Alto Ingredients, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS. ALTO INGREDIENTS, INC. CONSOLIDATED BALANCE SHEETS (in thousands) June 30, December 31, 2021 2020 (unaudited) * ASSETS Current Assets: Cash and cash equivalents $ 50,796 $ 47,667 Accounts receivable, net (net of allowance for doubtful accounts of $ 363 and $ 260 , respectively) 67,043 43,491 Inventories 58,251 37,925 Prepaid inventory 531 891 Derivative instruments 28,498 17,149 Assets held-for-sale 30,199 58,295 Other current assets 8,932 8,628 Total current assets 244,250 214,046 Property and equipment, net 221,327 229,486 Other Assets: Right of use operating lease assets, net 13,509 11,046 Notes receivable 12,775 14,337 Intangible assets 2,678 2,678 Other assets 4,665 5,225 Total other assets 33,627 33,286 Total Assets $ 499,204 $ 476,818 * Amounts derived from the audited consolidated 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) June 30, December 31, 2021 2020 (unaudited) * LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable – trade $ 30,029 $ 13,047 Accrued liabilities 15,977 11,101 Current portion – operating leases 3,171 2,180 Current portion – long-term debt 23,660 25,533 Derivative instruments 20,174 — Liabilities held-for-sale 10,478 19,542 Other current liabilities 7,255 15,524 Total current liabilities 110,744 86,927 Long-term debt, net of current portion 56,848 71,807 Operating leases, net of current portion 10,188 8,715 Other liabilities 13,405 13,134 Total Liabilities 191,185 180,583 Commitments and Contingencies (Note 7) 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 June 30, 2021 and December 31, 2020; Series B: 1,581 shares authorized; 927 shares issued and outstanding as of June 30, 2021 and December 31, 2020; liquidation preference of $ 20,290 as of June 30, 2021 1 1 Common stock, $ 0.001 par value; 300,000 shares authorized; 72,811 and 72,487 shares issued and outstanding as of June 30, 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 June 30, 2021 and December 31, 2020, respectively — — Additional paid-in capital 1,035,980 1,036,638 Accumulated other comprehensive loss ( 3,878 ) ( 3,878 ) Accumulated deficit ( 724,157 ) ( 736,598 ) Total Stockholders’ Equity 308,019 296,235 Total Liabilities and Stockholders’ Equity $ 499,204 $ 476,818 * Amounts derived from the audited consolidated 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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 Net sales $ 298,110 $ 212,074 $ 516,844 $ 523,478 Cost of goods sold 282,877 180,892 487,774 505,186 Gross profit 15,233 31,182 29,070 18,292 Selling, general and administrative expenses 7,230 8,629 14,244 18,841 Asset impairments 1,900 — 3,100 — Income (loss) from operations 6,103 22,553 11,726 ( 549 ) Interest expense, net ( 1,045 ) ( 4,647 ) ( 2,930 ) ( 9,954 ) Income from loan forgiveness 3,887 — 3,887 — Fair value adjustments — ( 1,314 ) — ( 641 ) Other income (expense), net ( 555 ) ( 1,738 ) 385 ( 1,158 ) Income (loss) before benefit for income taxes 8,390 14,854 13,068 ( 12,302 ) Benefit for income taxes — — — — Consolidated net income (loss) 8,390 14,854 13,068 ( 12,302 ) Net loss attributed to noncontrolling interests — 110 — 2,166 Net income (loss) attributed to Alto Ingredients, Inc. $ 8,390 $ 14,964 $ 13,068 $ ( 10,136 ) Preferred stock dividends $ ( 315 ) $ ( 315 ) $ ( 627 ) $ ( 630 ) Net income (loss) available to common stockholders $ 8,075 $ 14,649 $ 12,441 $ ( 10,766 ) Net income (loss) per share, basic $ 0.11 $ 0.27 $ 0.18 $ ( 0.20 ) Net income (loss) per share, diluted $ 0.11 $ 0.27 $ 0.17 $ ( 0.20 ) Weighted-average shares outstanding, basic 71,260 54,498 70,808 54,163 Weighted-average shares outstanding, diluted 71,929 54,498 71,961 54,163 See accompanying notes to consolidated financial statements. 