Alto Ingredients, Inc. 10-K

Item 1. Business. Business Overview We are a leading producer and marketer of specialty alcohols and essential ingredients, and the largest producer of specialty alcohols in the United States based on annualized volumes. We operate seven alcohol production facilities. Three of our production facilities are located in the Midwestern state of Illinois and four of our facilities are located in the Western states of California, Oregon and Idaho. We have an annual alcohol production capacity of 450 million gallons. We market all of the alcohols produced at our facilities as well as fuel-grade ethanol produced by third parties. In 2020, we marketed over 500 million gallons combined of our own alcohols as well as fuel-grade ethanol produced by third parties, and nearly 1.5 million tons of essential ingredients on a dry matter basis. Our business consists of three reportable segments: two production segments and a marketing segment. Our mission is to expand our business as a leading producer and marketer of specialty alcohols and essential ingredients. We intend to accomplish this goal in part by investing in our specialized and higher value specialty alcohol production and distribution infrastructure, expanding production in high-demand essential ingredients, expanding and extending the sale of our products into new regional and international markets, building efficiencies and economies of scale and by capturing a greater portion of the value stream. Production Segments We produce specialty alcohols, fuel-grade ethanol and essential ingredients, focusing on four key markets: Health, Home & Beauty ; Food & Beverage ; Essential Ingredients ; and Renewable Fuels . Products for the Health, Home & Beauty market include specialty alcohols used in mouthwash, cosmetics, pharmaceuticals, hand sanitizers, disinfectants and cleaners. Products for the Food & Beverage markets include grain neutral spirits used in alcoholic beverages and vinegar as well as corn germ used for corn oils. Products for Essential Ingredients markets include yeast, corn gluten and distillers grains used in commercial animal feed and pet foods. Our Renewable Fuels products include fuel-grade ethanol and distillers corn oil used as a feedstock for renewable diesel fuel. We produce our alcohols and essential ingredients at our production facilities described below. Our production facilities located in the Midwest are in the heart of the Corn Belt, benefit from low-cost and abundant feedstock and enjoy logistical advantages that enable us to provide our products to both domestic and international markets via truck, rail or barge. Our production facilities located on the West Coast are near their respective fuel and feed customers, offering significant timing, transportation cost and logistical advantages. We are currently operating at approximately 64% of our estimated maximum annual production capacity. Our Magic Valley, Stockton and Madera facilities are currently idled. As market conditions change, we may increase, decrease or idle production at one or more operating facilities or resume operations at any idled facility. Annual Production Capacity (estimated, in gallons) Production Facility Location Fuel-Grade Ethanol Specialty Alcohol Pekin Campus Pekin, IL 110,000,000 140,000,000 Magic Valley Burley, ID 60,000,000 — Columbia Boardman, OR 40,000,000 — Stockton Stockton, CA 60,000,000 — Madera Madera, CA 40,000,000 — 1 Marketing Segment We market all of the alcohols and essential ingredients we produce at our facilities. We also market fuel-grade ethanol produced by third parties. We have extensive and long-standing customer relationships, both domestic and international, for our specialty alcohols and essential ingredients. These customers include producers and distributors of ingredients for cosmetics, sanitizers and related products, distilled spirits producers, food products manufacturers, producers of personal health/consumer health and personal care hygiene products, and global trading firms. Our fuel-grade ethanol customers are located throughout the Western and Midwestern United States and consist of integrated oil companies and gasoline marketers who blend fuel-grade ethanol into gasoline. Our customers depend on us to provide a reliable supply of fuel-grade ethanol and manage the logistics and timing of delivery with very little effort on their part. Our customers collectively require fuel-grade ethanol volumes in excess of the supplies we produce at our facilities. We secure additional fuel-grade ethanol supplies from third-party fuel-grade ethanol plants in California and other third-party suppliers in the Midwest where a majority of fuel-grade ethanol producers are located. We arrange for transportation, storage and delivery of fuel-grade ethanol purchased by our customers through our agreements with third-party service providers in the Western United States as well as in the Midwest from a variety of sources. We market our essential ingredient feed products to dairies and feedlots, in many cases located near our production facilities. These customers use our feed products for livestock as a substitute for corn and other sources of starch and protein. We sell our corn oil to poultry and biodiesel customers. We do not market essential ingredients from other producers. See “Note 4 – Segments” to our Notes to Consolidated Financial Statements included elsewhere in this report for financial information about our business segments. Company History We are a Delaware corporation formed in February 2005. Our common stock trades on The Nasdaq Capital Market under the symbol “ALTO”. Our Internet website address is http://www.altoingredients.com . Information contained on our website is not part of this Annual Report on Form 10-K. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such reports filed with or furnished to the Securities and Exchange Commission and other Securities and Exchange Commission filings are available free of charge through our website as soon as reasonably practicable after the reports are electronically filed with, or furnished to, the Securities and Exchange Commission. Business Strategy Our goal is to expand our business as a leading producer and marketer of specialty alcohols and essential ingredients. The key elements of our business and growth strategy to achieve this objective include: ● Focus on our customer relationships. We have repositioned our business to focus on specialty alcohols and essential ingredients. As a result, our business is service-oriented and focused on specialty products compared to a price-oriented business focused on commodity products. We strive to make our business ever more customer-centric to enable our premium services to support premium prices and new differentiated and higher-margin products. 2 ● Expand product offerings. We are pursuing initiatives to broaden our product offerings to appeal to a wider range of customers and uses in our key markets. For example, we have secured ISO 9001, ICH Q7 and EXCiPACT certifications. These certifications appeal to customers with stringent quality demands and enable us to offer alcohol certified for use as an active pharmaceutical ingredient, or API, and as an excipient—an inactive component of a drug or medication, such as solvents, carriers or tinctures—in the pharmaceutical industry. We are reviewing additional certifications and product positioning within our key markets to expand the range of customers we serve and the uses our products support. ● Implement new equipment and technologies. We are evaluating and plan to implement new equipment and technologies to increase our production yields, improve our operating efficiencies and reliability, reduce our overall carbon footprint, diversify our products and revenues, and increase our profitability as financial resources and market conditions justify these investments. ● Sell or repurpose underperforming production assets. We are pursuing the sale of our production facilities located in Stockton and Madera, California. We are also evaluating the sale or repurposing of other underperforming fuel-grade ethanol production assets. We have idled certain underperforming production facilities and intend to restart production at those facilities only when economic prospects indicate a level of production margins sufficient to justify resuming production. We may repurpose one or more underperforming production facilities to shift production to specialty alcohols if market demand justifies the expense. We are also exploring other potential repositioning activities, including an expansion into new markets such as essential oils and CBD oils, high protein development and protein pelletizing. ● Evaluate and pursue strategic opportunities . We are examining opportunities to expand our business such as joint ventures, strategic partnerships, synergistic acquisitions and other opportunities. We intend to pursue these opportunities as financial resources and business prospects make these opportunities desirable. Competitive Strengths We are the largest producer of specialty alcohols in the United States based on annualized volumes. We believe that our competitive strengths include: ● Our customer and supplier relationships . We have extensive and long-standing close customer and supplier relationships, both domestic and international, for our specialty alcohols and essential ingredients. We have an excellent reputation for developing specialty alcohols under stringent quality control standards, particularly at our Pekin, Illinois campus, or Pekin Campus. Our quality management systems are supported by ISO 9001, ICH Q7 and EXCiPACT certifications which are viewed by our customers as important attestations of our quality control standards. ● Barriers to entry . Our production facilities use specialized equipment, technologies and processes to achieve stringent quality controls, lower operating costs, higher yields, and efficient production of alcohols and essential ingredients. Our specialized equipment, technologies and processes, together with our quality management certifications, strict regulatory requirements, and close customer and supplier relationships create significant barriers to entry to new market participants. 