stock and option grants recognized in the accompanying consolidated statements
of operations, was as follows (in thousands):
|
|
Years
Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Employees
|
|
$
|
2,025
|
|
|
$
|
2,422
|
|
Non-employees
|
|
|
654
|
|
|
|
387
|
|
Total stock-based compensation expense
|
|
$
|
2,679
|
|
|
$
|
2,809
|
|
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee grants typically have a two or
three-year vesting schedule, while non-employee grants have a one-year vesting schedule. At December 31, 2020, the total compensation
expense related to unvested awards which had not been recognized was $865,000 and the associated weighted-average period over which
the compensation expense attributable to those unvested awards will be recognized was approximately 1.37 years.
15.
|
COMMITMENTS AND CONTINGENCIES.
|
Commitments – The following
is a description of significant commitments at December 31, 2020:
Sales Commitments – The Company
had open fuel-grade ethanol indexed-price contracts for 84,722,000 gallons as of December 31, 2020 and open fixed-price fuel-grade
ethanol and specialty alcohol sales contracts totaling $257,310,000 as of December 31, 2020. The Company had open fixed-price essential
ingredient contracts totaling $16,722,000 as of December 31, 2020 and open indexed-price essential ingredient sales contracts for
161,000 tons as of December 31, 2020. These sales contracts are scheduled to be completed throughout 2021.
Purchase Commitments – At
December 31, 2020, the Company had indexed-price purchase contracts to purchase 5,814,000 gallons of fuel-grade ethanol and fixed-price
purchase contracts to purchase $4,043,000 of fuel-grade ethanol from its suppliers. The Company had fixed-price purchase contracts
to purchase $22,809,000 of corn from its suppliers. These purchase commitments are scheduled to be satisfied throughout 2021.
Assessment Financing – In
September 2016, the Company signed an agreement to finance and construct a 5-megawatt solar project at its Madera, California production
facility. The amount financed is for up to $10.0 million, to be amortized over twenty years as part of the facility’s property
tax assessments. As of December 31, 2020 and 2019, the Company had outstanding $9,108,000 and $9,342,000, respectively, in the
accompanying consolidated balance sheets attributable to this financing, reflected in liabilities held-for-sale. To the extent
the Company retains this financing, it expects to pay approximately $0.9 million per year in connection with its property tax payments,
which includes an interest component based upon a 5.6% interest rate on the outstanding balance of the assessment.
Contingencies – The
following is a description of significant contingencies at December 31, 2020:
Litigation – The Company
is subject to various claims and contingencies in the ordinary course of its business, including those related to litigation, business
transactions, employee-related matters, and others. When the Company is aware of a claim or potential claim, it assesses the likelihood
of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the
Company will record a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably estimated,
the Company discloses the claim if the likelihood of a potential loss is reasonably possible and the amount involved could be material.
While there can be no assurances, the Company does not expect that any of its pending legal proceedings will have a material financial
impact on the Company’s operating results.
The Company has evaluated its pending cases
and has not recorded a litigation contingency liability with respect to the cases.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16.
|
FAIR VALUE MEASUREMENTS.
|
The fair value hierarchy prioritizes the
inputs used in valuation techniques into three levels, as follows:
|
●
|
Level 1 – Observable inputs – unadjusted quoted prices in active markets for identical
assets and liabilities;
|
|
|
|
|
●
|
Level 2 – Observable inputs other than quoted prices included in Level 1 that are observable
for the asset or liability through corroboration with market data; and
|
|
|
|
|
●
|
Level 3 – Unobservable inputs – includes amounts derived from valuation models where
one or more significant inputs are unobservable. For fair value measurements using significant unobservable inputs, a description
of the inputs and the information used to develop the inputs is required along with a reconciliation of Level 3 values from the
prior reporting period.
|
Pooled separate accounts
– Pooled separate accounts invest primarily in domestic and international stocks, commercial paper or single mutual funds.
The net asset value is used as a practical expedient to determine fair value for these accounts. Each pooled separate account provides
for redemptions by the Retirement Plan at reported net asset values per share, with little to no advance notice requirement, therefore
these funds are classified within Level 2 of the valuation hierarchy.
