Alto Ingredients, Inc. 10-Q

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. Overview We are a leading producer and marketer of specialty alcohols and essential ingredients, and the largest producer of specialty alcohols in the United States based on annualized volumes. We operate 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. We are in the process of marketing our Stockton, California 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. 20 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, or Pekin 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 71% 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. 21 Our fuel-grade ethanol customers are located throughout the Western and Midwestern United States and consist of integrated oil companies and gasoline marketers who blend fuel-grade ethanol into gasoline. Our customers depend on us to provide a reliable supply of fuel-grade ethanol and manage the logistics and timing of delivery with very little effort on their part. Our customers collectively require fuel-grade ethanol volumes in excess of the supplies we produce at our facilities. We secure additional fuel-grade ethanol supplies from third-party fuel-grade ethanol plants in California and other third-party suppliers in the Midwest where a majority of fuel-grade ethanol producers are located. We arrange for transportation, storage and delivery of fuel-grade ethanol purchased by our customers through our agreements with third-party service providers in the Western United States as well as in the Midwest from a variety of sources. We market our essential ingredient feed products to dairies and feedlots, in many cases located near our production facilities. These customers use our feed products for livestock as a substitute for corn and other sources of starch and protein. We sell our corn oil to poultry and biodiesel customers. We do not market essential ingredients from other producers. See “Note 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 achieved our fifth consecutive quarter of gross profit and continue to reap the benefits of our new business focus on specialty alcohols and essential ingredients. As part of our business transformation, we continue to improve our balance sheet, invest in our production infrastructure, expand our product offerings and pursue new long-term accretive growth opportunities. We are expanding, deepening and strengthening our relationships with key customers as a leading certified producer of a growing variety of specialty alcohols used in common everyday consumer goods such as vinegars, spirits, mouthwash, cosmetics and cleaning products. Through our integrated production and operations at our Pekin, Illinois campus along with our enhanced certifications, we can provide surety of quality, supply and redundancy, all of which are material differentiators among our growing base of product offerings. We are well positioned through these and other distinctions as we begin the contracting process for specialty alcohol volumes for 2022 and beyond. We believe that we will improve utilization over time of our expanded specialty alcohol production capacity. We remain on track to generate a minimum of $60 million in gross profit in 2021 from the sale of specialty alcohols under fixed-price contracts. Many variables could materially impact this projected amount and our overall 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. In the second quarter, we closed the sale of our fuel-grade ethanol facility in Madera, California. As we continue our business transformation to further focus on specialty alcohols and essential ingredients, our asset sale initiatives are now targeting our fuel-grade ethanol facility in Stockton, California and the remaining assets of our non-operating facility in Canton, Illinois. 22 Our capital improvement projects are on-track and directed at expanding revenue and increasing efficiencies and plant reliability. Our yeast facility expansion and Pekin campus upgrade projects are scheduled for completion and full operation 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, or EBITDA. We are also expanding our annual corn oil production capacity at our Pekin campus by approximately 4,000 tons, which we estimate will contribute an additional $4.5 million in EBITDA annually. This project is on-track for completion before year-end. We have scheduled a mid-August repair and maintenance shutdown of our Pekin campus wet mill. This project is scheduled to occur during a period of choppy market conditions resulting from low pre-harvest corn inventories and tight fuel-grade ethanol margins. Lower revenues and higher repair and maintenance expenses resulting from this project are expected to impact only the third quarter. We do not anticipate any impact on our ability to meet our contractual supply obligations for specialty alcohols or essential ingredients. The net effect of this project will be improved efficiency and reliability of our Pekin campus wet mill and better alignment of our production with market demand. Looking ahead, among many other projects under development is our plan to expand protein production at our dry-mill 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 growth and greater diversity in revenue as well as growth and higher quality of earnings. 