Alto Ingredients, Inc. (as identified in request) — Filing Summary
Important identity note: The supplied 10-Q is filed by Pacific Ethanol, Inc., not Alto Ingredients, Inc. Verify that this is the intended filing. It covers the quarter and six months ended June 30, 2011 and was signed August 11, 2011. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
Pacific Ethanol markets and produces renewable fuels in the Western United States, including ethanol and co-products, and provides plant management and marketing services. It consolidated New PE Holdco, a variable interest entity, beginning October 2010 despite holding a 20% ownership interest. Three of four plants were operating; Madera was idle. The filing reports results for the consolidated group, including the VIE, and separately attributes most VIE losses to noncontrolling interests.
Financial results and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $214.6 | $76.8 | $387.7 | $148.0 |
| Gross profit (loss) | $1.3 | ($2.7) | $3.8 | ($5.8) |
| Gross margin | 0.6% | (3.6%) | 1.0% | (3.9%) |
| Operating loss | ($2.8) | ($5.9) | ($4.4) | ($12.1) |
| Consolidated net income (loss) | ($4.7) | $108.6 | ($9.4) | $97.7 |
| Net income attributed to Pacific Ethanol | $0.8 | $108.6 | $0.8 | $97.7 |
| Income available to common stockholders | $0.4 | $107.8 | $0.1 | $96.1 |
Higher sales reflected both greater volumes and higher prices: Q2 total gallons sold rose 53.8% to 100.6 million, while average selling price increased 67.1% to $2.79 per gallon. Gross margins improved with higher production volumes; first-half production costs also benefited by about $1.5 million from California’s ethanol producer incentive program. SG&A rose in dollars but fell as a share of sales, to 1.9% in Q2 and 2.1% for the half.
Operating cash flow was negative $14.0 million for the six months, versus negative $8.0 million in 2010. Investing cash outflow was $1.4 million; financing provided $16.5 million, primarily from credit-facility borrowings. Cash ended June at $9.8 million, up from $8.7 million at year-end. Working capital was $34.1 million and the current ratio was 1.87.
Total debt was $126.6 million at June 30, including $26.4 million current and $100.2 million long-term; interest expense was $7.3 million for the half, compared with $2.9 million. The $25.1 million fair-value carrying amount of convertible notes exceeded their $20.3 million stated unpaid principal. Separately, $85.6 million of liabilities belonged to the VIE and its creditors had no recourse to Pacific Ethanol’s general credit, according to the filing.
Material changes versus the prior comparable period
- Revenue increased 179.6% in Q2 and 161.9% in the first half, driven by higher gallons sold and higher ethanol prices. The Stockton facility operated in 2011 but not in the comparable 2010 periods; third-party marketing volumes also increased, including Keyes facility output.
- Gross results improved from losses to modest profits, but margins remained thin. Corn costs rose sharply: CBOT-equivalent costs increased 105.6% in Q2 and 92.3% for the half.
- Interest expense increased substantially, primarily because of higher average debt balances, including convertible notes and New PE Holdco facilities.
- Prior-year net income was dominated by a one-time $119.4 million bankruptcy-exit gain, alongside reorganization costs. Those items did not recur in 2011; reported prior-year earnings are therefore not a like-for-like measure of operating performance.
- Shares outstanding increased, in part as convertible-note principal and interest were paid in stock. A one-for-seven reverse split took effect June 8, 2011; share data in the filing is retroactively adjusted.
Outlook, risks, contingencies, and unusual items
Management said available capital, operating revenues, and credit facilities should meet anticipated working-capital and capital-expenditure needs for at least the next 12 months. This assessment is conditional: additional financing may be needed if cash flows or capital requirements differ from projections, or if the company cannot meet convertible-note payments through stock issuance. No quantified revenue, profit, or production guidance is provided.
- Convertible notes bear 8% interest, rising to 15% upon default, mature May 6, 2012, and require monthly amortization beginning after August 1, 2011. Stock-settlement and conversion terms, including market-price discounts and full-ratchet anti-dilution provisions, create substantial potential dilution. As of August 9, the company estimated up to 19.8 million additional shares could be issued for remaining scheduled payments if paid in shares. It notified holders it would pay the September 1 installment in cash.
- Kinergy’s credit facility is secured by its assets, guaranteed by Pacific Ethanol, and subject to financial covenants and restrictions. New PE Holdco also has debt and a working-capital line; its creditors lack recourse to the parent’s general credit.
- Pacific Ethanol disclosed $6.7 million in accrued, unpaid Series B preferred dividends and stated it was in breach of its preferred-stock dividend obligations. The preferred stock carries a 7% annual cumulative dividend.
- The filing warned that the stock had recently traded below Nasdaq’s $1.00 minimum bid-price requirement; delisting could reduce share liquidity and access to financing and adversely affect vendor credit terms.
- Key business risks include ethanol and co-product price volatility, corn costs, regulatory changes or waivers affecting renewable-fuel mandates, and the possibility that one idled plant may not resume operations. Commodity derivatives were used for risk management, but none were designated as cash-flow hedges during the reported periods.
- Ordinary-course litigation may adversely affect future results or cash flows, although management did not expect a material adverse effect based on currently available facts. Management reported disclosure controls were effective at a reasonable-assurance level and no material quarterly change in internal control.
Most important facts for investors to verify
- Confirm whether Pacific Ethanol’s 2011 Q2 filing is the intended filing for the requested company, Alto Ingredients.
- Assess operating profitability and cash conversion: positive but very low gross margins accompanied by $14.0 million of operating cash use in the first half.
- Review convertible-note repayment capacity, cash-payment plans, conversion-price mechanics, and resulting dilution risk.
- Distinguish parent-company debt and obligations from the consolidated VIE’s assets and nonrecourse liabilities; confirm the practical availability of reported liquidity.
- Separate recurring operations from the prior-year $119.4 million bankruptcy-exit gain when comparing earnings.
- Monitor the unpaid preferred dividends and Nasdaq bid-price compliance, and review the filing’s detailed debt, covenant, and legal-contingency disclosures.