Alto Ingredients, Inc. (identified in this filing as Pacific Ethanol, Inc.) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 14, 2020. The supplied filing names Pacific Ethanol, Inc. as the registrant, while the request identifies Alto Ingredients, Inc.
Business context and key financial results
The company produced and marketed ethanol, specialty alcohols and co-products through production and marketing segments. At March 31, it reported nine production facilities and operation at approximately 40% of capacity; management said utilization had subsequently risen to about 50%. The company completed the sale of its 73.93% interest in Pacific Aurora after quarter-end.
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net sales | $311.4 million | $355.8 million; down 12.5% |
| Gross loss and gross margin | $12.9 million; -4.1% | $2.3 million; -0.6% |
| Operating loss | $23.1 million | $10.5 million |
| Consolidated net loss | $27.2 million | $14.2 million |
| Net loss available to common stockholders; diluted loss per share | $25.4 million; $0.47 | $13.2 million; $0.29 |
| Operating cash flow | $26.9 million provided | $15.0 million used |
| Investing cash flow | $1.2 million used | $1.1 million used |
| Financing cash flow | $17.9 million used | $11.3 million provided |
At March 31, cash was $26.8 million, working capital was $11.1 million and the current ratio was 1.06, versus $71.7 million of working capital and a 1.45 ratio at December 31, 2019. Total liabilities were $370.4 million. Reported borrowings were $227.5 million before debt discounts and financing costs; $86.7 million was classified as current and $139.3 million as long-term debt, net of the stated adjustments. Approximately $174.9 million of subsidiary net assets were restricted from transfer to the parent.
Changes and drivers
- Sales declined as total gallons sold fell 12.7% to 184.9 million, chiefly reflecting a 34.2% reduction in third-party gallons; production gallons sold rose 4.8% to 122.5 million. The average sales price per gallon was $1.51 versus $1.53.
- Gross loss widened primarily because ethanol prices and demand weakened while corn costs did not fall as much. Production segment losses increased; marketing segment gross profit also declined.
- SG&A rose 24.0% to $10.2 million, primarily due to professional fees for strategic initiatives. Inventory valuation adjustments increased to $5.5 million from $1.3 million at year-end.
- Operating cash flow improved year over year, supported largely by working-capital movements, including lower receivables and inventories and higher liabilities held for sale; it should not be read as evidence of improved earnings.
Outlook, liquidity, risks and unusual items
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern. It stated that liquidity was insufficient for anticipated near-term needs and that it did not expect to fund the next 12 months without debt restructuring, further asset sales, improved demand and margins, or other financing. Further curtailment or cessation of production, or bankruptcy protection, was identified as a possible outcome if liquidity efforts fail.
- COVID-19 and market conditions: Stay-at-home orders sharply reduced transportation-fuel demand, contributing to historically low ethanol prices and negative industry margins. Management reported improving demand and margins in early May, but cautioned that sustained adverse margins could undermine its plans.
- Restructuring and debt: The company was negotiating a comprehensive restructuring plan and had appointed a chief restructuring officer. Under amended plant credit arrangements, PE Pekin and ICP were required to pay lenders an aggregate $40.0 million by September 30, 2020; the filing’s risk discussion cites a remaining $25.5 million balance due on that date. March amendments deferred certain principal and interest payments and added or expanded collateral and intercreditor arrangements.
- Subsequent events: On April 15, the company closed the Pacific Aurora sale for stated total consideration of $52.8 million, subject to working-capital adjustments. The filing reports $20.2 million in cash proceeds and $16.5 million in ACEC promissory notes; those components do not reconcile to the stated total in the supplied text. Approximately $14.5 million was used to repay term debt. On May 4, the parent and PE Pekin received PPP loans of $6.0 million and $3.9 million, respectively, at 1% interest; forgiveness was not assured.
- Other risks and commitments: Commodity-price volatility, customer concentration, production and distribution disruptions, environmental obligations, regulatory changes to the Renewable Fuel Standard, and debt covenant and refinancing risks may materially affect results. The company also disclosed sales and purchase commitments scheduled through 2020. Management did not expect pending legal proceedings to have a material impact based on information then available.
- Outlook: No formal quantified earnings or revenue guidance was provided. Management cited high-protein feed and specialty alcohol demand, possible export recovery, and potential effects of limits on small-refinery exemptions as favorable factors, while emphasizing liquidity and margin challenges.
- Controls: Management concluded disclosure controls were effective at a reasonable assurance level as of March 31; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Confirm the registrant’s identity and whether this Pacific Ethanol filing is the intended filing for Alto Ingredients, Inc.
- Review the April 15 sale closing documents and working-capital adjustments to reconcile the $52.8 million stated consideration with the reported cash proceeds and promissory note.
- Track progress on the restructuring, asset-sale and capital-raising plans, including the $25.5 million remaining payment cited as due September 30, 2020.
- Assess the company’s liquidity and ability to fund operations and debt service, including the impact of restricted subsidiary assets, PPP loan terms and any loan forgiveness.
- Monitor ethanol demand, realized margins, production utilization, inventory valuation and subsequent cash flows; Q1 operating cash generation was substantially affected by working-capital changes.
- Check subsequent filings for developments in going-concern risk, debt covenant compliance, asset sales, Nasdaq bid-price compliance and any potential bankruptcy proceedings.