Long-Lived Assets Held-for-Sale
– The Company recorded its long-lived assets associated with its property and equipment held-for-sale at fair value at December
31, 2020 and 2019 of $48,548,000 and $70,400,000, respectively. The fair values of these assets are based on observable values
for the assets through corroboration with market data and are designated as Level 3 inputs.
Warrants issued to Senior Noteholders
– The Company’s warrants issued December 22, 2019, were valued using the Black-Scholes Valuation Model and adjusted
for quarterly. On August 5, 2020, these warrants were exercised in full and prior to exercise, the Company adjusted their fair value using
the following assumptions (fair value dollars in thousands):
Original
Issuance
|
|
Exercise
Price
|
|
|
Volatility
|
|
|
Risk Free
Interest
Rate
|
|
|
Term
(years)
|
|
|
Fair Value
|
|
12/22/19
|
|
$
|
1.00
|
|
|
|
178.0
|
%
|
|
|
0.08
|
%
|
|
|
0.10
|
|
|
$
|
8,474
|
|
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The assumptions used and related fair value
for these warrants as of December 31, 2019 were as follows (fair value dollars in thousands):
Original
Issuance
|
|
Exercise
Price
|
|
|
Volatility
|
|
|
Risk Free
Interest
Rate
|
|
|
Term
(years)
|
|
|
Fair Value
|
|
12/22/19
|
|
$
|
1.00
|
|
|
|
76.0
|
%
|
|
|
1.66
|
%
|
|
|
3.00
|
|
|
$
|
977
|
|
Warrants issued in Equity
Offering – The Company issued pre-funded warrants and other warrants with exercise prices of $0.001 and
$9.757, respectively. The Company valued these warrants upon issuance using the Binomial valuation methodology. On November
16, 2020, the pre-funded warrants were exercised, and as a result, were revalued immediately prior to their exercise. Further, the
other warrants were amended on November 24, 2020, resulting in equity accounting, and accordingly were revalued immediately
prior to their amendment. The assumptions used were as follows (fair value dollars in thousands):
Warrant Type
|
|
Valuation
Date
|
|
Exercise
Price
|
|
|
Volatility
|
|
|
Risk
Free
Interest
Rate
|
|
|
Term
(years)
|
|
|
Fair
Value
|
|
Pre-funded
|
|
10/28/2020
|
|
$
|
0.01
|
|
|
|
97.0
|
%
|
|
|
0.34
|
%
|
|
|
5.00
|
|
|
$
|
23,638
|
|
Other
|
|
10/28/2020
|
|
$
|
9.76
|
|
|
|
134.0
|
%
|
|
|
0.14
|
%
|
|
|
1.50
|
|
|
$
|
27,048
|
|
Pre-funded
|
|
11/16/2020
|
|
$
|
0.01
|
|
|
|
97.0
|
%
|
|
|
0.40
|
%
|
|
|
4.95
|
|
|
$
|
21,916
|
|
Other
|
|
11/24/2020
|
|
$
|
9.76
|
|
|
|
135.0
|
%
|
|
|
0.13
|
%
|
|
|
1.45
|
|
|
$
|
31,231
|
|
The fair values of the warrants are based
on unobservable inputs and are designated as Level 3 inputs. The changes in the Company’s fair value of its Level 3 inputs
with respect to its warrants were as follows (in thousands):
|
|
Warrants to
Senior
Noteholders
|
|
|
Pre-funded
Warrants
|
|
|
Other
Warrants
|
|
Balance, December 31, 2019
|
|
$
|
977
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Issuance of warrants in October offering
|
|
|
—
|
|
|
|
23,638
|
|
|
|
27,048
|
|
Exercise of warrants/reclass to equity
|
|
|
(8,474
|
)
|
|
|
(21,917
|
)
|
|
|
(31,231
|
)
|
Adjustments to fair value for the period
|
|
|
7,497
|
|
|
|
(1,721
|
)
|
|
|
4,183
|
|
Balance, December 31, 2020
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other Derivative Instruments
– The Company’s other derivative instruments consist of commodity positions. The fair values of the commodity positions
are based on quoted prices on the commodity exchanges and are designated as Level 1 inputs.
