Alto Ingredients, Inc. 10-K

Item 9A. Controls and Procedures. We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended, or Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of December 31, 2020 that our disclosure controls and procedures were effective at a reasonable assurance level. 42 Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A material weakness is defined by the Public Company Accounting Oversight Board’s Audit Standards AS 2201 as being a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework set forth in Internal Control — Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2020. Inherent Limitations on the Effectiveness of Controls Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected. 43 These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Changes in Internal Control over Financial Reporting There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information. None. 44 PART III Item 10. Directors, Executive Officers and Corporate Governance. The information under the captions “Information about our Board of Directors, Board Committees and Related Matters” appearing in the Proxy Statement, is hereby incorporated by reference. Item 11. Executive Compensation. The information under the caption “Executive Compensation and Related Information,” appearing in the Proxy Statement, is hereby incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information,” appearing in the Proxy Statement, is hereby incorporated by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information under the captions “Certain Relationships and Related Transactions” and “Information about our Board of Directors, Board Committees and Related Matters—Director Independence” appearing in the Proxy Statement, is hereby incorporated by reference. Item 14. Principal Accounting Fees and Services. The information under the caption “Audit Matters—Principal Accountant Fees and Services,” appearing in the Proxy Statement, is hereby incorporated by reference. 45 PART IV Item 15. Exhibits, Financial Statement Schedules. (a)(1) Financial Statements Reference is made to the financial statements listed on and attached following the Index to Consolidated Financial Statements contained on page F-1 of this report. (a)(2) Financial Statement Schedules None. (a)(3) Exhibits Reference is made to the exhibits listed on the Index to Exhibits. Item 16. Form 10-K Summary. None. 46 Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, 2020 and 2019 F-3 Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019 F-5 Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2020 and 2019 F-6 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020 and 2019 F-7 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019 F-8 Notes to Consolidated Financial Statements F-10 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Alto Ingredients, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Alto Ingredients, Inc. and its subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. Long-Lived Asset Impairment As discussed in Note 1 to the financial statements, the Company assesses the impairment of long-lived assets, including property and equipment, internally developed software and purchased intangibles subject to amortization, when events or circumstances exist that indicate that the fair value of assets may be less than their net book value. The Company’s model includes forecasted undiscounted cash flows and estimated net proceeds expected from the sale of the asset group used for the determination of any impairment of the Company’s long-lived assets. The projections used for analysis are judgmental and based on circumstances and future plans as determined by management. We identified the assessment of the Company’s impairment of long-lived assets as a critical audit matter because auditor judgment was required in evaluating significant assumptions related to the Company’s estimate, including the estimated residual value of the asset group. Our audit procedures related to the Company’s long-lived asset impairment assessment included the following, among others: ● We compared plant efficiency and profitability at the asset group to comparable asset groups that have been sold by the Company and others in the industry, to determine the reasonableness of the estimated residual value of the asset group. ● For the asset group with an indicator of impairment, we obtained the third-party valuation report for the asset group and evaluated the reasonableness of the sales approach by evaluating market data, used in the valuation, for plants that have been sold recently by the Company and others in the industry. /s/ RSM US LLP We have served as the Company’s auditor since 2015. Rochester, Minnesota March 26, 2021 F- 2 ALTO INGREDIENTS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except shares and par value) December 31, ASSETS 2020 2019 Current Assets: Cash and cash equivalents $ 47,667 $ 18,997 Accounts receivable, net of allowance for doubtful accounts of $260 and $39, respectively 43,491 74,307 Inventories 41,767 60,600 Prepaid inventory 891 1,528 Derivative assets 17,149 2,438 Assets held-for-sale 58,295 69,764 Other current assets 4,786 4,430 Total current assets 214,046 232,064 Property and equipment, net 229,486 332,526 Other Assets: Right of use operating lease assets, net 11,046 24,346 Notes receivable 14,337 — Assets held-for-sale — 16,500 Intangible asset 2,678 2,678 Other assets 5,225 4,381 Total other assets 33,286 47,905 Total Assets $ 476,818 $ 612,495 The accompanying notes are an integral part of these consolidated financial statements. F- 3 ALTO INGREDIENTS, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) (in thousands, except shares and par value) December 31, LIABILITIES AND STOCKHOLDERS’ EQUITY 2020 2019 Current Liabilities: Accounts payable – trade $ 13,047 $ 29,277 Accrued liabilities 11,101 22,331 Current portion – operating leases 2,180 3,457 Current portion – long-term debt, net 25,533 63,000 Derivative liabilities — 1,860 Liabilities held-for-sale 19,542 34,413 Other current liabilities 15,524 6,060 Total current liabilities 86,927 160,398 Long-term debt, net of current portion 71,807 180,795 Operating leases, net of current portion 8,715 21,171 Other liabilities 13,134 23,086 Total Liabilities 180,583 385,450 Commitments and contingencies (Notes 1, 8, 9, 10 and 15) Stockholders’ Equity: Preferred stock, $0.001 par value; 10,000,000 shares authorized: Series A: 1,684,375 shares authorized; no shares issued and outstanding as of December 31, 2020 and 2019 — — Series B: 1,580,790 shares authorized; 926,942 shares issued and outstanding as of December 31, 2020 and 2019; liquidation preference of $19,663 as of December 31, 2020 1 1 Common stock, $0.001 par value; 300,000,000 shares authorized; 72,486,962 and 55,508,314 shares issued and outstanding as of December 31, 2020 and 2019, respectively 72 56 Non-voting common stock, $0.001 par value; 3,553,000 shares authorized; 896 shares issued and outstanding as of December 31, 2020 and 2019 — — Additional paid-in capital 1,036,638 942,307 Accumulated other comprehensive loss (3,878 ) (2,370 ) Accumulated deficit (736,598 ) (720,214 ) Total Alto Ingredients, Inc. stockholders’ equity 296,235 219,780 Noncontrolling interests — 7,265 Total stockholders’ equity 296,235 227,045 Total Liabilities and Stockholders’ Equity $ 476,818 $ 612,495 The accompanying notes are an integral part of these consolidated financial statements. F- 4 ALTO INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Years Ended December 31, 2020 2019 Net sales $ 897,023 $ 1,424,881 Cost of goods sold 844,164 1,434,819 Gross profit (loss) 52,859 (9,938 ) Selling, general and administrative expenses (31,980 ) (35,453 ) Gain on litigation settlement 11,750 — Gain on sale of assets 1,580 — Asset impairments (24,356 ) (29,292 ) Income (loss) from operations 9,853 (74,683 ) Interest expense, net (17,943 ) (20,206 ) Loss on debt extinguishment — (6,517 ) Fair value adjustments (9,959 ) — Other income, net 750 104 Loss before benefit for income taxes (17,299 ) (101,302 ) Benefit for income taxes 17 20 Consolidated net loss (17,282 ) (101,282 ) Net loss attributed to noncontrolling interests 2,166 12,333 Net loss attributed to Alto Ingredients, Inc. $ (15,116 ) $ (88,949 ) Preferred stock dividends $ (1,268 ) $ (1,265 ) Loss available to common stockholders $ (16,384 ) $ (90,214 ) Loss per share, basic and diluted $ (0.28 ) $ (1.90 ) Weighted-average shares outstanding, basic and diluted 58,609 47,384 The accompanying notes are an integral part of these consolidated financial statements. F- 5 ALTO INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands) Years Ended December 31, 2020 2019 Consolidated net loss $ (17,282 ) $ (101,282 ) Other comprehensive income (expense) – net gain (loss) arising during the period on defined benefit pension plans (1,508 ) 89 Total comprehensive loss (18,790 ) (101,193 ) Comprehensive loss attributed to noncontrolling interests 2,166 12,333 Comprehensive loss attributed to Alto Ingredients, Inc. $ (16,624 ) $ (88,860 ) The accompanying notes are an integral part of these consolidated financial statements. F- 6 ALTO INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands) Preferred Stock Common Stock and Non-Voting Common Additional Paid-In Accumulated Accum. Other Comprehensive Non- Controlling Shares Amount Shares Amount Capital Deficit Loss Interests Total Balances, December 31, 2018 927 $ 1 45,771 $ 46 $ 932,179 $ (630,000 ) $ (2,459 ) $ 19,598 $ 319,365 Stock-based compensation expense – restricted stock and options to employees and directors, net of cancellations and tax — — 1,069 1 2,650 — — — 2,651 Common stock issuances ATM — — 3,137 3 3,667 — — — 3,670 Common stock issuances senior notes — — 5,531 6 3,811 — — — 3,817 Pension plan adjustment — — — — — — 89 — 89 Preferred stock dividends — — — — — (1,265 ) — — (1,265 ) Net loss — — — — — (88,949 ) — (12,333 ) (101,282 ) Balances, December 31, 2019 927 $ 1 55,508 $ 56 $ 942,307 $ (720,214 ) $ (2,370 ) $ 7,265 $ 227,045 Stock-based compensation expense – restricted stock and options to employees and directors, net of cancellations and tax — — 1,137 1 2,077 — — — 2,078 Common stock issuances — — 5,075 5 70,528 — — — 70,533 Warrant exercises — — 9,346 9 16,431 — — — 16,440 Common stock issuances ATM — — 1,421 1 5,295 — — — 5,296 Sale of interests in PAL — — — — — — — (5,099 ) (5,099 ) Pension plan adjustment — — — — — — (1,508 ) — (1,508 ) Preferred stock dividends — — — — — (1,268 ) — — (1,268 ) Net loss — — — — — (15,116 ) — (2,166 ) (17,282 ) Balances, December 31, 2020 927 $ 1 72,487 $ 72 $ 1,036,638 $ (736,598 ) $ (3,878 ) $ — $ 296,235 The accompanying notes are an integral part of these consolidated financial statements. F- 7 ALTO INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Years Ended December 31, 2020 2019 Operating Activities: Consolidated net loss $ (17,282 ) $ (101,282 ) Adjustments to reconcile consolidated net loss to cash provided by (used in) operating activities: Depreciation and amortization of intangibles 30,268 47,909 Asset impairments 24,356 29,292 Fair value adjustments 9,959 — Gain on sale of assets (1,580 ) — Loss on debt extinguishment — 6,517 Inventory valuation (257 ) — Gain on derivative instruments (14,780 ) (555 ) Amortization of deferred financing costs 1,394 511 Amortization of debt discounts (premiums) (230 ) 689 Noncash compensation 2,679 2,809 Bad debt expense 245 27 Interest expense added to senior notes 133 1,185 Changes in operating assets and liabilities: Accounts receivable 30,571 (6,698 ) Inventories 19,090 (2,780 ) Prepaid expenses and other assets 965 10,197 Prepaid inventory 637 1,562 Operating leases (4,751 ) (10,161 ) Assets held-for-sale 1,012 — Liabilities held-for-sale 9,110 — Accounts payable and accrued expenses (19,763 ) (2,585 ) Net cash provided by (used in) operating activities $ 71,776 $ (23,363 ) Investing Activities: Proceeds from sale of interests in PAL $ 19,896 $ — Proceeds from Magic Valley asset sale 10,000 — Additions to property and equipment (6,580 ) (3,281 ) Net cash provided by (used in) investing activities $ 23,316 $ (3,281 ) Financing Activities: Proceeds from issuances of common stock and warrants $ 75,829 $ 3,670 Proceeds from warrant exercises 5,500 — Proceeds from CARES Act loans 9,860 — Net proceeds (payments) on Kinergy’s line of credit (45,826 ) 21,282 Payments on plant borrowings (71,536 ) (8,000 ) Payments on senior notes (40,249 ) (3,748 ) Preferred stock dividend payments — (946 ) Proceeds from CoGen contract amendment — 8,036 Debt issuance costs — (1,280 ) Net cash provided by (used in) financing activities $ (66,422 ) $ 19,014 Net increase (decrease) in cash and cash equivalents 28,670 (7,630 ) Cash and cash equivalents at beginning of period 18,997 26,627 Cash and cash equivalents at end of period $ 47,667 $ 18,997 The accompanying notes are an integral part of these consolidated financial statements. F- 8 ALTO INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Years Ended December 31, 2020 2019 Supplemental Information: Interest paid $ 17,469 $ 18,763 Income tax refunds $ 641 $ — Noncash financing and investing activities: Initial right of use assets and liabilities recorded under ASC 842 $ — $ 43,753 Issuance of common stock for senior note amendment $ — $ 3,817 Issuance of warrants for senior note amendment $ — $ 977 Accrued preferred stock dividends $ 1,268 $ 319 The accompanying notes are an integral part of these consolidated financial statements. F- 9 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES . Organization and Business – The consolidated financial statements include, for all periods presented, the accounts of Alto Ingredients, Inc. (formerly known as Pacific Ethanol, Inc.), a Delaware corporation (“Alto Ingredients”), and its direct and indirect subsidiaries (collectively, the “Company”), including its wholly-owned subsidiaries, Kinergy Marketing LLC, an Oregon limited liability company (“Kinergy”), Alto Nutrients, LLC (formerly known as Pacific Ag. Products, LLC), a California limited liability company (“Alto Nutrients”), Alto Op Co. (formerly known as PE Op Co.), a Delaware corporation (“Alto Op Co.”), Alto Pekin, LLC (formerly known as Pacific Ethanol Pekin, LLC), a Delaware limited liability company (“Alto Pekin”) and Alto ICP, LLC (formerly known as Illinois Corn Processing, LLC), a Delaware limited liability company (“ICP”). On December 15, 2016, the Company and Aurora Cooperative Elevator Company, a Nebraska cooperative corporation (“ACEC”), closed a transaction under a contribution agreement under which the Company contributed its Aurora, Nebraska ethanol production facilities and ACEC contributed its Aurora grain elevator and related grain handling assets to Pacific Aurora, LLC (“Pacific Aurora”) in exchange for equity interests in Pacific Aurora. As a result, the Company owned 73.93% of Pacific Aurora and ACEC owned 26.07% of Pacific Aurora. As discussed further in Note 2, the Company sold its interest in Pacific Aurora on April 15, 2020. Therefore, from December 15, 2016 through April 15, 2020, the Company consolidated 100% of the results of Pacific Aurora and recorded ACEC’s 26.07% equity interest as noncontrolling interests in the accompanying financial statements. The Company is a leading producer and marketer of specialty alcohols and essential ingredients. The Company also produces and markets fuel-grade ethanol. The Company’s production facilities in Pekin, Illinois are located in the heart of the Corn Belt, benefit from low-cost and abundant feedstock and allow for access to many additional domestic markets. In addition, the Company’s ability to load unit trains and barges from these facilities allows for greater access to international markets. The Company’s four production facilities in California, Oregon and Idaho are located in close proximity to both feed and fuel-grade ethanol customers and thus enjoy unique advantages in efficiency, logistics and product pricing. The Company has a combined production capacity of 450 million gallons per year, markets, on an annualized basis, over 500 million gallons of alcohols, and produces, on an annualized basis, nearly 1.5 million tons of essential ingredients on a dry matter basis, such as dried yeast, corn gluten meal, corn gluten feed, and distillers grains and liquid feed used in commercial animal feed and pet foods. The Company focuses 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. Renewable Fuels includes fuel-grade ethanol and distillers corn oil used as a feedstock for renewable diesel fuel. As of December 31, 2020, the Company was operating at approximately 64% of its 450 million gallon annual production capacity. As market conditions change, the Company may increase, decrease or idle production at one or more operating facilities or resume operations at any idled facility. Basis of Presentation – The consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation. F- 10 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Liquidity – During the year ended December 31, 2020, the Company experienced significant adverse conditions in the fuel-grade ethanol market as demand and pricing reached record lows due to reduced domestic transportation and resulting lower gasoline demand resulting from stay-at-home orders issued in response to the coronavirus pandemic. In response, the Company reduced fuel-grade ethanol production at its production facilities by more than 50% in an effort to conserve capital. The Company continued producing and selling its specialty alcohols, but also converted a portion of its fuel-grade ethanol production to specialty alcohol production to respond to substantial increased demand from the sanitizer and disinfectant markets. Sales of specialty alcohols were at a mix of fixed and spot prices, both of which resulted in significant cash flow from operations during the year. As of December 31, 2020, the Company had $47.7 million in cash and $16.0 million available for borrowing under Kinergy’s operating line of credit. During 2020, the Company generated $71.8 million in cash from its operations. The Company also realized $19.9 million in net cash proceeds from the sale of its interest in Pacific Aurora and $10.0 million from its sale of certain real property and related assets at its Magic Valley production facility. In addition, the Company received net proceeds of approximately $75.8 million from issuances of common stock and warrants and $5.5 million from warrant exercises. These sources of cash enabled the Company to make principal payments totaling $157.6 million on its debt during 2020, resulting in the Company’s return to compliance with its lenders. Given the Company’s current liquidity and outlook for the rest of 2021, it believes it has sufficient liquidity to meet its anticipated working capital, debt service and other liquidity needs for the next twelve months from the date of this report. Segments – A segment is a component of an enterprise whose operating results are regularly reviewed by the enterprise’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. The Company determines and discloses its segments in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification Section 280, Segment Reporting , which defines how to determine segments. In 2020, with the Company’s strategic shift to an increased focus on specialty alcohol sales, the Company now reports financial and operating performance in three reportable segments (1) marketing and distribution, which includes marketing and merchant trading for Company-produced specialty alcohols, fuel-grade ethanol and essential ingredients, and third-party fuel-grade ethanol, (2) Pekin production, which includes the entire campus in Pekin, Illinois (“Pekin Campus”), and (3) other production, which includes all of the Company’s other production facilities on an aggregated basis (“Other production”). Cash and Cash Equivalents – The Company considers all highly-liquid investments with an original maturity of three months or less to be cash equivalents. The Company maintains its accounts at several financial institutions. These cash balances regularly exceed amounts insured by the Federal Deposit Insurance Corporation; however, the Company does not believe it is exposed to any significant credit risk on these balances. Accounts Receivable and Allowance for Doubtful Accounts – Trade accounts receivable are presented at face value, net of the allowance for doubtful accounts. The Company sells specialty alcohols to large consumer product companies, sells fuel-grade ethanol to gasoline refining and distribution companies, sells essential ingredients to animal feed customers, including distillers grains and other feed co-products to dairy operators and animal feedlots and corn oil to poultry and biodiesel customers, in each case generally without requiring collateral. Due to a limited number of customers, the Company had significant concentrations of credit risk from sales as of December 31, 2020 and 2019, as described below. F- 11 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company maintains an allowance for doubtful accounts for balances that appear to have specific collection issues. The collection process is based on the age of the invoice and requires attempted contacts with the customer at specified intervals. If, after a specified number of days, the Company has been unsuccessful in its collection efforts, a bad debt allowance is recorded for the balance in question. Delinquent accounts receivable are charged against the allowance for doubtful accounts once uncollectibility has been determined. The factors considered in reaching this determination are the apparent financial condition of the customer and the Company’s success in contacting and negotiating with the customer. If the financial condition of a Company customer deteriorates, resulting in an impairment of ability to make payments, additional allowances may be required. Of the accounts receivable balance, approximately $35,839,000 and $63,736,000 at December 31, 2020 and 2019, respectively, were used as collateral under Kinergy’s operating line of credit. The allowance for doubtful accounts was $260,000 and $39,000 as of December 31, 2020 and 2019, respectively. The Company recorded a bad debt expense of $245,000 and $27,000 for the years ended December 31, 2020 and 2019, respectively. The Company does not have any off-balance sheet credit exposure related to its customers. Concentration Risks – Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk, whether on- or off-balance sheet, that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions described below. Financial instruments that subject the Company to credit risk consist of cash balances maintained in excess of federal depository insurance limits and accounts receivable which have no collateral or security. The Company has not experienced any significant losses in such accounts and believes that it is not exposed to any significant risk of loss of cash. The Company sells specialty alcohols to consumer product companies and fuel-grade ethanol to gasoline refining and distribution companies. The Company sold to customers representing 10% or more of the Company’s total net sales, as follows. Years Ended December 31, 2020 2019 Customer A 9 % 11 % Customer B 5 % 13 % The Company had accounts receivable due from these customers totaling $4,421,000 and $15,624,000, representing 10% and 21% of total accounts receivable, as of December 31, 2020 and 2019, respectively. F- 12 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company purchases corn, its largest cost component in producing alcohols, from its suppliers. The Company purchased corn from suppliers representing 10% or more of the Company’s total corn purchases, as follows: Years Ended December 31, 2020 2019 Supplier A 9 % 25 % Supplier B 16 % 16 % As of December 31, 2020, approximately 51% of the Company’s employees were covered by a collective bargaining agreement. Inventories – Inventories consisted primarily of alcohols, corn, essential ingredients, carbon and Renewable Identification Number (“RIN”) credits and unleaded fuel, and are valued at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Inventory is net of a $1,033,000 and $1,290,000 valuation adjustment as of December 31, 2020 and 2019, respectively. Inventory balances consisted of the following (in thousands): December 31, 2020 2019 Finished goods $ 25,154 $ 38,194 Work in progress 4,333 7,426 Raw materials 7,074 7,890 Carbon and RIN credits 3,842 5,690 Other 1,364 1,400 Total $ 41,767 $ 60,600 Property and Equipment – Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the following estimated useful lives: Buildings 40 years Facilities and plant equipment 10 – 25 years Other equipment, vehicles and furniture 5 – 10 years The cost of normal maintenance and repairs is charged to operations as incurred. Significant capital expenditures that increase the life of an asset are capitalized and depreciated over the estimated remaining useful life of the asset. The cost of property and equipment sold, or otherwise disposed of, and the related accumulated depreciation or amortization are removed from the accounts, and any resulting gains or losses are reflected in current operations. Intangible Asset – The Company assesses indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. If the Company determines that an impairment charge is needed, the charge will be recorded as an asset impairment in the consolidated statements of operations. Leases – The Company accounts for leases under ASC 842, whereby, lessees are required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted cash flow basis; and (2) a “right of use” asset, which is an asset that represents the lessee’s right to use the specified asset for the lease term. See Note 9 for further information. F- 13 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Derivative Instruments and Hedging Activities – Derivative transactions, which can include exchange-traded forward contracts and futures positions on the New York Mercantile Exchange or the Chicago Board of Trade, are recorded on the balance sheet as assets and liabilities based on the derivative’s fair value. Changes in the fair value of derivative contracts are recognized currently in income unless specific hedge accounting criteria are met. If derivatives meet those criteria, and hedge accounting is elected, effective gains and losses are deferred in accumulated other comprehensive income (loss) and later recorded together with the hedged item in consolidated income (loss). For derivatives designated as a cash flow hedge, the Company formally documents the hedge and assesses the effectiveness with associated transactions. The Company has designated and documented contracts for the physical delivery of commodity products to and from counterparties as normal purchases and normal sales. Revenue Recognition – The Company recognizes revenue under ASC 606. The provisions of ASC 606 include a five-step process by which an entity will determine revenue recognition, depicting the transfer of goods or services to customers in amounts reflecting the payment to which an entity expects to be entitled in exchange for those goods or services. ASC 606 requires the Company to apply the following steps: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies the performance obligation. The Company recognizes revenue primarily from sales of alcohols and essential ingredients. The Company has seven production facilities from which it produces and sells alcohols to its customers through Kinergy. Kinergy enters into sales contracts with its customers under exclusive intercompany sales agreements with each of the Company’s seven production facilities. Kinergy also acts as a principal when it purchases third party fuel-grade ethanol which it resells to its customers. Finally, Kinergy has exclusive sales agreements with other third-party owned fuel-grade ethanol production facilities under which it sells their fuel-grade ethanol for a fee plus the costs to deliver the ethanol to Kinergy’s customers. These sales are referred to as third-party agent sales. Revenue from these third-party agent sales is recorded on a net basis, with Kinergy recognizing its predetermined fees and any associated delivery costs. The Company has seven production facilities from which it produces and sells essential ingredients to its customers through Alto Nutrients. Alto Nutrients enters into sales contracts with essential ingredient customers under exclusive intercompany sales agreements with each of the Company’s seven production facilities. The Company recognizes revenue from sales of alcohols and essential ingredients at the point in time when the customer obtains control of the products, which typically occurs upon delivery depending on the terms of the underlying contracts. In some instances, the Company enters into contracts with customers that contain multiple performance obligations to deliver volumes of alcohols or essential ingredients over a contractual period of less than 12 months. The Company allocates the transaction price to each performance obligation identified in the contract based on relative standalone selling prices and recognizes the related revenue as control of each individual product is transferred to the customer in satisfaction of the corresponding performance obligations. When the Company is the agent, the supplier controls the products before they are transferred to the customer because the supplier is primarily responsible for fulfilling the promise to provide the product, has inventory risk before the product has been transferred to a customer and has discretion in establishing the price for the product. When the Company is the principal, the Company controls the products before they are transferred to the customer because the Company is primarily responsible for fulfilling the promise to provide the products, has inventory risk before the product has been transferred to a customer and has discretion in establishing the price for the product. F- 14 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS See Note 4 for the Company’s revenue by type of contracts. Shipping and Handling Costs – The Company accounts for shipping and handling costs relating to contracts with customers as costs to fulfill its promise to transfer its products. Accordingly, the costs are classified as a component of cost of goods sold in the accompanying consolidated statements of operations. Selling Costs – Selling costs associated with the Company’s product sales are classified as a component of selling, general and administrative expenses in the accompanying consolidated statements of operations. Stock-Based Compensation – The Company accounts for the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award, determined on the date of grant. The expense is recognized over the period during which an employee is required to provide services in exchange for the award. The Company accounts for forfeitures as they occur. The Company recognizes stock-based compensation expense as a component of either cost of goods sold or selling, general and administrative expenses in the consolidated statements of operations. Impairment of Long-Lived Assets – The Company assesses the impairment of long-lived assets, including property and equipment, internally developed software and purchased intangibles subject to amortization, when events or changes in circumstances indicate that the fair value of assets could be less than their net book value. In such event, the Company assesses long-lived assets for impairment by first determining the forecasted, undiscounted cash flows the asset group is expected to generate plus the net proceeds expected from the sale of the asset group. If this amount is less than the carrying value of the asset, the Company will then determine the fair value of the asset group. An impairment loss would be recognized when the fair value is less than the related asset group’s net book value, and an impairment expense would be recorded in the amount of the difference. Forecasts of future cash flows are judgments based on the Company’s experience and knowledge of its operations and the industries in which it operates. These forecasts could be significantly affected by future changes in market conditions, the economic environment, including inflation, and purchasing decisions of the Company’s customers. The Company performed an undiscounted cash flow analysis for its long-lived assets held-for-use, exclusive of the Company’s assets held-for-sale, and for those that failed step 1, the Company performed a further fair value assessment, resulting in an impairment of $2.1 million for the year ended December 31, 2020. Deferred Financing Costs – Deferred financing costs are costs incurred to obtain debt financing, including all related fees, and are amortized as interest expense over the term of the related financing using the straight-line method, which approximates the effective interest rate method. Amortization of deferred financing costs was approximately $1,394,000 and $511,000 for the years ended December 31, 2020 and 2019, respectively. Amortization was accelerated in 2020 to reflect increased payments of principal and the reduction of outstanding debt balances. Unamortized deferred financing costs were approximately $759,000 and $2,153,000 as of December 31, 2020 and 2019, respectively, and are recorded net of long-term debt in the consolidated balance sheets. Provision for Income Taxes – Income taxes are accounted for under the asset and liability approach, where deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. F- 15 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining whether it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. An uncertain tax position is considered effectively settled on completion of an examination by a taxing authority if certain other conditions are satisfied. Should the Company incur interest and penalties relating to tax uncertainties, such amounts would be classified as a component of interest expense and other income (expense), net, respectively. Deferred tax assets and liabilities are classified as noncurrent in the Company’s consolidated balance sheets. The Company files a consolidated federal income tax return. This return includes all wholly-owned subsidiaries as well as the Company’s pro-rata share of taxable income from pass-through entities in which the Company owns less than 100%. State tax returns are filed on a consolidated, combined or separate basis depending on the applicable laws relating to the Company and its subsidiaries. Income (Loss) Per Share – Basic income (loss) per share is computed on the basis of the weighted-average number of shares of common stock outstanding during the period. Preferred dividends are deducted from net income (loss) attributed to Alto Ingredients, Inc. and are considered in the calculation of income (loss) available to common stockholders in computing basic income (loss) per share. Common stock equivalents to preferred stock are considered participating securities and are also included in this calculation when dilutive. The following tables compute basic and diluted earnings per share (in thousands, except per share data): Year Ended December 31, 2020 Loss Numerator Shares Denominator Per-Share Amount Net loss attributed to Alto Ingredients, Inc. $ (15,116 ) Less: Preferred stock dividends (1,268 ) Basic and Diluted loss per share: Loss available to common stockholders $ (16,384 ) 58,609 $ (0.28 ) Year Ended December 31, 2019 Loss Numerator Shares Denominator Per-Share Amount Net loss attributed to Alto Ingredients, Inc. $ (88,949 ) Less: Preferred stock dividends (1,265 ) Basic and Diluted loss per share: Loss available to common stockholders $ (90,214 ) 47,384 $ (1.90 ) F- 16 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS There were an aggregate 2,463,000 and 635,000 potentially dilutive shares from convertible securities outstanding as of December 31, 2020 and 2019, respectively. These convertible securities were not considered in calculating diluted loss per common share for the years ended December 31, 2020 and 2019 as their effect would be anti-dilutive. Financial Instruments – The carrying values of cash and cash equivalents, accounts receivable, derivative assets, accounts payable, accrued liabilities and derivative liabilities are reasonable estimates of their fair values because of the short maturity of these items. The carrying value of the Company’s senior secured notes are recorded at fair value and are considered Level 2 fair value measurements. The Company believes the carrying value of its notes receivable are not considered materially different than fair value due to their recent issuances, and other long-term debt instruments are not considered materially different than fair value because the interest rates on these instruments are variable, and are considered Level 2 fair value measurements. Employment-related Benefits – Employment-related benefits associated with pensions and postretirement health care are expensed based on actuarial analysis. The recognition of expense is affected by estimates made by management, such as discount rates used to value certain liabilities, investment rates of return on plan assets, increases in future wage amounts and future health care costs. Discount rates are determined based on a spot yield curve that includes bonds with maturities that match expected benefit payments under the plan. Estimates and Assumptions – The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates are required as part of determining the allowance for doubtful accounts, net realizable value of inventory, estimated lives of property and equipment, long-lived asset impairments, fair value of warrants, valuation allowances on deferred income taxes and the potential outcome of future tax consequences of events recognized in the Company’s financial statements or tax returns, and the valuation of assets acquired and liabilities assumed as a result of business combinations. Actual results and outcomes may materially differ from management’s estimates and assumptions. Uncertainty – As previously mentioned, the impact of the coronavirus pandemic has negatively impacted the Company’s operations and demand for fuel-grade ethanol. Any future quarantines, labor shortages or other disruptions to the Company’s operations, or those of its customers, may adversely impact the Company’s revenues, ability to provide its services and operating results. In addition, a significant outbreak of epidemic, pandemic or contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, including the geographical area in which the Company operates, resulting in an economic downturn that could further affect demand for its goods and services. The extent to which the coronavirus impacts the Company’s long-term results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and actions taken to contain the coronavirus or its impact, among others. Subsequent Events – Management evaluates, as of each reporting period, events or transactions that occur after the balance sheet date through the date that the financial statements are issued for either disclosure or adjustment to the consolidated financial results. F- 17 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Reclassifications – Certain prior year amounts have been reclassified to conform to the current presentation. Such reclassifications had no effect on the consolidated net loss, working capital or stockholders’ equity reported in the consolidated statements of operations and consolidated balance sheets. 2. ASSET SALES AND HELD-FOR-SALE CLASSIFICATION. Pacific Aurora On December 19, 2019, the Company entered into a term sheet covering the proposed sale of its 73.93% ownership interest in Pacific Aurora to ACEC for $52.8 million, and as a result, the Company determined that as of December 31, 2019, the long-lived assets of Pacific Aurora should be classified as held-for-sale. On April 15, 2020, the Company closed the sale of its ownership interest in Pacific Aurora and preliminarily received total consideration of $52.8 million, subject to working capital adjustments of approximately $35.3 million, resulting in cash proceeds of $19.9 million and the balance of $16.5 million in long-term ACEC promissory notes, resulting in a net loss on sale of approximately $1.4 million, recorded as gain (loss) on sale of assets in the Company’s consolidated statements of operations. Approximately $14.5 million of the cash proceeds were used to repay a portion of the Company’s term debt. In September 2020, the Company and ACEC agreed to certain post-closing adjustments to the purchase price, resulting in a decrease of $0.9 million, and a corresponding reduction in the aggregate principal amount owed under the long-term ACEC promissory notes. The Company received two promissory notes, as adjusted, in the amounts of $8.6 million and $7.0 million as part consideration for the sale, both maturing on April 15, 2025. The $8.6 million note accrues interest at an annual rate of 5.00%. Interest payments are due quarterly beginning July 1, 2020 and principal payments of $0.4 million are due quarterly beginning July 1, 2021. The $7.0 million note accrues interest at an annual rate of 4.50%. Interest payments are due quarterly beginning July 1, 2020 and principal payments of $0.4 million are due quarterly beginning January 3, 2022. In addition, upon the sale, the Company no longer had noncontrolling interests on its balance sheet and no longer records income (loss) of noncontrolling interests for future periods. For the years ended December 31, 2020 and 2019, Pacific Aurora contributed $39.6 million and $163.5 million in net sales, $8.4 million and $43.4 million in pre-tax loss, and $2.2 million and $12.3 million in net loss attributed to noncontrolling interests, respectively. Magic Valley On November 30, 2020, the Company sold 134 acres, the related rail loop and grain handling assets at its Magic Valley facility located in Burley, Idaho for $10.0 million in cash. The Company retained the fuel-grade ethanol production facility and terminal on the remaining 25 acres and has entered into certain agreements with the buyer for delivery of grain to the plant. Upon the sale, the Company recognized a gain on sale of $3.2 million in gain (loss) on sale of assets in the accompanying consolidated statements of operations. F- 18 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stockton and Madera In October 2020, the Company’s Board of Directors approved a plan to sell the Company’s fuel-grade ethanol production facilities located in Madera and Stockton, California. As a result, the Company determined the related long-lived asset groups should be classified as held-for-sale at December 31, 2020. The analysis of these potential sales resulted in an aggregate asset impairment of $22.3 million in the Company’s other production segment. The Company classified the following assets and liabilities as held-for-sale as of December 31, 2020 (in thousands): Stockton Madera Property and equipment, net $ 19,535 $ 29,013 Right of use operating lease assets, net 9,747 — Assets held-for-sale $ 29,282 $ 29,013 Stockton Madera Operating lease obligations $ 10,435 $ — Assessment financing — 9,107 Liabilities held-for-sale $ 10,435 $ 9,107 For the year ended December 31, 2020, net sales attributed to the results of operations for Stockton and Madera were $21.9 million and $22.7 million, respectively. For the year ended December 31, 2019, net sales attributed to the results of operations for Stockton and Madera were $132.9 million and $82.7 million, respectively. For the year ended December 31, 2020, pre-tax loss attributed to the results of operations for Stockton and Madera was $6.5 million and $6.1 million, respectively. For the year ended December 31, 2019, pre-tax loss attributed to the results of operations for Stockton and Madera was $3.9 million and $2.7 million, respectively. In addition, asset impairments associated with Stockton and Madera recorded for the year ended December 31, 2020 were $17.9 million and $4.4 million, respectively. 3. INTERCOMPANY AGREEMENTS. The Company, directly or through one of its subsidiaries, has entered into the following management and marketing agreements: Affiliate Management Agreement – Alto Ingredients entered into an Affiliate Management Agreement (“AMA”) with its operating subsidiaries, under which Alto Ingredients agreed to provide operational and administrative and staff support services. These services generally include, but are not limited to, administering the subsidiaries’ compliance with their credit agreements and performing billing, collection, record keeping and other administrative and ministerial tasks. Alto Ingredients agreed to supply all labor and personnel required to perform its services under the AMA, including the labor and personnel required to operate and maintain the production facilities and marketing activities. These services are billed at a predetermined amount per subsidiary each month plus out of pocket costs such as employee wages and benefits. The AMAs have an initial term of one year and automatic successive one year renewal periods. Alto Ingredients may terminate the AMA, and any subsidiary may terminate the AMA, at any time by providing at least 90 days prior notice of such termination. F- 19 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Alto Ingredients recorded revenues of approximately $11,724,000 and $12,682,000 related to the AMAs in place for the years ended December 31, 2020 and 2019, respectively. These amounts have been eliminated upon consolidation. Ethanol Marketing Agreements – Kinergy entered into separate marketing agreements with each of the Company’s production facilities, which granted it the exclusive right to purchase, market and sell the alcohols produced at those facilities. Under the terms of the marketing agreements, within ten days after delivering alcohol to Kinergy, an amount is paid to Kinergy equal to (i) the estimated purchase price payable by the third-party purchaser of the alcohol, minus (ii) the estimated amount of transportation costs to be incurred, minus (iii) the estimated incentive fee payable to Kinergy, which equals 1% of the aggregate third-party purchase price, provided that the marketing fee shall not be less than $0.015 per gallon and not more than $0.0225 per gallon. Each of the marketing agreements had an initial term of one year and successive one year renewal periods at the option of the individual plant. Kinergy recorded revenues of approximately $4,275,000 and $7,900,800 related to the marketing agreements for the years ended December 31, 2020 and 2019, respectively. These amounts have been eliminated upon consolidation. Corn Procurement and Handling Agreements – Alto Nutrients entered into separate corn procurement and handling agreements with each of the Company’s production facilities, with the exception of the Pacific Aurora facilities. Under the terms of the corn procurement and handling agreements, each facility appointed Alto Nutrients as its exclusive agent to solicit, negotiate, enter into and administer, on its behalf, corn supply arrangements to procure the corn necessary to operate the facility. Alto Nutrients also provides grain handling services including, but not limited to, receiving, unloading and conveying corn into the facility’s storage and, in the case of whole corn delivered, processing and hammering the whole corn. Under these agreements, Alto Nutrients receives a fee of $0.03 per bushel of corn delivered to each production facility as consideration for its procurement and handling services, payable monthly. Each corn procurement and handling agreement had an initial term of one year and successive one year renewal periods at the option of the individual facility. Alto Nutrients recorded revenues of approximately $2,595,000 and $4,288,000 related to the corn procurement and handling agreements for the years ended December 31, 2020 and 2019, respectively. These amounts have been eliminated upon consolidation. Through April 15, 2020, each Pacific Aurora production facility operated under a grain procurement agreement with ACEC. Under this agreement, ACEC received a fee of $0.03 per bushel of corn delivered to each facility as consideration for ACEC’s procurement and handling services, payable monthly. The grain procurement agreement had an initial term of one year and successive one year renewal periods at the option of the individual facility. Pacific Aurora recorded expenses of approximately $210,000 and $1,103,000 for the years ended December 31, 2020 and 2019, respectively, associated with these agreements. These amounts have not been eliminated upon consolidation as they were with a related but unconsolidated third-party. F- 20 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Essential Ingredients Marketing Agreements – Alto Nutrients entered into separate marketing agreements with each of the Company’s production facilities which grant Alto Nutrients the exclusive right to market, purchase and sell the various essential ingredients produced at each facility. Under the terms of the marketing agreements, within ten days after a facility delivers essential ingredients to Alto Nutrients, the production facility is paid an amount equal to (i) the estimated purchase price payable by the third-party purchaser of the essential ingredients, minus (ii) the estimated amount of transportation costs to be incurred, minus (iii) the estimated amount of fees and taxes payable to governmental authorities in connection with the tonnage of the essential ingredients produced or marketed, minus (iv) the estimated incentive fee payable to the Company, which equals (a) 5% of the aggregate third-party purchase price for wet corn gluten feed, wet distillers grains, corn condensed distillers solubles and distillers grains with solubles, or (b) 1% of the aggregate third-party purchase price for corn gluten meal, dry corn gluten feed, dry distillers grains, corn germ and corn oil. Each marketing agreement had an initial term of one year and successive one year renewal periods at the option of the individual facility. Alto Nutrients recorded revenues of approximately $2,778,000 and $6,029,000 related to the marketing agreements for the years ended December 31, 2020 and 2019, respectively. These amounts have been eliminated upon consolidation. 4. SEGMENTS. The Company reports its financial and operating performance in three segments: (1) marketing and distribution, which includes marketing and merchant trading for Company-produced alcohols and essential ingredients, on an aggregated basis, and third-party fuel-grade ethanol (2) Pekin Campus production, which includes the production and sale of alcohols and essential ingredients produced at the Company’s Pekin, Illinois campus, and (3) Other production, which includes the production and sale of fuel-grade ethanol and essential ingredients produced at all of the Company’s other production facilities on an aggregated basis, none of which are individually significant to be considered a reportable segment. Income before provision for income taxes includes management fees charged by Alto Ingredients to the segments. The Pekin Campus production segment incurred $4,344,000 and $4,014,000 in management fees for the years ended December 31, 2020 and 2019, respectively. The marketing and distribution segment incurred $3,480,000 in management fees for each of the years ended December 31, 2020 and 2019, respectively. The Other production segment incurred $3,893,000 and $5,188,000 in management fees for the years ended December 31, 2020 and 2019, respectively. Corporate activities include selling, general and administrative expenses, consisting primarily of corporate employee compensation, professional fees and overhead costs not directly related to a specific operating segment. During the normal course of business, the segments do business with each other. The preponderance of this activity occurs when the Company’s marketing segment markets alcohol produced by the production segments for a marketing fee, as discussed in Note 3. These intersegment activities are considered arms’-length transactions. Consequently, although these transactions impact segment performance, they do not impact the Company’s consolidated results since all revenues and corresponding costs are eliminated in consolidation. Capital expenditures are substantially all incurred at the Company’s Pekin Campus production segment. F- 21 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables set forth certain financial data for the Company’s operating segments (in thousands): Years Ended December 31, 2020 2019 Net Sales Marketing and distribution: Alcohol sales, gross $ 256,209 $ 355,101 Alcohol sales, net 1,529 1,831 Intersegment sales 9,648 18,219 Total marketing and distribution sales 267,386 375,151 Pekin Campus production, recorded as gross: Alcohol sales $ 330,432 $ 343,610 Essential ingredient sales 130,270 138,987 Intersegment sales 645 1,110 Total Pekin Campus sales 461,347 483,707 Other Production, recorded as gross: Alcohol sales $ 137,703 $ 455,343 Essential ingredient sales 40,880 130,009 Intersegment sales 1,309 509 Total Other production sales 179,892 585,861 Intersegment eliminations (11,602 ) (19,838 ) Net sales as reported $ 897,023 $ 1,424,881 Cost of goods sold: Marketing and distribution $ 253,465 $ 347,185 Pekin Campus production 389,125 481,262 Other production 206,412 612,040 Intersegment eliminations (4,838 ) (5,668 ) Cost of goods sold as reported $ 844,164 $ 1,434,819 Income (loss) before benefit for income taxes: Marketing and distribution $ 4,889 $ 12,533 Pekin Campus production 53,898 (21,441 ) Other production (54,677 ) (77,019 ) Corporate activities (21,409 ) (15,375 ) $ (17,299 ) $ (101,302 ) Depreciation: Pekin Campus production $ 17,450 $ 17,535 Other production 12,691 30,107 Corporate activities 127 267 $ 30,268 $ 47,909 Interest expense: Marketing and distribution $ 1,574 $ 3,053 Pekin Campus production 6,038 7,556 Other production 334 13 Corporate activities 9,997 9,584 $ 17,943 $ 20,206 F- 22 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth the Company’s total assets by operating segment (in thousands): December 31, 2020 2019 Total assets: Marketing and distribution $ 89,337 $ 129,664 Pekin Campus production 234,439 229,050 Other production 102,409 229,748 Corporate assets 50,633 24,033 $ 476,818 $ 612,495 5. PROPERTY AND EQUIPMENT. Property and equipment consisted of the following (in thousands): December 31, 2020 2019 Facilities and plant equipment $ 357,740 $ 495,513 Land 4,837 7,219 Other equipment, vehicles and furniture 7,858 11,229 Construction in progress 11,828 15,793 382,263 529,754 Accumulated depreciation (152,777 ) (197,228 ) $ 229,486 $ 332,526 Depreciation expense was $30,268,000 and $40,931,000 for the years ended December 31, 2020 and 2019, respectively. For the years ended December 31, 2020 and 2019, the Company capitalized interest of $224,000 and $563,000, respectively, related to its capital investment activities. F- 23 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. INTANGIBLE ASSET. The Company recorded a tradename valued at $2,678,000 in 2006 as part of its acquisition of Kinergy. The Company determined that the Kinergy tradename has an indefinite life and, therefore, rather than being amortized, will be tested annually for impairment. The Company did not record any impairment of the Kinergy tradename for the years ended December 31, 2020 and 2019. 7. DERIVATIVES. The business and activities of the Company expose it to a variety of market risks, including risks related to changes in commodity prices. The Company monitors and manages these financial exposures as an integral part of its risk management program. This program recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effects that market volatility could have on operating results. Commodity Risk – Cash Flow Hedges – The Company uses derivative instruments to protect cash flows from fluctuations caused by volatility in commodity prices for periods of up to twelve months in order to protect gross profit margins from potentially adverse effects of market and price volatility on alcohol sales and purchase commitments where the prices are set at a future date and/or if the contracts specify a floating or index-based price. In addition, the Company hedges anticipated sales of alcohol to minimize its exposure to the potentially adverse effects of price volatility. These derivatives may be designated and documented as cash flow hedges and effectiveness is evaluated by assessing the probability of the anticipated transactions and regressing commodity futures prices against the Company’s purchase and sales prices. Ineffectiveness, which is defined as the degree to which the derivative does not offset the underlying exposure, is recognized immediately in cost of goods sold. For the years ended December 31, 2020 and 2019, the Company did not designate any of its derivatives as cash flow hedges. Commodity Risk – Non-Designated Hedges – The Company uses derivative instruments to lock in prices for certain amounts of corn and alcohols by entering into exchange-traded forward contracts or options for those commodities. These derivatives are not designated for hedge accounting treatment. The changes in fair value of these contracts are recorded on the balance sheet and recognized immediately in cost of goods sold. The Company recognized net gains of $14,780,000 and $555,000 as the change in the fair value of these contracts for the years ended December 31, 2020 and 2019, respectively. Non Designated Derivative Instruments – The classification and amounts of the Company’s derivatives not designated as hedging instruments, and related cash collateral balances, are as follows (in thousands): F- 24 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2020 Assets Liabilities Type of Instrument Balance Sheet Location Fair Value Balance Sheet Location Fair Value Cash collateral balance Other current assets $ 520 Commodity contracts Derivative assets $ 17,149 Derivative liabilities $ — As of December 31, 2019 Assets Liabilities Type of Instrument Balance Sheet Location Fair Value Balance Sheet Location Fair Value Cash collateral balance Other current assets $ 615 Commodity contracts Derivative assets $ 2,438 Derivative liabilities $ 1,860 The above amounts represent the gross balances of the contracts, however, the Company does have a right of offset with each of its derivative brokers. The classification and amounts of the Company’s recognized gains (losses) for its derivatives not designated as hedging instruments are as follows (in thousands): Realized Gains (Losses) For the Years Ended December 31, Type of Instrument Statements of Operations Location 2020 2019 Commodity contracts Cost of goods sold $ 2,102 $ (4,568 ) $ 2,102 $ (4,568 ) Unrealized Gains For the Years Ended December 31, Type of Instrument Statements of Operations Location 2020 2019 Commodity contracts Cost of goods sold $ 12,678 $ 5,123 $ 12,679 $ 5,123 F- 25 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. DEBT. Long-term borrowings are summarized as follows (in thousands): December 31, 2020 2019 Kinergy line of credit $ 32,512 $ 78,338 Pekin term loan — 39,500 Pekin revolving loan 20,580 32,000 ICP term loan — 12,000 ICP revolving loan 9,384 18,000 CARES Act loans 9,860 — Parent notes payable 25,533 65,649 97,869 245,487 Less unamortized debt premium 230 461 Less unamortized debt financing costs (759 ) (2,153 ) Less short-term portion (25,533 ) (63,000 ) Long-term debt $ 71,807 $ 180,795 Kinergy Line of Credit – Kinergy has an operating line of credit for an aggregate amount of up to $100,000,000. The line of credit matures on August 2, 2022. The credit facility is based on Kinergy’s eligible accounts receivable and inventory levels, subject to certain concentration reserves. The credit facility is subject to certain other sublimits, including inventory loan limits. Interest accrues under the line of credit at a rate equal to (i) the three-month London Interbank Offered Rate (“LIBOR”), plus (ii) a specified applicable margin ranging between 1.50% and 2.00%. The applicable margin was 2.00%, for a total rate of 2.24% at December 31, 2020. The credit facility’s monthly unused line fee is an annual rate equal to 0.25% to 0.375% depending on the average daily principal balance during the immediately preceding month. Payments that may be made by Kinergy to the Company as reimbursement for management and other services provided by the Company to Kinergy are limited under the terms of the credit facility to $1,500,000 per fiscal quarter. The credit facility also includes the accounts receivable of Alto Nutrients as additional collateral. Payments that may be made by Alto Nutrients to the Company as reimbursement for management and other services provided by the Company to Alto Nutrients are limited under the terms of the credit facility to $500,000 per fiscal quarter. If the monthly excess borrowing availability of Kinergy and Alto Nutrients falls below certain thresholds, they are collectively required to maintain a fixed-charge coverage ratio (calculated as a twelve-month rolling earnings before interest, taxes, depreciation and amortization divided by the sum of interest expense, capital expenditures, principal payments of indebtedness, indebtedness from capital leases and taxes paid during such twelve-month rolling period) of at least 2.0 and are prohibited from incurring certain additional indebtedness (other than specific intercompany indebtedness). The obligations of Kinergy and Alto Nutrients under the credit facility are secured by a first-priority security interest in all of their assets in favor of the lender. Alto Ingredients has guaranteed all of Kinergy’s obligations under the line of credit. As of December 31, 2020, Kinergy had $16.0 million in unused borrowing availability under the credit facility. F- 26 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pekin Credit Facilities – On December 15, 2016, Alto Pekin entered into a Credit Agreement (“Pekin Credit Agreement”) with 1 st Farm Credit Services, PCA and CoBank, ACB, (“CoBank”). Under the terms of the Pekin Credit Agreement, Alto Pekin borrowed from 1 st Farm Credit Services $64.0 million under a term loan facility that matures on August 20, 2021 (the “Pekin Term Loan”) and up to $32.0 million under a revolving term loan facility that matures on February 1, 2022 (the “Pekin Revolving Loan”), and together with the Pekin Term Loan (the “Pekin Credit Facility”). The Pekin Credit Facility is secured by a first-priority security interest in all of Alto Pekin’s assets. The Pekin Credit Facility and related agreements contain a variety of representations, warranties, covenants and events of default. Following a series of amendments and waivers among Alto Pekin, its lenders and their agent, certain terms of the agreements are as follows: ● Interest accrues under the Pekin Credit Facility at an annual rate equal to the 30-day LIBOR plus 5.00%. ● Alto Pekin is required to pay a monthly fee on any unused portion of the Pekin Revolving Loan at a rate of 0.75% per annum. ● Alto Pekin and ICP are collectively required to maintain working capital of not less than 50% of the combined outstanding revolving lines of credit, which was $30.0 million at December 31, 2020; and an annual debt service coverage ratio of not less than 1.25 to 1.00, in addition to various other affirmative and negative covenants. Alto Pekin and ICP collectively agreed to pay Alto Pekin’s and ICP’s lenders an aggregate of $40.0 million on or before September 30, 2020 (the “September Paydown Amount”) to reduce the outstanding balances of Alto Pekin’s and ICP’s respective term loans, to be allocated between them. Alto Pekin, ICP and their lenders contemplated funding the September Paydown Amount through asset sales, proceeds of any award, judgment or settlement of litigation, or, at our election, from funds contributed by Alto Ingredients to Alto Pekin or ICP. In March 2020, the Company granted to Alto Pekin’s lender a security interest in all of its equity interests in Alto Op Co. The Company and certain subsidiaries also entered into intercreditor agreements with the Alto Pekin’s and ICP’s lenders, and the agent for the Company’s senior secured noteholders, to address issues of priority and the allocation of proceeds from asset sales. On December 18, 2020, Alto Pekin and its lender further amended the Pekin Credit Facility to waive certain covenant defaults, including the covenant requiring Alto Pekin and ICP to pay the September Paydown Amount from an approved source of funds on or before September 30, 2020. The effect of this amendment was, in part, to deem the September Paydown Amount to have been timely paid. The parties also agreed to amend the Pekin Credit Facility to provide for a payment to Alto Pekin’s and ICP’s lenders of an aggregate of $24.9 million (the “December Paydown Amount”), on or prior to December 21, 2020, with $19.9 million allocated to Alto Pekin’s lenders and $5.0 million allocated to ICP’s lenders. On December 18, 2020, Alto Pekin and ICP paid the December Paydown Amount in full. Following receipt of the December Paydown Amount, any additional proceeds arising from the sale of any of the Company’s midwestern production facility assets will be allocated 33/34/33% among Alto Pekin’s and ICP’s lenders, collectively, the Company’s senior secured noteholders, and the Company, respectively; and any additional proceeds arising from the sale of any of the Company’s western production facility assets will be allocated first to the senior secured noteholders up to $20.0 million and then allocated 33/34/33% among Alto Pekin’s and ICP’s lenders, collectively, the Company’s senior secured noteholders, and the Company, respectively. F- 27 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of the filing of this report, the Company believes it is in compliance with the terms and conditions of the Pekin Credit Facility. ICP Credit Facilities — On September 15, 2017, ICP, Compeer Financial, PCA, or Compeer, and CoBank as agent, entered into a Credit Agreement (the “ICP Credit Agreement”). Under the terms of the ICP Credit Agreement, ICP borrowed from Compeer $24.0 million under a term loan facility that matures on September 20, 2021 (the “ICP Term Loan”), and up to $18.0 million under a revolving term loan facility that matures on September 1, 2022 (the “ICP Revolving Loan”), and together with the ICP Term Loan (the “ICP Credit Facility”). The ICP Credit Facility is secured by a first-priority security interest in all of ICP’s assets. The ICP Credit Facility and related agreements contain a variety of representations, warranties, covenants and events of default. Following a series of amendments and waivers among ICP, its lenders and their agent, certain terms of the agreements are as follows: ● Interest accrues under the ICP Credit Facility at an annual rate equal to the 30-day LIBOR plus 3.75%. ● ICP is required to pay an annual nonrefundable commitment fee, calculated as 0.75% multiplied by the average daily positive difference between (i) the ICP Revolving Loan commitment (which may be reduced by ICP from time to time in increments of $0.5 million), minus (ii) the aggregate principal amounts outstanding under the ICP Revolving Loan. ● ICP and Alto Pekin are collectively required to maintain working capital of not less than 50% of the combined outstanding revolving lines of credit, which was $30.0 million at December 31, 2020; and an annual debt service coverage ratio of not less than 1.50 to 1.00, in addition to various other affirmative and negative covenants. ICP and Alto Pekin collectively agreed to pay ICP’s and Alto Pekin’s lenders an aggregate of $40.0 million on or before September 30, 2020, the same amount referred to above as the September Paydown Amount, to reduce the outstanding balances of ICP’s and Alto Pekin’s respective term loans, to be allocated between them. ICP, Alto Pekin, and their lenders contemplated funding the September Paydown Amount through asset sales, proceeds of any award, judgment or settlement of litigation, or, at our election, from funds contributed by the Company to ICP or Alto Pekin. In March 2020, the Company granted to Alto Pekin’s lender a security interest in all of its equity interests in Alto Op Co. The Company and certain subsidiaries also entered into intercreditor agreements with the ICP’s and Alto Pekin’s lenders, and the agent for the Company’s senior secured noteholders, to address issues of priority and the allocation of proceeds from asset sales. On December 18, 2020, ICP and its lender further amended the ICP Credit Facility to waive certain covenant defaults, including the covenant requiring ICP and Alto Pekin to pay the September Paydown Amount from an approved source of funds on or before September 30, 2020. The effect of this amendment was, in part, to deem the September Paydown Amount to have been timely paid. The parties also agreed to amend the ICP Credit Facility to provide for a payment to ICP’s and Alto Pekin’s lenders of an aggregate of $24.9 million, the same amount referred to above as the December Paydown Amount, on or prior to December 21, 2020, with $5.0 million allocated to ICP’s lenders and $19.9 million allocated to Alto Pekin’s lenders. On December 18, 2020, ICP and Alto Pekin paid the December Paydown Amount in full. F- 28 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Following receipt of the December Paydown Amount, any additional proceeds arising from the sale of any of the Company’s midwestern production facility assets will be allocated 33/34/33% among Alto Pekin’s and ICP’s lenders, collectively, the Company’s senior secured noteholders, and the Company, respectively; and any additional proceeds arising from the sale of any of the Company’s western production facility assets will be allocated first to the senior secured noteholders up to $20.0 million and then allocated 33/34/33% among Alto Pekin’s and ICP’s lenders, collectively, the Company’s senior secured noteholders, and the Company, respectively. As of the filing of this report, the Company believes it is in compliance with the terms and conditions of the ICP Credit Facility. Alto Ingredients, Inc. Senior Secured Notes – On December 12, 2016, the Company entered into a Note Purchase Agreement with five accredited investors and sold $55.0 million in aggregate principal amount of senior secured notes to the investors in a private offering for aggregate gross proceeds of 97% of the principal amount of the notes sold. On June 26, 2017, the Company entered into a second Note Purchase Agreement with five accredited investors and sold an additional $13.9 million in aggregate principal amount of senior secured notes to the investors in a private offering for aggregate gross proceeds of 97% of the principal amount of the notes sold, and collectively with the notes previously sold, (the “Notes”). The Notes are secured by a first-priority security interest in all of the Company’s equity interests in Alto Op Co. The Notes and related agreements contain a variety of representations, warranties, covenants and events of default. Following a series of amendments and waivers with the senior secured note holders and their agent, certain terms of the agreements are as follows: ● The Notes mature on December 15, 2021. ● Payments due under the Notes rank senior to all other indebtedness of Alto Ingredients, Inc. other than permitted senior indebtedness. ● Interest on the Notes accrues at a rate of 15% per annum. ● Any voluntary prepayments must made at 102% of the principal amount prepaid. The Notes also contain a variety of limitations, including a prohibition on parent company indebtedness; restrictions on redemption, repurchase or payment of any dividend or distribution in respect of our or our subsidiaries’ equity interests; restrictions on asset sales and other dispositions; and restrictions on our or our subsidiaries’ ability to issue equity for purposes other than to pay down a portion of the outstanding balance of the Notes. In March 2020, ICP granted to the senior secured noteholders a security interest in certain of its personal property. In addition, Alto Central granted to the senior secured noteholders a security interest in certain of its personal property. Alto Central also pledged its equity interests in Alto Pekin and ICP in favor of the senior secured noteholders as additional collateral securing our obligations to the noteholders. Alto Op. Co also granted to the senior secured noteholders a security interest in certain of its personal property. The Company and certain subsidiaries also entered into intercreditor agreements with the ICP’s and Alto Pekin’s lenders, and the agent for the Company’s senior secured noteholders, to address issues of priority and the allocation of proceeds from asset sales. F- 29 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In November 2020, the Company repaid $35.3 million in principal under the Notes using a portion of the net proceeds of its then-recent offerings of common stock and warrants and the sale of certain real property assets at our Magic Valley production facility. As of the filing of this report, the Company believes it is in compliance with the terms and conditions of the Notes. CARES Act Loans – On May 4, 2020, Alto Ingredients and Alto Pekin received loan proceeds from Bank of America, NA under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), through the Paycheck Protection Program administered by the U.S. Small Business Administration. Alto Ingredients received $6.0 million and Alto Pekin received $3.9 million in loan proceeds. The loans mature in two years and bear interest at a rate of 1.00% per annum. Under the terms of the loans, certain amounts may be forgiven if they are used for qualifying expenses as described in the CARES Act, but the Company can provide no assurance that it will be able to obtain forgiveness of all or any portion of the loans. The Company is in the process of applying for loan forgiveness. Maturities of Long-term Debt – The Company’s long-term debt matures as follows (in thousands): December 31: 2021 $ 25,533 2022 72,336 $ 97,869 9. LEASES. The Company leases railcar equipment, office equipment and land for certain of its facilities. Operating lease right of use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses its estimated incremental borrowing rate, unless an implicit rate is readily determinable, as the discount rate for each lease in determining the present value of lease payments. For the years ended December 31, 2020 and 2019, the Company’s weighted average discount rate was 6.00%. Operating lease expense is recognized on a straight-line basis over the lease term. Upon the adoption of ASC 842, the Company elected the following practical expedients allowable under the guidance: not to reassess whether any expired or existing contracts are or contain leases; not to reassess the lease classification for any expired or existing leases; not to reassess initial direct costs for any existing leases; not to separately identify lease and non-lease components; and not to evaluate historical land easements. Additionally, the Company elected the short-term lease exemption policy, applying the requirements of ASC 842 to only long-term (greater than 1 year) leases. The Company determines if an arrangement is a lease or contains a lease at inception. The Company’s leases have remaining lease terms of approximately 1 year to 55 years, which may include options to extend the lease when it is reasonably certain the Company will exercise those options. For the year ended December 31, 2020, the weighted average remaining lease terms of equipment and land-related leases were 1.10 years and 4.73 years, respectively. The Company does not have lease arrangements with residual value guarantees, sale leaseback terms or material restrictive covenants. The Company does not have any material finance lease obligations nor sublease agreements. F- 30 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the remaining maturities of the Company’s operating lease liabilities, assuming all land lease extensions are taken, as of December 31, 2020 (in thousands): Year Ended: Equipment Land Related 2021 $ 2,263 $ 547 2022 2,144 559 2023 1,504 461 2024 858 436 2025 578 436 2026-76 315 6,150 Less Interest (1,171 ) (4,185 ) $ 6,491 $ 4,404 For the years ended December 31, 2020 and 2019, the Company recorded operating lease costs of $5,461,000 and $9,948,000, respectively, in cost of goods sold and $482,000 and $472,000, respectively, in selling, general and administrative expenses, in the Company’s statements of operations. 10. PENSION PLANS. Retirement Plan - The Company sponsors a defined benefit pension plan (the “Retirement Plan”) that is noncontributory, and covers only “grandfathered” unionized employees at its Alto Pekin production facilities. Benefits are based on a prescribed formula based upon the employee’s years of service. Employees hired after November 1, 2010, are not eligible to participate in the Retirement Plan. The Company uses a December 31 st measurement date for its Retirement Plan. The Company’s funding policy is to make the minimum annual contribution required by applicable regulations. Information related to the Retirement Plan as of and for the years ended December 31, 2020 and 2019 is presented below (dollars in thousands): 2020 2019 Changes in plan assets: Fair value of plan assets, beginning $ 15,654 $ 13,257 Actual gains 1,969 2,692 Benefits paid (721 ) (698 ) Company contributions 686 403 Participant contributions — — Fair value of plan assets, ending $ 17,588 $ 15,654 Less: projected accumulated benefit obligation $ 24,629 $ 21,643 Funded status, (underfunded)/overfunded $ (7,041 ) $ (5,989 ) Amounts recognized in the consolidated balance sheets: Other liabilities $ (7,041 ) $ (5,989 ) Accumulated other comprehensive loss $ 3,199 $ 1,654 Components of net periodic benefit costs are as follows: Service cost $ 405 $ 374 Interest cost 690 760 Expected return on plan assets (903 ) (760 ) Net periodic benefit cost $ 192 $ 374 Loss recognized in other comprehensive expense $ 1,545 $ 585 Assumptions used in computation of benefit obligations: Discount rate 2.50 % 3.25 % Expected long-term return on plan assets 6.25 % 6.25 % Rate of compensation increase — — F- 31 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company expects to make contributions in the year ending December 31, 2021 of approximately $0.8 million. Net periodic benefit cost for 2021 is estimated at approximately $0.2 million. The following table summarizes the expected benefit payments for the Company’s Retirement Plan for each of the next five fiscal years and in the aggregate for the five fiscal years thereafter (in thousands): December 31: 2021 $ 830 2022 860 2023 900 2024 930 2025 990 2026-30 5,510 $ 10,020 See Note 15 for discussion of the Retirement Plan’s fair value disclosures. Historical and future expected returns of multiple asset classes were analyzed to develop a risk-free real rate of return and risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation component, the risk-free real rate of return, and the associated risk premium. A weighted average rate was developed based on those overall rates and the target asset allocation of the Retirement Plan. The Company’s pension committee is responsible for overseeing the investment of pension plan assets. The pension committee is responsible for determining and monitoring the appropriate asset allocations and for selecting or replacing investment managers, trustees, and custodians. The Retirement Plan’s current investment target allocations are 50% equities and 50% debt. The pension committee reviews the actual asset allocation in light of these targets periodically and rebalances investments as necessary. The pension committee also evaluates the performance of investment managers as compared to the performance of specified benchmarks and peers and monitors the investment managers to ensure adherence to their stated investment style and to the Retirement Plan’s investment guidelines. Postretirement Plan - The Company also sponsors a health care plan and life insurance plan (the “Postretirement Plan”) that provides postretirement medical benefits and life insurance to certain “grandfathered” unionized employees at its Alto Pekin production facilities. Employees hired after December 31, 2000, are not eligible to participate in the Postretirement Plan. The plan is contributory, with contributions required at the same rate as active employees. Benefit eligibility under the plan reduces at age 65 from a defined benefit to a defined dollar cap based upon years of service. F- 32 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Information related to the Postretirement Plan as of December 31, 2020 and 2019 is presented below (dollars in thousands): December 31, 2020 2019 Amounts at the end of the year: Accumulated/projected benefit obligation $ 5,296 $ 5,274 Fair value of plan assets — — Funded status, (underfunded)/overfunded $ (5,296 ) $ (5,274 ) Amounts recognized in the consolidated balance sheets: Accrued liabilities $ (300 ) $ (280 ) Other liabilities $ (4,996 ) $ (4,994 ) Accumulated other comprehensive loss $ 679 $ 716 Information related to the Postretirement Plan for the years ended December 31, 2020 and 2019 is presented below (dollars in thousands): Years Ended December 31, 2020 2019 Amounts recognized in the plan for the year: $ 174 $ 171 Participant contributions $ 26 $ 24 Benefits paid $ (200 ) $ (195 ) Components of net periodic benefit costs are as follows: Service cost $ 54 $ 67 Interest cost 151 219 Amortization of prior service costs 30 122 Net periodic benefit cost $ 235 $ 408 Gain recognized in other comprehensive income $ (37 ) $ (674 ) Discount rate used in computation of benefit obligations 2.05 % 2.95 % The Company does not expect to recognize any amortization of net actuarial loss during the year ended December 31, 2021. F- 33 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the expected benefit payments for the Company’s Postretirement Plan for each of the next five fiscal years and in the aggregate for the five fiscal years thereafter (in thousands): December 31: 2021 $ 300 2022 270 2023 290 2024 330 2025 330 2026-2030 2,040 $ 3,560 For purposes of determining the cost and obligation for pre-Medicare postretirement medical benefits, a 7.00% annual rate of increase in the per capita cost of covered benefits (i.e., health care trend rate) was assumed for the Postretirement Plan in 2022, adjusted to a rate of 4.50% in 2031. Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. 11. INCOME TAXES. The Company recorded a provision (benefit) for income taxes as follows (in thousands): Years Ended December 31, 2020 2019 Current provision (benefit) $ — $ (22 ) Deferred provision (benefit) (17 ) 2 Total $ (17 ) $ (20 ) A reconciliation of the differences between the United States statutory federal income tax rate and the effective tax rate as provided in the consolidated statements of operations is as follows: Years Ended December 31, 2020 2019 Statutory rate 21.0 % 21.0 % State income taxes, net of federal benefit 5.7 5.7 Change in valuation allowance (9.4 ) (22.4 ) Fair value adjustments (12.7 ) — Noncontrolling interest (3.4 ) (3.3 ) Non-deductible items (0.4 ) (0.1 ) Other (0.8 ) (1.0 ) Effective rate (0.0 )% (0.1 )% F- 34 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Deferred income taxes are provided using the asset and liability method to reflect temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities using presently enacted tax rates and laws. The components of deferred income taxes included in the consolidated balance sheets were as follows (in thousands): December 31, 2020 2019 Deferred tax assets: Net operating loss carryforwards $ 61,208 $ 61,775 Capital loss 29,684 — Disallowed interest 6,255 8,242 R&D, Energy and AMT credits 3,864 3,864 Pension liability 3,235 2,979 Railcar contracts 302 379 Stock-based compensation 441 551 Allowance for doubtful accounts and other assets 461 578 Property and equipment — 3,325 Other 1,963 3,458 Total deferred tax assets 107,413 85,151 Deferred tax liabilities: Property and equipment (16,243 ) — Intangibles (749 ) (749 ) Derivatives (4,497 ) (153 ) Other (472 ) (437 ) Total deferred tax liabilities (21,961 ) (1,339 ) Valuation allowance (85,688 ) (84,065 ) Net deferred tax liabilities, included in other liabilities $ (236 ) $ (253 ) A portion of the Company’s net operating loss carryforwards are subject to provisions of the tax law that limit the use of losses incurred by a corporation prior to the date certain ownership changes occur. These limitations also apply to certain depreciation deductions associated with assets on hand at the time of the ownership change and otherwise allowable during the five-year period following the ownership change. As the five-year limitation period lapsed in 2019, these disallowed deductions are reflected in property and equipment in the schedule above but continue to be subject to the annual limitation that applies to the pre-change net operating losses. Due to the limitation on the use of net operating losses and depreciation deductions, a significant portion of these carryforwards will expire regardless of whether the Company generates future taxable income. After reducing these net operating loss carryforwards for the amount which will expire due to this limitation, the Company had remaining federal net operating loss carryforwards of approximately $227,817,000 and state net operating loss carryforwards of approximately $211,680,000 at December 31, 2020. These net operating loss carryforwards expire as follows (in thousands): Tax Years Federal State 2021–2025 $ 4,103 $ — 2026–2030 9,678 56,174 2031–2035 106,886 57,567 2036 and after* 107,150 97,940 Total NOLs $ 227,817 $ 211,681 * Includes indefinite life federal net operating losses of $77.5 million generated after 2017. F- 35 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Certain of these net operating losses are not immediately available, but become available to be utilized in each of the years ended December 31, as follows (in thousands): Year Federal State 2021 $ 152,026 $ 135,458 2022 6,308 5,318 2023 6,308 5,318 2024 6,308 5,135 2025 6,308 5,089 Beyond 2025 50,559 55,363 Total $ 227,817 $ 211,681 To the extent amounts are not utilized in any year, they may be carried forward to the next year until expiration. These amounts may change if there are future additional limitations on their utilization. Federal capital loss of $113,928,000 may be carried forward for 5 years and will expire in 2025. State capital loss of $110,279,000 may be carried forward for 5 years for most of the states in which the Company files returns and will expire in 2025. In assessing whether the deferred tax assets are realizable, a more likely than not standard is applied. If it is determined that it is more likely than not that deferred tax assets will not be realized, a valuation allowance must be established against the deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the associated temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. A valuation allowance was established in the amount of $85,688,000 and $84,065,000 as of December 31, 2020 and 2019, respectively, based on the Company’s assessment of the future realizability of certain deferred tax assets. The valuation allowance on deferred tax assets is related to future deductible temporary differences and net operating loss carryforwards for which the Company has concluded it is more likely than not that these items will not be realized in the ordinary course of operations. For the year ended December 31, 2020, the Company recorded an increase in valuation allowance of $1,623,000. This was primarily the offsetting impact of an increase in deferred tax assets associated with the capital loss carryforward offset by changes in depreciation and other adjustments associated with property plant and equipment, and mark-to-market adjustment related to derivatives in 2020. For the year ended December 31, 2019, the Company recorded an increase in the valuation allowance of $43,477,000. Of this increase, $22,641,000 was primarily the offsetting impact of an increase in deferred tax assets associated with additional net operating losses in 2019. The remaining increase of $20,836,000 relates to a deferred asset related to previously disallowed depreciation discussed above. F- 36 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company is subject to income tax in the United States federal jurisdiction and various state jurisdictions and has identified its federal tax return and tax returns in state jurisdictions below as “major” tax filings. These jurisdictions, along with the years still open to audit under the applicable statutes of limitation, are as follows: Jurisdiction Tax Years Federal 2017 – 2019 Alabama 2017 – 2019 Arizona 2016 – 2019 Arkansas 2017 – 2019 California 2016 – 2019 Colorado 2015 – 2019 Connecticut 2017 – 2019 Georgia 2017 – 2019 Idaho 2017 – 2019 Illinois 2017 – 2019 Indiana 2017 – 2019 Iowa 2017 – 2019 Kansas 2017 – 2019 Louisiana 2017 – 2019 Michigan 2017 – 2019 Minnesota 2017 – 2019 Mississippi 2017 – 2019 Missouri 2017 – 2019 Nebraska 2017 – 2019 New Mexico 2017 – 2019 Oklahoma 2017 – 2019 Oregon 2017 – 2019 Pennsylvania 2017 – 2019 Rhode Island 2017 – 2019 South Carolina 2017 – 2019 Tennessee 2017 – 2019 Texas 2016 – 2019 However, because the Company had net operating losses and credits carried forward in several of the jurisdictions, including the United States federal and California jurisdictions, certain items attributable to closed tax years are still subject to adjustment by applicable taxing authorities through an adjustment to tax attributes carried forward to open years. 12. PREFERRED STOCK. The Company has 6,734,835 undesignated shares of authorized and unissued preferred stock, which may be designated and issued in the future on the authority of the Company’s Board of Directors. As of December 31, 2020, the Company had the following designated classes of preferred stock: Series A Preferred Stock – The Company has authorized 1,684,375 shares of Series A Cumulative Redeemable Convertible Preferred Stock (“Series A Preferred Stock”), with none outstanding at December 31, 2020 and 2019. Shares of Series A Preferred Stock that are converted into shares of the Company’s common stock revert to undesignated shares of authorized and unissued preferred stock. F- 37 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Upon any issuance, the Series A Preferred Stock would rank senior in liquidation and dividend preferences to the Company’s common stock. Holders of Series A Preferred Stock would be entitled to quarterly cumulative dividends payable in arrears in cash in an amount equal to 5% per annum of the purchase price per share of the Series A Preferred Stock. The holders of the Series A Preferred Stock would have conversion rights initially equivalent to two shares of common stock for each share of Series A Preferred Stock, subject to customary antidilution adjustments. Certain specified issuances will not result in antidilution adjustments. The shares of Series A Preferred Stock would also be subject to forced conversion upon the occurrence of a transaction that would result in an internal rate of return to the holders of the Series A Preferred Stock of 25% or more. Accrued but unpaid dividends on the Series A Preferred Stock are to be paid in cash upon any conversion of the Series A Preferred Stock. The holders of Series A Preferred Stock would have a liquidation preference over the holders of the Company’s common stock equivalent to the purchase price per share of the Series A Preferred Stock plus any accrued and unpaid dividends on the Series A Preferred Stock. A liquidation would be deemed to occur upon the happening of customary events, including transfer of all or substantially all of the Company’s capital stock or assets or a merger, consolidation, share exchange, reorganization or other transaction or series of related transactions, unless holders of 66 2/3% of the Series A Preferred Stock vote affirmatively in favor of or otherwise consent to such transaction. Series B Preferred Stock – The Company has authorized 1,580,790 shares of Series B Cumulative Convertible Preferred Stock (“Series B Preferred Stock”), with 926,942 shares outstanding at December 31, 2020 and 2019. Shares of Series B Preferred Stock that are converted into shares of the Company’s common stock revert to undesignated shares of authorized and unissued preferred stock. The Series B Preferred Stock ranks senior in liquidation and dividend preferences to the Company’s common stock. Holders of Series B Preferred Stock are entitled to quarterly cumulative dividends payable in arrears in cash in an amount equal to 7.00% per annum of the purchase price per share of the Series B Preferred Stock; however, subject to the provisions of the Letter Agreement described below, such dividends may, at the option of the Company, be paid in additional shares of Series B Preferred Stock based initially on the liquidation value of the Series B Preferred Stock. In addition to the quarterly cumulative dividends, holders of the Series B Preferred Stock are entitled to participate in any common stock dividends declared by the Company to its common stockholders. The holders of Series B Preferred Stock have a liquidation preference over the holders of the Company’s common stock initially equivalent to $19.50 per share of the Series B Preferred Stock plus any accrued and unpaid dividends on the Series B Preferred Stock. A liquidation will be deemed to occur upon the happening of customary events, including the transfer of all or substantially all of the capital stock or assets of the Company or a merger, consolidation, share exchange, reorganization or other transaction or series of related transaction, unless holders of 66 2/3% of the Series B Preferred Stock vote affirmatively in favor of or otherwise consent that such transaction shall not be treated as a liquidation. The Company believes that such liquidation events are within its control and therefore has classified the Series B Preferred Stock in stockholders’ equity . As of December 31, 2020, the Series B Preferred Stock was convertible into 964,230 shares of the Company’s common stock. The conversion ratio is subject to customary antidilution adjustments. In addition, antidilution adjustments are to occur in the event that the Company issues equity securities, including derivative securities convertible into equity securities (on an as-converted or as-exercised basis), at a price less than the conversion price then in effect. The shares of Series B Preferred Stock are also subject to forced conversion upon the occurrence of a transaction that would result in an internal rate of return to the holders of the Series B Preferred Stock of 25% or more. The forced conversion is to be based upon the conversion ratio as last adjusted. Accrued but unpaid dividends on the Series B Preferred Stock are to be paid in cash upon any conversion of the Series B Preferred Stock. F- 38 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The holders of Series B Preferred Stock vote together as a single class with the holders of the Company’s common stock on all actions to be taken by the Company’s stockholders. Each share of Series B Preferred Stock entitles the holder to approximately 0.03 votes per share on all matters to be voted on by the stockholders of the Company. Notwithstanding the foregoing, the holders of Series B Preferred Stock are afforded numerous customary protective provisions with respect to certain actions that may only be approved by holders of a majority of the shares of Series B Preferred Stock. In 2008, the Company entered into Letter Agreements with Lyles United LLC (“Lyles United”) and other purchasers under which the Company expressly waived its rights under the Certificate of Designations relating to the Series B Preferred Stock to make dividend payments in additional shares of Series B Preferred Stock in lieu of cash dividend payments without the prior written consent of Lyles United and the other purchasers. On or about December 19, 2019, the Company and the holders of its Series B Preferred Stock entered into letter agreements under which the holders agreed that until the earlier of (i) the Company’s repayment of its obligations in respect of its senior secured notes and thereafter until the next scheduled quarterly installment of Series B Preferred Stock dividends, or (ii) the occurrence of a specified event of default under the letter agreement, or (iii) two years from the date of the letter agreement (collectively, the “Waiver Period”), the holders waive any rights and remedies against the Company with respect to any unpaid dividends. Cumulative dividends on the Series B Preferred Stock will continue to accrue during the Waiver Period and remain owing to the holders of the Series B Preferred Stock. Registration Rights Agreement – In connection with the sale of its Series B Preferred Stock, the Company entered into a registration rights agreement with Lyles United. The registration rights agreement is to be effective until the holders of the Series B Preferred Stock, and their affiliates, as a group, own less than 10% for each of the series issued, including common stock into which such Series B Preferred Stock has been converted. The registration rights agreement provides that holders of a majority of the Series B Preferred Stock, including common stock into which such Series B Preferred Stock has been converted, may demand and cause the Company to register on their behalf the shares of common stock issued, issuable or that may be issuable upon conversion of the Preferred Stock and as payment of dividends thereon, and upon exercise of the related warrants (collectively, the “Registrable Securities”). The Company is required to keep such registration statement effective until such time as all of the Registrable Securities are sold or until such holders may avail themselves of Rule 144 for sales of Registrable Securities without registration under the Securities Act of 1933, as amended. The holders are entitled to two demand registrations on Form S-1 and unlimited demand registrations on Form S-3; provided, however, that the Company is not obligated to effect more than one demand registration on Form S-3 in any calendar year. In addition to the demand registration rights afforded the holders under the registration rights agreement, the holders are entitled to unlimited “piggyback” registration rights. These rights entitle the holders who so elect to be included in registration statements to be filed by the Company with respect to other registrations of equity securities. The Company is responsible for all costs of registration, plus reasonable fees of one legal counsel for the holders, which fees are not to exceed $25,000 per registration. The registration rights agreement includes customary representations and warranties on the part of both the Company and the holders and other customary terms and conditions. The Company accrued and paid in cash preferred stock dividends of $946,000 for the year ended December 31, 2019. The Company accrued but did not pay in cash preferred stock dividends of $1,268,000 and $319,000 for the years ended December 31, 2020 and 2019, respectively. F- 39 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. COMMON STOCK AND WARRANTS. Warrants issued to Senior Noteholders – On December 22, 2019, in connection with an extension of the Company’s Notes, the Company issued warrants to purchase an aggregate of 5,500,000 shares of the Company’s common stock. The warrants had an exercise price of $1.00 per share and were exercisable commencing June 22, 2020 and were to expire on December 22, 2020. The Company had determined that the warrants issued in this transaction did not meet the conditions for classification in stockholders’ equity and as such, the Company recorded them as a liability at fair value. In August 2020, these warrants were fully exercised for $1.00 per share. For the period they were outstanding in 2020, the Company revalued them at each reporting period. These warrants were valued at $977,000 as of December 31, 2019 and are included in other assets on the accompanying consolidated balance sheets. See Note 16 for the Company’s fair value assumptions. Warrants issued in Equity Offering – On October 28, 2020, the Company closed an underwritten public offering of 5,075,000 shares of its common stock at a public offering price of $8.42 per share and 5-year pre-funded warrants to purchase 3,825,493 shares of common stock at a public offering price of $8.42 per pre-funded warrant. The Company had determined that the warrants issued in this transaction did not meet the conditions for classification in stockholders’ equity and as such, the Company recorded them as a liability at fair value. In November 2020, these warrants were fully exercised. For the period they were outstanding in 2020, the Company revalued them at each reporting period. See Note 16 for the Company’s fair value assumptions. In addition, in a concurrent private placement, the Company also issued to the investor, for a nominal price, warrants to purchase an additional 8,900,493 shares of common stock at an exercise price of $9.757 per share. The warrants became exercisable after the six-month anniversary of the offering and will expire on the 18-month anniversary of the offering. The Company had determined that when initially issued, these warrants did not meet the conditions for classification in stockholders’ equity, however, in November 2020, the Company amended these warrants which then met the conditions of classification in stockholders’ equity and as such, the Company recorded them initially as a liability at fair value and upon their amendment, reclassified their then fair value to equity. See Note 16 for the Company’s fair value assumptions. The aggregate gross proceeds from the offerings of common stock, pre-funded warrants and warrants was approximately $75.0 million. The net offering proceeds were approximately $70.5 million after deducting underwriting discounts and commissions and other estimated offering expenses. The following table summarizes warrant activity for the years ended December 31, 2020 and 2019 (number of shares in thousands): Number of Shares Price per Share Weighted Average Exercise Price Balance at December 31, 2018 — $ — $ — Warrants issued 5,500 $ 1.00 $ 1.00 Balance at December 31, 2019 5,500 $ 1.00 $ 1.00 Warrants exercised (5,500 ) $ 1.00 $ 1.00 Pre-funded warrants issued 3,825 $ 0.00 $ 0.00 Pre-funded warrants exercised (3,825 ) $ 0.00 $ 0.00 Series A warrants issued 8,900 $ 9.76 $ 9.76 Balance at December 31, 2020 8,900 $ 9.76 $ 9.76 F- 40 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Nonvoting Common Stock – In 2015, the Company issued nonvoting common shares exercisable at the holders’ election. As of December 31, 2020, an aggregate of 3,539,236 shares of nonvoting common stock had been exchanged for an equal number of shares of the Company’s common stock upon the holders’ request. As of December 31, 2020, 896 shares of nonvoting common stock were outstanding. At-the-Market Program – In October 2018, the Company established an “at-the-market” equity distribution program under which it could offer and sell shares of common stock to, or through, sales agents by means of ordinary brokers’ transactions on The Nasdaq Stock Market, in block transactions, or as otherwise agreed to between the Company and its sales agent at prices deemed appropriate. For the years ended December 31, 2020 and 2019, the Company issued 1,421,000 and 3,137,000 shares of common stock through its “at-the-market” equity program that resulted in net proceeds of $5,296,000 and $3,670,000 and fees paid to its sales agent of $171,000 and $66,000, respectively. The Company terminated its “at-the-market” program in October 2020. 14. STOCK-BASED COMPENSATION. The Company has two equity incentive compensation plans: a 2006 Stock Incentive Plan and a 2016 Stock Incentive Plan. 2006 Stock Incentive Plan – The 2006 Stock Incentive Plan authorized the issuance of incentive stock options (“ISOs”) and non-qualified stock options (“NQOs”), restricted stock, restricted stock units, stock appreciation rights, direct stock issuances and other stock-based awards to the Company’s officers, directors or key employees or to consultants that do business with the Company for up to an aggregate of 1,715,000 shares of common stock. In June 2016, the 2006 Stock Incentive plan was terminated, except to the extent of issued and outstanding unvested stock awards and options. 2016 Stock Incentive Plan – On June 16, 2016, the Company’s shareholders approved the 2016 Stock Incentive Plan, which authorizes the issuance of ISOs, NQOs, restricted stock, restricted stock units, stock appreciation rights, direct stock issuances and other stock-based awards to the Company’s officers, directors or key employees or to consultants that do business with the Company initially for up to an aggregate of 1,150,000 shares of common stock. On June 14, 2018, the Company’s shareholders approved an increase to the aggregate number of shares authorized under the 2016 Stock Incentive Plan to 3,650,000 shares. On November 7, 2019, the Company’s shareholders approved an increase to the aggregate number of shares authorized under the 2016 Stock Incentive Plan to 5,650,000 shares. On November 18, 2020, the Company’s shareholders approved an increase to the aggregate number of shares authorized under the 2016 Stock Incentive Plan to 7,400,000 shares. F- 41 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock Options – Summaries of the status of Company’s stock option plans as of December 31, 2020 and 2019 and of changes in options outstanding under the Company’s plans during those years are as follows (number of shares in thousands): Years Ended December 31, 2020 2019 Number of Shares Weighted Average Exercise Price Number of Shares Weighted Average Exercise Price Outstanding at beginning of year 229 $ 4.15 229 $ 4.15 Options exercised (22 ) 3.74 — — Outstanding at end of year 207 $ 4.16 229 $ 4.15 Options exercisable at end of year 207 $ 4.16 229 $ 4.15 Stock options outstanding as of December 31, 2020 were as follows (number of shares in thousands): Options Outstanding Options Exercisable Range of Exercise Prices Number Outstanding Weighted Average Remaining Contractual Life (yrs.) Weighted Average Exercise Price Number Exercisable Weighted Average Exercise Price $ 3.74 197 2.47 $ 3.74 197 $ 3.74 $ 12.90 10 0.59 $ 12.90 10 $ 12.90 The aggregate intrinsic value of the options outstanding was $262,000 and $0 as of December 31, 2020 and 2019, respectively. Restricted Stock – A summary of unvested restricted stock activity is as follows (shares in thousands): Number of Shares Weighted Average Grant Date Fair Value Per Share Unvested at December 31, 2019 2,201 $ 1.84 Issued 1,663 $ 1.25 Vested (1,290 ) $ 2.08 Canceled (314 ) $ 1.33 Unvested at December 31, 2020 2,260 $ 1.34 The fair value of the common stock at vesting aggregated $1,639,000 and $599,000 for the years ended December 31, 2020 and 2019, respectively. Stock-based compensation expense related to employee and non-employee restricted stock and option grants recognized in the accompanying consolidated statements of operations, was as follows (in thousands): Years Ended December 31, 2020 2019 Employees $ 2,025 $ 2,422 Non-employees 654 387 Total stock-based compensation expense $ 2,679 $ 2,809 F- 42 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Employee grants typically have a two or three-year vesting schedule, while non-employee grants have a one-year vesting schedule. At December 31, 2020, the total compensation expense related to unvested awards which had not been recognized was $865,000 and the associated weighted-average period over which the compensation expense attributable to those unvested awards will be recognized was approximately 1.37 years. 15. COMMITMENTS AND CONTINGENCIES. Commitments – The following is a description of significant commitments at December 31, 2020: Sales Commitments – The Company had open fuel-grade ethanol indexed-price contracts for 84,722,000 gallons as of December 31, 2020 and open fixed-price fuel-grade ethanol and specialty alcohol sales contracts totaling $257,310,000 as of December 31, 2020. The Company had open fixed-price essential ingredient contracts totaling $16,722,000 as of December 31, 2020 and open indexed-price essential ingredient sales contracts for 161,000 tons as of December 31, 2020. These sales contracts are scheduled to be completed throughout 2021. Purchase Commitments – At December 31, 2020, the Company had indexed-price purchase contracts to purchase 5,814,000 gallons of fuel-grade ethanol and fixed-price purchase contracts to purchase $4,043,000 of fuel-grade ethanol from its suppliers. The Company had fixed-price purchase contracts to purchase $22,809,000 of corn from its suppliers. These purchase commitments are scheduled to be satisfied throughout 2021. Assessment Financing – In September 2016, the Company signed an agreement to finance and construct a 5-megawatt solar project at its Madera, California production facility. The amount financed is for up to $10.0 million, to be amortized over twenty years as part of the facility’s property tax assessments. As of December 31, 2020 and 2019, the Company had outstanding $9,108,000 and $9,342,000, respectively, in the accompanying consolidated balance sheets attributable to this financing, reflected in liabilities held-for-sale. To the extent the Company retains this financing, it expects to pay approximately $0.9 million per year in connection with its property tax payments, which includes an interest component based upon a 5.6% interest rate on the outstanding balance of the assessment . Contingencies – The following is a description of significant contingencies at December 31, 2020: Litigation – The Company is subject to various claims and contingencies in the ordinary course of its business, including those related to litigation, business transactions, employee-related matters, and others. When the Company is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the Company will record a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the claim if the likelihood of a potential loss is reasonably possible and the amount involved could be material. While there can be no assurances, the Company does not expect that any of its pending legal proceedings will have a material financial impact on the Company’s operating results. The Company has evaluated its pending cases and has not recorded a litigation contingency liability with respect to the cases. F- 43 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. FAIR VALUE MEASUREMENTS. The fair value hierarchy prioritizes the inputs used in valuation techniques into three levels, as follows: ● Level 1 – Observable inputs – unadjusted quoted prices in active markets for identical assets and liabilities; ● Level 2 – Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data; and ● Level 3 – Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable. For fair value measurements using significant unobservable inputs, a description of the inputs and the information used to develop the inputs is required along with a reconciliation of Level 3 values from the prior reporting period. Pooled separate accounts – Pooled separate accounts invest primarily in domestic and international stocks, commercial paper or single mutual funds. The net asset value is used as a practical expedient to determine fair value for these accounts. Each pooled separate account provides for redemptions by the Retirement Plan at reported net asset values per share, with little to no advance notice requirement, therefore these funds are classified within Level 2 of the valuation hierarchy. Long-Lived Assets Held-for-Sale – The Company recorded its long-lived assets associated with its property and equipment held-for-sale at fair value at December 31, 2020 and 2019 of $48,548,000 and $70,400,000, respectively. The fair values of these assets are based on observable values for the assets through corroboration with market data and are designated as Level 3 inputs. Warrants issued to Senior Noteholders – The Company’s warrants issued December 22, 2019, were valued using the Black-Scholes Valuation Model and adjusted for quarterly. On August 5, 2020, these warrants were exercised in full and prior to exercise, the Company adjusted their fair value using the following assumptions (fair value dollars in thousands): Original Issuance Exercise Price Volatility Risk Free Interest Rate Term (years) Fair Value 12/22/19 $ 1.00 178.0 % 0.08 % 0.10 $ 8,474 F- 44 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The assumptions used and related fair value for these warrants as of December 31, 2019 were as follows (fair value dollars in thousands): Original Issuance Exercise Price Volatility Risk Free Interest Rate Term (years) Fair Value 12/22/19 $ 1.00 76.0 % 1.66 % 3.00 $ 977 Warrants issued in Equity Offering – The Company issued pre-funded warrants and other warrants with exercise prices of $0.001 and $9.757, respectively. The Company valued these warrants upon issuance using the Binomial valuation methodology. On November 16, 2020, the pre-funded warrants were exercised, and as a result, were revalued immediately prior to their exercise. Further, the other warrants were amended on November 24, 2020, resulting in equity accounting, and accordingly were revalued immediately prior to their amendment. The assumptions used were as follows (fair value dollars in thousands): Warrant Type Valuation Date Exercise Price Volatility Risk Free Interest Rate Term (years) Fair Value Pre-funded 10/28/2020 $ 0.01 97.0 % 0.34 % 5.00 $ 23,638 Other 10/28/2020 $ 9.76 134.0 % 0.14 % 1.50 $ 27,048 Pre-funded 11/16/2020 $ 0.01 97.0 % 0.40 % 4.95 $ 21,916 Other 11/24/2020 $ 9.76 135.0 % 0.13 % 1.45 $ 31,231 The fair values of the warrants are based on unobservable inputs and are designated as Level 3 inputs. The changes in the Company’s fair value of its Level 3 inputs with respect to its warrants were as follows (in thousands): Warrants to Senior Noteholders Pre-funded Warrants Other Warrants Balance, December 31, 2019 $ 977 $ — $ — Issuance of warrants in October offering — 23,638 27,048 Exercise of warrants/reclass to equity (8,474 ) (21,917 ) (31,231 ) Adjustments to fair value for the period 7,497 (1,721 ) 4,183 Balance, December 31, 2020 $ — $ — $ — Other Derivative Instruments – The Company’s other derivative instruments consist of commodity positions. The fair values of the commodity positions are based on quoted prices on the commodity exchanges and are designated as Level 1 inputs. F- 45 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes recurring and nonrecurring fair value measurements by level at December 31, 2020 (in thousands): Fair Value Level 1 Level 2 Level 3 Benefit Plan Percentage Allocation Assets: Derivative financial instruments $ 17,149 $ 17,149 $ — $ — Long-lived assets held-for-sale 58,295 — — 58,295 Defined benefit plan assets(1) (pooled separate accounts): Large U.S. Equity(2) 5,470 — 5,470 — 31 % Small/Mid U.S. Equity(3) 2,605 — 2,605 — 15 % International Equity(4) 2,921 — 2,921 — 17 % Fixed Income(5) 6,592 — 6,592 — 37 % $ 93,032 $ 17,149 $ 17,588 $ 58,295 Liabilities: $ — $ — $ — $ — The following table summarizes recurring and nonrecurring fair value measurements by level at December 31, 2019 (in thousands): Fair Value Level 1 Level 2 Level 3 Benefit Plan Percentage Allocation Assets: Derivative financial instruments $ 2,438 $ 2,438 $ — $ — Long-lived assets held-for-sale 70,400 — — 70,400 Defined benefit plan assets(1) (pooled separate accounts): Large U.S. Equity(2) 4,654 — 4,654 — 30 % Small/Mid U.S. Equity(3) 2,348 — 2,348 — 15 % International Equity(4) 2,596 — 2,596 — 17 % Fixed Income(5) 6,056 — 6,056 — 38 % $ 88,492 $ 2,438 $ 15,654 $ 70,400 Liabilities: Derivative financial instruments $ (1,860 ) $ (1,860 ) $ — $ — Warrants (977 ) — — (977 ) $ (2,837 ) $ (1,860 ) $ — $ (977 ) (1) See Note 10 for accounting discussion. (2) This category includes investments in funds comprised of equity securities of large U.S. companies. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. (3) This category includes investments in funds comprised of equity securities of small- and medium-sized U.S. companies. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. (4) This category includes investments in funds comprised of equity securities of foreign companies including emerging markets. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. (5) This category includes investments in funds comprised of U.S. and foreign investment-grade fixed income securities, high-yield fixed income securities that are rated below investment-grade, U.S. treasury securities, mortgage-backed securities, and other asset-backed securities. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. F- 46 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. PARENT COMPANY FINANCIALS. Restricted Net Assets – At December 31, 2020, the Company had approximately $262,200,000 of net assets at its subsidiaries that were not available to be transferred to Alto Ingredients in the form of dividends, distributions, loans or advances due to restrictions contained in the credit facilities of these subsidiaries. Parent company financial statements for the periods covered in this report are set forth below. December 31, ASSETS 2020 2019 Current Assets: Cash and cash equivalents $ 25,632 $ 4,985 Receivables from subsidiaries 15,548 13,057 Other current assets 1,836 2,349 Total current assets 43,016 20,391 Property and equipment, net 142 269 Other Assets: Investments in subsidiaries 246,518 218,464 Right of use lease assets 2,985 3,253 Alto West LLC receivable 42,649 55,750 Other assets 1,088 1,452 Total other assets 293,240 278,919 Total Assets $ 336,398 $ 299,579 Current Liabilities: Accounts payable and accrued liabilities $ 2,001 $ 5,907 Accrued Alto Op Co. purchase 3,829 3,829 Current portion of long-term debt 25,533 10,000 Other current liabilities 473 659 Total current liabilities 31,836 20,395 Long-term debt, net 5,564 56,110 Other liabilities 2,763 3,294 Total Liabilities 40,163 79,799 Stockholders’ Equity: Preferred stock 1 1 Common and non-voting common stock 72 56 Additional paid-in capital 1,036,638 942,307 Accumulated other comprehensive loss (3,878 ) (2,370 ) Accumulated deficit (736,598 ) (720,214 ) Total Alto Ingredients, Inc. stockholders’ equity 296,235 219,780 Total Liabilities and Stockholders’ Equity $ 336,398 $ 299,579 F- 47 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2020 2019 Management fees from subsidiaries $ 11,724 $ 12,682 Selling, general and administrative expenses 16,990 16,007 Loss from operations (5,266 ) (3,325 ) Fair value adjustments (9,959 ) — Loss on debt extinguishment — (6,517 ) Interest income 4,011 4,600 Interest expense (10,095 ) (9,637 ) Other expense, net (220 ) (86 ) Loss before benefit for income taxes (21,529 ) (14,965 ) Benefit for income taxes 17 20 Loss before equity in earnings of subsidiaries (21,512 ) (14,945 ) Equity in income (losses) of subsidiaries 6,396 (74,004 ) Consolidated net loss $ (15,116 ) $ (88,949 ) F- 48 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2020 2019 Operating Activities: Net loss $ (15,116 ) $ (88,949 ) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Equity in (income) losses of subsidiaries (6,396 ) 74,004 Depreciation 127 267 Fair value adjustments 9,959 — Loss on debt extinguishment — 6,517 Amortization of debt discounts (230 ) 689 Changes in operating assets and liabilities: Other assets 883 3,277 Accounts payable and accrued expenses (5,378 ) 2,673 Accounts receivable with subsidiaries (2,491 ) 2,115 Accounts payable with subsidiaries — (49 ) Net cash provided by (used in) operating activities $ (18,642 ) $ 544 Investing Activities: Additions to property and equipment $ — $ (14 ) Investments in subsidiaries (20,865 ) — Net cash used in investing activities $ (20,865 ) $ (14 ) Financing Activities: Proceeds from issuance of common stock $ 75,829 $ 3,670 Proceeds from warrant exercises 5,500 — Proceeds from CARES Act loans 5,973 — Proceeds from West receivable 13,101 — Debt issuances costs — (1,280 ) Payments on senior notes (40,249 ) (3,748 ) Preferred stock dividend payments — (946 ) Net cash provided by (used in) financing activities $ 60,154 $ (2,304 ) Net increase (decrease) in cash and cash equivalents 20,647 (1,774 ) Cash and cash equivalents at beginning of period 4,985 6,759 Cash and cash equivalents at end of period $ 25,632 $ 4,985 F- 49 INDEX TO EXHIBITS Where Located Exhibit Number Description* Form File Number Exhibit Number Filing Date Filed Herewith 3.1 Certificate of Incorporation 10-Q 000-21467 3.1 11/06/2015 3.2 Certificate of Designations, Powers, Preferences and Rights of the Series A Cumulative Redeemable Convertible Preferred Stock 10-Q 000-21467 3.2 11/06/2015 3.3 Certificate of Designations, Powers, Preferences and Rights of the Series B Cumulative Convertible Preferred Stock 10-Q 000-21467 3.3 11/06/2015 3.4 Certificate of Amendment to Certificate of Incorporation dated June 3, 2010 10-Q 000-21467 3.4 11/06/2015 3.5 Certificate of Amendment to Certificate of Incorporation effective June 8, 2011 10-Q 000-21467 3.5 11/06/2015 3.6 Certificate of Amendment to Certificate of Incorporation effective May 14, 2013 10-Q 000-21467 3.6 11/06/2015 3.7 Certificate of Amendment to Certificate of Incorporation effective July 1, 2015 10-Q 000-21467 3.7 11/06/2015 3.8 Certificate of Amendment to Certificate of Incorporation effective January 12, 2021 8-K 000-21467 3.1 01/13/2021 3.9 Second Amended and Restated Bylaws 8-K 000-21467 3.2 01/13/2021 4.1 Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 10-K 000-21467 4.1 03/30/2020 10.1 2006 Stock Incentive Plan, as amended# S-8 333-196876 4.1 06/18/2014 10.2 2016 Stock Incentive Plan, as amended# S-8 333-250180 4.10 11/18/2020 10.3 Form of Employee Restricted Stock Agreement under 2016 Stock Incentive Plan# 10-K 000-21467 10.5 03/15/2018 10.4 Form of Non-Employee Director Restricted Stock Agreement under 2016 Stock Incentive Plan# 10-K 000-21467 10.6 03/15/2017 10.5 Amended and Restated Executive Employment Agreement dated November 7, 2016 between the Registrant and Christopher W. Wright# 10-K 000-21467 10.8 03/15/2017 10.6 Amended and Restated Executive Employment Agreement dated November 7, 2016 between the Registrant and Bryon T. McGregor# 10-K 000-21467 10.9 03/15/2017 10.7 Amended and Restated Executive Employment Agreement dated November 7, 2016 between the Registrant and James R. Sneed# 10-K 000-21467 10.12 03/15/2017 47 INDEX TO EXHIBITS Where Located Exhibit Number Description* Form File Number Exhibit Number Filing Date Filed Herewith 10.8 Second Amended and Restated Employment Agreement dated July 26, 2018 between the Registrant and Michael D. Kandris# 8-K 000-21467 10.1 08/07/2020 10.9 Form of Indemnity Agreement between the Registrant and each of its Executive Officers and Directors# 10-K 000-21467 10.46 03/31/2010 10.10 Policy for Recoupment of Incentive Compensation dated March 29, 2018# 10-K 000-21467 10.17 03/18/2019 10.11 Form of Clawback Policy Acknowledgement and Agreement# 10-K 000-21467 10.18 03/18/2019 10.12 Registration Rights Agreement dated March 27, 2008 between the Registrant and Lyles United, LLC 8-K 000-21467 10.4 03/27/2008 10.13 Letter Agreement dated March 27, 2008 between the Registrant and Lyles United, LLC 8-K 000-21467 10.5 03/27/2008 10.14 Letter Agreement dated May 22, 2008 among the Registrant, Neil M. Koehler, Bill Jones, Paul P. Koehler and Thomas D. Koehler# 8-K 000-21467 10.3 05/23/2008 10.15 Senior Secured Note Amendment Agreement dated as of December 22, 2019 among the Registrant and the noteholders named therein 8-K 000-21467 10.1 12/26/2019 10.16 Form of Amended and Restated Senior Secured Note for an aggregate original principal amount of $65,649,177.91 issued on December 22, 2019 pursuant to the Senior Secured Note Amendment Agreement dated December 22, 2019 among the Registrant and the noteholders named therein 8-K 000-21467 10.2 12/26/2019 10.17 Note Amendment dated as of March 20, 2020 by and among the Registrant and the noteholders named therein 8-K 000-21467 10.3 03/26/2020 10.18 Note Amendment dated as of May 26, 2020 by and among the Registrant and the noteholders named therein 8-K 000-21467 10.1 05/29/2020 10.19 Security Agreement dated December 15, 2016 among the Registrant, Capital Market Services LLC and the holders of the Registrant’s Senior Secured Notes 8-K 000-21467 10.4 12/20/2016 48 INDEX TO EXHIBITS Where Located Exhibit Number Description* Form File Number Exhibit Number Filing Date Filed Herewith 10.20 First Amendment to Security Agreement dated June 30, 2017 among the Registrant, Cortland Capital Market Services LLC and the holders of the Registrant’s Senior Secured Notes 8-K 000-21467 10.5 07/05/2017 10.21 Second Amendment to Security Agreement dated as of December 22, 2019 among the Registrant, the holders named therein and Cortland Capital Market Services LLC 8-K 000-21467 10.5 12/26/2019 10.22 Third Amendment to Security Agreement effective as of March 20, 2020 by and among the Registrant, each of the holders and new holders named therein, Cortland Products Corp. as successor agent and Cortland Capital Market Services LLC as existing collateral agent 8-K 000-21467 10.10 03/26/2020 10.23 Security Agreement dated May 5, 2020 by Pacific Ethanol Pekin, LLC in favor of Cortland Products Corp. 8-K 000-21467 10.1 05/11/2020 10.24 Credit Agreement dated December 15, 2016 among Pacific Ethanol Pekin, Inc., 1 st Farm Credit Services, PCA and CoBank, ACB 8-K 000-21467 10.5 12/20/2016 10.25 Amendment No. 1 to Credit Agreement dated March 1, 2017 among Pacific Ethanol Pekin, LLC, 1 st Farm Credit Services, PCA and CoBank, ACB 10-K 000-21467 10.31 03/15/2018 10.26 Amendment No. 2 to Credit Agreement dated August 7, 2017 among Pacific Ethanol Pekin, LLC, 1 st Farm Credit Services, PCA and CoBank, ACB 8-K 000-21467 10.1 08/11/2017 10.27 Amendment No. 3 to Credit Agreement dated March 30, 2018 among Pacific Ethanol Pekin, LLC, Compeer Financial, PCA, as successor by merger to 1st Farm Credit Services, PCA, and CoBank, ACB 8-K 000-21467 10.1 04/05/2018 10.28 Amendment No. 4 to Credit Agreement dated March 20, 2019 among Pacific Ethanol Pekin, LLC, Compeer Financial, PCA, as successor by merger to 1st Farm Credit Services, PCA, and CoBank, ACB 10-Q 000-21467 10.1 05/03/2019 10.29 Amendment No. 5 to Credit Agreement dated July 15, 2019 among Pacific Ethanol Pekin, LLC, Compeer Financial, PCA, as successor by merger to 1st Farm Credit Services, PCA, and CoBank, ACB 8-K 000-21467 10.1 07/19/2019 49 INDEX TO EXHIBITS Where Located Exhibit Number Description* Form File Number Exhibit Number Filing Date Filed Herewith 10.30 Amendment No. 6 to Credit Agreement dated November 15, 2019 by and among Pacific Ethanol Pekin, LLC, Compeer Financial, PCA and CoBank, ACB 8-K 000-21467 10.1 11/19/2019 10.31 First Amendment to Amendment No. 6 to Credit Agreement and Other Loan Documents dated as of December 15, 2019 by and among Pacific Ethanol Pekin, LLC, Compeer Financial, PCA, and CoBank, ACB 8-K 000-21467 10.1 12/26/2019 10.32 Amendment No. 7 to Credit Agreement and Waiver dated December 20, 2019 among Pacific Ethanol Pekin, LLC, Compeer Financial, PCA and CoBank, ACB S-1 333-235990 10.50 01/21/2020 10.33 Amendment No. 8 to Credit Agreement dated as of March 20, 2020 by and among Pacific Ethanol Pekin, LLC, Compeer Financial, PCA and CoBank, ACB 8-K 000-21467 10.2 03/26/2020 10.34 Amendment No. 9 to Credit Agreement and Waiver dated as of December 18, 2020 by and among Pacific Ethanol Pekin, LLC, Compeer Financial, PCA and CoBank, ACB 8-K 000-21467 10.1 12/23/2020 10.35 Fourth Amended and Restated Revolving Term Note dated December 18, 2020 by Pacific Ethanol Pekin, LLC in favor of Compeer Financial, PCA 8-K 000-21467 10.1 12/23/2020 10.36 Fourth Amended and Restated Term Note dated December 20, 2019 by Pacific Ethanol Pekin, LLC in favor of Compeer Financial, PCA S-1 333-235990 10.65 01/21/2020 10.37 Security Agreement dated December 15, 2016 between Pacific Ethanol Pekin, Inc. and CoBank, ACB 8-K 000-21467 10.6 12/20/2016 10.38 Amendment to Security Agreement dated December 20, 2019 by and between Pacific Ethanol Pekin, LLC and CoBank, ACB for the benefit of Compeer Financial, PCA S-1 333-235990 10.53 01/21/2020 10.39 Amendment to Illinois Future Advance Real Estate Mortgage dated December 20, 2019 by and between Pacific Ethanol Pekin, LLC and Compeer Financial, PCA S-1 333-235990 10.61 01/21/2020 50 INDEX TO EXHIBITS Where Located Exhibit Number Description* Form File Number Exhibit Number Filing Date Filed Herewith 10.40 Guaranty and Contribution Agreement by Pacific Ethanol Pekin, LLC dated March 20, 2019 in favor of Compeer Financial, PCA and CoBank, ACB 10-Q 000-21467 10.5 05/03/2019 10.41 Guaranty by Pacific Ethanol Pekin, LLC dated December 20, 2019 in favor of Compeer Financial, PCA and CoBank, ACB S-1 333-235990 10.56 01/21/2020 10.42 First Amendment to Guaranty dated as of December 18, 2020 by Pacific Ethanol Pekin, LLC in favor of Compeer Financial, PCA and CoBank, ACB 8-K 000-21467 10.1 12/23/2020 10.43 Amended and Restated Guaranty and Contribution Agreement dated December 20, 2019 by Pacific Ethanol Central, LLC for the benefit of Compeer Financial, PCA and CoBank, ACB S-1 333-235990 10.55 01/21/2020 10.44 Pledge Agreement dated December 20, 2019 by and among Pacific Ethanol Central, LLC, Pacific Ethanol Pekin, LLC and CoBank, ACB S-1 333-235990 10.57 01/21/2020 10.45 Security Agreement dated March 20, 2019 by and among Pacific Ethanol Pekin, LLC, Compeer Financial PCA and CoBank ACB 10-Q 000-21467 10.4 05/03/2019 10.46 First Amendment to Security Agreement dated December 20, 2019 by and between Pacific Ethanol Central, LLC and CoBank, ACB for the benefit of Compeer Financial, PCA S-1 333-235990 10.52 01/21/2020 10.47 Second Amendment to Security Agreement dated as of December 18, 2020 by and between Pacific Ethanol Central, LLC and CoBank, ACB 8-K 000-21467 10.9 12/23/2020 10.48 Working Capital Maintenance Agreement dated December 15, 2016 between the Registrant and CoBank, ACB 8-K 000-21467 10.9 12/20/2016 10.49 Pledge Agreement dated March 20, 2019 by and among Pacific Ethanol Central, LLC, Pacific Aurora, LLC and CoBank, ACB 10-Q 000-21467 10.6 05/03/2019 10.50 First Amendment to Pledge Agreement dated December 20, 2019 by and among Pacific Ethanol Central, LLC, Pacific Aurora, LLC and CoBank, ACB S-1 333-235990 10.59 01/21/2020 51 INDEX TO EXHIBITS Where Located Exhibit Number Description* Form File Number Exhibit Number Filing Date Filed Herewith 10.51 Security Agreement dated March 20, 2020 by and between Pacific Ethanol Central, LLC and Cortland Products Corp. 8-K 000-21467 10.5 03/26/2020 10.52 Pledge Agreement dated March 20, 2020 by and among Pacific Ethanol Central, LLC, Illinois Corn Processing, LLC and Cortland Products Corp. 8-K 000-21467 10.6 03/26/2020 10.53 Pledge Agreement dated March 20, 2020 by and among Pacific Ethanol Central, LLC, Pacific Ethanol Pekin, LLC and Cortland Products Corp. 8-K 000-21467 10.7 03/26/2020 10.54 Pledge Agreement dated March 20, 2020 by and among Pacific Ethanol Central, LLC, Pacific Aurora, LLC and Cortland Products Corp. 8-K 000-21467 10.8 03/26/2020 10.55 Security Agreement dated March 20, 2020 by and among Pacific Ethanol West, LLC, PE Op Co. and Cortland Products Corp. 8-K 000-21467 10.9 03/26/2020 10.56 Second Amended and Restated Credit Agreement dated August 2, 2017 among Kinergy Marketing LLC, Pacific Ag. Products, LLC, Wells Fargo Bank, National Association, and the parties thereto from time to time as lenders 8-K 000-21467 10.1 08/08/2017 10.57 Amendment No. 1 to Second Amended and Restated Credit Agreement dated March 27, 2019 by and among Kinergy Marketing LLC, Pacific Ag. Products, LLC and Wells Fargo Bank, National Association 10-Q 000-21467 10.7 05/03/2019 10.58 Amendment No. 2 to Second Amended and Restated Credit Agreement dated July 31, 2019 by and among Kinergy Marketing LLC, Pacific Ag. Products, LLC, the parties thereto from time to time as lenders and Wells Fargo Bank, National Association 8-K 000-21467 10.1 08/06/2019 10.59 Amendment No. 3 to Second Amended and Restated Credit Agreement dated November 19, 2019 by and among Kinergy Marketing LLC, Pacific Ag. Products, LLC, the parties thereto from time to time as lenders and Wells Fargo Bank, National Association 10-K 000-21467 10.61 03/30/2020 52 INDEX TO EXHIBITS Where Located Exhibit Number Description* Form File Number Exhibit Number Filing Date Filed Herewith 10.60 Second Amended and Restated Guarantee dated August 2, 2017 by the Registrant in favor of Wells Fargo Bank, National Association, for and on behalf of the lenders 8-K 000-21467 10.2 08/08/2017 10.61 Credit Agreement dated September 15, 2017 between Illinois Corn Processing, LLC, Compeer Financial, PCA and CoBank, ACB 8-K 000-21467 10.1 09/21/2017 10.62 Amendment No. 1 to Credit Agreement and Waiver dated December 20, 2019 among Illinois Corn Processing, LLC, Compeer Financial, PCA and CoBank, ACB S-1 333-235990 10.49 01/21/2020 10.63 Amendment No. 2 to Credit Agreement dated as of March 20, 2020 by and among Illinois Corn Processing, LLC, Compeer Financial, PCA and CoBank, ACB 8-K 000-21467 10.1 03/26/2020 10.64 Amendment No. 3 to Credit Agreement and Waiver dated as of December 18, 2020 by and among Illinois Corn Processing, LLC, Compeer Financial, PCA and CoBank, ACB 8-K 000-21467 10.5 12/23/2020 10.65 Amended and Restated Term Note dated December 20, 2019 by Illinois Corn Processing, LLC in favor of Compeer Financial, PCA S-1 333-235990 10.62 01/21/2020 10.66 Second Amended and Restated Revolving Term Note dated December 18, 2020 by Illinois Corn Processing, LLC in favor of Compeer Financial, PCA 8-K 000-21467 10.6 12/23/2020 10.67 Illinois Future Advance Real Estate Mortgage dated September 15, 2017 by Illinois Corn Processing, LLC in favor of CoBank, ACB 8-K 000-21467 10.4 09/21/2017 10.68 Amendment to Illinois Future Advance Real Estate Mortgage dated December 20, 2019 by and between Illinois Corn Processing, LLC and Compeer Financial, PCA S-1 333-235990 10.60 01/21/2020 10.69 Security Agreement dated September 15, 2017 by Illinois Corn Processing, LLC in favor of CoBank, ACB 8-K 000-21467 10.5 09/21/2017 53 INDEX TO EXHIBITS Where Located Exhibit Number Description* Form File Number Exhibit Number Filing Date Filed Herewith 10.70 First Amendment to Security Agreement dated December 20, 2019 by and between Illinois Corn Processing, LLC and CoBank, ACB for the benefit of Compeer Financial, PCA S-1 333-235990 10.51 01/21/2020 10.71 Guaranty by Illinois Corn Processing, LLC dated December 20, 2019 in favor of Compeer Financial, PCA and CoBank, ACB S-1 333-235990 10.54 01/21/2020 10.72 First Amendment to Guaranty dated as of December 18, 2020 by Illinois Corn Processing, LLC in favor of Compeer Financial, PCA and CoBank, ACB 8-K 000-21467 10.7 12/23/2020 10.73 Pledge Agreement dated December 20, 2019 by and among Pacific Ethanol Central, LLC, Illinois Corn Processing, LLC and CoBank, ACB S-1 333-235990 10.58 01/21/2020 10.74 Security Agreement dated March 20, 2020 by Illinois Corn Processing, LLC in favor of Cortland Products Corp. 8-K 000-21467 10.4 03/26/2020 10.75 Security Agreement effective as of March 20, 2020 by and between the Registrant and CoBank, ACB 8-K 000-21467 10.11 03/26/2020 10.76 Intercreditor Agreement dated as of March 20, 2020 by and among Cortland Products Corp., CoBank, ACB, the Registrant and the grantors named therein 8-K 000-21467 10.12 03/26/2020 10.77 Intercreditor Agreement dated as of March 20, 2020 between the Pekin Lenders and the ICP Lenders named therein 8-K 000-21467 10.13 03/26/2020 10.78 First Amendment to Intercreditor Agreement dated as of December 18, 2020 by and among the Pekin Lenders and the ICP Lenders named therein 8-K 000-21467 10.10 12/23/2020 10.79 Secured Promissory Note (Negotiable) dated April 15, 2020 in the amount of $8,580,000 by Pacific Aurora, LLC in favor of Pacific Ethanol Central, LLC 8-K 000-21467 10.4 04/21/2020 10.80 Secured Promissory Note (Non-Negotiable) dated April 15, 2020 in the amount of $7,920,000 by Pacific Aurora, LLC in favor of Pacific Ethanol Central, LLC 8-K 000-21467 10.5 04/21/2020 54 INDEX TO EXHIBITS Where Located Exhibit Number Description* Form File Number Exhibit Number Filing Date Filed Herewith 10.81 Assignment of Notes and Deeds of Trust dated April 15, 2020 by Pacific Aurora, LLC and Pacific Ethanol Central, LLC in favor of CoBank, ACB 8-K 000-21467 10.6 04/21/2020 10.82 First Amendment to Assignment of Notes and Deeds of Trust dated as of December 18, 2020 by and between Pacific Ethanol Central, LLC and CoBank, ACB 8-K 000-21467 10.11 12/23/2020 10.83 Promissory Note dated April 29, 2020 in the amount of $5,973,138 by the Registrant in favor of Bank of America, NA 8-K 000-21467 10.1 04/21/2020 10.84 Promissory Note dated April 29, 2020 in the amount of $3,886,729 by the Registrant in favor of Bank of America, NA 8-K 000-21467 10.2 04/21/2020 10.85 Series A Warrant to Purchase Common Stock dated October 28, 2020 for 8,900,493 shares by and between the Registrant and CVI Investments, Inc. X 10.86 Registration Rights Agreement dated October 28, 2020 by and between the Registrant and CVI Investments, Inc. X 21.1 Subsidiaries of the Registrant X 23.1 Consent of Independent Registered Public Accounting Firm X 31.1 Certification Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X 31.2 Certification Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X 32.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X 101.INS Inline XBRL Instance Document X 101.SCH Inline XBRL Taxonomy Extension Schema X 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase X 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase X 101.LAB Inline XBRL Taxonomy Extension Label Linkbase X 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase X (#) A contract, compensatory plan or arrangement to which a director or executive officer is a party or in which one or more directors or executive officers are eligible to participate. (*) Certain of the agreements filed as exhibits contain representations and warranties made by the parties thereto. The assertions embodied in such representations and warranties are not necessarily assertions of fact, but a mechanism for the parties to allocate risk. Accordingly, investors should not rely on the representations and warranties as characterizations of the actual state of facts or for any other purpose at the time they were made or otherwise. 55 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 26 th day of March, 2021. ALTO INGREDIENTS, INC. /s/ MICHAEL D. KANDRIS Michel D. Kandris President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ WILLIAM L. JONES Chairman of the Board and Director March 26, 2021 William L. Jones /s/ MICHAEL D. KANDRIS President, Chief Executive Officer (Principal Executive Officer), Chief Operating Officer and Director March 26, 2021 Michael D. Kandris /s/ BRYON T. MCGREGOR Chief Financial Officer (Principal Financial and Accounting Officer) March 26, 2021 Bryon T. McGregor /s/ TERRY L. STONE Director March 26, 2021 Terry L. Stone /s/ JOHN L. PRINCE Director March 26, 2021 John L. Prince /s/ DOUGLAS L. KIETA Director March 26, 2021 Douglas L. Kieta /s/ GILBERT E. NATHAN Director March 26, 2021 Gilbert E. Nathan /s/ DIANNE S. NURY Director March 26, 2021 Dianne S. Nury 56