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. Over the past year, we have improved operations and our production footprint to focus on our most profitable and strategic operations. We have also repaired our balance sheet. We are now pursuing opportunities to expand our business through enhanced service and product offerings and accretive vertical integration. 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. 23 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 June 30, Percentage Six Months Ended June 30, Percentage 2021 2020 Variance 2021 2020 Variance Fuel-grade ethanol production gallons sold (in millions) 41.4 27.0 53.3 % 80.4 127.2 (36.8 )% Specialty alcohol production gallons sold (in millions) 24.3 29.9 (18.7 )% 43.3 52.2 (17.0 )% Third party fuel-grade ethanol gallons sold (in millions) 59.3 73.9 (19.8 )% 113.3 136.3 (16.9 )% Total gallons sold (in millions) 125.0 130.8 (4.4 )% 237.0 315.7 (24.9 )% Total gallons produced (in millions) 63.6 47.6 33.6 % 121.5 163.9 (25.9 )% Production capacity utilization 59 % 40 % 47.5 % 56 % 60 % (6.7 )% Average sales price per gallon $ 2.41 $ 1.59 51.6 % $ 2.17 $ 1.55 40.0 % Corn cost per bushel – CBOT equivalent $ 6.05 $ 3.39 78.5 % $ 5.51 $ 3.59 53.5 % Average basis (1) $ 0.41 $ 0.20 105.0 % $ 0.36 $ 0.32 12.5 % Delivered cost of corn $ 6.46 $ 3.59 79.9 % $ 5.87 $ 3.91 50.1 % Total essential ingredients tons sold (in thousands) 304.0 250.1 21.6 % 580.9 922.0 (37.0 )% Essential ingredients revenues as % of delivered cost of corn (2) 32.2 % 46.5 % (30.8 )% 35.9 % 41.8 % (14.1 )% Average CBOT ethanol price per gallon $ 2.30 $ 1.08 113.0 % $ 2.00 $ 1.16 72.4 % Average CBOT corn price per bushel $ 6.62 $ 3.23 105.0 % $ 6.01 $ 3.59 67.4 % (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 The following table presents our net sales, cost of goods sold and gross profit in dollars and gross profit as a percentage of net sales (in thousands, except percentages): Three Months Ended June 30, Variance in Six Months Ended June 30, Variance in 2021 2020 Dollars Percent 2021 2020 Dollars Percent Net sales $ 298,110 $ 212,074 $ 86,036 40.6 % $ 516,844 $ 523,478 $ (6,634 ) (1.3 )% Cost of goods sold 282,877 180,892 101,985 56.4 % 487,774 505,186 (17,412 ) (3.4 )% Gross profit $ 15,233 $ 31,182 $ (15,949 ) (51.1 )% $ 29,070 $ 18,292 $ 10,778 58.9 % Percentage of net sales 5.1 % 14.7 % 5.6 % 3.5 % Net Sales The increase in our consolidated net sales for the three months ended June 30, 2021 as compared to the same period in 2020 was primarily due to an increase in our average sales price per gallon, partially offset by a decrease in our total gallons sold. 24 Our production gallons sold and our volume of essential ingredients sold increased for the three months ended June 30, 2021 as compared to the same period in 2020 primarily due to the operation of our Pekin dry mill in the second quarter of 2021 which was idled during the second quarter of 2020 because of the Illinois River closure. Our third-party gallons sold declined as compared to the same period in 2020 because we focused our efforts on selling our own fuel-grade ethanol production. The decline in our consolidated net sales for the six months ended June 30, 2021 as compared to the same period in 2020 was primarily due to a reduction in our total gallons sold and lower sales of essential ingredients, partially offset by an increase in our average sales price per gallon. Our production gallons, our third-party gallons and our volume of essential ingredients sold declined for the six months ended June 30, 2021 as compared to the same period in 2020 due to an intentional reduction in our production of fuel-grade ethanol in the first quarter of 2020 because of adverse market conditions. In addition, the prior year period includes gallons associated with our production facilities that have since been idled and/or sold. Three Months Ended June 30, 2021 and 2020 On a consolidated basis, our average sales price per gallon increased by 52% to $2.41 for the three months ended June 30, 2021 as compared to $1.59 for the same period in 2020. The average Chicago Board of Trade, or