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes recurring
and nonrecurring fair value measurements by level at December 31, 2020 (in thousands):
|
|
Fair
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Benefit Plan
Percentage
Allocation
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
17,149
|
|
|
$
|
17,149
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Long-lived assets held-for-sale
|
|
|
58,295
|
|
|
|
—
|
|
|
|
—
|
|
|
|
58,295
|
|
|
|
|
|
Defined benefit plan assets(1) (pooled separate accounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large U.S. Equity(2)
|
|
|
5,470
|
|
|
|
—
|
|
|
|
5,470
|
|
|
|
—
|
|
|
|
31
|
%
|
Small/Mid U.S. Equity(3)
|
|
|
2,605
|
|
|
|
—
|
|
|
|
2,605
|
|
|
|
—
|
|
|
|
15
|
%
|
International Equity(4)
|
|
|
2,921
|
|
|
|
—
|
|
|
|
2,921
|
|
|
|
—
|
|
|
|
17
|
%
|
Fixed Income(5)
|
|
|
6,592
|
|
|
|
—
|
|
|
|
6,592
|
|
|
|
—
|
|
|
|
37
|
%
|
|
|
$
|
93,032
|
|
|
$
|
17,149
|
|
|
$
|
17,588
|
|
|
$
|
58,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
The following table summarizes recurring
and nonrecurring fair value measurements by level at December 31, 2019 (in thousands):
|
|
Fair
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Benefit Plan
Percentage
Allocation
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
2,438
|
|
|
$
|
2,438
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Long-lived assets held-for-sale
|
|
|
70,400
|
|
|
|
—
|
|
|
|
—
|
|
|
|
70,400
|
|
|
|
|
|
Defined benefit plan assets(1) (pooled separate accounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large U.S. Equity(2)
|
|
|
4,654
|
|
|
|
—
|
|
|
|
4,654
|
|
|
|
—
|
|
|
|
30
|
%
|
Small/Mid U.S. Equity(3)
|
|
|
2,348
|
|
|
|
—
|
|
|
|
2,348
|
|
|
|
—
|
|
|
|
15
|
%
|
International Equity(4)
|
|
|
2,596
|
|
|
|
—
|
|
|
|
2,596
|
|
|
|
—
|
|
|
|
17
|
%
|
Fixed Income(5)
|
|
|
6,056
|
|
|
|
—
|
|
|
|
6,056
|
|
|
|
—
|
|
|
|
38
|
%
|
|
|
$
|
88,492
|
|
|
$
|
2,438
|
|
|
$
|
15,654
|
|
|
$
|
70,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
(1,860
|
)
|
|
$
|
(1,860
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Warrants
|
|
|
(977
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(977
|
)
|
|
|
|
|
|
|
$
|
(2,837
|
)
|
|
$
|
(1,860
|
)
|
|
$
|
—
|
|
|
$
|
(977
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
See Note 10 for accounting discussion.
|
|
(2)
|
This category includes investments in funds comprised of equity securities of large U.S. companies.
The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is
used to value the fund.
|
|
(3)
|
This category includes investments in funds comprised of equity securities of small- and medium-sized
U.S. companies. The funds are valued using the net asset value method in which an average of the market prices for the underlying
investments is used to value the fund.
|
|
(4)
|
This category includes investments in funds comprised of equity securities of foreign companies
including emerging markets. The funds are valued using the net asset value method in which an average of the market prices for
the underlying investments is used to value the fund.
|
|
(5)
|
This category includes investments in funds comprised of U.S. and foreign investment-grade fixed
income securities, high-yield fixed income securities that are rated below investment-grade, U.S. treasury securities, mortgage-backed
securities, and other asset-backed securities. The funds are valued using the net asset value method in which an average of the
market prices for the underlying investments is used to value the fund.
|
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17.
|
PARENT COMPANY FINANCIALS.
|
Restricted Net Assets – At December 31,
2020, the Company had approximately $262,200,000 of net assets at its subsidiaries that were not available to be transferred to
Alto Ingredients in the form of dividends, distributions, loans or advances due to restrictions contained in the credit facilities
of these subsidiaries.
Parent company financial statements for the periods covered
in this report are set forth below.
|
|
December 31,
|
|
ASSETS
|
|
2020
|
|
|
2019
|
|
Current Assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
25,632
|
|
|
$
|
4,985
|
|
Receivables from subsidiaries
|
|
|
15,548
|
|
|
|
13,057
|
|
Other current assets
|
|
|
1,836
|
|
|
|
2,349
|
|
Total current assets
|
|
|
43,016
|
|
|
|
20,391
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
142
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
Investments in subsidiaries
|
|
|
246,518
|
|
|
|
218,464
|
|
Right of use lease assets
|
|
|
2,985
|
|
|
|
3,253
|
|
Alto West LLC receivable
|
|
|
42,649
|
|
|
|
55,750
|
|
Other assets
|
|
|
1,088
|
|
|
|
1,452
|
|
Total other assets
|
|
|
293,240
|
|
|
|
278,919
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
336,398
|
|
|
$
|
299,579
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
2,001
|
|
|
$
|
5,907
|
|
Accrued Alto Op Co. purchase
|
|
|
3,829
|
|
|
|
3,829
|
|
Current portion of long-term debt
|
|
|
25,533
|
|
|
|
10,000
|
|
Other current liabilities
|
|
|
473
|
|
|
|
659
|
|
Total current liabilities
|
|
|
31,836
|
|
|
|
20,395
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net
|
|
|
5,564
|
|
|
|
56,110
|
|
Other liabilities
|
|
|
2,763
|
|
|
|
3,294
|
|
Total Liabilities
|
|
|
40,163
|
|
|
|
79,799
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
1
|
|
|
|
1
|
|
Common and non-voting common stock
|
|
|
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
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
336,398
|
|
|
$
|
299,579
|
|
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Years Ended
December 31,
|
|
|
|
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
|
)
|
Fair value adjustments
|
|
|
(9,959
|
)
|
|
|
—
|
|
Loss on debt extinguishment
|
|
|
—
|
|
|
|
(6,517
|
)
|
Interest income
|
|
|
4,011
|
|
|
|
4,600
|
|
Interest expense
|
|
|
(10,095
|
)
|
|
|
(9,637
|
)
|
Other expense, net
|
|
|
(220
|
)
|
|
|
(86
|
)
|
Loss before benefit for income taxes
|
|
|
(21,529
|
)
|
|
|
(14,965
|
)
|
Benefit for income taxes
|
|
|
17
|
|
|
|
20
|
|
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
|
)
|
ALTO INGREDIENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
For the Years Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(15,116
|
)
|
|
$
|
(88,949
|
)
|
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Equity in (income) losses of subsidiaries
|
|
|
(6,396
|
)
|
|
|
74,004
|
|
Depreciation
|
|
|
127
|
|
|
|
267
|
|
Fair value adjustments
|
|
|
9,959
|
|
|
|
—
|
|
Loss on debt extinguishment
|
|
|
—
|
|
|
|
6,517
|
|
Amortization of debt discounts
|
|
|
(230
|
)
|
|
|
689
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
883
|
|
|
|
3,277
|
|
Accounts payable and accrued expenses
|
|
|
(5,378
|
)
|
|
|
2,673
|
|
Accounts receivable with subsidiaries
|
|
|
(2,491
|
)
|
|
|
2,115
|
|
Accounts payable with subsidiaries
|
|
|
—
|
|
|
|
(49
|
)
|
Net cash provided by (used in) operating activities
|
|
$
|
(18,642
|
)
|
|
$
|
544
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
$
|
—
|
|
|
$
|
(14
|
)
|
Investments in subsidiaries
|
|
|
(20,865
|
)
|
|
|
—
|
|
Net cash used in investing activities
|
|
$
|
(20,865
|
)
|
|
$
|
(14
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
$
|
75,829
|
|
|
$
|
3,670
|
|
Proceeds from warrant exercises
|
|
|
5,500
|
|
|
|
—
|
|
Proceeds from CARES Act loans
|
|
|
5,973
|
|
|
|
—
|
|
Proceeds from West receivable
|
|
|
13,101
|
|
|
|
—
|
|
Debt issuances costs
|
|
|
—
|
|
|
|
(1,280
|
)
|
Payments on senior notes
|
|
|
(40,249
|
)
|
|
|
(3,748
|
)
|
Preferred stock dividend payments
|
|
|
—
|
|
|
|
(946
|
)
|
Net cash provided by (used in) financing activities
|
|
$
|
60,154
|
|
|
$
|
(2,304
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
20,647
|
|
|
|
(1,774
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
4,985
|
|
|
|
6,759
|
|
Cash and cash equivalents at end of period
|
|
$
|
25,632
|
|
|
$
|
4,985
|
|