Pacific Ethanol, Inc. (now Alto Ingredients, Inc.) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. The registrant in this filing is named Pacific Ethanol, Inc.; the company name in the request reflects its later name.
Business context
The company produced ethanol, specialty alcohols and animal-feed co-products at facilities in the Western and Midwestern United States, and marketed its own and third-party ethanol. Reported annual production capacity was 605 million gallons. The business had production and marketing/distribution segments.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $1.425 billion | $1.515 billion |
| Gross loss (margin) | $9.9 million (−0.7%) | $15.2 million (−1.0%) |
| Operating loss | $74.7 million | $51.5 million |
| Consolidated net loss | $101.3 million | $67.9 million |
| Net loss available to common stockholders | $90.2 million; $1.90 per share | $61.5 million; $1.42 per share |
| Cash from (used in) operating activities | $(23.4) million | $1.6 million |
| Cash and cash equivalents at year-end | $19.0 million | $26.6 million |
- Interest expense was $20.2 million, up from $17.1 million. A $29.3 million impairment related to the planned Pacific Aurora sale and a $6.5 million loss on debt extinguishment weighed on 2019 results.
- Year-end working capital was $71.7 million, versus a $63.1 million deficit a year earlier. The improvement reflected assets classified as held for sale and debt reclassification; it does not resolve the company’s stated liquidity shortfall.
- Debt principal outstanding was approximately $245.5 million before unamortized financing adjustments. The company reported $63.0 million of current debt and $180.8 million of long-term debt, net, on its balance sheet. Kinergy’s $100 million revolving facility was fully drawn at year-end, with no additional availability.
- Production gallons sold fell 11.7% to 491.0 million; third-party gallons sold rose 0.5% to 328.4 million. Total gallons sold declined 7.2% to 819.4 million. Average ethanol sales price increased 2.5% to $1.61 per gallon, while delivered corn cost rose 9.0% to $4.26 per bushel.
Material changes and unusual items
- Sales declined 6.0% year over year, mainly because lower production volumes outweighed higher average selling prices. Production capacity utilization decreased to 82% from 92%.
- The production segment reported a $24.9 million gross loss, improved from $39.0 million. Marketing and distribution gross profit declined to $14.9 million from $23.8 million.
- In December 2019, senior secured notes were amended and extended to December 2021 at 15% interest. The company issued 5.5 million common shares and warrants for 5.5 million shares with a $1.00 exercise price; the amendment generated a $6.5 million extinguishment loss.
- The company sold 3.1 million shares through its at-the-market program in 2019, receiving $3.7 million net, used to repay senior notes. Common shares outstanding increased during the year.
- Fourth-quarter 2019 net sales were $357.6 million, gross profit was $3.2 million, and net loss available to common stockholders was $41.4 million, or $0.85 per share. The quarter included a $29.3 million asset impairment.
Outlook, risks and contingencies
- Going concern: The auditor’s report included an emphasis-of-matter paragraph stating substantial doubt about the company’s ability to continue as a going concern. Management said it did not expect to have sufficient liquidity for anticipated working capital and debt-service needs absent debt restructuring, asset sales, improved margins or other liquidity. The financial statements were prepared on a going-concern basis.
- COVID-19 and operations: Management described sharply reduced fuel demand and historically low ethanol prices in early 2020, and expected demand could fall by up to 50% while stay-at-home orders remained in effect. It reported production reductions of more than 60%; Stockton was idled in March 2020. Further curtailments or shutdowns were possible.
- Debt deadlines and collateral: Pekin and ICP lenders required an aggregate $40 million payment by September 30, 2020, expected to be funded through asset sales or other specified sources. The company also reported covenant waivers, cross-default provisions, additional collateral pledges and deferred payments. It reported a separate $2.5 million senior-note interest payment deferred to May 20, 2020.
- Pacific Aurora sale: A February 2020 agreement provided for sale of the company’s 73.93% interest for $52.8 million, subject to working-capital adjustments, payable in cash and $16.5 million of ACEC promissory notes. Closing was subject to conditions, including a buyer financing condition; proceeds and timing were not certain.
- Management appointed a chief restructuring officer and said it was pursuing asset sales, strategic partnerships, capital raising and cost reductions. It planned to provide lenders a comprehensive restructuring plan by April 20, 2020. No earnings or margin guidance is stated in the supplied filing text.
- Other key exposures include volatile ethanol, corn and natural-gas prices; customer and supplier concentration; reliance on renewable-fuel mandates; potential Nasdaq delisting if the stock failed to regain the $1 bid-price requirement by July 13, 2020; and possible dilution from securities and warrants.
Most important facts for investors to verify
- Whether the Pacific Aurora sale closed, the final cash proceeds after adjustments, and the value and collectability of ACEC’s promissory notes.
- Whether the company met the $40 million lender payment requirement and subsequent debt, covenant and interest-payment obligations.
- Liquidity runway, borrowing availability, cash burn and the outcome of restructuring or financing efforts; confirm whether substantial doubt about going concern was later resolved.
- Actual production levels, margins and demand after the reported 2020 cuts, including any further facility idling or restart.
- Current share count and potential dilution, including the 5.5 million warrants, and the company’s Nasdaq listing status.