Alto Ingredients, Inc. — FY2020 Form 10-K
Reporting period: Year ended December 31, 2020; filed March 26, 2021. This is an annual report, not a standalone fourth-quarter report. The company, formerly Pacific Ethanol, rebranded as Alto Ingredients in 2021; its Nasdaq ticker changed from PEIX to ALTO.
Business context
Alto produces and markets specialty alcohols, fuel-grade ethanol and essential ingredients, including animal-feed products. It reported three segments: Pekin Campus production, other production and marketing and distribution. Specialty alcohol demand—particularly for sanitizer and disinfectant products—boosted results, while pandemic-related declines in transportation-fuel demand weakened fuel-grade ethanol operations. The company ended 2020 with 450 million gallons of annual capacity, operated at approximately 64% of estimated capacity, and had idled its Magic Valley, Stockton and Madera facilities.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $897.0 million | $1,424.9 million |
| Gross profit (loss) | $52.9 million | ($9.9 million) |
| Gross margin | 5.9% | (0.7%) |
| Operating income (loss) | $9.9 million | ($74.7 million) |
| Consolidated net loss | ($17.3 million) | ($101.3 million) |
| Loss available to common stockholders | ($16.4 million); ($0.28) per share | ($90.2 million); ($1.90) per share |
| Cash from (used in) operating activities | $71.8 million | ($23.4 million) |
- Sales fell 37% as total gallons sold declined 35% to 536.3 million; higher average selling prices partly offset lower volume. Production capacity utilization was 53%, versus 82% in 2019.
- Gross profit improved by $62.8 million, driven chiefly by higher specialty-alcohol margins and reduced exposure to loss-making fuel ethanol production. Pekin production reported pretax income of $53.9 million, versus a $21.4 million loss; other production reported a $54.7 million loss, versus a $77.0 million loss.
- Cash and cash equivalents were $47.7 million at year-end, up from $19.0 million. Working capital was $127.1 million, with a 2.46 current ratio. The company reported $16.0 million of available borrowing under Kinergy’s operating line.
- Gross borrowings were $97.9 million at year-end, down from $245.5 million. Reported current and long-term debt were $25.5 million and $71.8 million, respectively. Scheduled debt maturities were $25.5 million in 2021 and $72.3 million in 2022. Interest expense was $17.9 million, down from $20.2 million.
- Cash flow included $23.3 million from investing activities and $66.4 million used in financing activities. The company paid $157.6 million of debt principal during 2020 and raised approximately $75.8 million net from common-stock and warrant issuances, in addition to proceeds from asset sales and warrant exercises.
Material changes, outlook and risks
- Alto reduced fuel-grade ethanol capacity by 55% during 2020 through facility idling and asset sales, sold its interest in the Nebraska Pacific Aurora facilities, and sold Magic Valley land and related assets. It recorded $24.4 million in asset impairments, including charges related to planned Stockton and Madera sales; those two facilities were classified as held for sale.
- The company raised specialty-alcohol capacity at Pekin to 140 million gallons annually by early 2021. It said approximately 50% of that capacity was contracted for 2021 and forecast at least $60 million of gross profit from existing contracted specialty-alcohol sales. These are management expectations, not reported results.
- Management expected 2021 SG&A to decline by $7 million to $12 million year over year and interest expense to decline by as much as $14 million. It estimated each five-cent-per-gallon improvement in fuel ethanol crush margins would increase EBITDA by $5 million. The company also planned a $5.5 million yeast-capacity expansion, targeted for completion in the third quarter of 2021, and identified an additional $14 million for other projects.
- Management said it believed available liquidity would meet anticipated needs for the next 12 months. That assessment depends on operating performance, debt service and access to liquidity; approximately $262.1 million of subsidiary net assets were restricted from transfer to the parent under credit agreements.
- Important risks include volatile ethanol, corn and natural-gas prices; pandemic-related changes in sanitizer demand and fuel consumption; low or negative fuel-ethanol margins; customer ability to take contracted volumes; facility-sale execution; and refinancing or repayment of debt. The 15% senior secured notes mature December 15, 2021. Lenders waived specified covenant defaults in December 2020 after the company made a $24.9 million paydown; management reported compliance as of the filing.
- Other notable items: a $11.75 million litigation-settlement gain, a $9.96 million fair-value loss, and $1.27 million of accrued but unpaid Series B preferred dividends for 2020. CARES Act loans totaled $9.86 million, with forgiveness applications pending. The filing reports ordinary-course legal matters but no recorded litigation contingency liability.
Investor verification points
- Track actual 2021 contracted specialty-alcohol deliveries, realized pricing and gross profit against management’s forecast, including whether customers take contracted volumes.
- Check completion, proceeds and debt allocation for the planned Stockton and Madera sales, and whether other idled assets are restarted, sold or repurposed.
- Verify refinancing or repayment plans for the 2021 and 2022 debt maturities, the 15% senior notes, and compliance with lender covenants and restrictions on subsidiary cash transfers.
- Assess dilution from the 8.9 million outstanding warrants with a $9.757 exercise price, alongside 2020 equity issuance and preferred dividends that continue to accrue.
- Monitor fuel-ethanol crush margins, commodity-hedging effects, sanitizer-market supply and demand, and the company’s ability to sustain positive operating cash flow.