Filing identity and period
Important entity mismatch: The supplied filing is a Pacific Ethanol, Inc. Form 10-Q, not an Alto Ingredients, Inc. filing. It covers the quarter ended June 30, 2012, and was signed August 14, 2012. The summary below describes the filing provided.
Business context
Pacific Ethanol marketed ethanol and related co-products and managed four ethanol plants with combined annual capacity of up to 200 million gallons. Three plants were operating and the Madera, California plant was idled. At quarter-end, the company owned 34% of New PE Holdco, a consolidated variable interest entity (VIE); it acquired an additional 33% in July 2012, increasing ownership to 67%.
Financial results
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $205.4 | $214.6 | $403.2 | $387.7 |
| Gross profit (loss) | $(4.9) | $1.3 | $(12.4) | $3.8 |
| Operating loss | $(8.0) | $(2.8) | $(18.9) | $(4.4) |
| Consolidated net loss | $(10.0) | $(4.7) | $(24.0) | $(9.4) |
| Net income (loss) attributable to Pacific Ethanol | $(2.6) | $0.8 | $(7.6) | $0.8 |
| Loss per share available to common stockholders | $(0.03) | $0.03 income | $(0.10) | $0.01 income |
Gross margin was negative 2.4% in Q2 and negative 3.1% for the first half, versus positive 0.6% and 1.0% in the comparable 2011 periods. Q2 sales fell 4.3% despite 16% higher gallons sold, as average selling price per gallon declined 17.6%. First-half sales increased 4.0% as gallons sold rose 25%, partly offset by a 13.1% decline in average selling price.
- Cash flow: First-half operating cash use was $6.3 million, investing cash use was $1.6 million, and financing provided $4.7 million. Cash declined from $8.9 million at year-end 2011 to $5.7 million at June 30, 2012.
- Liquidity: Working capital was negative $4.4 million, versus positive $50.5 million at December 31, 2011; the current ratio was 0.92.
- Debt: Reported debt was $99.8 million, including $40.1 million current and $59.7 million long-term. The current classification rose principally because $39.3 million of New PE Holdco debt was due in June 2013 under the then-existing terms.
- Other balance-sheet items: Total assets were $215.0 million and total liabilities $120.0 million. Series B preferred dividends of $7.3 million were accrued and unpaid.
Changes, outlook and risks
- Management attributed weaker gross results primarily to production costs, particularly corn costs relative to ethanol selling prices. In the first half of 2011, $1.5 million of California ethanol incentive proceeds reduced cost of goods sold; no such proceeds were received in 2012.
- Third-party gallons sold increased substantially, while company-plant production gallons sold declined. SG&A decreased 23% in Q2 and 21% for the first half; net interest expense also declined, partly reflecting retirement of convertible debt in November 2011.
- Management said available resources were expected to meet working-capital and capital-expenditure needs through the rest of 2012, but warned that additional financing could be required if cash flows or needs differed from projections.
- After quarter-end, the company raised $11.3 million net through a July public offering. It also bought the additional 33% of New PE Holdco for $20 million, funded with $10 million cash and $10 million of unsecured notes due April 13, 2013. Management said it did not have, and did not expect to generate through operations, enough cash to repay those notes at maturity and planned to seek financing.
- In July, New PE Holdco amended its credit facilities, extending maturity to June 30, 2016 for $46.7 million of debt and increasing revolving commitments by $5 million. The company still planned to refinance the remaining amount due in June 2013; refinancing and new financing were not assured.
- Three Series B holders demanded $2.4 million of accrued dividends; the company said it lacked funds to pay. The filing warns that inability to meet debt or preferred-dividend obligations could force curtailed operations or bankruptcy protection.
- The company received a Nasdaq minimum-bid-price deficiency notice and had until December 3, 2012 to regain compliance, subject to possible extension. Delisting could impair share liquidity, financing access and vendor terms.
- Management reported disclosure controls effective at a reasonable assurance level and no material quarterly change in internal control over financial reporting. It did not expect pending legal proceedings to have a material financial impact based on information then available, while noting outcomes remained uncertain.
Investor verification priorities
- Confirm the issuer: this source identifies Pacific Ethanol, Inc., not Alto Ingredients, Inc.
- Assess liquidity and refinancing needs, including the $10 million notes due April 2013 and debt then due in June 2013.
- Review whether the company raised sufficient capital and resolved the preferred-dividend demand and Nasdaq bid-price deficiency.
- Track ethanol and corn prices, plant operating status, and whether margins and operating cash flow improved.
- Check the subsequent-period effects of the increased New PE Holdco ownership and related financing on parent-attributable results and dilution.
- Reconcile the Kinergy credit-line capacity: the filing describes a $30 million base commitment with a $10 million accordion in MD&A, while a note describes an aggregate facility of up to $40 million.