3 ● Our experienced management . Our senior management team has a proven track record with significant operational and financial expertise and many years of experience in the alcohol production industry. Our senior executives have successfully navigated a wide variety of business and industry-specific challenges and deeply understand the business of successfully producing and marketing specialty alcohols and essential ingredients. ● The strategic location of our Midwest production facilities . We operate three distinct but integrated production facilities at our Pekin Campus in the Midwest. We are able to participate from that location in the largest regional specialty alcohol market in the United States as well as international markets. In addition: ● Our Midwest location enhances our overall hedging opportunities with a greater correlation to the highly-liquid physical and paper markets in Chicago. ● Our Midwest location provides excellent logistical access via rail, truck and barge. In particular, barge access via the Illinois River to the Mississippi River enables us to efficiently bring our products to international markets. ● The relatively unique wet milling process at one of our production facilities at our Pekin Campus allows us to extract the highest use and value from each component of the corn kernel. As a result, the wet milling process generates a higher level of cost recovery from corn than that produced at a dry mill. ● Our Midwest location allows us deep market insight and engagement in major fuel-grade ethanol and feed markets, thereby improving pricing opportunities. We believe that these competitive strengths will help us attain our goal of expanding our business as a leading producer and marketer of specialty alcohols and essential ingredients. Overview of Our Key Markets and Market Opportunity We produce specialty alcohols, fuel-grade ethanol and essential ingredients, focusing on four key markets: Health, Home & Beauty ; Food & Beverage ; Essential Ingredients ; and Renewable Fuels . Health, Home & Beauty Our products for the health, home and beauty markets include specialty alcohols used in mouthwash, cosmetics, pharmaceuticals, hand sanitizers, disinfectants and cleaners. We offer a variety of specialty alcohols for the health, home and beauty markets, depending on usage and regulatory requirements, including API-grade, United States Pharmacopeia, or USP, -grade ethyl alcohols, and industrial-grade ethyl alcohol. In 2020 we expanded our range of available product offerings within the health, home and beauty markets through quality management systems certifications. We have ISO 9001, ICH Q7 and EXCiPACT certifications at a key production facility at our Pekin Campus, all of which are viewed as important attestations of quality control standards. In particular, our ICH Q7 certification qualifies our specialty alcohols for use as an API, and our EXCiPACT certification qualifies our specialty alcohols for use as an excipient in the pharmaceutical industry. These certifications enable us to offer products to a wider group of customers and generally at more profitable margins. 4 Food & Beverage Our products for the food and beverage market include specialty alcohols used in alcoholic beverages, flavor extracts and vinegar as well as corn germ used for corn oils and carbon dioxide, or CO 2 , used for beverage carbonation and dry ice. The principal specialty alcohol we offer for alcoholic beverages and vinegar is our grain neutral spirits, or GNS, alcohol. We believe the key drivers in the food and beverage market include consumer preferences for the social currency of brand authenticity and heritage; consumers seeking unique and personalized experiences; younger adults drawn to the caché of luxury brands, including super-premium spirits; improved consumer access to spirits products; the growth of craft distillers; and the ability to meet wide-ranging consumer preferences through a broad diversity of spirits categories and cocktails. Essential Ingredients Our essential ingredients products include dried yeast, corn gluten meal, corn gluten feed, and distillers grains and liquid feed used in commercial animal feed and pet foods. The raw materials for our essential ingredients products are generated as co-products from our production of alcohols. These co-products are further manufactured, altered and refined into our essential ingredients products, including for special customer applications. Many of our essential ingredients are used in a variety of food products to affect their nutrition, including protein and fat content, as well as other product attributes such as taste, texture, palatability and stability. Our high quality and high purity manufacturing enable our customers to use some of our essential ingredients in human foods while others are used in pet foods and animal feed. See “—Overview of Distillers Grains Market”. We expect the essential ingredients market to grow significantly due to global demand for higher-grade protein feed, such as feed used in fisheries and other applications. Renewable Fuels Our renewable fuels products include fuel-grade ethanol used as transportation fuel and distillers corn oil used as a biodiesel feedstock. Our renewable fuels business is supported by our own production of fuel-grade ethanol as well as fuel-grade ethanol produced by third parties. Renewable fuels, primarily fuel-grade ethanol, are used for a variety of purposes, including as octane enhancers for premium gasoline and to enable refiners to produce greater quantities of lower octane blend stock; for fuel blending to extend fuel supplies and reduce reliance on crude oil and refined products; and to comply with a variety of governmental programs, in particular, the national Renewable Fuel Standard, or RFS, which was enacted to promote alternatives to fossil fuels. Under the RFS, the mandated use of all renewable fuels rises incrementally and peaks at 36.0 billion gallons by 2022, of which 15.0 billion gallons are required from conventional, or corn-based, ethanol. The RFS allows the Environmental Protection Agency, or EPA, to adjust the annual requirement based on certain facts and circumstances. See “—Governmental Regulation”. According to the Renewable Fuels Association, the domestic fuel-grade ethanol industry produced 13.8 billion gallons of ethanol in 2020. According to the United States Department of Energy, total annual gasoline consumption in the United States is approximately 123.5 billion gallons and total annual fuel-grade ethanol consumption represented approximately 11% of this amount in 2020. We anticipate that increased transportation and economic activity as the coronavirus pandemic subsides together with continued limited opportunities for gasoline refinery expansions and the growing importance of reducing CO 2 emissions through the use of renewable fuels will generate additional growth in the demand for fuel-grade ethanol. 5 Overview of Alcohol Production Process Alcohol production from starch- or sugar-based feedstock is a highly-efficient process. Modern alcohol production requires large amounts of corn, or other high-starch grains, and water as well as chemicals, enzymes and yeast, and denaturants including unleaded gasoline or liquid natural gas, in addition to natural gas and electricity. Dry Milling Process In the dry milling process, corn or other high-starch grain is first ground into meal, then slurried with water to form a mash. Enzymes are added to the mash to convert the starch into dextrose, a simple sugar. Ammonia is added for acidic (pH) control and as a nutrient for the yeast. The mash is processed through a high temperature cooking procedure, which reduces bacteria levels prior to fermentation. The mash is then cooled and transferred to fermenters, where yeast is added and the conversion of sugar to alcohol and CO 2 begins. After fermentation, the resulting “beer” is transferred to distillation, where the alcohol is separated from the residual “stillage”. The resulting alcohol is concentrated to 190 proof using conventional distillation methods and then is dehydrated to approximately 200 proof, representing 100% alcohol levels, in a molecular sieve system. For fuel-grade ethanol, the resulting anhydrous alcohol is then blended with approximately 2.5% denaturant, which is usually gasoline, and is then ready for shipment to renewable fuels markets. The residual stillage is separated into a coarse grain portion and a liquid portion through a centrifugation process. The soluble liquid portion is concentrated to about 40% dissolved solids by an evaporation process. This intermediate state is called condensed distillers solubles, or syrup. The coarse grain and syrup portions are then mixed to produce wet distillers grains, or WDG, or can be mixed and dried to produce dried distillers grains with solubles, or DDGS. Both WDG and DDGS are high-protein animal feed products. Wet Milling Process In the wet milling process, corn or other high-starch grain is first soaked or “steeped” in water for 24 – 48 hours to separate the grain into its many components. After steeping, the grain slurry is processed first to separate the grain germ, from which the grain oil can be further separated. The remaining fiber, gluten and starch components are further separated and sold. The steeping liquor is concentrated in an evaporator. The concentrated product, called heavy steep water, is co-dried with the fiber component and is then sold as gluten feed. The gluten component is filtered and dried to produce gluten meal. The starch and any remaining water from the mash is then processed into alcohol or dried and processed into corn syrup. The fermentation process for alcohol at this stage is similar to the dry milling process. Overview of Distillers Grains Market Distillers grains are produced as a co-product of alcohol production and are valuable components of feed rations primarily to dairies and beef cattle markets, both nationally and internationally. Our plants produce both WDG and DDGS. WDG is sold to customers proximate to the plants and DDGS is delivered by truck, rail and barge to customers in domestic and international markets. Producing WDG also allows us to use up to one-third less process energy, thus reducing production costs and lowering the carbon footprint of our production facilities. 6 Historically, the market price for distillers grains has generally tracked the value of corn. We believe that the market price of WDG and DDGS is determined by a number of factors, including the market value of corn, soybean meal and other competitive ingredients, the performance or value of WDG and DDGS in a particular feed formulation and general market forces of supply and demand, including export markets for these co-products. The market price of distillers grains is also often influenced by nutritional models that calculate the feed value of distillers grains by nutritional content, as well as reliability of consistent supply. Customers We market and sell through our wholly-owned subsidiary, Kinergy Marketing LLC, or Kinergy, all of the alcohols we produce. Kinergy also markets fuel-grade ethanol produced by third parties. We market and sell through our wholly-owned subsidiary, Alto Nutrients, LLC, all of the essential ingredients we produce. We have extensive and long-standing customer relationships, both domestic and international, for our specialty alcohols and essential ingredients. These customers include producers and distributors of ingredients for cosmetics, sanitizers and related products, distilled spirits producers, food products manufacturers, producers of personal health/consumer health and personal care hygiene products, and global trading firms. Our fuel-grade ethanol customers are located throughout the Western and Midwestern United States and consist of integrated oil companies and gasoline marketers who blend fuel-grade ethanol into gasoline. Our customers depend on us to provide a reliable supply of fuel-grade ethanol and manage the logistics and timing of delivery with very little effort on their part. Our customers collectively require fuel-grade ethanol volumes in excess of the supplies we produce at our facilities. We secure additional fuel-grade ethanol supplies from third-party fuel-grade ethanol plants in California and other third-party suppliers in the Midwest where a majority of fuel-grade ethanol producers are located. We arrange for transportation, storage and delivery of fuel-grade ethanol purchased by our customers through our agreements with third-party service providers in the Western United States as well as in the Midwest from a variety of sources. We market our essential ingredient feed products to dairies and feedlots, in many cases located near our production facilities. These customers use our feed products for livestock as a substitute for corn and other sources of starch and protein. We sell our corn oil to poultry and biodiesel customers. We do not market essential ingredients from other producers. Our Pekin Campus production segment generated $330.4 million and $343.6 million in net sales for the years ended December 31, 2020 and 2019, respectively, from the sale of alcohols. Our Pekin Campus production segment generated $130.3 million and $139.0 million in net sales for the years ended December 31, 2020 and 2019, respectively, from the sale of essential ingredients. During 2020 and 2019, our Pekin Campus production segment sold an aggregate of approximately 193.9 million and 218.5 million gallons of alcohols and 829,000 and 913,000 tons of essential ingredients, respectively, on a dry matter basis. Our other production segment generated $137.7 million and $455.3 million in net sales for the years ended December 31, 2020 and 2019, respectively, from the sale of alcohols. Our other production segment generated $40.9 million and $130.0 million in net sales for the years ended December 31, 2020 and 2019, respectively, from the sale of essential ingredients. 7 During 2020 and 2019, our other production segment sold an aggregate of approximately 78.0 million and 272.5 million gallons of alcohols and 619,000 and 1,908,000 tons of essential ingredients, respectively, on a dry matter basis. Our marketing segment generated $257.7 million and $356.9 million in net sales for the years ended December 31, 2020 and 2019, respectively, from the sale of alcohols. During 2020 and 2019, we produced or purchased from third parties and resold an aggregate of 536.3 million and 819.4 million gallons of alcohols to approximately 65 and 109 customers, respectively. For 2020 and 2019, sales to our two largest customers, Chevron Products USA and Valero Energy Corporation represented an aggregate of approximately 14% and 24%, of our net sales, respectively. For 2020 and 2019, sales to each of our other customers represented less than 10% of our net sales. Suppliers Production Segments Our production operations depend upon various raw materials suppliers, including suppliers of corn, natural gas, electricity and water. The cost of corn is the most important variable cost associated with our alcohol production. We source corn for our plants using standard contracts, including spot purchase, forward purchase and basis contracts. When resources are available, we seek to limit the exposure of our production operations to raw material price fluctuations by purchasing forward a portion of our corn requirements on a fixed price basis and by purchasing corn and other raw materials futures contracts. During 2020 and 2019, purchases of corn from our two largest suppliers represented an aggregate of approximately 25% and 40% of our total corn purchases, respectively, for those periods. Purchases from each of our other corn suppliers represented less than 10% of total corn purchases in each of 2020 and 2019. Marketing Segment Our marketing operations cover alcohols and essential ingredients we produce but also depend upon various third-party producers of fuel-grade ethanol. In addition, we provide transportation, storage and delivery services through third-party service providers with whom we have contracted to receive fuel-grade ethanol at agreed upon locations from our third-party suppliers and to store and/or deliver the ethanol to agreed-upon locations on behalf of our customers. These contracts generally run from year-to-year, subject to termination by either party upon advance written notice before the end of the then current annual term. During 2020 and 2019, we purchased and resold from third parties an aggregate of approximately 163 million and 213 million gallons, respectively, of fuel-grade ethanol. During 2020 and 2019, purchases of fuel-grade ethanol from our two largest third-party suppliers represented 54% and 35%, respectively, of our total third-party ethanol purchases for each of those periods. Purchases from each of our other third-party ethanol suppliers represented less than 10% of total third-party ethanol purchases in each of 2020 and 2019. 8 Production Facilities We operate seven production facilities. Three of our production facilities are located in the Midwestern state of Illinois and four of our facilities are located in the Western states of California, Oregon and Idaho. We have a combined annual alcohol production capacity of 450 million gallons. Our Magic Valley, Stockton and Madera facilities are currently idled. As market conditions change, we may increase, decrease or idle production at one or more operating facilities or resume operations at any idled facility. The tables below provide an overview of our seven production facilities. Pekin Campus Production Facilities Pekin Wet Facility Pekin Dry Facility Pekin ICP Facility Location Pekin, IL Pekin, IL Pekin, IL Operating status Operating Operating Operating Approximate maximum annual alcohol production capacity (in millions of gallons) 100 60 90 Approximate maximum annual specialty alcohol production capacity (in millions of gallons)* 74 — 66 Production milling process Wet Dry Dry Primary energy source Natural Gas Natural Gas Natural Gas * Included in approximate maximum annual alcohol production capacity. Western Production Facilities Madera Facility Columbia Facility Magic Valley Facility Stockton Facility Location Madera, CA Boardman, OR Burley, ID Stockton, CA Operating status Idled Operating Idled Idled Approximate maximum annual fuel-grade ethanol production capacity (in millions of gallons) 40 40 60 60 Production milling process Dry Dry Dry Dry Primary energy source Natural Gas Natural Gas Natural Gas Natural Gas Commodity Risk Management We employ various risk mitigation techniques. For example, we may seek to mitigate our exposure to commodity price fluctuations by purchasing forward a portion of our corn and natural gas requirements through fixed-price or variable-price contracts with our suppliers, as well as entering into derivative contracts for fuel-grade ethanol, corn and natural gas. To mitigate fuel-grade ethanol inventory price risks, we may sell a portion of our production forward under fixed- or index-price contracts, or both. We may hedge a portion of the price risks by selling exchange-traded futures contracts. Proper execution of these risk mitigation strategies can reduce the volatility of our gross profit margins. Specialty alcohols have relatively low price volatility and are usually priced at significant premiums to fuel-grade ethanol. The market price of fuel-grade ethanol is volatile, however, and subject to large fluctuations. Given the nature of our business, we cannot effectively hedge against extreme volatility or certain market conditions. For example, fuel-grade ethanol prices, as reported by the Chicago Board of Trade, or CBOT, ranged from $0.81 to $1.62 per gallon during 2020 and from $1.25 to $1.70 per gallon during 2019; and corn prices, as reported by the CBOT, ranged from $3.03 to $4.84 per bushel during 2020 and from $3.41 to $4.55 per bushel during 2019. 9 Marketing Arrangements We market all the alcohols and essential ingredients produced at our facilities. In addition, we have exclusive fuel-grade ethanol marketing arrangements with two third-party ethanol producers, Calgren Renewable Fuels, LLC and Aemetis Advanced Fuels Keyes, Inc., to market and sell their entire fuel-grade ethanol production volumes. Calgren Renewable Fuels, LLC owns and operates a fuel-grade ethanol production facility in Pixley, California with annual production capacity of 55 million gallons. Aemetis Advanced Fuels Keyes, Inc. owns and operates a fuel-grade ethanol production facility in Keyes, California with annual production capacity of 60 million gallons. Competition We are the largest producer of specialty alcohols in the United States based on annualized volumes. Other significant producers of specialty alcohols in the United States are Archer-Daniels-Midland Company, MGP Ingredients, Inc., Grain Processing Corporation, CIE and Greenfield Global Inc., which collectively make up a significant majority of the total installed specialty alcohol production capacity in the United States along with many smaller producers. The largest producers of fuel-grade ethanol in the United States are POET, LLC, Valero Renewable Fuels Company, LLC, Archer-Daniels-Midland Company, Green Plains Inc. and Flint Hills Resources, collectively with approximately 41% of the total installed fuel-grade ethanol production capacity in the United States. In addition, there are many mid-sized fuel-grade ethanol producers with several plants under ownership, smaller producers with one or two plants, and several fuel-grade ethanol marketers that create significant competition. Overall, we believe there are over 200 fuel-grade ethanol production facilities in the United States with a total installed production capacity of approximately 17.4 billion gallons and many brokers and marketers with whom we compete for sales of fuel-grade ethanol and its co-products. Our fuel-grade ethanol also competes on a global market against production from other countries, such as Brazil, which may have lower production costs than United States producers. Lower feedstock input costs such as sugarcane used in Brazil as compared to corn used in the Unites States may give foreign producers a competitive advantage. In addition, fuel-grade ethanol from sugarcane feedstock qualifies as an advanced biofuel, unlike corn ethanol, allowing required parties to economically satisfy an advanced biofuel standard. Moreover, new products and production technologies are under continuous development, many of which, if adopted by competitors, could harm ability to compete. We believe that our competitive strengths include our customer and supplier relationships, the barriers to entry to our most profitable lines of business—including our modern technologies at our production facilities—our experienced management, and the strategic location of our Midwest production facilities. We believe that these advantages will help us to attain our goal to expand our business as a leading producer and marketer of specialty alcohols and essential ingredients. See “—Competitive Strengths”. Governmental Regulation Our business is subject to a wide range of federal, state and local laws and regulations directed at protecting public health and the environment, including those promulgated by the Occupational Safety and Health Administration, or OSHA, the U.S. Food and Drug Administration, or FDA, the EPA, and numerous state and local authorities. These laws, their underlying regulatory requirements and their potential enforcement, some of which are described below, impact, or may impact, nearly every aspect of our operations, including our production of alcohols (including distillation), our production of essential ingredients, our storage facilities, and our water usage, waste water discharge, disposal of hazardous wastes and emissions, and other matters pertaining to our existing and proposed business by imposing: ● restrictions on our existing and proposed operations and/or the need to install enhanced or additional controls; ● special requirements applicable to food and drug additives; 10 ● the need to obtain and comply with permits and authorizations; ● liability for exceeding applicable permit limits or legal requirements, in some cases for the remediation of contaminated soil and groundwater at our production facilities, contiguous and adjacent properties and other properties owned and/or operated by third parties; and ● other specifications for the specialty alcohols and essential ingredients we produce and market. In addition, some governmental regulations are helpful to our production and marketing business. The fuel-grade ethanol industry in particular is supported by federal and state mandates and environmental regulations that favor the use of fuel-grade ethanol in motor fuel blends in North America. Some of the governmental regulations applicable to our production and marketing business are briefly described below. Food and Drug Regulation Our products for the Health, Home & Beauty, Food & Beverage and some Essential Ingredients markets are subject to regulation by the FDA as well as similar state agencies. Under the Federal Food, Drug, and Cosmetic Act, or FDCA, the FDA regulates the processing, formulation, safety, manufacture, packaging, labeling and distribution of food ingredients, vitamins and cosmetics. Many of the FDA’s and FDCA’s rules and regulations apply directly to us as well as indirectly through their application in our customers’ products. To be properly marketed and sold in the United States, a relevant product must be generally recognized as safe, approved and not adulterated or misbranded under the FDCA and relevant regulations issued under the FDCA. The FDA has broad authority to enforce the provisions of the FDCA. Failure to comply with the laws and regulations of the FDA or similar state agencies could prevent us from selling certain of our products or subject us to liability. Renewable Fuels Energy Legislation Under the RFS, the mandated use of all renewable fuels, including fuel-grade ethanol, rises incrementally and peaks at 36.0 billion gallons by 2022, of which 15.0 billion gallons are required from conventional, or corn-based, ethanol. Under the provisions of the Energy Independence and Security Act of 2007, the EPA has the authority to waive the mandated RFS requirements in whole or in part. To grant a waiver, the EPA administrator must determine, in consultation with the Secretaries of Agriculture and Energy, that there is inadequate domestic renewable fuel supply or implementation of the requirement would severely harm the economy or environment of a state, region or the United States as a whole. Various bills in Congress introduced from time to time are also directed at altering existing renewable fuels energy legislation, but none has passed in recent years. Some legislative bills are directed at halting or reversing expansion of, or even eliminating, the renewable fuel program, while other bills are directed at bolstering the program or enacting further mandates or grants that would support the renewable fuels industry. The EPA has allowed fuel and fuel-additive manufacturers to introduce into commercial gasoline that contains greater than 10% fuel-grade ethanol by volume, up to 15% fuel-grade ethanol by volume, or E15, for vehicles from model year 2001 and beyond. Commercial sale of E15 has begun in a majority of states, and the EPA has enacted a rule allowing for year-round use of E15. Various states including California, Oregon and Washington, and other regions such as the Canadian province of British Columbia, have implemented low-carbon fuel standards focused on reducing the carbon intensity of transportation fuels. Blending fuel-grade ethanol into gasoline is one of the primary means of attaining these goals. Additional Environmental Regulations In addition to the governmental regulations applicable to the alcohol production and marketing industry described above, our business is subject to additional federal, state and local environmental regulations, including regulations established by the EPA and state regulatory agencies related to water quality and air pollution control. We cannot predict the manner or extent to which these regulations will harm or help our business or the alcohol production and marketing industry in general. Employees As of March 25, 2021, we had approximately 370 employees, including 369 full-time employees. We believe that our employees are highly-skilled, and our success will depend in part upon our ability to retain our employees and attract new qualified employees, many of whom are in great demand. Approximately 51% of our employees are presently represented by a labor union and covered by a collective bargaining agreement. We have never had a work stoppage or strike and we consider our relations with our employees to be good. 11