3 ALTO INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands) Six Months Ended June 30, 2021 2020 Operating Activities: Consolidated net income (loss) $ 13,068 $ ( 12,302 ) Adjustments to reconcile consolidated net income (loss) to net cash provided by operating activities: Depreciation 11,670 18,806 Asset impairments 3,100 — Income from loan forgiveness ( 3,887 ) — Non-cash compensation 1,655 1,441 Amortization of deferred financing fees 701 497 Fair value adjustments — 641 Interest added to debt — 133 Bad debt expense 143 1 Changes in operating assets and liabilities: Accounts receivable ( 23,694 ) 25,435 Inventories ( 18,526 ) 14,274 Prepaid expenses and other assets 8,615 ( 403 ) Prepaid inventory 361 ( 1,652 ) Operating leases ( 2,069 ) ( 2,348 ) Assets held-for-sale ( 2,915 ) 1,012 Liabilities held-for-sale 1,445 9,345 Accounts payable and accrued expenses 11,096 ( 9,225 ) Net cash provided by operating activities 763 45,655 Investing Activities: Proceeds from Madera Sale 19,500 — Proceeds from PAL Sale — 19,896 Additions to property and equipment ( 4,192 ) ( 2,510 ) Net cash provided by investing activities 15,308 17,386 Financing Activities: Net proceeds from (payments on) Kinergy’s line of credit 24,406 ( 36,897 ) Proceeds from stock option exercises 462 — Principal payments on borrowings ( 37,810 ) ( 25,500 ) Proceeds from issuance of common stock — 282 Proceeds from borrowings — 9,860 Net cash used in financing activities ( 12,942 ) ( 52,255 ) Net change in cash and cash equivalents 3,129 10,786 Cash and cash equivalents at beginning of period 47,667 18,997 Cash and cash equivalents at end of period $ 50,796 $ 29,783 Supplemental Information: Interest paid $ 2,723 $ 9,733 Accrued preferred stock dividends $ 627 $ 630 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 Restricted stock issued to employees and directors, net of cancellations and tax — — 550 1 ( 186 ) — — — ( 185 ) Stock-based compensation — — — — 804 — — — 804 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 Restricted stock issued to employees and directors, net of cancellations and tax — — ( 350 ) — ( 2,589 ) — — — ( 2,589 ) Stock-based compensation — — — — 851 — — — 851 Preferred stock dividends — — — — — ( 315 ) — — ( 315 ) Net income — — — — — 8,390 — — 8,390 Balances, June 30, 2021 927 $ 1 72,811 $ 73 $ 1,035,980 $ ( 724,157 ) $ ( 3,878 ) $ — $ 308,019 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, 2020 927 $ 1 55,508 $ 56 $ 942,307 $ ( 720,214 ) $ ( 2,370 ) $ 7,265 $ 227,045 Restricted stock issued to employees and directors, net of cancellations and tax — — ( 38 ) ( 4 ) 3 — — — ( 1 ) Stock-based compensation — — — — 865 — — — 865 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 Restricted stock issued to employees and directors, net of cancellations and tax — — ( 409 ) ( 1 ) 6 — — — 5 Stock-based compensation — — — — 576 — — — 576 Preferred stock dividends — — — — — ( 315 ) — — ( 315 ) Sale of interests in PAL — — — — — — — ( 5,099 ) ( 5,099 ) Net income (loss) — — — — — 14,964 — ( 110 ) 14,854 Balances, June 30, 2020 927 $ 1 55,482 $ 55 $ 944,035 $ ( 730,980 ) $ ( 2,370 ) $ — $ 210,741 See accompanying notes to consolidated financial statements. 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 Op Co., a Delaware corporation, and all seven of the Company’s production facilities through May 14, 2021. As discussed in Note 2, on May 14, 2021, the Company completed the sale of its production facility located in Madera, California. 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 three 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 has a combined production capacity of 410 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 June 30, 2021, the Company was operating at approximately 71% of its 410 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. 6 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. 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 $ 61,501,000 and $ 35,839,000 at June 30, 2021 and December 31, 2020, respectively, were used as collateral under Kinergy’s operating line of credit. The allowance for doubtful accounts was $ 363,000 and $ 260,000 as of June 30, 2021 and December 31, 2020, respectively. The Company recorded a bad debt expense of $ 52,000 and a bad debt recovery of $ 18,000 for the three months ended June 30, 2021 and 2020, respectively. The Company recorded a bad debt expense of $ 143,000 and $ 1,000 for the six months ended June 30, 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 six months ended June 30, 2021, the Company provided for an additional impairment charge of $ 1.2 million based on revised fair value estimates. On May 14, 2021, the Company closed the sale of 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, resulting in a net loss on sale of less than $ 0.1 million, recorded as other income (expense), net in the Company’s consolidated statements of operations. All of the cash proceeds were used to repay a significant portion of the Company’s term debt and accrued interest. 7 The Company continues to market its Stockton facility for sale. In June 2021, the Company agreed to a plan to sell certain assets of the Company’s idled facility in Canton, Illinois. As a result, the Company determined the related long-lived asset groups should be classified as held-for-sale at June 30, 2021. During the three months ended June 30, 2021, the Company recorded an estimated impairment charge of $ 1.9 million based on fair value estimates. The Company classified the following assets and liabilities as held-for-sale as of June 30, 2021 (in thousands): Stockton Canton Property and equipment, net $ 19,535 $ 1,000 Right of use operating lease assets, net 9,664 — Assets held-for-sale $ 29,199 $ 1,000 Stockton Canton Liabilities held-for-sale – operating leases $ 10,478 $ — 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 June 30, 2021, net sales attributed to the results of operations for Stockton and Madera were $ 0.4 million and less than $ 0.1 million, respectively. For the three months ended June 30, 2020, net sales attributed to the results of operations for Stockton and Madera were $ 0.5 million and $ 1.0 million, respectively. For the three months ended June 30, 2021, pre-tax loss attributed to the results of operations for Stockton and Madera was $ 1.4 million and $ 0.2 million, respectively. For the three months ended June 30, 2020, pre-tax loss attributed to the results of operations for Stockton and Madera was $ 1.2 million and $ 1.8 million, respectively. For the six months ended June 30, 2021, net sales attributed to the results of operations for Stockton and Madera were $ 0.6 million and less than $ 0.1 million, respectively. For the six months ended June 30, 2020, net sales attributed to the results of operations for Stockton and Madera were $ 22.4 million and $ 22.5 million, respectively. For the six months ended June 30, 2021, pre-tax loss attributed to the results of operations for Stockton and Madera was $ 2.2 million and $ 1.8 million, respectively. For the six months ended June 30, 2020, pre-tax loss attributed to the results of operations for Stockton and Madera was $ 3.5 million and $ 3.6 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 June 30, Six Months Ended June 30, 2021 2020 2021 2020 Net Sales Marketing and distribution: Alcohol sales, gross $ 86,299 $ 71,117 $ 143,309 $ 128,623 Alcohol sales, net 532 307 984 736 Intersegment sales 2,618 1,838 4,862 6,153 Total marketing and distribution sales 89,449 73,262 149,155 135,512 Pekin Campus production, recorded as gross: Alcohol sales $ 132,296 $ 94,538 $ 227,380 $ 178,669 Essential ingredient sales 49,578 33,633 94,655 73,504 Intersegment sales 316 263 628 680 Total Pekin Campus sales 182,190 128,434 322,663 252,853 Other production, recorded as gross: Alcohol sales $ 22,153 $ 9,796 $ 38,121 $ 109,025 Essential ingredient sales 7,252 2,683 12,395 32,921 Intersegment sales 332 410 637 701 Total Other production sales 29,737 12,889 51,153 142,647 Intersegment eliminations ( 3,266 ) ( 2,511 ) ( 6,127 ) ( 7,534 ) Net sales as reported $ 298,110 $ 212,074 $ 516,844 $ 523,478 Cost of goods sold: Marketing and distribution $ 85,746 $ 69,101 $ 139,705 $ 126,240 Pekin Campus production 171,547 95,070 299,250 221,840 Other production 27,325 18,354 51,442 160,663 Intersegment eliminations ( 1,741 ) ( 1,633 ) ( 2,623 ) ( 3,557 ) Cost of goods sold as reported $ 282,877 $ 180,892 $ 487,774 $ 505,186 Income (loss) before benefit for income taxes: Marketing and distribution $ 1,678 $ 2,043 $ 5,411 $ 4,286 Pekin Campus production 10,726 27,459 20,736 19,280 Other production ( 1,666 ) ( 10,252 ) ( 7,609 ) ( 33,816 ) Corporate activities ( 2,348 ) ( 4,396 ) ( 5,470 ) ( 2,052 ) $ 8,390 $ 14,854 $ 13,068 $ ( 12,302 ) Depreciation: Pekin Campus production $ 4,326 $ 4,371 $ 8,671 $ 8,757 Other production 1,468 3,697 2,966 9,982 Corporate activities 17 33 33 67 $ 5,811 $ 8,101 $ 11,670 $ 18,806 Interest expense: Marketing and distribution $ 222 $ 313 $ 426 $ 940 Pekin Campus production 73 1,594 591 3,679 Other production 46 29 182 60 Corporate activities 704 2,711 1,731 5,275 $ 1,045 $ 4,647 $ 2,930 $ 9,954 9 The following table sets forth the Company’s total assets by operating segment (in thousands): June 30, 2021 December 31, 2020 Total assets: Marketing and distribution $ 140,204 $ 89,337 Pekin Campus production 254,206 234,439 Other production 83,330 102,409 Corporate assets 21,464 50,633 $ 499,204 $ 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 valuation adjustments of $ 1,800,000 and $ 1,033,000 as of June 30, 2021 and December 31, 2020, respectively. Inventory balances consisted of the following (in thousands): June 30, 2021 December 31, 2020 Finished goods $ 40,497 $ 25,154 Work in progress 5,701 4,333 Raw materials 10,788 7,074 Other 1,265 1,364 Total $ 58,251 $ 37,925 10 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. 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 and six months ended June 30, 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 $ 8,868,000 and $ 0 as the change in the fair value of these contracts for the three months ended June 30, 2021 and 2020, respectively. The Company recognized net gains of $ 19,411,000 and $ 0 as the change in the fair value of these contracts for the six months ended June 30, 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 June 30, 2021 Assets Liabilities Type of Instrument Balance Sheet Location Fair Value Balance Sheet Location Fair Value Cash collateral balance Other current assets $ 3,777 Commodity contracts Derivative assets $ 28,498 Derivative liabilities $ 20,174 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 $ — 11 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 June 30, Type of Instrument Statements of Operations Location 2021 2020 Commodity contracts Cost of goods sold $ 18,158 $ — $ 18,158 $ — Realized Gains For the Six Months Ended June 30, Type of Instrument Statements of Operations Location 2021 2020 Commodity contracts Cost of goods sold $ 24,343 $ — $ 24,343 $ — Unrealized Losses For the Three Months Ended June 30, Type of Instrument Statements of Operations Location 2021 2020 Commodity contracts Cost of goods sold $ 9,290 $ — $ 9,290 $ — Unrealized Losses For the Six Months Ended June 30, Type of Instrument Statements of Operations Location 2021 2020 Commodity contracts Cost of goods sold $ 4,932 $ — $ 4,932 $ — 12 6. DEBT. Long-term borrowings are summarized as follows (in thousands): June 30, 2021 December 31, 2020 Kinergy line of credit $ 56,918 $ 32,512 Pekin revolving loan 7,580 20,580 ICP revolving loan 9,384 9,384 Parent notes payable 723 25,533 CARES Act loans 5,973 9,860 80,578 97,869 Less unamortized debt premium — 230 Less unamortized debt financing costs ( 70 ) ( 759 ) Less short-term portion ( 23,660 ) ( 25,533 ) Long-term debt $ 56,848 $ 71,807 Parent Notes Payable – On May 14, 2021, with proceeds from the Company’s sale of its Madera, California facility, the Company repaid $ 19.3 million of principal on its notes payable, resulting in an aggregate balance of $ 0.7 million. 13 CARES Act Loans – On May 4, 2020, Alto Ingredients, Inc. and Alto Pekin, LLC, or 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 (“SBA”). Alto Ingredients, Inc. received $ 6.0 million and Alto Pekin received $ 3.9 million in loan proceeds. Under the terms of the loans, certain amounts may be forgiven if they are used for qualifying expenses as described in the CARES Act. In June 2021, the SBA approved Alto Pekin’s forgiveness application for the full amount of $ 3.9 million, and accordingly, the Company recognized income from loan forgiveness for the three months ended June 30, 2021. The Company has applied to the SBA for forgiveness of the Company’s remaining loan. The SBA may audit the loan forgiveness applications and further examine eligibility for forgiveness, including the facts and circumstances existing at the time the loans were made. The Company can provide no assurances that any loan forgiven will not require repayment following an audit by the SBA. Maturities of Long-term Debt – The Company’s long-term debt matures as follows (in thousands): December 31: 2021 $ 723 2022 22,937 2023 56,918 $ 80,578 Restrictions – At June 30, 2021, there were approximately $ 245.7 million of net assets at the Company’s subsidiaries that were not available for transfer 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 June 30, 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 96,399,000 gallons as of June 30, 2021 and open fixed-price alcohol sales contracts totaling $ 223,575,000 as of June 30, 2021. The Company had open fixed-price sales contracts for essential ingredients totaling $ 11,061,000 and open indexed-price sales contracts of essential ingredients for 117,000 tons as of June 30, 2021. These sales contracts are scheduled for completion over the next twelve months. Purchase Commitments – At June 30, 2021, the Company had indexed-price purchase contracts to purchase 17,706,000 gallons of alcohol and fixed-price purchase contracts to purchase $ 39,086,000 of alcohol from its suppliers. The Company had fixed-price purchase contracts to purchase $ 77,375,000 of corn from its suppliers as of June 30, 2021. These purchase commitments are scheduled to be satisfied throughout 2021. 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. 14 8. PENSION AND RETIREMENT BENEFIT 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 Aventine Renewable Energy Holdings, Inc. 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 June 30, 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 June 30, 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. For the six months ended June 30, 2021, the Retirement Plan’s net periodic expense was $ 44,000 , comprised of $ 302,000 in interest cost and $ 218,000 in service cost, partially offset by $ 476,000 of expected return on plan assets. For the six months ended June 30, 2020, the Retirement Plan’s net periodic expense was $ 96,000 , comprised of $ 346,000 in interest cost and $ 202,000 in service cost, partially offset by $ 452,000 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 declines 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 June 30, 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 June 30, 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. For the six months ended June 30, 2021, the Postretirement Plan’s net periodic expense was $ 84,000 , comprised of $ 20,000 of interest cost, $ 52,000 of service cost and $ 12,000 of amortization expense. For the six months ended June 30, 2020, the Postretirement Plan’s net periodic expense was $ 118,000 , comprised of $ 76,000 of interest cost, $ 28,000 of service cost and $ 14,000 of amortization expense. 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. 15 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 June 30, 2021 and December 31, 2020 of $ 20,535,000 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 June 30, 2021 (in thousands): Fair Value Level 1 Level 2 Level 3 Assets: Derivative financial instruments $ 28,498 $ 28,498 $ — $ — Long-lived assets held-for-sale 30,199 — — 30,199 $ 58,697 $ 28,498 $ — $ 30,199 Liabilities: Derivative financial instruments $ ( 20,174 ) $ ( 20,174 ) $ — $ — $ ( 20,174 ) $ ( 20,174 ) $ — $ — 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. 16 10. EARNINGS PER SHARE. The following tables compute basic and diluted earnings per share (in thousands, except per share data): Three Months Ended June 30, 2021 Income Numerator Shares Denominator Per-Share Amount Net income attributed to Alto Ingredients, Inc. $ 8,390 Less: Preferred stock dividends ( 315 ) Basic income per share: Income available to common stockholders $ 8,075 71,260 $ 0.11 Add: Dilutive instruments — 669 Diluted income per share: Income available to common stockholders $ 8,075 71,929 $ 0.11 Three Months Ended June 30, 2020 Income Numerator Shares Denominator Per-Share Amount Net income attributed to Alto Ingredients, Inc. $ 14,964 Less: Preferred stock dividends ( 315 ) Basic and diluted income per share: Income available to common stockholders $ 14,649 54,498 $ 0.27 Six Months Ended June 30, 2021 Income Numerator Shares Denominator Per-Share Amount Net income attributed to Alto Ingredients, Inc. $ 13,068 Less: Preferred stock dividends ( 627 ) Basic income per share: Income available to common stockholders $ 12,441 70,808 $ 0.18 Add: Dilutive instruments — 1,153 Diluted income per share: Income available to common stockholders $ 12,441 71,961 $ 0.17 Six Months Ended June 30, 2020 Loss Numerator Shares Denominator Per-Share Amount Net loss attributed to Alto Ingredients, Inc. $ ( 10,136 ) Less: Preferred stock dividends ( 630 ) Basic and diluted loss per share: Loss available to common stockholders $ ( 10,766 ) 54,163 $ ( 0.20 ) There were an additional aggregate potentially dilutive weighted-average shares of 964,000 from convertible securities outstanding for the three and six months ended June 30, 2021 and 2020. These securities were not considered in calculating diluted net income (loss) per share for the three and six months ended June 30, 2021 and 2020, as their effect would have been anti-dilutive. 17 11. PARENT COMPANY FINANCIALS. Restricted Net Assets – At June 30, 2021, the Company had approximately $ 245.7 million of net assets at its subsidiaries that were not available for transfer 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): June 30, 2021 December 31, 2020 ASSETS Current Assets: Cash and cash equivalents $ 15,128 $ 25,632 Receivables from subsidiaries 13,460 15,548 Other current assets 2,588 1,836 Total current assets 31,176 43,016 Property and equipment, net 108 142 Other Assets: Investments in subsidiaries 264,645 246,518 Alto West, LLC receivable 27,592 42,649 Right of use operating lease assets, net 2,844 2,985 Other assets 796 1,088 Total other assets 295,877 293,240 Total Assets $ 327,161 $ 336,398 Current Liabilities: Accounts payable and accrued liabilities $ 5,439 $ 2,001 Accrued Alto Op Co. purchase 3,829 3,829 Current portion of long-term debt 6,696 25,533 Other current liabilities 329 473 Total current liabilities 16,293 31,836 Long-term debt, net of current portion — 5,564 Other liabilities 2,849 2,763 Total Liabilities 19,142 40,163 Stockholders’ Equity: Preferred stock 1 1 Common and non-voting common stock 73 72 Additional paid-in capital 1,035,980 1,036,638 Accumulated other comprehensive loss ( 3,878 ) ( 3,878 ) Accumulated deficit ( 724,157 ) ( 736,598 ) Total Alto Ingredients, Inc. stockholders’ equity 308,019 296,235 Total Liabilities and Stockholders’ Equity $ 327,161 $ 336,398 Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Management fees from subsidiaries $ 2,486 $ 2,873 $ 5,012 $ 6,126 Selling, general and administrative expenses 4,393 4,308 9,044 9,685 Income (loss) from operations ( 1,907 ) ( 1,435 ) ( 4,032 ) ( 3,559 ) Fair value adjustments — ( 1,314 ) — ( 641 ) Interest expense, net ( 704 ) ( 1,721 ) ( 1,731 ) ( 3,297 ) Other income (expense) 410 ( 140 ) 1,218 ( 162 ) Loss before benefit for income taxes ( 2,201 ) ( 4,610 ) ( 4,545 ) ( 7,659 ) Benefit for income taxes — — — — Net loss ( 2,201 ) ( 4,610 ) ( 4,545 ) ( 7,659 ) Equity in income (losses) of subsidiaries 10,591 19,574 17,613 ( 2,477 ) Net income (loss) attributed to Alto Ingredients, Inc. $ 8,390 $ 14,964 $ 13,068 $ ( 10,136 ) 18 For the Six Months Ended June 30, 2021 2020 Operating Activities: Net income (loss) $ 13,068 $ ( 10,136 ) Adjustments to reconcile net income (loss) to cash used in operating activities: Equity in (income) losses of subsidiaries ( 17,613 ) 2,477 Fair value adjustments — ( 641 ) Depreciation 33 67 Amortization of debt (premiums) discounts 409 ( 115 ) Changes in operating assets and liabilities: Accounts receivable 2,088 ( 1,207 ) Other assets ( 319 ) 714 Accounts payable and accrued expenses ( 2,416 ) — Accounts payable with subsidiaries 37 475 Net cash used in operating activities ( 4,713 ) ( 8,366 ) 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 receivables 15,057 5,813 Proceeds from long-term debt — 5,973 Payments on senior notes ( 24,810 ) — Dividend from subsidiary 3,500 — Net cash provided by (used in) financing activities ( 5,791 ) 12,068 Net change in cash and cash equivalents ( 10,504 ) 3,702 Cash and cash equivalents at beginning of period 25,632 4,985 Cash and cash equivalents at end of period $ 15,128 $ 8,687 19