Filing summary
Registrant identification: The supplied filing is for Pacific Ethanol, Inc., not Alto Ingredients, Inc. It is a Form 10-Q for the quarter ended September 30, 2011, filed November 4, 2011. Financial amounts below are in U.S. dollars; statements are unaudited.
Business context and reporting period
Pacific Ethanol markets ethanol and co-products and manages ethanol plants in the Western United States. It consolidated New PE Holdco, which owns the plants, beginning October 2010 despite holding a 20% ownership interest, because management determined it was the variable interest entity’s primary beneficiary. Three of four plants were operating; Madera was idled. The results therefore reflect a materially different consolidation scope from the 2010 comparison.
Financial performance and condition
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net sales | $271.6 million, versus $46.0 million | $659.4 million, versus $194.1 million |
| Gross profit (loss) | $8.2 million, versus $4.0 million; gross margin 3.0% versus 8.6% | $12.0 million, versus a $1.8 million loss; gross margin 1.8% versus negative 0.9% |
| Operating income (loss) | $4.7 million, versus $1.2 million | $0.3 million, versus a $10.9 million loss |
| Net income (loss) attributable to Pacific Ethanol | $4.4 million, versus a $12.1 million loss | $5.1 million, versus $85.5 million income |
| Income (loss) available to common stockholders | $4.0 million, or $0.12 per share, versus a $12.9 million loss | $4.2 million, or $0.20 per share, versus $83.2 million |
- Quarterly sales growth reflected 72% more total gallons sold and a 54% higher average sales price per gallon. For nine months, gallons sold rose 57%, while average sales price increased 54%.
- Management attributed improved gross profit to increased volume and better commodity spreads; the nine-month period also included $1.5 million of California ethanol producer incentives recorded as a cost-of-goods-sold reduction. Corn costs rose substantially: CBOT-equivalent corn cost per bushel increased 62% for the quarter and 81% for the nine-month comparison.
- Nine-month 2011 net income included a $7.0 million favorable fair-value adjustment on convertible debt and warrants. The 2010 comparison included a $119.4 million bankruptcy-exit gain; accordingly, the reported nine-month earnings comparison is not representative of recurring operations.
- Cash and cash equivalents were $16.8 million at September 30, up from $8.7 million at year-end 2010. Working capital was $53.7 million, versus $9.5 million, and the current ratio was 3.27 versus 1.20.
- For the first nine months, operating cash flow was negative $7.6 million, investing cash flow negative $1.5 million, and financing cash flow positive $17.1 million. The operating cash outflow reflected working-capital investment, including higher inventory and prepaid inventory.
- Total debt carrying value was $113.3 million, including $12.1 million current and $101.1 million long-term. Convertible notes were carried at a $10.9 million fair value; stated unpaid principal was $9.3 million at quarter-end. New PE Holdco creditors had no recourse to Pacific Ethanol’s general credit, according to the filing.
Material changes, outlook, and risks
- Pacific Ethanol’s convertible notes matured May 6, 2012, bore 8% interest compounded monthly, and could bear 15% after default. They had variable and discounted conversion provisions, full-ratchet anti-dilution terms, and monthly amortization requirements. After quarter-end through November 3, the company issued 28.481 million shares to settle $8.181 million of principal and $0.388 million of interest; it reported 77.1 million common shares outstanding on November 3, versus 48.6 million at September 30.
- Management said available capital resources and operating revenues should cover anticipated working capital and capital expenditures for at least 12 months, but warned that materially different cash flows, unforeseen events, or acquisition needs could require additional financing. No quantified earnings or sales guidance was provided.
- Series B preferred dividends of $7.0 million were accrued and unpaid at September 30. The filing states the company was in breach of its preferred-stock dividend obligations. The preferred stock carries a 7% annual cumulative dividend.
- NASDAQ had notified the company that it failed the $1.00 minimum bid-price requirement. The initial compliance period ran through March 12, 2012, with a possible additional period; delisting could impair liquidity, financing access, and vendor credit terms.
- Risks include ethanol and co-product price volatility, corn and energy costs, dependence on government mandates and incentives, financing and dilution, and plant operating conditions. One plant remained idle, and restarting Madera depended on improved market conditions and New PE Holdco approval.
- A Florida lawsuit sought approximately $22 million in damages; summary judgment motions had been filed and a non-jury trial was set to begin February 27, 2012. Management said ordinary-course legal matters were not expected to materially affect the company, while acknowledging uncertain outcomes.
- Management reported disclosure controls were effective at a reasonable assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer: this document identifies Pacific Ethanol, Inc., not Alto Ingredients, Inc.
- Reconcile the sharp post-quarter share-count increase, note conversions, remaining debt, and dilution exposure under the convertible-note terms.
- Assess cash generation and liquidity excluding noncash fair-value gains and taking account of working-capital needs, debt maturities, and financing availability.
- Verify the status of the unpaid preferred dividends and related breach, as well as the NASDAQ bid-price compliance process.
- Evaluate the recurring profitability of the marketing and plant operations separately from the 2010 bankruptcy gain and 2011 fair-value adjustments; confirm the operating status and economics of the idled Madera plant.