CBOT, fuel-grade ethanol price per gallon, increased 113% to $2.30 for the three months ended June 30, 2021 as compared to $1.08 for the same period in 2020. Marketing Segment Net sales of fuel-grade ethanol from our marketing segment reported gross, excluding intersegment sales, increased by $15.4 million, or 22%, to $86.8 million for the three months ended June 30, 2021 as compared to $71.4 million for the same period in 2020. Our volume of third party fuel-grade ethanol gallons sold reported gross by our marketing segment declined by 20.1 million gallons, or 38%, to 33.4 million gallons for the three months ended June 30, 2021 as compared to 53.5 million gallons for the same period in 2020. At our marketing segment’s average sales price per gallon of $2.58 for the three months ended June 30, 2021, we generated $51.9 million less in net sales from our marketing segment from the 20.1 million fewer gallons of third-party fuel-grade ethanol sold gross in the three months ended June 30, 2021 as compared to the same period in 2020. The $1.25 per gallon, or 94%, increase in our marketing segment’s average sales price per gallon for the three months ended June 30, 2021 as compared to the same period in 2020 resulted in a $67.1 million increase in our net sales from third-party fuel-grade ethanol sold reported gross by our marketing segment. Our volume of third party fuel-grade ethanol gallons sold reported net by our marketing segment increased by 5.5 million gallons, or 27%, to 25.9 million gallons for the three months ended June 30, 2021 as compared to 20.4 million gallons for the same period in 2020. The increase in third-party fuel-grade ethanol gallons sold reported net increased net sales by $0.2 million. Pekin Campus Production Segment Net sales of alcohol from our Pekin Campus production segment increased by $37.8 million, or 40%, to $132.3 million for the three months ended June 30, 2021 as compared to $94.5 million for the same period in 2020. Our total volume of production gallons sold increased by 7.2 million gallons, or 14%, to 57.5 million gallons for the three months ended June 30, 2021 as compared to 50.3 million gallons for the same period in 2020. At our Pekin Campus production segment’s average sales price per gallon of $2.30 for the three months ended June 30, 2021, we generated $16.6 million in additional net sales from our Pekin Campus production segment from the 7.2 million additional gallons of alcohol sold in the three months ended June 30, 2021 as compared to the same period in 2020. The increase of $0.42, or 22%, in our Pekin Campus production segment’s average sales price per gallon in the three months ended June 30, 2021 as compared to the same period in 2020 improved our net sales from our Pekin Campus production segment by $21.2 million. 25 Net sales of essential ingredients increased by $16.0 million, or 48%, to $49.6 million for the three months ended June 30, 2021 as compared to $33.6 million for the same period in 2020. Our total volume of essential ingredients sold increased by 17,800 tons, or 9%, to 222,200 tons for the three months ended June 30, 2021 from 204,400 tons for the same period in 2020. At our average sales price per ton of $223.12 for the three months ended June 30, 2021, we generated an additional $4.0 million in net sales from the 17,800 additional tons of essential ingredients sold in the three months ended June 30, 2021 as compared to the same period in 2020. The increase of $58.58, or 36%, in our average sales price per ton for the three months ended June 30, 2021 as compared to the same period in 2020 increased our net sales from our Pekin Campus production segment by $12.0 million. Other Production Segment Net sales of alcohol from our other production segment increased by $12.4 million, or 127%, to $22.2 million for the three months ended June 30, 2021 as compared to $9.8 million for the same period in 2020. Our total volume of gallons sold increased by 1.6 million gallons, or 24%, to 8.2 million gallons for the three months ended June 30, 2021 as compared to 6.6 million gallons for the same period in 2020. At our other production segment’s average sales price per gallon of $2.70 for the three months ended June 30, 2021, we generated an additional $4.4 million in net sales from our other production segment from the 1.6 million additional gallons of alcohol sold in the three months ended June 30, 2021 as compared to the same period in 2020. The increase of $1.22, or 82%, in our other production segment’s average sales price per gallon for the three months ended June 30, 2021 as compared to the same period in 2020 improved our net sales from our other production segment by $8.0 million. Net sales of essential ingredients increased by $4.6 million, or 170%, to $7.3 million for the three months ended June 30, 2021 as compared to $2.7 million for the same period in 2020. Our total volume of essential ingredients sold increased by 36,100 tons, or 79%, to 81,800 tons for the three months ended June 30, 2021 from 45,700 tons for the same period in 2020. At our average sales price per ton of $88.66 for the three months ended June 30, 2021, we generated an additional $3.2 million in net sales from the 36,100 additional tons of essential ingredients sold in the three months ended June 30, 2021 as compared to the same period in 2020. The increase of $29.95, or 51%, in our average sales price per ton for the three months ended June 30, 2021 as compared to the same period in 2020 increased our net sales from our other production segment by $1.4 million. Six Months Ended June 30, 2021 and 2020 On a consolidated basis, our average sales price per gallon increased by 40% to $2.17 for the six months ended June 30, 2021 as compared to $1.55 for the same period in 2020. The average CBOT fuel-grade ethanol price per gallon, increased by 72% to $2.00 for the six months ended June 30, 2021 as compared to $1.16 for the same period in 2020. Marketing Segment Net sales of fuel-grade ethanol from our marketing segment reported gross, excluding intersegment sales, increased by $14.9 million, or 12%, to $144.3 million for the six months ended June 30, 2021 as compared to $129.4 million for the same period in 2020. Our volume of third party fuel-grade ethanol gallons sold reported gross by our marketing segment declined by 27.3 million gallons, or 31%, to 60.1 million gallons for the six months ended June 30, 2021 as compared to 87.4 million gallons for the same period in 2020. At our marketing segment’s average sales price per gallon of $2.38 for the six months ended June 30, 2021, we generated $65.1 million less in net sales from our marketing segment from the 27.3 million fewer gallons of third-party fuel-grade ethanol sold gross in the six months ended June 30, 2021 as compared to the same period in 2020. 26 The $0.91 per gallon, or 62%, increase in our marketing segment’s average sales price per gallon for the six months ended June 30, 2021 as compared to the same period in 2020 resulted in a $79.8 million increase in our net sales from third-party fuel-grade ethanol sold reported gross by our marketing segment. Our volume of third party fuel-grade ethanol gallons sold reported net by our marketing segment increased by 4.3 million gallons, or 9%, to 53.2 million gallons for the six months ended June 30, 2021 as compared to 48.9 million gallons for the same period in 2020. The increase in third-party fuel-grade ethanol gallons sold reported net increased net sales by $0.2 million. Pekin Campus Production Segment Net sales of alcohol from our Pekin Campus production segment increased by $48.7 million, or 27%, to $227.4 million for the six months ended June 30, 2021 as compared to $178.7 million for the same period in 2020. Our total volume of production gallons sold declined by 23.7 million gallons, or 18%, to 108.1 million gallons for the six months ended June 30, 2021 as compared to 131.8 million gallons for the same period in 2020. At our Pekin Campus production segment’s average sales price per gallon of $2.10 for the six months ended June 30, 2021, we generated $49.9 million less in net sales from our Pekin Campus production segment from the 23.7 million fewer gallons of alcohol sold in the six months ended June 30, 2021 as compared to the same period in 2020. The increase of $0.75, or 55%, in our Pekin Campus production segment’s average sales price per gallon in the six months ended June 30, 2021 as compared to the same period in 2020 improved our net sales from our Pekin Campus production segment by $98.6 million. Net sales of essential ingredients increased by $21.2 million, or 29%, to $94.7 million for the six months ended June 30, 2021 as compared to $73.5 million for the same period in 2020. Our total volume of essential ingredients sold declined by 21,900 tons, or 5%, to 433,700 tons for the six months ended June 30, 2021 from 455,600 tons for the same period in 2020. At our average sales price per ton of $218.25 for the six months ended June 30, 2021, we generated $4.8 million less in net sales from the 21,900 fewer tons of essential ingredients sold in the six months ended June 30, 2021 as compared to the same period in 2020. The increase of $56.92, or 35%, in our average sales price per ton for the six months ended June 30, 2021 as compared to the same period in 2020 increased our net sales from our Pekin Campus production segment by $26.0 million. Other Production Segment Net sales of alcohol from our other production segment declined by $70.9 million, or 65%, to $38.1 million for the six months ended June 30, 2021 as compared to $109.0 million for the same period in 2020. Our total volume of gallons sold declined by 32.0 million gallons, or 67%, to 15.6 million gallons for the six months ended June 30, 2021 as compared to 47.6 million gallons for the same period in 2020. At our other production segment’s average sales price per gallon of $2.44 for the six months ended June 30, 2021, we generated $78.2 million less in net sales from the 32.0 million fewer gallons of alcohol sold in the six months ended June 30, 2021 as compared to the same period in 2020. The increase of $0.15, or 7%, in our other production segment’s average sales price per gallon for the six months ended June 30, 2021 as compared to the same period in 2020 improved our net sales from our other production segment by $7.3 million. 27 Net sales of essential ingredients declined by $20.5 million, or 62%, to $12.4 million for the six months ended June 30, 2021 as compared to $32.9 million for the same period in 2020. Our total volume of essential ingredients sold declined by 319,200 tons, or 68%, to 147,200 tons for the six months ended June 30, 2021 from 466,400 tons for the same period in 2020. At our average sales price per ton of $84.21 for the six months ended June 30, 2021, we generated $26.9 million less in net sales from the 319,200 fewer tons of essential ingredients sold in the six months ended June 30, 2021 as compared to the same period in 2020. The increase of $13.62, or 19%, in our average sales price per ton for the six months ended June 30, 2021 as compared to the same period in 2020 increased our net sales from our other production segment by $6.4 million. Cost of Goods Sold and Gross Profit Our consolidated gross profit declined to $15.2 million, representing a gross profit margin of 5.1%, for the three months ended June 30, 2021 compared to $31.2 million, representing a gross profit margin of 14.7%, for the same period in 2020. Our gross profit and gross profit margin declined primarily due to significantly higher margins during the three months ended June 30, 2020 from spot sales of our high quality alcohol used in sanitizers and disinfectants which experienced unprecedented demand in the quarter. Our consolidated gross profit improved to $29.1 million, representing a gross profit margin of 5.6%, for the six months ended June 30, 2021 compared to $18.3 million, representing a gross profit margin of 3.5%, for the same period in 2020. Our gross profit and gross profit margin improved primarily due to a greater proportion of higher margin fixed-price contract sales of our high quality alcohol for the six months ended June 30, 2021 as compared to the first six months of 2020 during which we experienced an extreme negative margin environment for fuel-grade ethanol. Three Months Ended June 30, 2021 and 2020 Marketing Segment Our marketing segment’s gross profit declined by $1.4 million to $1.4 million for the three months ended June 30, 2021 as compared to $2.8 million for the same period in 2020. Of this reduction, $0.9 million is attributable to lower marketing volumes of third-party fuel-grade ethanol and $0.5 million is attributable to lower margins from sales of third-party fuel-grade ethanol for the three months ended June 30, 2021 as compared to the same period in 2020. Pekin Campus Production Segment Our Pekin Campus production segment’s gross profit declined by $22.6 million to a gross profit of $11.6 million for the three months ended June 30, 2021 as compared to $34.2 million for the same period in 2020. Of this decline, $24.0 million is attributable to lower margins from our specialty alcohols, partially offset by $1.4 million in additional gross profit attributable to increased sales volumes in the three months ended June 30, 2021 as compared to the same period in 2020. Other Production Segment Our other production segment’s gross profit improved by $8.0 million to a gross profit of $2.2 million for the three months ended June 30, 2021 as compared to a gross loss of $5.8 million for the same period in 2020. Of this improvement, $7.6 million is attributable to higher margins for fuel-grade ethanol and $0.4 million is attributable to increased volumes of fuel-grade ethanol for the three months ended June 30, 2021 as compared to the same period in 2020. 28 Six Months Ended June 30, 2021 and 2020 Marketing Segment Our marketing segment’s gross profit improved by $1.4 million to $5.3 million for the six months ended June 30, 2021 as compared to $3.9 million for the same period in 2020. Of this improvement, $3.8 million is attributable to higher margins from sales of third-party fuel-grade ethanol, partially offset by $2.4 million less in gross profit attributable to lower marketing volumes of third-party fuel-grade ethanol for the six months ended June 30, 2021 as compared to the same period in 2020. Pekin Campus Production Segment Our Pekin Campus production segment’s gross profit declined by $8.1 million to a gross profit of $24.6 million for the six months ended June 30, 2021 as compared to $32.7 million for the same period in 2020. Of this decline, $5.4 million is attributable to lower sales volumes and $2.7 million is attributed to lower margins from our specialty alcohols in the six months ended June 30, 2021 as compared to the same period in 2020. Other Production Segment Our other production segment’s gross profit improved by $17.5 million to a gross loss of $0.8 million for the six months ended June 30, 2021 as compared to a gross loss of $18.3 million for the same period in 2020. Of this improvement, $15.9 million is attributable to higher margins and $1.6 million is attributable to lower sales volumes at negative margins for the six months ended June 30, 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 June 30, Variance in Six Months Ended June 30, Variance in 2021 2020 Dollars Percent 2021 2020 Dollars Percent Selling, general and administrative expenses $ 7,230 $ 8,629 $ (1,399 ) (16.2 )% $ 14,244 $ 18,841 $ (4,597 ) (24.4 )% Percentage of net sales 2.4 % 4.1 % 2.8 % 3.6 % Our SG&A expenses declined for the three and six months ended June 30, 2021 as compared to the same period in 2020. The period over period declines in SG&A expenses are primarily due to lower professional fees incurred in 2021, as compared to 2020 during which we were working extensively on our debt restructuring and asset sales efforts. We anticipate SG&A expenses of $27.0 million to $30.0 million for all of 2021. 29 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 June 30, Variance in Six Months Ended June 30, Variance in 2021 2020 Dollars Percent 2021 2020 Dollars Percent Interest Expense, net $ 1,045 $ 4,647 $ (3,602 ) (77.5 )% $ 2,930 $ 9,954 $ (7,024 ) (70.6 )% Percentage of net sales 0.4 % 2.2 % 0.6 % 1.9 % Our interest expense declined for the three and six months ended June 30, 2021 as compared to the same period in 2020. The declines are primarily due to lower debt balances for 2021 as compared to 2020 as we paid down high interest rate debt in the second half of 2020 and continuing into 2021. 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 June 30, Variance in Six Months Ended June 30, Variance in 2021 2020 Dollars Percent 2021 2020 Dollars Percent Net income (loss) available to common stockholders $ 8,075 $ 14,649 $ (6,574 ) (44.9 )% $ 12,441 $ (10,766 ) $ 23,207 NM Percentage of net sales 2.7 % 6.9 % 2.4 % (2.1 )% The decline in net income available to common stockholders for the three months ended June 30, 2021 as compared to the same period in 2020 is primarily due to significantly higher spot margins from sales of our high quality alcohol in the prior year period compared to predominately fixed-price sales in the current year period. The increase in net income available to common stockholders for the six months ended June 30, 2021 as compared to the same period in 2020 is primarily due to significantly higher margins from sales of our high quality alcohol in the first quarter of 2021 as compared to the same period in 2020. The first quarter of 2020 also included substantial sales of low- or negative-margin fuel-grade ethanol. Liquidity and Capital Resources During the six months ended June 30, 2021, we funded our operations primarily from cash generated by our operations, proceeds from the sale of our Madera facility, 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 June 30, 2021, we had $50.8 million in cash and cash equivalents and $15.0 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. 30 Quantitative Period-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). June 30, 2021 December 31, 2020 Change Cash and cash equivalents $ 50,796 $ 47,667 6.6 % Current assets $ 244,250 $ 214,046 14.1 % Property and equipment, net $ 221,327 $ 229,486 (3.6 )% Current liabilities $ 110,744 $ 86,927 27.4 % Long-term debt, noncurrent portion $ 56,848 $ 71,807 (20.8 )% Working capital $ 133,506 $ 127,119 5.0 % Working capital ratio 2.21 2.46 (10.2 )% Restricted Net Assets At June 30, 2021, we had approximately $245.7 million of net assets at our subsidiaries that were not available for transfer 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 $133.5 million at June 30, 2021 from $127.1 million at December 31, 2020 as a result of an increase of $30.2 million in current assets, partially offset by an increase of $23.8 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, partially offset by a reduction in assets held-for-sale as we completed the sale of our Madera facility. Our current liabilities increased primarily due to an increase in accounts payable due to the timing of payments and an increase in derivative instruments, partially offset by a reduction in liabilities held-for-sale as we completed the sale of our Madera facility. Our cash and cash equivalents increased by $3.1 million primarily due to $0.8 million in cash provided by our operating activities and $15.3 million in cash provided by our investing activities, partially offset by $13.0 million in cash used in our financing activities. Cash provided by our Operating Activities We generated $0.8 million in cash from our operating activities during the six months ended June 30, 2021, as compared to $45.7 million for the same period in 2020. Specific factors that contributed to the change in cash from our operating activities include: ● a decrease of $49.1 million related to higher accounts receivable balances due to the timing of payments and higher commodity sales prices; ● a decrease of $32.8 million related to higher inventories due to increased commodity prices; and ● a net decrease of $11.8 million of held-for-sale assets and liabilities as we completed the sale of our Madera facility. 31 These amounts were partially offset by: ● an increase of $25.4 million in our consolidated net income due to higher margins from our sales of specialty alcohols; ● an increase of $20.3 million related to accounts payable due to the timing of payments; and ● an increase in prepaid expenses of $9.0 million related to operating activities. Cash provided by our Investing Activities We generated $15.3 million of cash from our investing activities for the six months ended June 30, 2021, of which $19.5 million in cash was generated from the sale of our Madera facility, partially offset by $4.2 million for additions to property and equipment resulting from our capital expenditure projects. Cash used in our Financing Activities Cash used in our financing activities was $13.0 million for the six months ended June 30, 2021, which reflected net payments on term debt of $37.8 million, partially offset by proceeds of $24.4 million from Kinergy’s operating line of credit and $0.5 million in stock option exercises. 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 8, 2023. Interest accrues under the credit facility at a rate equal to (i) the daily Secured Overnight Financing Rate, plus (ii) a specified applicable margin ranging from 1.75% to 2.25%. 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. 32 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 June 30, Years Ended December 31, 2021 2020 2020 2019 Fixed-Charge Coverage Ratio Requirement 2.00 2.00 2.00 2.00 Actual 7.92 4.84 5.35 5.71 Excess 5.92 2.84 3.35 3.71 Alto Ingredients, Inc. has guaranteed all of Kinergy’s obligations under the credit facility. As of June 30, 2021, Kinergy had an outstanding balance of $56.9 million and $15.0 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. 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 London Interbank Offered Rate, or 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 $17.0 million at June 30, 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 our Pekin Credit Facility. 33 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 $17.0 million at June 30, 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. 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., our subsidiary that indirectly holds our West Coast production assets. 34 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, LLC, or Alto Central, our subsidiary that indirectly holds our Pekin Campus assets, 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, a balance of approximately $0.7 million remains on the Notes and we believe we are in compliance with the terms and conditions of the Notes. 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, or SBA. Alto Ingredients, Inc. received $6.0 million and Alto Pekin received $3.9 million in loan proceeds. The loans were to 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. We have applied for loan forgiveness for both loans. In June 2021, the SBA approved Alto Pekin’s forgiveness application for the full amount of $3.9 million. We can provide no assurance that we will be able to obtain forgiveness of all or any portion of the remaining loan. Effects of Inflation The impact of inflation was not significant to our financial condition or results of operations for the three and six months ended June 30, 2021 and 2020. 35 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable.