Alto Ingredients, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS. ALTO INGREDIENTS, INC. CONSOLIDATED BALANCE SHEETS (in thousands) March 31, December 31, ASSETS 2021 2020 (unaudited) * Current Assets: Cash and cash equivalents $ 44,146 $ 47,667 Accounts receivable (net of allowance for doubtful accounts of $351 and $260, respectively) 56,458 43,491 Inventories 55,216 37,925 Prepaid inventory 1,021 891 Derivative instruments 22,355 17,149 Assets held-for-sale 57,053 58,295 Other current assets 5,339 8,628 Total current assets 241,588 214,046 Property and equipment, net 226,183 229,486 Other Assets: Right of use operating lease assets, net 11,704 11,046 Notes receivable 13,556 14,337 Intangible asset 2,678 2,678 Other assets 5,407 5,225 Total other assets 33,345 33,286 Total Assets $ 501,116 $ 476,818 * Amounts derived from the audited financial statements for the year ended December 31, 2020. See accompanying notes to consolidated financial statements. - 1 - ALTO INGREDIENTS, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) (in thousands, except par value) March 31, December 31, LIABILITIES AND STOCKHOLDERS’ EQUITY 2021 2020 (unaudited) * Current Liabilities: Accounts payable – trade $ 23,171 $ 13,047 Accrued liabilities 13,623 11,101 Current portion – operating leases 2,581 2,180 Current portion – long-term debt 37,581 25,533 Derivative instruments 4,741 — Liabilities held-for-sale 19,231 19,542 Other current liabilities 11,822 15,524 Total current liabilities 112,750 86,927 Long-term debt, net of current portion 64,396 71,807 Operating leases, net of current portion 8,956 8,715 Other liabilities 13,332 13,134 Total Liabilities 199,434 180,583 Commitments and Contingencies (Note 6) Stockholders’ Equity: Alto Ingredients, Inc. Stockholders’ Equity: Preferred stock, $0.001 par value; 10,000 shares authorized; Series A: 1,684 shares authorized; no shares issued and outstanding as of March 31, 2021 and December 31, 2020; Series B: 1,581 shares authorized; 927 shares issued and outstanding as of March 31, 2021 and December 31, 2020; liquidation preference of $19,975 as of March 31, 2021 1 1 Common stock, $0.001 par value; 300,000 shares authorized; 73,161 and 72,487 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively 73 72 Non-voting common stock, $0.001 par value; 3,553 shares authorized; 1 share issued and outstanding as of March 31, 2021 and December 31, 2020 — — Additional paid-in capital 1,037,718 1,036,638 Accumulated other comprehensive loss (3,878 ) (3,878 ) Accumulated deficit (732,232 ) (736,598 ) Total Stockholders’ Equity 301,682 296,235 Total Liabilities and Stockholders’ Equity $ 501,116 $ 476,818 * Amounts derived from the audited financial statements for the year ended December 31, 2020. See accompanying notes to consolidated financial statements. - 2 - ALTO INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in thousands, except per share data) Three Months Ended March 31, 2021 2020 Net sales $ 218,734 $ 311,404 Cost of goods sold 204,897 324,294 Gross profit (loss) 13,837 (12,890 ) Selling, general and administrative expenses 7,014 10,212 Asset impairment 1,200 — Income (loss) from operations 5,623 (23,102 ) Fair value adjustments — 673 Interest expense, net (1,885 ) (5,307 ) Other income, net 940 580 Income (loss) before benefit for income taxes 4,678 (27,156 ) Benefit for income taxes — — Consolidated net income (loss) 4,678 (27,156 ) Net loss attributed to noncontrolling interests — 2,056 Net income (loss) attributed to Alto Ingredients, Inc. $ 4,678 $ (25,100 ) Preferred stock dividends $ (312 ) $ (315 ) Net income (loss) available to common stockholders $ 4,366 $ (25,415 ) Net income (loss) per share, basic $ 0.06 $ (0.47 ) Net income (loss) per share, diluted $ 0.06 $ (0.47 ) Weighted-average shares outstanding, basic 70,351 53,828 Weighted-average shares outstanding, diluted 72,464 53,828 See accompanying notes to consolidated financial statements. - 3 - ALTO INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands) Three Months Ended March 31, 2021 2020 Operating Activities: Consolidated net income (loss) $ 4,678 $ (27,156 ) Adjustments to reconcile consolidated net income (loss) to net cash provided by (used in) operating activities: Depreciation 5,860 9,759 Asset impairment 1,200 — Gains (losses) on derivative instruments (10,543 ) — Non-cash compensation 804 865 Amortization of deferred financing fees 190 305 Fair value adjustments — (673 ) Inventory valuation — 4,223 Interest added to debt — 133 Bad debt expense 91 19 Changes in operating assets and liabilities: Accounts receivable (13,057 ) 22,024 Inventories (17,291 ) 10,845 Prepaid expenses and other assets 3,832 (396 ) Prepaid inventory (129 ) (181 ) Operating leases (1,037 ) (2,348 ) Assets held-for-sale 1,241 1,624 Liabilities held-for-sale (312 ) 9,370 Accounts payable and accrued liabilities 20,391 (1,512 ) Net cash provided by (used in) operating activities (4,082 ) 26,901 Investing Activities: Additions to property and equipment (4,411 ) (1,245 ) Net cash used in investing activities (4,411 ) (1,245 ) Financing Activities: Net proceeds (payments) from Kinergy’s line of credit 13,042 (18,156 ) Proceeds from stock option exercises 462 — Proceeds from issuance of common stock — 282 Principal payments on borrowings (8,532 ) — Net cash provided by (used in) financing activities 4,972 (17,874 ) Net increase (decrease) in cash and cash equivalents (3,521 ) 7,782 Cash and cash equivalents at beginning of period 47,667 18,997 Cash and cash equivalents at end of period $ 44,146 $ 26,779 Supplemental Information: Interest paid $ 1,825 $ 1,968 Accrued preferred stock dividends $ 312 $ 315 See accompanying notes to consolidated financial statements. - 4 - ALTO INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited, in thousands) Preferred Stock Common Stock Additional Paid-In Accumulated Accum. Other Comprehensive Non-Controlling Shares Amount Shares Amount Capital Deficit Income (Loss) Interests Total Balances, January 1, 2021 927 $ 1 72,487 $ 72 $ 1,036,638 $ (736,598 ) $ (3,878 ) $ — $ 296,235 Stock-based compensation expense – restricted stock issued to employees and directors, net of cancellations and tax — — 550 1 618 — — — 619 Stock option exercises — — 124 — 462 — — — 462 Preferred stock dividends — — — — — (312 ) — — (312 ) Net loss — — — — — 4,678 — — 4,678 Balances, March 31, 2021 927 $ 1 73,161 $ 73 $ 1,037,718 $ (732,232 ) $ (3,878 ) $ — $ 301,682 Balances, January 1, 2020 927 $ 1 55,508 $ 56 $ 942,307 $ (720,214 ) $ (2,370 ) $ 7,265 $ 227,045 Stock-based compensation expense – restricted stock issued to employees and directors, net of cancellations and tax — — (38 ) (4 ) 868 — — — 864 Issuances of common stock — — 421 4 278 — — — 282 Preferred stock dividends — — — — — (315 ) — — (315 ) Net loss — — — — — (25,100 ) — (2,056 ) (27,156 ) Balances, March 31, 2020 927 $ 1 55,891 $ 56 $ 943,453 $ (745,629 ) $ (2,370 ) $ 5,209 $ 200,720 - 5 - ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND BASIS OF PRESENTATION. Organization and Business – The consolidated financial statements include, for all periods presented, the accounts of Alto Ingredients, 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, a California limited liability company (“Alto Nutrients”), Alto Op Co., a Delaware corporation (“Alto Op Co.”) and all seven of the Company’s production facilities as of March 31, 2021. 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, located in close proximity to both feed and fuel-grade ethanol customers, enjoy unique advantages in efficiency, logistics and product pricing. The Company had a combined production capacity of 450 million gallons per year, as of March 31, 2021, 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 March 31, 2021, the Company was operating at approximately 64% of its then-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 – Interim Financial Statements – The accompanying unaudited consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Results for interim periods should not be considered indicative of results for a full year. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. The accounting policies used in preparing these consolidated financial statements are the same as those described in Note 1 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included. All significant intercompany accounts and transactions have been eliminated in consolidation. 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 products 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 generally without requiring collateral. - 6 - 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 the Company’s customers were to deteriorate, resulting in an impairment of ability to make payments, additional allowances may be required. Of the accounts receivable balance, approximately $51,301,000 and $35,839,000 at March 31, 2021 and December 31, 2020, respectively, were used as collateral under Kinergy’s operating line of credit. The allowance for doubtful accounts was $351,000 and $260,000 as of March 31, 2021 and December 31, 2020, respectively. The Company recorded a bad debt expense of $91,000 and $19,000 for the three months ended March 31, 2021 and 2020, respectively. The Company does not have any off-balance sheet credit exposure related to its customers. 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’ carrying values 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. 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. 2. ASSETS AND LIABILITIES HELD-FOR-SALE. 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. During the three months ended March 31, 2021, the Company provided for an additional impairment charge of $1.2 million based on revised fair value estimates. On April 23, 2021, the Company entered into an asset purchase agreement to sell its Madera facility for total consideration of $28.3 million, comprised of $19.5 million in cash and $8.8 million in assumption of liabilities. On May 14, 2021, the Company closed the sale. - 7 - The Company classified the following assets and liabilities as held-for-sale as of March 31, 2021 (in thousands): Stockton Madera Property and equipment, net $ 19,535 $ 27,813 Right of use operating lease assets, net 9,705 - Assets held-for-sale $ 29,240 $ 27,813 Stockton Madera Operating lease obligations $ 10,456 $ — Assessment financing — 8,775 Liabilities held-for-sale $ 10,456 $ 8,775 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 three months ended March 31, 2021, net sales attributed to the results of operations for Stockton and Madera were $0.2 million and less than $0.1 million, respectively. For the three months ended March 31, 2020, net sales attributed to the results of operations for Stockton and Madera were $21.9 million and $21.5 million, respectively. For the three months ended March 31, 2021, pre-tax loss attributed to the results of operations for Stockton and Madera was $0.8 million and $1.6 million, respectively. For the three months ended March 31, 2020, pre-tax loss attributed to the results of operations for Stockton and Madera was $2.3 million and $1.8 million, respectively. 3. 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 production, which includes the production and sale of alcohols and essential ingredients produced at the Company’s Pekin, Illinois campus (“Pekin 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 (“Other production”), none of which are individually so significant as to be considered a reportable segment. - 8 - The following tables set forth certain financial data for the Company’s operating segments (in thousands): Three Months Ended March 31, Net Sales 2021 2020 Marketing and distribution: Alcohol sales, gross $ 57,010 $ 57,506 Alcohol sales, net 452 429 Intersegment sales 2,244 4,315 Total marketing and distribution sales 59,706 62,250 Pekin Campus production, recorded as gross: Alcohol sales $ 95,083 $ 84,132 Essential ingredient sales 45,077 39,870 Intersegment sales 9,985 2,332 Total Pekin Campus sales 150,145 126,334 Other production, recorded as gross: Alcohol sales $ 15,969 $ 99,230 Essential ingredient sales 5,143 30,237 Intersegment sales 305 291 Total Other production sales 21,417 129,758 Intersegment eliminations (12,534 ) (6,938 ) Net sales as reported $ 218,734 $ 311,404 Cost of goods sold: Marketing and distribution $ 53,957 $ 57,139 Pekin Campus production 137,376 128,683 Other production 24,118 142,310 Intersegment eliminations (10,554 ) (3,838 ) Cost of goods sold as reported $ 204,897 $ 324,294 Income (loss) before benefit for income taxes: Marketing and distribution $ 3,973 $ 2,930 Pekin Campus production 9,691 (6,849 ) Other production (5,137 ) (16,621 ) Corporate activities (2,904 ) (2,562 ) $ 5,623 $ (23,102 ) Depreciation: Pekin Campus production $ 4,345 $ 5,130 Other production 1,498 4,530 Corporate activities 17 99 $ 5,860 $ 9,759 Interest expense: Marketing and distribution $ 202 $ 627 Pekin Campus production 519 2,084 Other production 136 32 Corporate activities 1,028 2,564 $ 1,885 $ 5,307 - 9 - The following table sets forth the Company’s total assets by operating segment (in thousands): March 31, December 31, Total assets: 2021 2020 Marketing and distribution $ 119,546 $ 89,337 Pekin Campus production 238,370 234,439 Other production 120,351 102,409 Corporate assets 22,849 50,633 $ 501,116 $ 476,818 4. INVENTORIES. Inventories consisted primarily of bulk ethanol, specialty alcohols, corn, essential ingredients 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 valuation adjustment as of December 31, 2020. Inventory balances consisted of the following (in thousands): March 31, 2021 December 31, 2020 Finished goods $ 39,654 $ 25,154 Work in progress 4,965 4,333 Raw materials 9,233 7,074 Other 1,364 1,364 Total $ 55,216 $ 37,925 5. 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. - 10 - 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 three months ended March 31, 2021 and 2020, 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 $10,543,000 and $0 as the change in the fair value of these contracts for the three months ended March 31, 2021 and 2020, 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): As of March 31, 2021 Assets Liabilities Type of Instrument Balance Sheet Location Fair Value Balance Sheet Location Fair Value Commodity contracts Derivative assets $ 22,355 Derivative liabilities $ 4,741 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 $ — The classification and amounts of the Company’s recognized gains for its derivatives not designated as hedging instruments are as follows (in thousands): Realized Gains For the three months Ended March 31, Type of Instrument Statements of Operations Location 2021 2020 Commodity contracts Cost of goods sold $ 6,185 $ — $ 6,185 $ — Unrealized Gains For the three months Ended March 31, Type of Instrument Statements of Operations Location 2021 2020 Commodity contracts Cost of goods sold $ 4,358 $ — $ 4,358 $ — - 11 - 6. DEBT. Long-term borrowings are summarized as follows (in thousands): March 31, 2021 December 31, 2020 Kinergy line of credit $ 45,554 $ 32,512 Pekin revolving loan 17,580 20,580 ICP revolving loan 9,384 9,384 Parent notes payable 20,001 25,533 CARES Act loans 9,860 9,860 102,379 97,869 Less unamortized debt premium 174 230 Less unamortized debt financing costs (576 ) (759 ) Less short-term portion (37,581 ) (25,533 ) Long-term debt $ 64,396 $ 71,807 Parent Notes Payable – On May 14, 2021, with proceeds from the Company’s sale of its Madera, California facility, it repaid $19.3 million of principal on its notes payable, with $0.7 million remaining. Maturities of Long-term Debt – The Company’s long-term debt matures as follows (in thousands): December 31: 2021 $ 20,001 2022 82,378 $ 102,379 Restrictions – At March 31, 2021, there were approximately $231.9 million of net assets at the Company’s subsidiaries that were not available to be transferred to Alto Ingredients, Inc. in the form of dividends, loans or advances due to restrictions contained in the credit facilities of the Company’s subsidiaries. 7. COMMITMENTS AND CONTINGENCIES. Sales Commitments – At March 31, 2021, the Company had entered into sales contracts with its major customers to sell certain quantities of alcohol and essential ingredients. The Company had open alcohol indexed-price contracts for 102,526,000 gallons as of March 31, 2021 and open fixed-price alcohol sales contracts totaling $207,687,000 as of March 31, 2021. The Company had open fixed-price sales contracts for essential ingredients totaling $18,170,000 and open indexed-price sales contracts of essential ingredients for 146,000 tons as of March 31, 2021. These sales contracts are scheduled to be completed throughout 2021. Purchase Commitments – At March 31, 2021, the Company had indexed-price purchase contracts to purchase 15,626,000 gallons of alcohol and fixed-price purchase contracts to purchase $1,238,000 of alcohol from its suppliers. The Company had fixed-price purchase contracts to purchase $33,883,000 of corn from its suppliers as of March 31, 2021. These purchase commitments are scheduled to be satisfied throughout 2021. - 12 - Litigation – General – 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, environmental regulations, 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 impact on the Company’s financial condition or results of operations. 8. PENSION PLANS. The Company sponsors a defined benefit pension plan (the “Retirement Plan”) and a health care and life insurance plan (the “Postretirement Plan”). The Company assumed the Retirement Plan and the Postretirement Plan as part of its acquisition of PE Central on July 1, 2015. The Retirement Plan is noncontributory, and covers only “grandfathered” unionized employees at the Company’s Pekin, Illinois facility who fulfill minimum age and service requirements. Benefits are based on a prescribed formula based upon the employee’s years of service. The Retirement Plan, which is part of a collective bargaining agreement, covers only union employees hired prior to November 1, 2010. The Company uses a December 31 measurement date for its Retirement Plan. The Company’s funding policy is to make the minimum annual contribution required by applicable regulations. As of December 31, 2020, the Retirement Plan’s accumulated projected benefit obligation was $24.6 million, with a fair value of plan assets of $17.6 million. The underfunded amount of $7.0 million is recorded on the Company’s consolidated balance sheet in other liabilities. For the three months ended March 31, 2021, the Retirement Plan’s net periodic expense was $22,000, comprised of $151,000 in interest cost and $109,000 in service cost, partially offset by $238,000 of expected return on plan assets. For the three months ended March 31, 2020, the Retirement Plan’s net periodic expense was $48,000, comprised of $173,000 in interest cost and $101,000 in service cost, partially offset by $226,000 of expected return on plan assets. The Postretirement Plan provides postretirement medical benefits and life insurance to certain “grandfathered” unionized employees. Employees hired after December 31, 2000 are not eligible to participate in the Postretirement Plan. The Postretirement 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. As of December 31, 2020, the Postretirement Plan’s accumulated projected benefit obligation was $5.3 million and is recorded on the Company’s consolidated balance sheet in other liabilities. The Company’s funding policy is to make the minimum annual contribution required by applicable regulations. For the three months ended March 31, 2021, the Postretirement Plan’s net periodic expense was $42,000, comprised of $10,000 of interest cost, $26,000 of service cost and $6,000 of amortization expense. For the three months ended March 31, 2020, the Postretirement Plan’s net periodic expense was $59,000, comprised of $38,000 of interest cost, $14,000 of service cost and $7,000 of amortization expense. - 13 - 9. 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 March 31, 2021 and December 31, 2020 of $47,348,000 and $48,548,000, 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. 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. The following table summarizes recurring and nonrecurring fair value measurements by level at March 31, 2021 (in thousands): Fair Value Level 1 Level 2 Level 3 Assets: Derivative financial instruments $ 22,355 $ 22,355 $ — $ — Long-lived assets held-for-sale 57,053 — — 57,053 $ 79,408 $ 22,355 $ — $ 57,053 Liabilities: Derivative financial instruments $ (4,741 ) $ (4,741 ) $ — $ — $ (4,741 ) $ (4,741 ) $ — $ — - 14 - The following table summarizes recurring and nonrecurring fair value measurements by level at December 31, 2020 (in thousands): Benefit Plan Fair Percentage Value Level 1 Level 2 Level 3 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: $ — $ — $ — $ — (1) Included in other assets in the consolidated balance sheets. (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. 10. EARNINGS PER SHARE. The following tables compute basic and diluted earnings per share (in thousands, except per share data): Three Months Ended March 31, 2021 Income Numerator Shares Denominator Per-Share Amount Net income attributed to Alto Ingredients, Inc. $ 4,678 Less: Preferred stock dividends (312 ) Basic income per share: Income available to common stockholders $ 4,366 70,351 $ 0.06 Add: Dilutive securities — 2,113 Diluted income per share: Income available to common stockholders $ 4,366 72,464 $ 0.06 - 15 - Three Months Ended March 31, 2020 Loss Numerator Shares Denominator Per-Share Amount Net loss attributed to Alto Ingredients, Inc. $ (25,100 ) Less: Preferred stock dividends (315 ) Basic and diluted loss per share: Net loss available to common stockholders $ (25,415 ) 53,828 $ (0.47 ) There were an additional aggregate potentially dilutive weighted-average shares of 3,265,000 and 964,000 from convertible securities outstanding for the three months ended March 31, 2021 and 2020. These securities were not considered in calculating diluted net income (loss) per share for the three months ended March 31, 2021 and 2020, as their effect would have been anti-dilutive. 11. PARENT COMPANY FINANCIALS. Restricted Net Assets – At March 31, 2021, the Company had approximately $231.9 million 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 (in thousands): ASSETS March 31, 2021 December 31, 2020 Current Assets: Cash and cash equivalents $ 16,534 $ 25,632 Receivables from subsidiaries 16,412 15,548 Other current assets 2,188 1,836 Total current assets 35,134 43,016 Property and equipment, net 125 142 Other Assets: Investments in subsidiaries 257,547 246,518 Alto West, LLC receivable 42,649 42,649 Right of use operating lease assets, net 2,915 2,985 Other assets 1,087 1,088 Total other assets 304,198 293,240 Total Assets $ 339,457 $ 336,398 Current Liabilities: Accounts payable and accrued liabilities $ 4,961 $ 2,001 Accrued Alto Op Co. purchase 3,829 3,829 Current portion of long-term debt 20,001 25,533 Other current liabilities 394 473 Total current liabilities 29,185 31,836 Long-term debt, net of current portion 5,665 5,564 Other liabilities 2,925 2,763 Total Liabilities 37,775 40,163 Stockholders’ Equity: Preferred stock 1 1 Common and non-voting common stock 73 72 Additional paid-in capital 1,037,718 1,036,638 Accumulated other comprehensive loss (3,878 ) (3,878 ) Accumulated deficit (732,232 ) (736,598 ) Total Alto Ingredients, Inc. stockholders’ equity 301,682 296,235 Total Liabilities and Stockholders’ Equity $ 339,457 $ 336,398 - 16 - Three Months Ended March 31, 2021 2020 Management fees from subsidiaries $ 2,526 $ 3,253 Selling, general and administrative expenses 4,651 5,377 Loss from operations (2,125 ) (2,124 ) Fair value adjustments — 673 Interest expense, net (1,028 ) (1,598 ) Other income 807 — Loss before benefit for income taxes (2,346 ) (3,049 ) Benefit for income taxes — — Loss before equity in losses of subsidiaries (2,346 ) (3,049 ) Equity in income (losses) of subsidiaries 7,024 (24,107 ) Consolidated net income (loss) $ 4,678 $ (27,156 ) For the Three Months Ended March 31, 2021 2020 Operating Activities: Consolidated net income (loss) $ 4,678 $ (27,156 ) Adjustments to reconcile net income (loss) to cash used in operating activities: Equity in (income) losses of subsidiaries (7,024 ) 24,107 Fair value adjustments — (673 ) Depreciation 17 33 Amortization (accretion) of debt discount (premium) 101 (57 ) Changes in operating assets and liabilities: Receivables from subsidiaries (864 ) 123 Other assets (281 ) 29 Accounts payable and accrued expenses (765 ) — Accounts payable with subsidiaries 110 2,235 Net cash used in operating activities $ (4,028 ) $ (1,359 ) Investing Activities: Additions to property and equipment $ — $ — Net cash used in investing activities $ — $ — Financing Activities: Proceeds from issuances of common stock $ 462 $ 282 Proceeds from plant receivable — 5,813 Payments on senior notes (5,532 ) — Preferred stock dividend payments — — Net cash provided by (used in) financing activities $ (5,070 ) $ 6,095 Net increase (decrease) in cash and cash equivalents (9,098 ) 4,736 Cash and cash equivalents at beginning of period 25,632 4,985 Cash and cash equivalents at end of period $ 16,534 $ 9,721 12. SUBSEQUENT EVENT. Agreement to sell Madera facility – On April 23, 2021, the Company entered into an asset purchase agreement with Seaboard Energy California, LLC, for the purchase and sale of the Company’s Madera, California production facility for total consideration of $28.3 million, comprised of $19.5 million in cash and $8.8 million in assumption of liabilities. The Company closed the sale on May 14, 2021, and using net cash proceeds, repaid $19.3 million on its parent notes payable. - 17 - ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report. This report and our consolidated financial statements and notes to consolidated financial statements contain forward-looking statements, which generally include the plans and objectives of management for future operations, including plans and objectives relating to our future economic performance and our current beliefs regarding revenues we might generate and profits we might earn if we are successful in implementing our business and growth strategies. The forward-looking statements and associated risks may include, relate to or be qualified by other important factors, including: ● fluctuations in the market prices of alcohols and essential ingredients; ● fluctuations in the costs of key production input commodities such as corn and natural gas; ● the projected growth or contraction in the alcohol and essential ingredients markets in which we operate; ● our strategies for expanding, maintaining or contracting our presence in these markets; ● anticipated trends in our financial condition and results of operations; and ● our ability to distinguish ourselves from our current and future competitors. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this report, or in the case of a document incorporated by reference, as of the date of that document. We do not undertake to update, revise or correct any forward-looking statements, except as required by law. Any of the factors described immediately above, or referenced from time to time in our filings with the Securities and Exchange Commission or in the “Risk Factors” section below could cause our financial results, including our net income or loss or growth in net income or loss to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially. Recent Developments On April 23, 2021, we entered into an asset purchase agreement with Seaboard Energy California, LLC, for the purchase and sale of our Madera, California production facility for total consideration of $28.3 million, comprised of $19.5 million in cash and $8.8 million in assumption of liabilities. We closed the transaction on May 14, 2021, and with the net proceeds, repaid $19.3 million in principal on our senior notes. Overview We are a leading producer and marketer of specialty alcohols and essential ingredients, and the largest producer of specialty alcohols in the United States based on annualized volumes. - 18 - We operate six alcohol production facilities. Three of our production facilities are located in the Midwestern state of Illinois and three of our facilities are located in the Western states of California, Oregon and Idaho. Our facility in California is held-for-sale as we are in the process of marketing the Stockton facility for sale. We have an annual alcohol production capacity of 410 million gallons. We market all of the alcohols produced at our facilities as well as fuel-grade ethanol produced by third parties. In 2020, we marketed over 500 million gallons combined of our own alcohols as well as fuel-grade ethanol produced by third parties, and nearly 1.5 million tons of essential ingredients on a dry matter basis. Our business consists of three reportable segments: two production segments and a marketing segment. We report our 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 production, which includes the production and sale of alcohols and essential ingredients produced at our Pekin, Illinois campus, and (3) Other production, which includes the production and sale of fuel-grade ethanol and essential ingredients produced at all of our other production facilities on an aggregate basis, none of which are individually so significant as to be considered a reportable segment. Our mission is to expand our business as a leading producer and marketer of specialty alcohols and essential ingredients. We intend to accomplish this goal in part by investing in our specialized and higher value specialty alcohol production and distribution infrastructure, expanding production in high-demand essential ingredients, expanding and extending the sale of our products into new regional and international markets, building efficiencies and economies of scale and by capturing a greater portion of the value stream. Production Segments We produce specialty alcohols, fuel-grade ethanol and essential ingredients, focusing on four key markets: Health, Home & Beauty ; Food & Beverage ; Essential Ingredients ; and Renewable Fuels . Products for the Health, Home & Beauty market include specialty alcohols used in mouthwash, cosmetics, pharmaceuticals, hand sanitizers, disinfectants and cleaners. Products for the Food & Beverage markets include grain neutral spirits used in alcoholic beverages and vinegar as well as corn germ used for corn oils. Products for Essential Ingredients markets include yeast, corn gluten and distillers grains used in commercial animal feed and pet foods. Our Renewable Fuels products include fuel-grade ethanol and distillers corn oil used as a feedstock for renewable diesel fuel. We produce our alcohols and essential ingredients at our production facilities described below. Our production facilities located in the Midwest are in the heart of the Corn Belt, benefit from low-cost and abundant feedstock and enjoy logistical advantages that enable us to provide our products to both domestic and international markets via truck, rail or barge. Our production facilities located on the West Coast are near their respective fuel and feed customers, offering significant timing, transportation cost and logistical advantages. We are currently operating at approximately 64% of our estimated maximum annual production capacity. Our Magic Valley and Stockton facilities are currently idled. As market conditions change, we may increase, decrease or idle production at one or more operating facilities or resume operations at any idled facility. Annual Production Capacity (estimated, in gallons) Production Facility Location Fuel-Grade Ethanol Specialty Alcohol Pekin Campus Pekin, IL 110,000,000 140,000,000 Magic Valley Burley, ID 60,000,000 — Columbia Boardman, OR 40,000,000 — Stockton Stockton, CA 60,000,000 — Marketing Segment We market all of the alcohols and essential ingredients we produce at our facilities. We also market fuel-grade ethanol produced by third parties. We have extensive and long-standing customer relationships, both domestic and international, for our specialty alcohols and essential ingredients. These customers include producers and distributors of ingredients for cosmetics, sanitizers and related products, distilled spirits producers, food products manufacturers, producers of personal health/consumer health and personal care hygiene products, and global trading firms. Our fuel-grade ethanol customers are located throughout the Western and Midwestern United States and consist of integrated oil companies and gasoline marketers who blend fuel-grade ethanol into gasoline. Our customers depend on us to provide a reliable supply of fuel-grade ethanol and manage the logistics and timing of delivery with very little effort on their part. Our customers collectively require fuel-grade ethanol volumes in excess of the supplies we produce at our facilities. We secure additional fuel-grade ethanol supplies from third-party fuel-grade ethanol plants in California and other third-party suppliers in the Midwest where a majority of fuel-grade ethanol producers are located. We arrange for transportation, storage and delivery of fuel-grade ethanol purchased by our customers through our agreements with third-party service providers in the Western United States as well as in the Midwest from a variety of sources. - 19 - We market our essential ingredient feed products to dairies and feedlots, in many cases located near our production facilities. These customers use our feed products for livestock as a substitute for corn and other sources of starch and protein. We sell our corn oil to poultry and biodiesel customers. We do not market essential ingredients from other producers. See “Note 3 – Segments” to our Notes to Consolidated Financial Statements included elsewhere in this report for financial information about our business segments. Current Initiatives and Outlook We had a solid first quarter, selling 19 million gallons of specialty alcohols through a combination of contracted volumes, spot sales and exports. The first quarter also represented our fourth consecutive quarter of gross profit, reflecting the benefits of our new business focus on specialty alcohols and essential ingredients. Our new business focus is more sustainable and profitable than our prior focus on fuel-grade ethanol. We are now the largest producer of specialty alcohols in the United States based on annualized volumes. We have 410 million gallons of annual production capacity, of which approximately 140 million gallons, or 34%, is specialty alcohols and the balance is fuel-grade ethanol. We are currently operating production facilities with 290 million gallons of annual capacity, of which nearly 50% is specialty alcohols. All of our operating facilities are running at break-even or better on an earnings before interest, taxes, depreciation and amortization basis. We remain on track for sales of our specialty alcohols to contribute a minimum of $60 million in gross profit for the full year based on 70 million gallons of specialty alcohols contracted in the fall of 2020 at fixed volumes and prices. Many variables could materially impact our results, including export conditions, the ability of our customers to take all of their contracted volumes for 2021, market demand for sanitizers and disinfectants, our ability to timely sell our Stockton, California production facility, and fuel-grade ethanol crush margins. We are optimistic that we can add additional contracted specialty alcohol volumes in 2022 and future years, improving utilization over time from our expanded specialty alcohol production capacity and our ISO 9001, ICH Q7 and EXCiPACT certifications. As noted above, we have completed the sale of our idled fuel-grade ethanol production facility in Madera, California for total consideration of $28.3 million. We expect to save approximately $0.7 million per quarter in interest expense and approximately $0.4 million per quarter in carrying costs associated with the idled facility. We have capital improvement projects totaling $18.0 million in process or scheduled for 2021. We expect these projects to expand revenue and increase efficiencies and plant reliability. For example, we are increasing our yeast facility’s annual production capacity by approximately 15%. We will also have the ability to further expand production of even higher value yeast derivatives with similar payback profiles. In addition, we are upgrading our feed dryers at our Pekin Campus that will produce even higher value feed and improve overall plant efficiency and reliability. These two projects are scheduled for completion by the third quarter with an expected payback in less than two years, or approximately $5.0 million in additional annual earnings before interest, taxes, depreciation and amortization. Our Pekin Campus sits on the Mt. Simon sandstone formation, considered one of the most significant potential carbon storage resources in the United States. As a member of the Carbon Capture Coalition, we are actively engaged in discussions to develop a carbon capture and sequestration program at our Pekin site, which generates over 600,000 tons of CO 2 annually, and expect to be an active player in the carbon capture space. Finally, among many other projects under development is our plan to expand protein production at our dry-mill production facilities, which collectively represent 250 million gallons of annual production capacity. We believe the economics of expanded protein production are compelling and would expect to achieve protein concentrations in excess of 50% and an improvement in corn oil production by 50%. Over the past twelve months, we have improved operations and our production footprint, and reduced controllable expenses and our overall cost of capital, to build a strong foundation for the future which will enable us to aggressively pursue organic opportunities to reinvest in quality, proven high-value projects, as well as pursue accretive strategic acquisitions. Critical Accounting Policies The preparation of our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, requires us to make judgments and estimates that may have a significant impact upon the portrayal of our financial condition and results of operations. We believe that of our significant accounting policies, the following require estimates and assumptions that require complex, subjective judgments by management that can materially impact the portrayal of our financial condition and results of operations: revenue recognition; impairment of long-lived assets and held-for-sale classification; valuation of allowance for deferred taxes and derivative instruments. These significant accounting principles are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2020. - 20 - Results of Operations The following selected financial information should be read in conjunction with our consolidated financial statements and notes to our consolidated financial statements included elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report. Certain performance metrics that we believe are important indicators of our results of operations include: Three Months Ended March 31, Percentage 2021 2020 Change Fuel-grade ethanol production gallons sold (in millions) 39.0 100.2 (61.1 )% Specialty alcohol production gallons sold (in millions) 19.0 22.3 (14.8 )% Third party fuel-grade ethanol gallons sold (in millions) 54.0 62.4 (13.5 )% Total gallons sold (in millions) 112.0 184.9 (39.4 )% Total gallons produced (in millions) 58.0 116.2 (50.1 )% Production capacity utilization 52 % 77 % (32.5 )% Average sales price per gallon $ 1.94 $ 1.51 28.5 % Corn cost per bushel—CBOT equivalent $ 4.98 $ 3.79 31.4 % Average basis (1) 0.29 0.44 (34.1 )% Delivered cost of corn $ 5.27 $ 4.23 24.6 % Total essential ingredients tons sold (in thousands) 276.9 671.9 (58.8 )% Essential ingredients revenues as % of delivered cost of corn (2) 40.0 % 37.0 % 8.1 % Average CBOT ethanol price per gallon $ 1.60 $ 1.24 29.0 % Average CBOT corn price per bushel $ 5.40 $ 3.74 44.4 % (1) Corn basis represents the difference between the immediate cash price of delivered corn and the future price of corn for Chicago delivery. (2) Essential ingredients revenues as a percentage of delivered cost of corn shows our yield based on sales of essential ingredients, including wet distillers grains and corn oil, generated from alcohol we produced. Net Sales, Cost of Goods Sold and Gross Profit (Loss) The following table presents our net sales, cost of goods sold and gross profit (loss) in dollars and gross profit (loss) as a percentage of net sales (in thousands, except percentages): Three Months Ended March 31, Change in 2021 2020 Dollars Percent Net sales $ 218,734 $ 311,404 $ (92,670 ) (29.8 )% Cost of goods sold 204,897 324,294 (119,397 ) (36.8 )% Gross profit (loss) $ 13,837 $ (12,890 ) $ 26,727 NM* Percentage of net sales 6.3 % (4.1 )% * Not meaningful Net Sales The decrease in our consolidated net sales for the three months ended March 31, 2021 as compared to the same period in 2020 was primarily due to a decrease in our total gallons sold, partially offset by an increase in our average sales price per gallon. - 21 - Our production gallons sold and our volume of essential ingredients sold declined for the three months ended March 31, 2021 as compared to the same period in 2020. Our third-party gallons sold also declined. Our production gallons and essential ingredients sold declined primarily due to an intentional reduction in our production of fuel-grade ethanol due to adverse market conditions as well as the sale of our Nebraska facilities in April 2020. Our third-party gallons sold declined as we focused our efforts on selling our own fuel-grade ethanol production. On a consolidated basis, our average sales price per gallon increased 28.5% to $1.94 for the three months ended March 31, 2021 as compared to $1.51 for the same period in 2020. The average Chicago Board of Trade, or CBOT, fuel-grade ethanol price per gallon, increased 29.0% to $1.60 for the three months ended March 31, 2021 as compared to $1.24 for the same period in 2020. Marketing Segment Net sales of fuel-grade ethanol from our marketing segment, excluding intersegment sales, decreased by $0.5 million, or 1%, to $57.4 million for the three months ended March 31, 2021 as compared to $57.9 million for the same period in 2020. Our volume of third party fuel-grade ethanol gallons sold reported gross by our marketing segment decreased by 7.2 million gallons, or 21%, to 26.7 million gallons for the three months ended March 31, 2021 as compared to 33.9 million gallons for the same period in 2020. At our marketing segment’s average sales price per gallon of $2.14 for the three months ended March 31, 2021, we generated $15.3 million less in net sales from our marketing segment from the 7.2 million fewer gallons of third-party fuel-grade ethanol sold gross in the three months ended March 31, 2021 as compared to the same period in 2020. Our volume of third party fuel-grade ethanol gallons sold reported net by our marketing segment decreased by 1.2 million gallons, or 4%, to 27.3 million gallons for the three months ended March 31, 2021 as compared to 28.5 million gallons for the same period in 2020. The decrease in third-party fuel-grade ethanol gallons sold reported net reduced net sales by less than $0.1 million. The $0.44 per gallon, or 26%, increase in our marketing segment’s average sales price per gallon for the three months ended March 31, 2021 as compared to the same period in 2020 resulted in a $14.8 million increase in our net sales from third-party fuel-grade ethanol sold by our marketing segment. Pekin Campus Production Segment Net sales of alcohol from our Pekin Campus production segment increased by $11.0 million, or 13%, to $95.1 million for the three months ended March 31, 2021 as compared to $84.1 million for the same period in 2020. Our total volume of production gallons sold decreased by 7.4 million gallons, or 13%, to 50.6 million gallons for the three months ended March 31, 2021 as compared to 58.0 million gallons for the same period in 2020. At our Pekin Campus production segment’s average sales price per gallon of $1.88 for the three months ended March 31, 2021, we generated $13.9 million less in net sales from our Pekin Campus production segment from the 7.4 million fewer gallons of alcohol sold in the three months ended March 31, 2021 as compared to the same period in 2020. The increase of $0.43, or 30%, in our Pekin Campus production segment’s average sales price per gallon in the three months ended March 31, 2021 as compared to the same period in 2020 improved our net sales from our Pekin Campus production segment by $24.9 million. Net sales of essential ingredients increased $5.2 million, or 13%, to $45.1 million for the three months ended March 31, 2021 as compared to $39.9 million for the same period in 2020. Our total volume of essential ingredients sold decreased by 27,000 tons, or 11%, to 211,000 tons for the three months ended March 31, 2021 from 238,000 tons for the same period in 2020. At our average sales price per ton of $213.18 for the three months ended March 31, 2021, we generated $5.6 million less in net sales from the 27,000 fewer tons of essential ingredients sold in the three months ended March 31, 2021 as compared to the same period in 2020. The increase of $45.59, or 27%, in our average sales price per ton for the three months ended March 31, 2021 as compared to the same period in 2020 increased our net sales from our Pekin Campus production segment by $10.8 million. - 22 - Other Production Segment Net sales of alcohol from our other production segment decreased by $83.3 million, or 84%, to $16.0 million for the three months ended March 31, 2021 as compared to $99.3 million for the same period in 2020. Our total volume of gallons sold decreased by 57.1 million gallons, or 89%, to 7.4 million gallons for the three months ended March 31, 2021 as compared to 64.5 million gallons for the same period in 2020. At our other production segment’s average sales price per gallon of $2.16 for the three months ended March 31, 2021, we generated $123.2 million less in net sales from our other production segment from the 57.1 million fewer gallons of alcohol sold in the three months ended March 31, 2021 as compared to the same period in 2020. The increase of $0.62, or 40%, in our other production segment’s average sales price per gallon for the three months ended March 31, 2021 as compared to the same period in 2020 improved our net sales from our other production segment by $39.9 million. Net sales of essential ingredients decreased $25.1 million, or 83%, to $5.1 million for the three months ended March 31, 2021 as compared to $30.2 million for the same period in 2020. Our total volume of essential ingredients sold decreased by 369,000 tons, or 85%, to 65,000 tons for the three months ended March 31, 2021 from 434,000 tons for the same period in 2020. At our average sales price per ton of $78.64 for the three months ended March 31, 2021, we generated $29.0 million less in net sales from the 369,000 fewer tons of essential ingredients sold in the three months ended March 31, 2021 as compared to the same period in 2020. The increase of $8.97, or 12.9%, in our average sales price per ton for the three months ended March 31, 2021 as compared to the same period in 2020 increased our net sales from our other production segment by $3.9 million. Cost of Goods Sold and Gross Profit (Loss) Our consolidated gross profit (loss) improved to a gross profit of $13.8 million for the three months ended March 31, 2021 from a gross loss of $12.9 million for the same period in 2020, representing a gross profit margin of 6.3% for the three months ended March 31, 2021 compared to negative 4.1% for the same period in 2020. Our consolidated gross profit (loss) improved due to significantly higher margin sales of our specialty alcohols and a substantial reduction in negative margin sales of fuel-grade ethanol as we have idled a significant amount of our fuel-grade ethanol production. Marketing Segment Our marketing segment’s gross profit improved by $2.0 million to $3.5 million for the three months ended March 31, 2021 as compared to $1.5 million for the same period in 2020. Of this improvement, $3.0 million is attributable to higher margins from sales of third-party fuel-grade ethanol, partially offset by a reduction of $1.0 million attributable to lower marketing volumes of third-party fuel-grade ethanol for the three months ended March 31, 2021 as compared to the same period in 2020. Pekin Campus Production Segment Our Pekin Campus production segment’s gross profit improved by $15.2 million to a gross profit of $13.2 million for the three months ended March 31, 2021 as compared to a gross loss of $2.0 million for the same period in 2020. Of this improvement, $17.1 million is attributable to increased margins from our specialty alcohols, partially offset by $1.9 million less in gross profit attributable to decreased sales volumes in the three months ended March 31, 2021 as compared to the same period in 2020. - 23 - Other Production Segment Our other production segment’s gross profit improved by $9.5 million to a gross loss of $2.9 million for the three months ended March 31, 2021 as compared to a gross loss of $12.4 million for the same period in 2020. Of this improvement, $22.6 million is attributable to lower sales volumes at negative margins, partially offset by $13.1 million in lower gross profit attributable to a negative margin environment for fuel-grade ethanol for the three months ended March 31, 2021 as compared to the same period in 2020. Selling, General and Administrative Expenses The following table presents our selling, general and administrative, or SG&A, expenses in dollars and as a percentage of net sales (in thousands, except percentages): Three Months Ended March 31, Change in 2021 2020 Dollars Percent Selling, general and administrative expenses $ 7,014 $ 10,212 $ (3,198 ) (31.3 )% Percentage of net sales 3.2 % 3.3 % Our SG&A expenses decreased for the three months ended March 31, 2021 as compared to the same period in 2021. The $3.2 million period over period decrease in SG&A expenses is primarily due to higher professional fees incurred in the three months ended March 31, 2021 in connection with our debt restructuring and asset sale efforts. We anticipate SG&A expenses of $20.0 million to $25.0 million for all of 2021. Interest Expense, net The following table presents our interest expense, net in dollars and as a percentage of net sales (in thousands, except percentages): Three Months Ended March 31, Change in 2021 2020 Dollars Percent Interest expense, net $ 1,885 $ 5,307 $ (3,422 ) (64.5 )% Percentage of net sales 0.9 % 1.7 % Our interest expense, net decreased for the three months ended March 31, 2021 as compared to the same period in 2021. The $3.4 million period over period decrease in interest expense, net is primarily due to lower average borrowings outstanding as a result of our significant principal payments on outstanding debt over the past year. - 24 - Net Income (Loss) Available to Common Stockholders The following table presents our net income (loss) available to common stockholders in dollars and as a percentage of net sales (in thousands, except percentages): Three Months Ended March 31, Change in 2021 2020 Dollars Percent Net income (loss) available to Common Stockholders $ 4,366 $ (25,415 ) $ 29,781 NM Percentage of net sales 2.0 % (8.2 )% The increase in net income available to common stockholders is primarily due to our higher gross profit and lower SG&A expenses and interest expense, for the three months ended March 31, 2021 as compared to the same period in 2020. Liquidity and Capital Resources During the three months ended March 31, 2021, we funded our operations primarily from cash generated by our operations, proceeds from lines of credit and cash on hand. These funds were also used to make payments on our term debt and our other credit facilities and for capital expenditures. As of March 31, 2021, we had $44.1 million in cash and cash equivalents and $4.7 million available for borrowing under Kinergy’s operating line of credit. We believe we have sufficient liquidity to meet our anticipated working capital, debt service and other liquidity needs for the next twelve months from the date of this report. Quantitative Year-End Liquidity Status We believe that the following amounts provide insight into our liquidity and capital resources. The following selected financial information should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report (dollars in thousands). March 31, 2021 December 31, 2020 Change Cash and cash equivalents $ 44,146 $ 47,667 (7.4 )% Current assets $ 241,588 $ 214,046 12.9 % Property and equipment, net $ 226,183 $ 229,486 (1.4 )% Current liabilities $ 112,750 $ 86,927 29.7 % Long-term debt, noncurrent portion $ 64,396 $ 71,807 (10.3 )% Working capital $ 128,838 $ 127,119 1.4 % Working capital ratio 2.14 2.46 (13.0 )% - 25 - Restricted Net Assets At March 31, 2021, we had approximately $231.9 million of net assets at our subsidiaries that were not available to be transferred to Alto Ingredients, Inc. in the form of dividends, distributions, loans or advances due to restrictions contained in the credit facilities of the subsidiaries. Changes in Working Capital and Cash Flows Working capital improved to $128.8 million at March 31, 2021 from $127.1 million at December 31, 2020 as a result of an increase of $27.5 million in current assets, partially offset by an increase of $25.8 million in current liabilities. Current assets increased primarily due to an increase in accounts receivable and higher inventory values due to increased commodity prices for both alcohol and corn from the prior period. Our current liabilities increased primarily due to an increase in accounts payable due to timing of payments and an increase in current portion of long-term debt as amounts due within one year increased. Our cash and cash equivalents declined by $3.5 million primarily due to $4.1 million in cash used in our operating activities and $4.4 million in cash used in our investing activities, partially offset by $5.0 million in cash provided by our financing activities. Cash used in our Operating Activities We used $4.1 million in cash in our operating activities during the three months ended March 31, 2021, as compared to $26.9 million in cash provided by our operations for the same period in 2020. Specific factors that contributed to the change in cash from our operating activities include: ● a decrease of $35.1 million related to higher accounts receivable balances due to the timing of payments ● a decrease of $28.1 million related to higher inventories due to increased commodity prices; and ● a decrease of $10.5 million from losses on derivative instruments due to the recent rise in corn prices. These amounts were partially offset by: ● an increase of $31.8 million in our consolidated net income due to higher margins from our sales of specialty alcohols; and ● an increase of $21.9 million related to accounts payable due to timing of payments. Cash used in our Investing Activities We used $4.4 million of cash in our investing activities for the three months ended March 31, 2021 for additions to property and equipment resulting from our capital expenditure projects. Cash provided by our Financing Activities Cash provided by our financing activities was $5.0 million for the three months ended March 31, 2021, which reflected net proceeds of $13.0 million from Kinergy’s operating line of credit and $0.5 million in stock option exercises, partially offset by $8.5 million in principal payments on our other indebtedness. - 26 - Kinergy’s Operating Line of Credit Kinergy maintains an operating line of credit for an aggregate amount of up to $100.0 million. The credit facility matures on August 2, 2022. Interest accrues under the credit facility at a rate equal to (i) the three-month London Interbank Offered Rate (“LIBOR”), plus (ii) a specified applicable margin ranging from 1.50% to 2.00%. The credit facility’s monthly unused line fee is 0.25% to 0.375% of the amount by which the maximum credit under the facility exceeds the average daily principal balance during the immediately preceding month. Payments that may be made by Kinergy to Alto Ingredients, Inc. as reimbursement for management and other services provided by Alto Ingredients, Inc. to Kinergy are limited under the terms of the credit facility to $1.5 million per fiscal quarter. The credit facility also includes the accounts receivable of our wholly-owned subsidiary, Alto Nutrients, LLC, or Alto Nutrients, as additional collateral. Payments that may be made by Alto Nutrients to Alto Ingredients, Inc. as reimbursement for management and other services provided by Alto Ingredients, Inc. to Alto Nutrients are limited under the terms of the credit facility to $0.5 million per fiscal quarter. Alto Nutrients, one of our indirect wholly-owned subsidiaries, markets our essential ingredients and also provides raw material procurement services to our subsidiaries. For all monthly periods in which excess borrowing availability falls below a specified level, Kinergy and Alto Nutrients must collectively 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 respective assets in favor of the lender. We believe Kinergy and Alto Nutrients are in compliance with the fixed-charge coverage ratio covenant as of the filing of this report. The following table sets forth the fixed-charge coverage ratio financial covenant and the actual results for the periods presented: Three Months Ended March 31, Years Ended December 31, 2021 2020 2020 2019 Fixed-Charge Coverage Ratio Requirement 2.00 2.00 2.00 2.00 Actual 7.71 4.05 5.35 5.71 Excess 5.71 2.05 3.35 3.71 Alto Ingredients, Inc. has guaranteed all of Kinergy’s obligations under the credit facility. As of March 31, 2021, Kinergy had an outstanding balance of $45.5 million and $4.7 million of unused borrowing availability under the credit facility. Alto Pekin Credit Facilities On December 15, 2016, Alto Pekin, LLC, or Alto Pekin, one of our indirect wholly-owned subsidiaries and the entity that holds two of our production facilities in Pekin, Illinois, entered into a Credit Agreement, or the Pekin Credit Agreement, with 1 st Farm Credit Services, PCA and CoBank, ACB, or 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, or the Pekin Term Loan, and up to $32.0 million under a revolving term loan facility that matures on February 1, 2022, or 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. - 27 - 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 Alto ICP, LLC, or ICP, one of our indirect wholly-owned subsidiaries and the entity that holds one of our production facilities in Pekin, Illinois, are collectively required to maintain working capital of not less than 50% of the combined outstanding revolving lines of credit, which was $27.0 million at March 31, 2021; 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. Net proceeds arising from a sale of any of our midwestern production facility assets will be allocated 33/34/33% among Alto Pekin’s and ICP’s lenders, collectively, our senior secured noteholders, and us, respectively. Net proceeds arising from the sale of any of our 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, our senior secured noteholders, and us, respectively. As of the filing of this report, we believe we are in compliance with the terms and conditions of the Notes. ICP Credit Facilities On September 15, 2017, ICP, Compeer Financial, PCA, or Compeer, and CoBank as agent, entered into a Credit Agreement, or 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, or the ICP Term Loan, and up to $18.0 million under a revolving term loan facility that matures on September 1, 2022, or 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 $27.0 million at March 31, 2021; 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. - 28 - Net proceeds arising from the sale of any of our midwestern production facility assets will be allocated 33/34/33% among Alto Pekin’s and ICP’s lenders, collectively, our senior secured noteholders, and us, respectively. Net proceeds arising from the sale of any of our 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, our senior secured noteholders, and us, respectively. As of the filing of this report, we believe we are in compliance with the terms and conditions of our ICP Credit Facility. Senior Secured Notes On December 12, 2016, we 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, we 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 our 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 holders of our Notes, or the senior secured noteholders, 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 be 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 senior secured noteholders. Alto Op. Co also granted to the senior secured noteholders a security interest in certain of its personal property. We and certain subsidiaries also entered into intercreditor agreements with the ICP’s and Alto Pekin’s lenders, and the agent for our senior secured noteholders, to address issues of priority and the allocation of proceeds from asset sales. On May 14, 2021, in connection with the sale of our Madera, California fuel-grade ethanol production facility, we repaid $19.3 million in principal on these Notes. As of the filing of this report, we believe we are in compliance with the terms and conditions of the Notes. - 29 - CARES Act Loans On May 4, 2020, Alto Ingredients, Inc. and Alto Pekin received loan proceeds from Bank of America, NA under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, through the Paycheck Protection Program administered by the U.S. Small Business Administration. Alto Ingredients, Inc. 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 we can provide no assurance that we will be able to obtain forgiveness of all or any portion of the loans. We have applied for loan forgiveness. Effects of Inflation The impact of inflation was not significant to our financial condition or results of operations for the three months ended March 31, 2021 and 2020. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable.