ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The
following discussion and analysis should be read in conjunction with our consolidated financial statements and notes to consolidated
financial statements included elsewhere in this report. This report and our consolidated financial statements and notes to consolidated
financial statements contain forward-looking statements, which generally include the plans and objectives of management for future operations,
including plans and objectives relating to our future economic performance and our current beliefs regarding revenues we might generate
and profits we might earn if we are successful in implementing our business and growth strategies. The forward-looking statements and
associated risks may include, relate to or be qualified by other important factors, including:
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●
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fluctuations
in the market prices of alcohols and essential ingredients;
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●
|
fluctuations
in the costs of key production input commodities such as corn and natural gas;
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●
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the
projected growth or contraction in the alcohol and essential ingredients markets in which
we operate;
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●
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our
strategies for expanding, maintaining or contracting our presence in these markets;
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●
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anticipated
trends in our financial condition and results of operations; and
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●
|
our
ability to distinguish ourselves from our current and future competitors.
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You
are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this report, or in the
case of a document incorporated by reference, as of the date of that document. We do not undertake to update, revise or correct any forward-looking
statements, except as required by law.
Any
of the factors described immediately above, or referenced from time to time in our filings with the Securities and Exchange Commission
or in the “Risk Factors” section below could cause our financial results, including our net income or loss or growth in net
income or loss to differ materially from prior results, which in turn could, among other things, cause the price of our common stock
to fluctuate substantially.
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 five alcohol production facilities.
Three of our production facilities are located in the Midwestern state of Illinois and two of our facilities are located in the Western
states of Oregon and Idaho. We have an annual alcohol production capacity of 350 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.
We
report our 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
production, which includes the production and sale of alcohols and essential ingredients produced at our Pekin, Illinois campus, or Pekin
Campus, and (3) Other production, which includes the production and sale of fuel-grade ethanol and essential ingredients produced at
all of our other production facilities on an aggregate basis, none of which are individually so significant as to be considered a reportable
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
83% of our estimated maximum annual production capacity. Our Magic Valley facility is currently idled, however, we are preparing to
restart the facility during the fourth quarter. 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
|
|
|
|
—
|
|
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 producers. 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 3 – Segments” to our Notes to Consolidated Financial Statements included elsewhere in this report for financial
information about our business segments.
Current
Initiatives and Outlook
We made significant progress advancing our strategic
initiatives in the third quarter by expanding our essential ingredients business and investing in infrastructure improvements. Subsequent
to quarter-end, we also completed the realignment of our business.
In September, we launched our first project to
produce enhanced protein at our dry mill in Magic Valley, Idaho by installing Harvesting Technology’s patented CoPromaxTM
system. We chose this facility because of its location near cattle, poultry, pork and acquaculture markets to serve the growing demand
for high protein feed. We plan to restart production at this facility by year-end and commission the new system in the first half of 2022.
Once completed, we expect the CoPromax system to produce over 33,000 tons of feed annually with a protein content greater than 50%. The
system will also increase corn oil yields by 50% to nearly 9.0 million pounds annually. We expect the combination of additional sales
of corn oil and premium prices from high protein feed to contribute earnings before interest, taxes, depreciation and amortization, or
EBITDA, of over $9.0 million annually based on current market prices, of which we expect a contribution of $5.0 million of EBITDA in 2022.
We plan to roll out the CoPromax system at our
three other dry mills following its successful installation at our Magic Valley facility. Assuming similar economics across all four dry
mills, we conservatively estimate that the systems will contribute EBITDA of $40.0 million annually, including additional EBITDA of $34.0
million in 2023 or 2024, or both. This initiative is one example of our efforts to grow and diversify our revenues and bolster the quantity
and quality of our earnings.
In the third quarter, we completed our yeast facility
expansion project. Our additional yeast production is fully contracted for sale through 2022. We expect to complete our feed dryer upgrades
and achieve their full operation by year-end. Beginning in 2022, we anticipate that our yeast facility expansion and feed dryer upgrade
projects will contribute EBITDA of approximately $5.0 million annually. We also completed the expansion of our annual corn oil production
capacity by 4,000 tons at our Pekin campus, which we expect will contribute EBITDA of approximately $4.5 million annually starting in
2022. In addition to our yeast facility expansion, we are pursuing opportunities to expand our yeast product offerings to include higher
quality, more versatile products marketable to the food industry.
We have completed the repair and maintenance shutdown,
and infrastructure upgrade, of our Pekin campus wet mill. We upgraded the facility’s electrical infrastructure, improved redundancy
in the facility’s cooling supply, and replaced condensers and pumps. This project has significantly improved the efficiency and
reliability of the facility’s production capabilities to further support customer demand long-term. The project has also extended
our planned outage schedule to 24-month intervals. The facility shutdown occurred during a period of volatile market conditions and reduced
revenues and increased operating costs, resulting in a net loss for the third quarter. Following its restart, our Pekin campus wet mill
returned to profitable operations in September.
We continue to work with new and existing customers
to act as their certified producer of a growing variety of specialty alcohols used in common, everyday consumer goods, such as vinegars,
spirits, mouthwash, cosmetics and cleaning supplies. To proactively address our customers’ growing needs, we are extending to our
Pekin wet mill the certifications we obtained in 2020 for our ICP facility. We expect to complete these certifications by year-end, which
will provide redundancy across our entire Pekin campus as well as further quality assurances to our customers.
Due to volatile commodity prices, customers are
taking a more measured approach to contracting annual specialty alcohol volumes for 2022 as compared to prior years. As a result, we expect
contract negotiations to extend through the rest of 2021. Nevertheless, we expect to contract for more specialty alcohol gallons in 2022
than in 2021.
In November, we completed the sale of our idled
fuel-grade ethanol facility in Stockton, California for $24 million in cash. We retained the right to service our regional customer needs
by using the facility’s terminal capabilities. We will also act as the facility’s exclusive marketer of fuel-grade ethanol
when production resumes. The sale of our Stockton facility and the earlier sale of our Madera, California facility collectively remove
approximately $4.0 million in annual negative EBITDA carrying costs for the idled facilities. The sale of our Stockton facility completes
the realignment, which began over 21 months ago, of our business. This realignment has contributed significantly to the repayment of approximately
$150.0 million in debt, achieving our goal of repayment by the end of 2021. Retiring this debt has also eliminated over $16.0 million
in annual interest expense and has removed the structural and financial impediments that contributed to our prior financial challenges.
In total, we expect our capital improvement projects
and cost savings from the realignment of our business to contribute $18.5 million of EBITDA in 2022 compared to 2021.
We anticipate full-year 2021 gross profit, on a
consolidated basis, of at least $40.0 million, excluding any fourth quarter impact from derivatives. Many variables could materially impact
this projected amount and our overall results, including highly volatile commodity prices, export conditions, and abnormally high logistical
costs, including corn basis. Given unusually high positive short-term spreads in fuel-grade ethanol and corn, we have begun locking in
margins for our fuel-grade ethanol production through year-end. Moreover, given the volatility we experienced in 2021 in the commodity
markets, we have elected to lock in our utility costs for the next twelve months and lock in other variable input costs, including corn,
through the first quarter of 2022 to mitigate risk.
We plan to reinvest in sustainable and profitable
business segments, strengthening our core operations and further diversifying our product offerings in specialty alcohols and essential
ingredients. In addition, we remain actively engaged with third parties to develop a carbon capture and sequestration program at our Pekin
campus, which remains an important opportunity, especially given the tax credit enhancements for carbon capture and sequestration included
in the Infrastructure Investment and Jobs Act. Finally, we are actively pursuing opportunities to extend our specialty alcohol business
through accretive vertical integration.
Use of Non-GAAP Measures
Management believes that certain financial measures not in accordance
with generally accepted accounting principles (“GAAP”) are useful measures of operations. The company defines EBITDA as unaudited
net income (loss) attributed to Alto Ingredients, Inc. before interest expense, provision (benefit) for income taxes, and depreciation
and amortization expense. Management provides this non-GAAP measure so that investors will have the same financial information that management
uses, which may assist investors in properly assessing the company’s performance on a period-over-period basis. EBITDA is not a
measure of financial performance under GAAP and should not be considered as an alternative to net income (loss) attributed to Alto Ingredients,
Inc. or any other measure of performance under GAAP, or to cash flows from operating, investing or financing activities as an indicator
of cash flows or as a measure of liquidity. EBITDA has limitations as an analytical tool and you should not consider this measure in isolation
or as a substitute for analysis of our results as reported under GAAP.
Information reconciling forward-looking EBITDA to forward-looking net income
(loss) attributed to Alto Ingredients, Inc. would require a forward-looking statement of net income (loss) attributed to Alto Ingredients,
Inc. prepared in accordance with GAAP, which is unavailable to us without unreasonable effort. We are not able to provide a quantitative
reconciliation of forward-looking EBITDA to forward-looking net income (loss) attributed to Alto Ingredients, Inc. because items required
for reconciliation are uncertain, outside of our control and/or cannot be reasonably predicted, such as provision (benefit) for income
taxes and net income (loss), that are not presently estimable.
Critical
Accounting Policies
The
preparation of our financial statements, which have been prepared in accordance with accounting principles generally accepted in the
United States of America, requires us to make judgments and estimates that may have a significant impact upon the portrayal of our financial
condition and results of operations. We believe that of our significant accounting policies, the following require estimates and assumptions
that require complex, subjective judgments by management that can materially impact the portrayal of our financial condition and results
of operations: revenue recognition; impairment of long-lived assets and held-for-sale classification; valuation of allowance for deferred
taxes and derivative instruments. These significant accounting principles are more fully described in “Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in our Annual Report on Form
10-K for the year ended December 31, 2020.
Results
of Operations
The
following selected financial information should be read in conjunction with our consolidated financial statements and notes to our consolidated
financial statements included elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” contained in this report.
Certain
performance metrics that we believe are important indicators of our results of operations include:
|
|
Three Months Ended
September 30,
|
|
|
Percentage
|
|
|
Nine Months Ended
September 30,
|
|
|
Percentage
|
|
|
|
2021
|
|
|
2020
|
|
|
Variance
|
|
|
2021
|
|
|
2020
|
|
|
Variance
|
|
Fuel-grade ethanol production gallons sold (in millions)
|
|
|
38.3
|
|
|
|
21.9
|
|
|
|
74.9
|
%
|
|
|
118.6
|
|
|
|
148.0
|
|
|
|
(19.9
|
)%
|
Specialty alcohol production gallons sold (in millions)
|
|
|
19.7
|
|
|
|
21.6
|
|
|
|
(8.8
|
)%
|
|
|
63.1
|
|
|
|
74.9
|
|
|
|
(15.8
|
)%
|
Third party fuel-grade ethanol gallons sold (in millions)
|
|
|
67.2
|
|
|
|
76.7
|
|
|
|
(12.4
|
)%
|
|
|
180.5
|
|
|
|
213.0
|
|
|
|
(15.3
|
)%
|
Total gallons sold (in millions)
|
|
|
125.2
|
|
|
|
120.2
|
|
|
|
4.2
|
%
|
|
|
362.2
|
|
|
|
435.9
|
|
|
|
(16.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gallons produced (in millions)
|
|
|
60.6
|
|
|
|
45.2
|
|
|
|
34.1
|
%
|
|
|
182.2
|
|
|
|
209.1
|
|
|
|
(12.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production capacity utilization
|
|
|
59
|
%
|
|
|
40
|
%
|
|
|
47.5
|
%
|
|
|
57
|
%
|
|
|
54
|
%
|
|
|
5.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average sales price per gallon
|
|
$
|
2.47
|
|
|
$
|
1.71
|
|
|
|
44.4
|
%
|
|
$
|
2.27
|
|
|
$
|
1.60
|
|
|
|
41.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn cost per bushel – CBOT equivalent
|
|
$
|
6.09
|
|
|
$
|
3.29
|
|
|
|
85.1
|
%
|
|
$
|
5.71
|
|
|
$
|
3.49
|
|
|
|
63.6
|
%
|
Average basis (1)
|
|
$
|
0.89
|
|
|
$
|
0.22
|
|
|
|
304.5
|
%
|
|
$
|
0.53
|
|
|
$
|
0.29
|
|
|
|
82.8
|
%
|
Delivered cost of corn
|
|
$
|
6.98
|
|
|
$
|
3.51
|
|
|
|
98.9
|
%
|
|
$
|
6.24
|
|
|
$
|
3.78
|
|
|
|
65.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total essential ingredients tons sold (in thousands)
|
|
|
305.6
|
|
|
|
255.5
|
|
|
|
19.6
|
%
|
|
|
886.5
|
|
|
|
1,177.5
|
|
|
|
(24.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Essential ingredients revenues as % of delivered cost of corn(2)
|
|
|
29.5
|
%
|
|
|
50.2
|
%
|
|
|
(41.2
|
)%
|
|
|
33.8
|
%
|
|
|
44.6
|
%
|
|
|
(24.2
|
)%
|
Average CBOT fuel-grade ethanol price per gallon
|
|
$
|
2.25
|
|
|
$
|
1.27
|
|
|
|
77.2
|
%
|
|
$
|
2.08
|
|
|
$
|
1.20
|
|
|
|
73.3
|
%
|
Average CBOT corn price per bushel
|
|
$
|
5.59
|
|
|
$
|
3.40
|
|
|
|
64.4
|
%
|
|
$
|
5.87
|
|
|
$
|
3.49
|
|
|
|
68.2
|
%
|
(1)
|
Corn
basis represents the difference between the immediate cash price of delivered corn and the
future price of corn for Chicago delivery.
|
(2)
|
Essential
ingredients revenues as a percentage of delivered cost of corn shows our yield based on sales
of essential ingredients, including wet distillers grains and corn oil, generated from alcohol
we produced.
|
Net
Sales, Cost of Goods Sold and Gross Profit (Loss)
The
following table presents our net sales, cost of goods sold and gross profit (loss) in dollars and gross profit as a percentage of
net sales (in thousands, except percentages):
|
|
Three Months Ended
September 30,
|
|
|
Variance in
|
|
|
Nine
Months Ended
September 30,
|
|
|
Variance in
|
|
|
|
2021
|
|
|
2020
|
|
|
Dollars
|
|
|
Percent
|
|
|
2021
|
|
|
2020
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
305,556
|
|
|
$
|
204,727
|
|
|
$
|
100,829
|
|
|
|
49.3
|
%
|
|
$
|
822,400
|
|
|
$
|
728,205
|
|
|
$
|
94,195
|
|
|
|
12.9
|
%
|
Cost of goods sold
|
|
|
308,955
|
|
|
|
183,797
|
|
|
|
125,158
|
|
|
|
68.1
|
%
|
|
|
796,729
|
|
|
|
688,983
|
|
|
|
107,746
|
|
|
|
15.6
|
%
|
Gross profit (loss)
|
|
$
|
(3,399
|
)
|
|
$
|
20,930
|
|
|
$
|
(24,329
|
)
|
|
|
NM
|
*
|
|
$
|
25,671
|
|
|
$
|
39,222
|
|
|
$
|
(13,551
|
)
|
|
|
(34.5
|
)%
|
Percentage of net sales
|
|
|
(1.1
|
)%
|
|
|
10.2
|
%
|
|
|
|
|
|
|
|
|
|
|
3.1
|
%
|
|
|
5.4
|
%
|
|
|
|
|
|
|
|
|
Net
Sales
The
increase in our consolidated net sales for the three months ended September 30, 2021 as compared to the same periods in 2020 was primarily
due to an increase in our average sales price per gallon and in our production gallons sold.
Our
production gallons and our volume of essential ingredients sold increased for the three months ended September 30, 2021 as compared to
the same period in 2020 primarily due to the operation of our Pekin dry mill in the third quarter of 2021, which was idled during the
same period in 2020 due to significant logistical constraints arising from closure of the Illinois River for lock repairs, and continued
contract sales of our specialty alcohols. Our third-party gallons sold declined as compared to the same period in 2020 because we focused
our efforts on selling our own fuel-grade ethanol production.
The
increase in our consolidated net sales for the nine months ended September 30, 2021 as compared to the same period in 2020 was primarily
due to an increase in our average sales price per gallon, partially offset by a decrease in our total gallons sold.
Our
production gallons, our third-party gallons and our volume of essential ingredients sold declined for the nine months ended September
30, 2021 as compared to the same period in 2020 due to an intentional reduction in our production and sale of fuel-grade ethanol as we
continued our focus on more profitable operations. In addition, the prior year period includes gallons associated with our production
facilities that have since been idled and/or sold. Moreover, we produced and sold fewer gallons of specialty alcohols due to lower spot
sales in 2021 compared to 2020 as demand has abated in 2021 for sanitizers and disinfectants.
Three
Months Ended September 30, 2021 and 2020
On
a consolidated basis, our average sales price per gallon increased by 44% to $2.47 for the three months ended September 30, 2021 as compared
to $1.71 for the same period in 2020. The average Chicago Board of Trade, or CBOT, fuel-grade ethanol price per gallon, increased 77%
to $2.25 for the three months ended September 30, 2021 as compared to $1.27 for the same period in 2020.
Marketing
Segment
Net
sales of fuel-grade ethanol from our marketing segment reported gross, excluding intersegment sales, increased by $28.4 million, or 34%,
to $112.4 million for the three months ended September 30, 2021 as compared to $84.0 million for the same period in 2020.
Our
volume of third party fuel-grade ethanol gallons sold reported gross by our marketing segment declined by 8.5 million gallons, or 17%,
to 43.0 million gallons for the three months ended September 30, 2021 as compared to 51.5 million gallons for the same period in 2020.
At our marketing segment’s average sales price per gallon of $2.61 for the three months ended September 30, 2021, we generated
$22.2 million less in net sales from our marketing segment from the 8.5 million fewer gallons of third-party fuel-grade ethanol sold
gross in the three months ended September 30, 2021 as compared to the same period in 2020.
The
$0.98 per gallon, or 60%, increase in our marketing segment’s average sales price per gallon for the three months ended September
30, 2021 as compared to the same period in 2020 resulted in a $51.0 million increase in our net sales from third-party fuel-grade ethanol
sold reported gross by our marketing segment.
Our
volume of third party fuel-grade ethanol gallons sold reported net by our marketing segment decreased by 1.0 million gallons, or 4%,
to 24.2 million gallons for the three months ended September 30, 2021 as compared to 25.2 million gallons for the same period in 2020.
The decrease in third-party fuel-grade ethanol gallons sold reported net decreased net sales by $0.4 million.
Pekin
Campus Production Segment
Net
sales of alcohol from our Pekin Campus production segment increased by $37.5 million, or 49%, to $114.6 million for the three months
ended September 30, 2021 as compared to $77.1 million for the same period in 2020. Our total volume of production gallons sold increased
by 12.7 million gallons, or 35%, to 49.2 million gallons for the three months ended September 30, 2021 as compared to 36.5 million gallons
for the same period in 2020. At our Pekin Campus production segment’s average sales price per gallon of $2.33 for the three months
ended September 30, 2021, we generated $29.6 million in additional net sales from our Pekin Campus production segment from the 12.7 million
additional gallons of alcohol sold in the three months ended September 30, 2021 as compared to the same period in 2020. The increase
of $0.22, or 10%, in our Pekin Campus production segment’s average sales price per gallon in the three months ended September 30,
2021 as compared to the same period in 2020 improved our net sales from our Pekin Campus production segment by $7.9 million.
Net
sales of essential ingredients increased by $18.4 million, or 67%, to $46.0 million for the three months ended September 30, 2021 as
compared to $27.6 million for the same period in 2020. Our total volume of essential ingredients sold increased by 44,100 tons, or 24%,
to 227,300 tons for the three months ended September 30, 2021 from 183,200 tons for the same period in 2020. At our average sales price
per ton of $202.45 for the three months ended September 30, 2021, we generated an additional $8.9 million in net sales from the 44,100
additional tons of essential ingredients sold in the three months ended September 30, 2021 as compared to the same period in 2020. The
increase of $51.69, or 34%, in our average sales price per ton for the three months ended September 30, 2021 as compared to the same
period in 2020 increased our net sales from our Pekin Campus production segment by $9.5 million.
Other
Production Segment
Net
sales of alcohol from our other production segment increased by $13.4 million, or 114%, to $25.2 million for the three months ended September
30, 2021 as compared to $11.8 million for the same period in 2020. Our total volume of gallons sold increased by 1.8 million gallons,
or 26%, to 8.8 million gallons for the three months ended September 30, 2021 as compared to 7.0 million gallons for the same period in
2020. At our other production segment’s average sales price per gallon of $2.86 for the three months ended September 30, 2021,
we generated an additional $5.1 million in net sales from our other production segment from the 1.8 million additional gallons of alcohol
sold in the three months ended September 30, 2021 as compared to the same period in 2020. The increase of $1.18, or 70%, in our other
production segment’s average sales price per gallon for the three months ended September 30, 2021 as compared to the same period
in 2020 improved our net sales from our other production segment by $8.3 million.
Net
sales of essential ingredients increased by $3.0 million, or 77%, to $6.9 million for the three months ended September 30, 2021 as compared
to $3.9 million for the same period in 2020. Our total volume of essential ingredients sold increased by 6,000 tons, or 8%, to 78,300
tons for the three months ended September 30, 2021 from 72,300 tons for the same period in 2020. At our average sales price per ton of
$87.70 for the three months ended September 30, 2021, we generated an additional $0.5 million in net sales from the 6,000 additional
tons of essential ingredients sold in the three months ended September 30, 2021 as compared to the same period in 2020. The increase
of $33.97, or 63%, in our average sales price per ton for the three months ended September 30, 2021 as compared to the same period in
2020 increased our net sales from our other production segment by $2.5 million.
Nine Months Ended September
30, 2021 and 2020
On a consolidated basis, our
average sales price per gallon increased by 42% to $2.27 for the nine months ended September 30, 2021 as compared to $1.60 for the same
period in 2020. The average CBOT fuel-grade ethanol price per gallon, increased by 73% to $2.08 for the nine months ended September 30,
2021 as compared to $1.20 for the same period in 2020.
Marketing Segment
Net sales of fuel-grade ethanol from our marketing
segment reported gross, excluding intersegment sales, increased by $43.1 million, or 20%, to $255.7 million for the nine months ended
September 30, 2021 as compared to $212.6 million for the same period in 2020.
Our volume of third party
fuel-grade ethanol gallons sold reported gross by our marketing segment declined by 35.7 million gallons, or 26%, to 103.2 million
gallons for the nine months ended September 30, 2021 as compared to 138.9 million gallons for the same period in 2020. At our
marketing segment’s average sales price per gallon of $2.48 for the nine months ended September 30, 2021, we generated $88.5
million less in net sales from our marketing segment from the 35.7 million fewer gallons of third-party fuel-grade ethanol sold
reported gross in the nine months ended September 30, 2021 as compared to the same period in 2020.
The $0.95 per gallon, or 62%, increase in our
marketing segment’s average sales price per gallon for the nine months ended September 30, 2021 as compared to the same period
in 2020 resulted in a $131.6 million increase in our net sales from third-party fuel-grade ethanol sold reported gross by our marketing
segment.
Our volume of third party fuel-grade ethanol gallons
sold reported net by our marketing segment increased by 3.2 million gallons, or 4%, to 77.3 million gallons for the nine months ended
September 30, 2021 as compared to 74.1 million gallons for the same period in 2020. The increase in third-party fuel-grade ethanol gallons
sold reported net increased net sales by $0.4 million.
Pekin Campus Production
Segment
Net sales of alcohol from our
Pekin Campus production segment increased by $86.3 million, or 34%, to $342.0 million for the nine months ended September 30, 2021 as
compared to $255.7 million for the same period in 2020. Our total volume of production gallons sold increased by 12.7 million gallons,
or 9%, to 157.4 million gallons for the nine months ended September 30, 2021 as compared to 144.7 million gallons for the same period
in 2020. At our Pekin Campus production segment’s average sales price per gallon of $2.17 for the nine months ended September 30,
2021, we generated $27.6 million additional net sales from our Pekin Campus production segment from the 12.7 million additional gallons
of alcohol sold in the nine months ended September 30, 2021 as compared to the same period in 2020. The increase of $0.41, or 23%, in
our Pekin Campus production segment’s average sales price per gallon in the nine months ended September 30, 2021 as compared to
the same period in 2020 improved our net sales from our Pekin Campus production segment by $58.7 million.
Net sales of essential ingredients
increased by $39.6 million, or 39%, to $140.7 million for the nine months ended September 30, 2021 as compared to $101.1 million for
the same period in 2020. Our total volume of essential ingredients sold increased by 22,100 tons, or 4%, to 660,900 tons for the nine
months ended September 30, 2021 from 638,800 tons for the same period in 2020. At our average sales price per ton of $212.85 for the
nine months ended September 30, 2021, we generated $4.7 million in additional net sales from the 22,100 additional tons of essential
ingredients sold in the nine months ended September 30, 2021 as compared to the same period in 2020. The increase of $54.54, or 35%,
in our average sales price per ton for the nine months ended September 30, 2021 as compared to the same period in 2020 increased our
net sales from our Pekin Campus production segment by $34.9 million.
Other Production Segment
Net sales of alcohol from our
other production segment declined by $57.5 million, or 48%, to $63.3 million for the nine months ended September 30, 2021 as compared
to $120.8 million for the same period in 2020. Our total volume of gallons sold declined by 53.9 million gallons, or 69%, to 24.3 million
gallons for the nine months ended September 30, 2021 as compared to 78.2 million gallons for the same period in 2020. At our other production
segment’s average sales price per gallon of $2.61 for the nine months ended September 30, 2021, we generated $140.4 million less
in net sales from the 53.9 million fewer gallons of alcohol sold in the nine months ended September 30, 2021 as compared to the same
period in 2020. The increase of $1.06, or 68%, in our other production segment’s average sales price per gallon for the nine months
ended September 30, 2021 as compared to the same period in 2020 improved our net sales from our other production segment by $82.9 million.
Net sales of essential ingredients declined by
$17.5 million, or 48%, to $19.3 million for the nine months ended September 30, 2021 as compared to $36.8 million for the same period
in 2020. Our total volume of essential ingredients sold declined by 313,100 tons, or 58%, to 225,600 tons for the nine months ended September
30, 2021 from 538,700 tons for the same period in 2020. At our average sales price per ton of $85.38 for the nine months ended September
30, 2021, we generated $26.7 million less in net sales from the 313,100 fewer tons of essential ingredients sold in the nine months ended
September 30, 2021 as compared to the same period in 2020. The increase of $17.05, or 25%, in our average sales price per ton for the
nine months ended September 30, 2021 as compared to the same period in 2020 increased our net sales from our other production segment
by $9.2 million.
Cost of Goods Sold
and Gross Profit (Loss)
Our consolidated gross profit (loss) declined
to a loss of $3.4 million, representing a negative gross margin of 1.1%, for the three months ended September 30, 2021
compared to gross profit of $20.9 million, representing a gross profit margin of 10.2%, for the same period in 2020. Our
consolidated gross profit declined to $25.7 million, representing a gross profit margin of 3.1%, for the nine months ended September
30, 2021 compared to $39.2 million, representing a gross profit margin of 5.4%, for the same period in 2020.
Our gross profit and gross profit margin declined
for the three and nine months ended September 30, 2021 primarily due to an increase in corn and basis costs as well as costs associated
with the shutdown of our Pekin wet mill for planned maintenance and upgrades as well as significantly higher margins during the three
and nine months ended September 30, 2020 from spot sales of our specialty alcohol used in sanitizers and disinfectants which experienced
unprecedented demand in 2020. In addition, while demand and prices for certain essential ingredients increased, industry-wide coproduct
prices have, on average, lagged the rise in corn prices, resulting in declining coproduct returns for 2021 as compared to 2020.
Three Months Ended September
30, 2021 and 2020
Marketing Segment
Our marketing segment’s gross profit increased
by $7.0 million to $7.3 million for the three months ended September 30, 2021 as compared to $0.3 million for the same period in 2020.
Of this improvement, $8.5 million is attributable to higher margins from sales of third-party fuel-grade ethanol partially offset by
$1.5 million attributable to lower marketing volumes of third-party fuel-grade ethanol for the three months ended September 30, 2021
as compared to the same period in 2020.
Pekin Campus Production Segment
Our Pekin Campus production segment’s gross
profit declined by $32.9 million to a gross loss of $7.2 million for the three months ended September 30, 2021 as compared to gross profit
of $25.7 million for the same period in 2020. Of this decline, $31.0 million is attributable to higher costs and resulting lower margins
and $1.9 million is attributable to decreased sales volumes in the three months ended September 30, 2021 as compared to the same period
in 2020. Costs were higher primarily due to the shutdown of our Pekin wet mill
for maintenance and upgrades as well as higher corn costs.
Other Production Segment
Our other production segment’s gross profit
improved by $1.5 million to a gross loss of $3.5 million for the three months ended September 30, 2021 as compared to a gross loss of
$5.0 million for the same period in 2020. Of this improvement, $2.2 million is attributable to higher margins for fuel-grade ethanol,
partially offset by $0.7 million attributable to decreased operating costs of plants idled and/or sold during the three months ended
September 30, 2021 as compared to the same period in 2020.
Nine Months Ended September
30, 2021 and 2020
Marketing Segment
Our marketing segment’s gross profit improved
by $8.4 million to $12.4 million for the nine months ended September 30, 2021 as compared to $4.0 million for the same period in 2020.
Of this improvement, $12.8 million is attributable to higher margins from sales of third-party fuel-grade ethanol, partially offset by
$4.4 million less in gross profit attributable to lower marketing volumes of third-party fuel-grade ethanol for the nine months ended
September 30, 2021 as compared to the same period in 2020.
Pekin Campus Production Segment
Our Pekin Campus production segment’s gross
profit declined by $41.0 million to a gross profit of $17.5 million for the nine months ended September 30, 2021 as compared to $58.5
million for the same period in 2020. Of this decline, $42.6 million is attributable to lower margins resulting from higher production
input costs, partially offset by $1.6 million attributed to higher volumes sold in the nine months ended September 30, 2021 as compared
to the same period in 2020. In addition, higher costs resulted from the shutdown of our Pekin wet mill for maintence and upgrades.
Other Production Segment
Our other production segment’s gross profit
improved by $19.0 million to a gross loss of $4.2 million for the nine months ended September 30, 2021 as compared to a gross loss of
$23.2 million for the same period in 2020. Of this improvement, $9.6 million is attributable to lower operating costs from idled and/or
sold plants and $9.4 million is attributable to lower sales volumes at negative margins for the nine months ended September 30, 2021 as
compared to the same period in 2020.
Selling, General and
Administrative Expenses
The following table presents
our selling, general and administrative, or SG&A, expenses in dollars and as a percentage of net sales (in thousands, except percentages):
|
|
Three Months Ended
September 30,
|
|
|
Variance in
|
|
|
Nine Months Ended
September 30,
|
|
|
Variance in
|
|
|
|
2021
|
|
|
2020
|
|
|
Dollars
|
|
|
Percent
|
|
|
2021
|
|
|
2020
|
|
|
Dollars
|
|
|
Percent
|
|
Selling, general and administrative expenses
|
|
$
|
5,533
|
|
|
$
|
6,404
|
|
|
$
|
(871
|
)
|
|
|
(13.6
|
)%
|
|
$
|
19,777
|
|
|
$
|
25,245
|
|
|
$
|
(5,468
|
)
|
|
|
(21.7
|
)%
|
Percentage of net sales
|
|
|
1.8
|
%
|
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
2.4
|
%
|
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
Our SG&A expenses declined for the three and
nine months ended September 30, 2021 as compared to the same periods in 2020. The period over period declines in SG&A expenses are
primarily due to lower professional fees incurred in 2021, as compared to 2020 during which we were working extensively on our debt restructuring
and asset sales efforts. We anticipate SG&A expenses of $27.0 million to $30.0 million for all of 2021.
Interest Expense,
net
The following table presents
our interest expense, net in dollars and as a percentage of net sales (in thousands, except percentages):
|
|
Three Months Ended
September 30,
|
|
|
Variance in
|
|
|
Nine Months Ended
September 30,
|
|
|
Variance in
|
|
|
|
2021
|
|
|
2020
|
|
|
Dollars
|
|
|
Percent
|
|
|
2021
|
|
|
2020
|
|
|
Dollars
|
|
|
Percent
|
|
Interest Expense, net
|
|
$
|
429
|
|
|
$
|
4,199
|
|
|
$
|
(3,770
|
)
|
|
|
(89.8
|
)%
|
|
$
|
3,359
|
|
|
$
|
14,153
|
|
|
$
|
(10,794
|
)
|
|
|
(76.3
|
)%
|
Percentage of net sales
|
|
|
0.1
|
%
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
0.4
|
%
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
Our interest expense declined for the three and
nine months ended September 30, 2021 as compared to the same periods in 2020. The declines are primarily due to lower debt balances for
2021 as compared to 2020 as we paid down high interest rate debt in the second half of 2020 and continuing into 2021.
Net Income (loss)
Available to Common Stockholders
The following table presents our net income
(loss) available to common stockholders in dollars and as a percentage of net sales (in thousands, except percentages):
|
|
Three Months Ended September 30,
|
|
|
Variance in
|
|
|
Nine Months Ended September 30,
|
|
|
Variance in
|
|
|
|
2021
|
|
|
2020
|
|
|
Dollars
|
|
|
Percent
|
|
|
2021
|
|
|
2020
|
|
|
Dollars
|
|
|
Percent
|
|
Net income (loss) available to common stockholders
|
|
$
|
(3,451
|
)
|
|
$
|
14,896
|
|
|
$
|
(18,347
|
)
|
|
|
NM
|
|
|
$
|
8,990
|
|
|
$
|
4,130
|
|
|
$
|
4,860
|
|
|
|
117.7
|
%
|
Percentage of net sales
|
|
|
(1.1
|
)%
|
|
|
7.3
|
%
|
|
|
|
|
|
|
|
|
|
|
1.1
|
%
|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
The decline
in net income (loss) available to common stockholders for the three months ended September 30, 2021 as compared to the same period
in 2020 is primarily due to the Pekin campus shut down costs for planned maintenance upgrades, and higher production input costs in
2021 as well as higher spot margins from sales of our specialty alcohols in the prior year period compared to predominately
fixed-price sales in the current year period, partially offset by income from loan forgiveness, lower interest expense and the
absence of any fair value adjustments. The increase in net income (loss) available to common stockholders for the nine months ended
September 30, 2021 as compared to the same period in 2020 is primarily due to significantly higher margins from sales of our
specialty alcohols in the first quarter of 2021 as compared to the same period in 2020 and income from loan forgiveness. The first
quarter of 2020 also included substantial sales of low- or negative-margin fuel-grade ethanol.
Liquidity and Capital Resources
During the nine months ended September 30,
2021, we funded our operations primarily from proceeds from the sale of our Madera facility, proceeds from lines of credit and cash
on hand. These funds were also used to make payments on our term debt and our other credit facilities and for capital expenditures.
As of September 30, 2021, we had $36.0 million in cash and cash equivalents and $5.9 million available for borrowing under
Kinergy’s operating line of credit. We anticipate capital expenditures to range between $7.0 million and $10.0 million in the
fourth quarter of 2021. We believe we have sufficient liquidity to meet our anticipated working capital, debt service and other
liquidity needs for at least the next twelve months from the date of this report.
Quantitative Period-End
Liquidity Status
We believe that the following
amounts provide insight into our liquidity and capital resources. The following selected financial information should be read in conjunction
with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report, and the
other sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained
in this report (dollars in thousands).
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
|
Change
|
|
Cash and cash equivalents
|
|
$
|
36,029
|
|
|
$
|
47,667
|
|
|
|
(24.4
|
)%
|
Current assets
|
|
$
|
226,598
|
|
|
$
|
214,046
|
|
|
|
5.9
|
%
|
Property and equipment, net
|
|
$
|
224,319
|
|
|
$
|
229,486
|
|
|
|
(2.3
|
)%
|
Current liabilities
|
|
$
|
84,448
|
|
|
$
|
86,927
|
|
|
|
(2.9
|
)%
|
Long-term debt, noncurrent portion
|
|
$
|
70,621
|
|
|
$
|
71,807
|
|
|
|
(1.7
|
)%
|
Working capital
|
|
$
|
142,150
|
|
|
$
|
127,119
|
|
|
|
11.8
|
%
|
Working capital ratio
|
|
|
2.68
|
|
|
|
2.46
|
|
|
|
8.9
|
%
|
Restricted Net Assets
At September 30, 2021, we had approximately $250.3
million of net assets at our subsidiaries that were not available for transfer to Alto Ingredients, Inc. in the form of dividends, distributions,
loans or advances due to restrictions contained in the credit facilities of the subsidiaries.
Changes in Working Capital and Cash Flows
Working capital improved to $142.2 million at September
30, 2021 from $127.1 million at December 31, 2020 as a result of an increase of $12.6 million in current assets and a decrease of $2.5
million in current liabilities.
Current assets increased primarily due to an increase
in accounts receivable and higher inventory values due to increased commodity prices for both alcohol and corn from the prior period,
partially offset by a reduction in assets held-for-sale as we completed the sale of our Madera facility.
Our current liabilities decreased primarily due
to a reduction in liabilities held-for-sale as we completed the sale of our Madera facility and a reduction in the current portion of
our long-term debt, partially offset by an increase in accounts payable and accrued liabilities due to the timing of payments and an
increase in derivative instruments.
Our cash and cash equivalents declined by
$11.6 million due to $19.7 million in cash used in our operating activities partially offset by $0.9 million in cash provided by our
financing activities and $7.3 million in cash provided by our investing activities.
Cash used in Operating Activities
We used $19.7 million in cash in our
operating activities during the nine months ended September 30, 2021, as compared to $75.7 million of cash provided by our operating
activities for the same period in 2020. Specific factors that contributed to the change in cash from our operating activities
include:
|
●
|
a decrease of $64.9
million related to higher accounts receivable balances primarily due to the timing of payments
and higher commodity sales prices;
|
|
●
|
a decrease of $43.1
million related to higher inventories primarily due to increased commodity prices; and
|
|
●
|
a net decrease of
$11.8 million of held-for-sale assets and liabilities as we completed the sale of our Madera
facility.
|
These amounts were partially offset by:
|
●
|
an increase of $7.0
million in our consolidated net income primarily due to lower SG&A expenses, lower interest
expense, and income from forgiveness of our CARES Act loans;
|
|
●
|
an increase of $33.6
million related to accounts payable due to the timing of payments; and
|
|
●
|
an increase in other assets of $12.6 million related to net changes in our derivative positions.
|
Cash provided by our Investing Activities
We generated $7.3 million of cash from our investing
activities for the nine months ended September 30, 2021, of which $19.5 million in cash was generated from the sale of our Madera facility,
partially offset by $12.2 million for additions to property and equipment resulting from our capital expenditure projects.
Cash provided by our Financing
Activities
Cash provided by our financing activities was
$0.9 million for the nine months ended September 30, 2021, which reflected proceeds of $38.2 million from Kinergy’s operating line
of credit and $0.5 million in stock option exercises, partially offset by net payments on term debt of $37.8 million.
Kinergy’s Operating Line of Credit
Kinergy maintains an operating line of credit
for an aggregate amount of up to $100.0 million. The credit facility matures on August 8, 2023. Interest accrues under the credit
facility at a rate equal to (i) the daily Secured Overnight Financing Rate, plus (ii) a specified applicable margin ranging
from 1.75% to 2.25%. The credit facility’s monthly unused line fee is 0.25% to 0.375% of the amount by which the maximum
credit under the facility exceeds the average daily principal balance during the immediately preceding month. Payments that may be
made by Kinergy to Alto Ingredients, Inc. as reimbursement for management and other services provided by Alto Ingredients, Inc. to
Kinergy are limited under the terms of the credit facility to $1.5 million per fiscal quarter. The credit facility also includes the
accounts receivable of our indirect wholly-owned subsidiary, Alto Nutrients, LLC, or Alto Nutrients, as additional collateral.
Payments that may be made by Alto Nutrients to Alto Ingredients, Inc. as reimbursement for management and other services provided by
Alto Ingredients, Inc. to Alto Nutrients are limited under the terms of the credit facility to $0.5 million per fiscal quarter. Alto
Nutrients, markets our essential ingredients and also provides raw material procurement services to our subsidiaries.
For all monthly periods in which excess borrowing
availability falls below a specified level, Kinergy and Alto Nutrients must collectively 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
respective assets in favor of the lender.
We believe Kinergy and Alto Nutrients are in compliance
with the fixed-charge coverage ratio covenant as of the filing of this report. The following table sets forth the fixed-charge coverage
ratio financial covenant and the actual results for the periods presented:
|
|
Three Months Ended
September
30,
|
|
|
Years Ended
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-Charge Coverage Ratio Requirement
|
|
|
2.00
|
|
|
|
2.00
|
|
|
|
2.00
|
|
|
|
2.00
|
|
Actual
|
|
|
16.11
|
|
|
|
5.66
|
|
|
|
5.35
|
|
|
|
5.71
|
|
Excess
|
|
|
14.11
|
|
|
|
3.66
|
|
|
|
3.35
|
|
|
|
3.71
|
|
Alto Ingredients, Inc. has
guaranteed all of Kinergy’s obligations under the credit facility. As of September 30, 2021, Kinergy had an outstanding balance
of $70.7 million and $5.9 million of unused borrowing availability under the credit facility.
Alto Pekin Credit Facilities
On December 15, 2016, Alto Pekin, LLC, or
Alto Pekin, one of our indirect wholly-owned subsidiaries and the entity that holds two of our production facilities in Pekin,
Illinois, entered into a Credit Agreement, or the Pekin Credit Agreement, with 1st Farm Credit Services, PCA and CoBank,
ACB, or 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 matured on August 20, 2021, or the Pekin Term Loan, and up to $32.0 million under a
revolving term loan facility that was to mature on February 1, 2022, or the Pekin Revolving Loan, and together with the Pekin Term
Loan, the Pekin Credit Facility.
On November 5, 2021, we
closed the sale of our Stockton, California facility and, using net proceeds from the sale, repaid the Pekin Credit Facility in
full.
ICP Credit Facilities
On September 15, 2017, ICP, Compeer
Financial, PCA, or Compeer, and CoBank as agent, entered into a Credit Agreement, or 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 matured on September 20, 2021, or
the ICP Term Loan, and up to $18.0 million under a revolving term loan facility that was to mature on September 1, 2022, or the ICP
Revolving Loan, and together with the ICP Term Loan, the ICP Credit Facility.
On November 5, 2021, we closed the sale of
our Stockton, California facility and, using net proceeds from the sale, repaid the ICP Credit Facility in full.
Senior Secured Notes
On December 12, 2016, we 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, we 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.
On May 14, 2021, in connection
with the sale of our Madera, California fuel-grade ethanol production facility, we repaid $19.3 million in principal on these Notes.
On November 5, 2021, we closed the sale of
our Stockton, California facility and, using net proceeds from the sale, repaid the Notes in full.
CARES Act Loans
On May 4, 2020, Alto Ingredients,
Inc. and Alto Pekin, received loan proceeds from Bank of America, NA under the Coronavirus Aid, Relief, and Economic Security Act through
the Paycheck Protection Program administered by the U.S. Small Business Administration, or SBA. Alto Ingredients, Inc. received $6.0 million
and Alto Pekin received $3.9 million in loan proceeds. In June 2021, the SBA approved Alto Pekin’s forgiveness application for the
full amount of $3.9 million, and accordingly, we recognized income from loan forgiveness for the three months ended June 30, 2021. In
September 2021, the SBA approved Alto Ingredients, Inc.’s forgiveness application for the full amount of $6.0 million, and accordingly,
we recognized income from loan forgiveness for the three months ended September 30, 2021. The SBA may audit the loan forgiveness applications
and further examine eligibility for forgiveness, including the facts and circumstances existing at the time the loans were made. We can
provide no assurances that any loan forgiven will not require repayment following an audit by the SBA.
Effects of Inflation
The impact of inflation was
not significant to our financial condition or results of operations for the three and nine months ended September 30, 2021 and 2020.