Alto Ingredients, Inc. quarterly report, Q2 FY2013

Alto Ingredients, Inc. — filing identity and period

Important: The supplied 10-Q is filed by Pacific Ethanol, Inc., not Alto Ingredients, Inc. It covers the quarter and six months ended June 30, 2013, and was signed August 7, 2013. The figures below therefore summarize the filing as provided and should not be attributed to Alto without verifying the issuer identity.

Business context and reporting period

Pacific Ethanol marketed and produced renewable fuels in the Western United States, including ethanol and co-products such as wet distillers grain, syrup, and, beginning in June 2013, corn oil. It held an 85% interest in New PE Holdco, which owned four ethanol plants with aggregate capacity of up to 200 million gallons annually. Three plants were operating; the Madera, California plant was idled.

Financial performance and liquidity

Unless noted otherwise, dollar amounts are in millions. The statements are unaudited.

• Sales and volumes: Revenue rose 13.8% in Q2 and 13.9% for the half, while total gallons sold fell 13.2% and 12.7%, respectively. Higher average sales prices more than offset lower volumes. The company attributed much of the volume decline to the May 2013 expiration without renewal of its Front Range Energy marketing arrangement.
• Profitability: Management attributed the gross-profit recovery primarily to improved crush and commodity margins and higher production yields. Q2 consolidated net income was $1.1 million; first-half consolidated net loss was $5.5 million. Interest expense increased to $4.0 million in Q2 and $7.5 million for the half, partly reflecting new borrowings and debt-discount amortization.
• Cash flow: For the six months, operating cash use was $3.7 million, investing cash use was $2.8 million, and financing provided $5.9 million. Cash declined $0.6 million to $7.0 million. Working capital was $50.5 million; the reported current ratio was 3.42, down from 4.63 at year-end 2012.
• Debt and liquidity: Balance-sheet debt, net of specified discounts and parent-purchased plant debt, was $119.6 million, including $6.4 million current and $113.2 million long-term. The filing also lists $153.2 million of gross debt before those deductions. Kinergy had $5.9 million of borrowing-base availability; Plant Owners had $8.0 million available under a separate revolving facility. Plant Owners’ debt carried an approximately 13.25% rate at June 30. Certain Plant Owners’ creditors have no recourse to Pacific Ethanol, but Kinergy’s facility is guaranteed by the parent.

Material changes versus the prior comparable period

• Gross profit improved by $11.9 million in Q2 and $20.2 million for the first half compared with 2012, moving both periods from gross loss to gross profit.
• Average sales price per gallon increased 21% in Q2 and 16% for the half; total gallons sold declined about 13% in both periods.
• Pacific Ethanol’s ownership of New PE Holdco rose from 67% at December 31, 2012 to 85% at June 30, 2013. This changed the allocation of consolidated earnings between the company and noncontrolling interests.
• SG&A was nearly flat in Q2 and increased 9.8% for the half, with the filing citing financing-related professional fees, stockholder-meeting costs, and noncash compensation.
• The company raised $38.0 million gross through senior notes, convertible notes, and warrant exercises, and used proceeds in part to buy or retire Plant Owners’ debt and acquire additional ownership interests.

Outlook, risks, contingencies, and unusual items

• Outlook: Management said the plants were operating profitably at then-current margins, expected continued ethanol-demand growth and a strong margin environment in 2014, and identified the fourth quarter as seasonally slow. It expected nominal corn-oil production at Stockton in Q3 and meaningful production at Magic Valley and Stockton by Q4. These are management expectations, not guarantees.
• Liquidity risk: Management believed available resources would cover anticipated working capital and capital spending for at least 12 months, but warned that weaker crush margins, unexpected cash needs, or the cost of restarting Madera could require additional financing.
• Financing and dilution: Series A and B subordinated convertible notes had a March 2014 maturity and conversion/installment provisions tied in part to market prices. As of August 2, 2013, subsequent conversions had issued 2.102 million shares for $6.412 million of principal and interest; Series A was retired and Series B principal outstanding was $3.620 million. The January senior notes mature in 2016 and may carry step-up interest if specified repayment thresholds are not met.
• Unusual items: Convertible-note conversions generated a reported $1.037 million loss on extinguishment for the six months. The company also paid $0.786 million to induce warrant exercises. Warrants and convertible-note conversion features were carried as fair-value liabilities, with Level 3 measurements sensitive to stock price and volatility.
• Legal contingency: GS CleanTech sued over alleged patent infringement involving corn-oil separation technology, seeking injunctions and unspecified damages. The company disputed infringement and counterclaimed that the patent claims were invalid; management said it did not expect pending proceedings to have a material impact, while acknowledging uncertain outcomes.
• Other operating risks: Results depend on ethanol and co-product prices, corn and natural-gas costs, commodity margins, plant operations, market demand, and regulatory conditions. The filing notes that corn-oil production had begun at Magic Valley and that the company was evaluating expansion to other plants.
• Capital structure: The company effected a one-for-fifteen reverse stock split in May 2013. It also reported $5.1 million of accrued Series B preferred dividends at June 30; a subsequent stock issuance paid $0.732 million of arrears, and preferred holders agreed to forbear from exercising related rights through December 31, 2014, subject to stated conditions.

Important facts for investors to verify

• Confirm that Pacific Ethanol, Inc.—rather than Alto Ingredients, Inc.—is the intended issuer for this requested summary.
• Review whether improved margins and management’s 2014 outlook persisted after the reporting date, given commodity-price and seasonal exposure.
• Track cash generation, available borrowing capacity, debt maturities and rates, and any need to finance a Madera restart.
• Assess the potential dilution and cash-payment requirements under the convertible notes, including post-quarter conversions and remaining Series B obligations.
• Monitor the GS CleanTech patent litigation, corn-oil production rollout, and any related injunction or damages developments.
• Reconcile reported debt measures carefully: gross consolidated debt, parent-purchased Plant Owners’ debt, unamortized discounts, and obligations without recourse to the parent are presented separately.