Alto Ingredients, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS. ALTO INGREDIENTS, INC. CONSOLIDATED BALANCE SHEETS (in thousands) September 30, December 31, 2021 2020 (unaudited) * ASSETS Current Assets: Cash and cash equivalents $ 36,029 $ 47,667 Accounts receivable, net (net of allowance for doubtful accounts of $ 360 and $ 260 , respectively) 78,424 43,491 Inventories 58,117 37,925 Prepaid inventory 5,480 891 Derivative instruments 12,977 17,149 Assets held-for-sale 30,158 58,295 Other current assets 5,413 8,628 Total current assets 226,598 214,046 Property and equipment, net 224,319 229,486 Other Assets: Right of use operating lease assets, net 12,715 11,046 Notes receivable 12,423 14,337 Intangible assets 2,678 2,678 Other assets 4,671 5,225 Total other assets 32,487 33,286 Total Assets $ 483,404 $ 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) September 30, December 31, 2021 2020 (unaudited) * LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable – trade $ 28,387 $ 13,047 Accrued liabilities 15,455 11,101 Current portion – operating leases 3,216 2,180 Current portion – long-term debt 17,687 25,533 Derivative instruments 2,735 — Liabilities held-for-sale 10,500 19,542 Other current liabilities 6,468 15,524 Total current liabilities 84,448 86,927 Long-term debt, net of current portion 70,621 71,807 Operating leases, net of current portion 9,365 8,715 Other liabilities 13,774 13,134 Total Liabilities 178,208 180,583 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 September 30, 2021 and December 31, 2020; Series B: 1,581 shares authorized; 927 shares issued and outstanding as of September 30, 2021 and December 31, 2020; liquidation preference of $ 20,609 as of September 30, 2021 1 1 Common stock, $ 0.001 par value; 300,000 shares authorized; 72,800 and 72,487 shares issued and outstanding as of September 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 September 30, 2021 and December 31, 2020 — — Additional paid-in capital 1,036,608 1,036,638 Accumulated other comprehensive loss ( 3,878 ) ( 3,878 ) Accumulated deficit ( 727,608 ) ( 736,598 ) Total Stockholders’ Equity 305,196 296,235 Total Liabilities and Stockholders’ Equity $ 483,404 $ 476,818 * Amounts derived from the audited consolidated financial statements for the year ended December 31, 2020. 2 ALTO INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net sales $ 305,556 $ 204,727 $ 822,400 $ 728,205 Cost of goods sold 308,955 183,797 796,729 688,983 Gross profit (loss) ( 3,399 ) 20,930 25,671 39,222 Selling, general and administrative expenses ( 5,533 ) ( 6,404 ) ( 19,777 ) ( 25,245 ) Asset impairments — — ( 3,100 ) — Gain on litigation settlement — 11,750 — 11,750 Income (loss) from operations ( 8,932 ) 26,276 2,794 25,727 Interest expense, net ( 429 ) ( 4,199 ) ( 3,359 ) ( 14,153 ) Income from loan forgiveness 5,973 — 9,860 — Fair value adjustments — ( 6,856 ) — ( 7,497 ) Other income (expense), net 256 ( 6 ) 641 ( 1,164 ) Income (loss) before benefit for income taxes ( 3,132 ) 15,215 9,936 2,913 Benefit for income taxes — — — — Consolidated net income (loss) ( 3,132 ) 15,215 9,936 2,913 Net loss attributed to noncontrolling interests — — — 2,166 Net income (loss) attributed to Alto Ingredients, Inc. $ ( 3,132 ) $ 15,215 $ 9,936 $ 5,079 Preferred stock dividends $ ( 319 ) $ ( 319 ) $ ( 946 ) $ ( 949 ) Net income (loss) available to common stockholders $ ( 3,451 ) $ 14,896 $ 8,990 $ 4,130 Net income (loss) per share, basic $ ( 0.05 ) $ 0.25 $ 0.13 $ 0.07 Net income (loss) per share, diluted $ ( 0.05 ) $ 0.24 $ 0.12 $ 0.07 Weighted-average shares outstanding, basic 71,383 58,503 71,002 55,620 Weighted-average shares outstanding, diluted 71,383 61,699 72,260 57,958 See accompanying notes to consolidated financial statements. 3 ALTO INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands) Nine Months Ended September 30, 2021 2020 Operating Activities: Consolidated net income $ 9,936 $ 2,913 Adjustments to reconcile consolidated net income to net cash (used in) provided by operating activities: Depreciation and amortization of intangibles 17,520 26,855 Asset impairments 3,100 — Income from loan forgiveness ( 9,860 ) — Non-cash compensation 2,282 2,012 Amortization of deferred financing fees 732 587 Fair value adjustments — 7,497 Interest added to debt — 133 Bad debt expense 140 1 Changes in operating assets and liabilities: Accounts receivable ( 35,072 ) 29,841 Inventories ( 20,192 ) 22,863 Prepaid expenses and other assets 12,362 ( 234 ) Prepaid inventory ( 4,588 ) 313 Operating leases ( 3,184 ) ( 2,348 ) Assets held-for-sale ( 2,874 ) 1,012 Liabilities held-for-sale 1,467 9,345 Accounts payable and accrued expenses 8,483 ( 25,097 ) Net cash (used in) provided by operating activities ( 19,748 ) 75,693 Investing Activities: Proceeds from Madera Sale 19,500 — Proceeds from PAL Sale — 19,896 Additions to property and equipment ( 12,240 ) ( 4,864 ) Net cash provided by investing activities 7,260 15,032 Financing Activities: Net proceeds from (payments on) Kinergy’s line of credit 38,198 ( 39,548 ) Proceeds from stock option exercises 462 — Principal payments on borrowings ( 37,810 ) ( 52,100 ) Proceeds from warrant exercises — 5,500 Proceeds from issuance of common stock — 5,296 Proceeds from borrowings — 9,860 Preferred stock dividends paid — — Net cash provided by (used in) financing activities 850 ( 70,992 ) Net change in cash and cash equivalents ( 11,638 ) 19,733 Cash and cash equivalents at beginning of period 47,667 18,997 Cash and cash equivalents at end of period $ 36,029 $ 38,730 Supplemental Cash Flow Information: Interest paid $ 3,194 $ 13,746 Accrued preferred stock dividends $ 946 $ 949 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 income — — — — — 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 Restricted stock issued to employees and directors, net of cancellations and tax — — ( 11 ) — — — — — — Stock-based compensation — — — — 628 — — — 628 Preferred stock dividends — — — — — ( 319 ) — — ( 319 ) Net loss — — — — — ( 3,132 ) — — ( 3,132 ) Balances, September 30, 2021 927 $ 1 72,800 $ 73 $ 1,036,608 $ ( 727,608 ) $ ( 3,878 ) $ — $ 305,196 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 Sale of interests in PAL — — — — — — — ( 5,099 ) ( 5,099 ) Preferred stock dividends — — — — — ( 315 ) — — ( 315 ) 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 Restricted stock issued to employees and directors, net of cancellations and tax — — 1,501 1 18 — — — 19 Stock-based compensation — — — — 571 — — — 571 Issuances of common stock — — 1,000 1 5,013 — — — 5,014 Warrant exercise — — 5,500 6 13,969 — — — 13,975 Preferred stock dividends — — — — — ( 319 ) — — ( 319 ) Net income — — — — — 15,215 — — 15,215 Balances, September 30, 2020 927 $ 1 63,483 $ 63 $ 963,606 $ ( 716,084 ) $ ( 2,370 ) $ — $ 245,216 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 had, as of September 30, 2021, a combined alcohol production capacity of 410 million gallons per year and produces, on an annualized basis, nearly 1.2 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. In addition, the Company markets, on an annualized basis, over 250 million gallons combined of its own alcohol production and third-party production. On November 5, 2021, the Company closed the sale of its Stockton facility, reducing its alcohol production capacity by 60 million gallons of fuel-grade ethanol per year. 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 September 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 $ 59,997,000 and $ 35,839,000 at September 30, 2021 and December 31, 2020, respectively, were used as collateral under Kinergy’s operating line of credit. The allowance for doubtful accounts was $ 360,000 and $ 260,000 as of September 30, 2021 and December 31, 2020, respectively. The Company recorded a bad debt recovery of $ 3,000 and no bad debt expense for the three months ended September 30, 2021 and 2020, respectively. The Company recorded bad debt expense of $ 140,000 and $ 1,000 for the nine months ended September 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 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. During the nine months ended September 30, 2021, the Company provided for an additional impairment charge of $ 1.2 million based on revised fair value estimates. 7 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. On November 5, 2021, the Company closed the sale of its Stockton facility for gross proceeds of $ 24.0 million in cash. With the net cash proceeds, the Company repaid its parent notes payable and the Pekin and ICP loans in full. During 2021, the Company has agreed 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 September 30, 2021. During the nine months ended September 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 September 30, 2021 (in thousands): Stockton Canton Property and equipment, net $ 19,535 $ 1,000 Right of use operating lease assets, net 9,623 — Assets held-for-sale $ 29,158 $ 1,000 Stockton Canton Liabilities held-for-sale – operating leases $ 10,500 $ — 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 September 30, 2021, net sales attributed to the results of operations for Stockton and Madera were $ 1.5 million and $ 0 , respectively. For the three months ended September 30, 2020, net sales attributed to the results of operations for Stockton and Madera were $ 0.2 million and less than $ 0.1 million, respectively. For the three months ended September 30, 2021, pre-tax income (loss) attributed to the results of operations for Stockton and Madera was income of $ 0.3 million and loss of $ 0.2 million, respectively. For the three months ended September 30, 2020, pre-tax loss attributed to the results of operations for Stockton and Madera was $ 1.8 million and $ 1.8 million, respectively. For the nine months ended September 30, 2021, net sales attributed to the results of operations for Stockton and Madera were $ 2.0 million and $ 0 , respectively. For the nine months ended September 30, 2020, net sales attributed to the results of operations for Stockton and Madera were $ 22.6 million and $ 22.5 million, respectively. For the nine months ended September 30, 2021, pre-tax loss attributed to the results of operations for Stockton and Madera was $ 1.9 million and $ 0.8 million, respectively. For the nine months ended September 30, 2020, pre-tax loss attributed to the results of operations for Stockton and Madera was $ 5.4 million and $ 5.4 million, respectively. 8 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. The following tables set forth certain financial data for the Company’s operating segments (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net Sales Marketing and distribution: Alcohol sales, gross $ 112,391 $ 84,001 $ 255,702 $ 212,625 Alcohol sales, net 505 382 1,489 1,117 Intersegment sales 2,415 1,598 7,277 7,751 Total marketing and distribution sales 115,311 85,981 264,468 221,493 Pekin Campus production, recorded as gross: Alcohol sales $ 114,587 $ 77,075 $ 341,967 $ 255,737 Essential ingredient sales 46,016 27,619 140,670 101,123 Intersegment sales 293 197 920 877 Total Pekin Campus sales 160,896 104,891 483,557 357,737 Other production, recorded as gross: Alcohol sales $ 25,190 $ 11,765 $ 63,311 $ 120,797 Essential ingredient sales 6,867 3,885 19,261 36,806 Intersegment sales 259 420 896 1,121 Total Other production sales 32,316 16,070 83,468 158,724 Intersegment eliminations ( 2,967 ) ( 2,215 ) ( 9,093 ) ( 9,749 ) Net sales as reported $ 305,556 $ 204,727 $ 822,400 $ 728,205 Cost of goods sold: Marketing and distribution $ 105,902 $ 84,589 $ 245,606 $ 210,827 Pekin Campus production 169,721 80,280 468,972 302,120 Other production 35,613 20,718 87,055 181,382 Intersegment eliminations ( 2,281 ) ( 1,790 ) ( 4,904 ) ( 5,346 ) Cost of goods sold as reported $ 308,955 $ 183,797 $ 796,729 $ 688,983 Income (loss) before benefit for income taxes: Marketing and distribution $ 7,517 $ ( 479 ) $ 12,925 $ 3,808 Pekin Campus production ( 11,830 ) 31,715 8,907 50,995 Other production ( 4,856 ) ( 7,173 ) ( 12,463 ) ( 40,990 ) Corporate activities 6,037 ( 8,848 ) 567 ( 10,900 ) $ ( 3,132 ) $ 15,215 $ 9,936 $ 2,913 Depreciation: Pekin Campus production $ 4,372 $ 4,335 $ 13,043 $ 13,101 Other production 1,468 3,690 4,433 13,657 Corporate activities 11 30 44 97 $ 5,851 $ 8,055 $ 17,520 $ 26,855 Interest expense (income): Marketing and distribution $ 295 $ 334 $ 721 $ 1,275 Pekin Campus production 176 1,243 767 4,922 Other production — 141 182 199 Corporate activities ( 42 ) 2,481 1,689 7,757 $ 429 $ 4,199 $ 3,359 $ 14,153 9 The following table sets forth the Company’s total assets by operating segment (in thousands): September 30, 2021 December 31, 2020 Total assets: Marketing and distribution $ 149,316 $ 89,337 Pekin Campus production 239,275 234,439 Other production 83,217 102,409 Corporate assets 11,596 50,633 $ 483,404 $ 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 $ 0 and $ 1,033,000 as of September 30, 2021 and December 31, 2020, respectively. Inventory balances consisted of the following (in thousands): September 30, 2021 December 31, 2020 Finished goods $ 40,836 $ 25,154 Work in progress 5,539 4,333 Raw materials 10,148 7,074 Other 1,594 1,364 Total $ 58,117 $ 37,925 5. DERIVATIVES. The business and activities of the Company expose it to a variety of market risks, including risks related to changes in commodity prices. The Company monitors and manages these financial exposures as an integral part of its risk management program. This program recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effects that market volatility could have on operating results. 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 nine months ended September 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 losses of $ 976,000 and gains of $ 1,582,000 as the change in the fair value of these contracts for the three months ended September 30, 2021 and 2020, respectively. The Company recognized net gains of $ 18,435,000 and $ 1,582,000 as the change in the fair value of these contracts for the nine months ended September 30, 2021 and 2020, respectively. 10 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 September 30, 2021 Assets Liabilities Type of Instrument Balance Sheet Location Fair Value Balance Sheet Location Fair Value Cash collateral balance Other current assets $ 757 Commodity contracts Derivative assets $ 12,977 Derivative liabilities $ 2,735 As of December 31, 2020 Assets Liabilities Type of Instrument Balance Sheet Location Fair Value Balance Sheet Location Fair Value Cash collateral balance Other current assets $ 520 Commodity contracts Derivative assets $ 17,149 Derivative liabilities $ — The classification and amounts of the Company’s recognized gains for its derivatives not designated as hedging instruments are as follows (in thousands): Realized Losses Three Months Ended September 30, Type of Instrument Statements of Operations Location 2021 2020 Commodity contracts Cost of goods sold $ ( 2,894 ) $ ( 531 ) Unrealized Gains Three Months Ended September 30, Type of Instrument Statements of Operations Location 2021 2020 Commodity contracts Cost of goods sold $ 1,918 $ 2,113 Realized Gains Nine Months Ended September 30, Type of Instrument Statements of Operations Location 2021 2020 Commodity contracts Cost of goods sold $ 21,449 $ 47 Unrealized Gains (Losses) Nine Months Ended September 30, Type of Instrument Statements of Operations Location 2021 2020 Commodity contracts Cost of goods sold $ ( 3,014 ) $ 1,535 11 6. DEBT. Long-term borrowings are summarized as follows (in thousands): September 30, 2021 December 31, 2020 Kinergy line of credit $ 70,710 $ 32,512 Pekin revolving loan 9,580 20,580 ICP revolving loan 7,384 9,384 Parent notes payable 723 25,533 CARES Act loans — 9,860 88,397 97,869 Less unamortized debt premium — 230 Less unamortized debt financing costs ( 89 ) ( 759 ) Less short-term portion ( 17,687 ) ( 25,533 ) Long-term debt $ 70,621 $ 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 remaining balance of $ 0.7 million. On November 5, 2021, with proceeds from the Company’s sale of its Stockton, California facility, the Company repaid the remaining outstanding balance on these notes. Pekin and ICP Revolving Loans – On November 5, 2021, with proceeds from the Company’s sale of its Stockton, California facility, the Company repaid in full the outstanding balances on these loans. 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. In September 2021, the SBA approved Alto Ingredients, Inc.’s forgiveness application for the full amount of $ 6.0 million, and accordingly, the Company recognized income from loan forgiveness for the three months ended September 30, 2021. 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 16,964 2023 70,710 $ 88,397 Restrictions – At September 30, 2021, there were approximately $ 250.3 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. 12 7. COMMITMENTS AND CONTINGENCIES. Sales Commitments – At September 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 93,403,000 gallons as of September 30, 2021 and open fixed-price alcohol sales contracts totaling $ 242,181,000 as of September 30, 2021. The Company had open fixed-price sales contracts for essential ingredients totaling $ 18,448,000 and open indexed-price sales contracts of essential ingredients for 5,044,000 tons as of September 30, 2021. These sales contracts are scheduled for completion over the next twelve months. Purchase Commitments – At September 30, 2021, the Company had indexed-price purchase contracts to purchase 33,233,000 gallons of alcohol and fixed-price purchase contracts to purchase $ 54,988,000 of alcohol from its suppliers. The Company had fixed-price purchase contracts to purchase $ 29,916,000 of corn from its suppliers as of September 30, 2021. The Company had fixed-price purchase contracts for natural gas totaling $ 4,464,000 . The Company also had future commitments for certain capital projects totalling $ 19,100,000 . These purchase commitments are scheduled to be satisfied through mid-2022. Litigation – General – The Company is subject to various claims and contingencies in the ordinary course of its business, including those related to litigation, business transactions, employee-related matters, environmental regulations, and others. When the Company is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the Company will record a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the claim if the likelihood of a potential loss is reasonably possible and the amount involved could be material. While there can be no assurances, the Company does not expect that any of its pending legal proceedings will have a material impact on the Company’s financial condition or results of operations. 8. PENSION 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 September 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 September 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 nine months ended September 30, 2021, the Retirement Plan’s net periodic expense was $ 66,000 , comprised of $ 453,000 in interest cost and $ 327,000 in service cost, partially offset by $ 714,000 of expected return on plan assets. For the nine months ended September 30, 2020, the Retirement Plan’s net periodic expense was $ 144,000 , comprised of $ 519,000 in interest cost and $ 303,000 in service cost, partially offset by $ 678,000 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 September 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 September 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. 13 For the nine months ended September 30, 2021, the Postretirement Plan’s net periodic expense was $ 126,000 , comprised of $ 30,000 of interest cost, $ 78,000 of service cost and $ 18,000 of amortization expense. For the nine months ended September 30, 2020, the Postretirement Plan’s net periodic expense was $ 177,000 , comprised of $ 114,000 of interest cost, $ 42,000 of service cost and $ 21,000 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. 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 September 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 September 30, 2021 (in thousands): Fair Value Level 1 Level 2 Level 3 Assets: Derivative financial instruments $ 12,977 $ 12,977 $ — $ — Long-lived assets held-for-sale 30,158 — — 30,158 $ 43,135 $ 12,977 $ — $ 30,158 Liabilities: Derivative financial instruments $ ( 2,735 ) $ ( 2,735 ) $ — $ — $ ( 2,735 ) $ ( 2,735 ) $ — $ — 14 The following table summarizes recurring and nonrecurring fair value measurements by level at December 31, 2020 (in thousands): Benefit Plan Fair Percentage Value Level 1 Level 2 Level 3 Allocation Assets: Derivative financial instruments $ 17,149 $ 17,149 $ — $ — Long-lived assets held-for-sale 58,295 — — 58,295 Defined benefit plan assets(1) (pooled separate accounts): Large U.S. Equity(2) 5,470 — 5,470 — 31 % Small/Mid U.S. Equity(3) 2,605 — 2,605 — 15 % International Equity(4) 2,921 — 2,921 — 17 % Fixed Income(5) 6,592 — 6,592 — 37 % $ 93,032 $ 17,149 $ 17,588 $ 58,295 Liabilities: $ — $ — $ — $ — (1) Included in other assets in the consolidated balance sheets. (2) This category includes investments in funds comprised of equity securities of large U.S. companies. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. (3) This category includes investments in funds comprised of equity securities of small- and medium-sized U.S. companies. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. (4) This category includes investments in funds comprised of equity securities of foreign companies including emerging markets. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. (5) This category includes investments in funds comprised of U.S. and foreign investment-grade fixed income securities, high-yield fixed income securities that are rated below investment-grade, U.S. treasury securities, mortgage-backed securities, and other asset-backed securities. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. 10. EARNINGS PER SHARE. The following tables compute basic and diluted earnings per share (in thousands, except per share data): Three Months Ended September 30, 2021 Loss Numerator Shares Denominator Per-Share Amount Net loss attributed to Alto Ingredients, Inc. $ ( 3,132 ) Less: Preferred stock dividends ( 319 ) Basic and Diluted loss per share: Loss available to common stockholders $ ( 3,451 ) 71,383 $ ( 0.05 ) 15 Three Months Ended September 30, 2020 Income Numerator Shares Denominator Per-Share Amount Net income attributed to Alto Ingredients, Inc. $ 15,215 Less: Preferred stock dividends ( 319 ) Basic income per share: Income available to common stockholders $ 14,896 58,503 $ 0.25 Add: Dilutive securities — 3,196 Diluted income per share: Income available to common stockholders $ 14,896 61,699 $ 0.24 Nine Months Ended September 30, 2021 Income Numerator Shares Denominator Per-Share Amount Net income attributed to Alto Ingredients, Inc. $ 9,936 Less: Preferred stock dividends ( 946 ) Basic income per share: Income available to common stockholders $ 8,990 71,002 $ 0.13 Add: Dilutive securities — 1,258 Diluted income per share: Income available to common stockholders $ 8,990 72,260 $ 0.12 Nine Months Ended September 30, 2020 Income Numerator Shares Denominator Per-Share Amount Net income attributed to Alto Ingredients, Inc. $ 5,079 Less: Preferred stock dividends ( 949 ) Basic income per share: Income available to common stockholders $ 4,130 55,620 $ 0.07 Add: Dilutive securities — 2,338 Diluted income per share: Income available to common stockholders $ 4,130 57,958 $ 0.07 There were an additional aggregate potentially dilutive weighted-average shares of 964,000 from convertible securities outstanding for the three and nine months ended September 30, 2021 and 2020. These securities were not considered in calculating diluted net income per share for the three and nine months ended September 30, 2021 and 2020, as their effect would have been anti-dilutive. 16 11. PARENT COMPANY FINANCIALS. Restricted Net Assets – At September 30, 2021, the Company had approximately $ 250.3 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): September 30, 2021 December 31, 2020 ASSETS Current Assets: Cash and cash equivalents $ 7,038 $ 25,632 Receivables from subsidiaries 23,165 15,548 Other current assets 891 1,836 Total current assets 31,094 43,016 Property and equipment, net 98 142 Other Assets: Investments in subsidiaries 255,904 246,518 Alto West, LLC receivable 27,592 42,649 Right of use operating lease assets, net 2,773 2,985 Other assets 796 1,088 Total other assets 287,065 293,240 Total Assets $ 318,257 $ 336,398 Current Liabilities: Accounts payable and accrued liabilities $ 5,405 $ 2,001 Accrued Alto Op Co. purchase 3,829 3,829 Current portion of long-term debt 723 25,533 Other current liabilities 332 473 Total current liabilities 10,289 31,836 Long-term debt, net of current portion — 5,564 Other liabilities 2,772 2,763 Total Liabilities 13,061 40,163 Stockholders’ Equity: Preferred stock 1 1 Common and non-voting common stock 73 72 Additional paid-in capital 1,036,608 1,036,638 Accumulated other comprehensive loss ( 3,878 ) ( 3,878 ) Accumulated deficit ( 727,608 ) ( 736,598 ) Total Alto Ingredients, Inc. stockholders’ equity 305,196 296,235 Total Liabilities and Stockholders’ Equity $ 318,257 $ 336,398 Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Management fees from subsidiaries $ 2,406 $ 2,802 $ 7,418 $ 8,928 Selling, general and administrative expenses 3,105 3,305 12,149 12,990 Loss from operations ( 699 ) ( 503 ) ( 4,731 ) ( 4,062 ) Income from loan forgiveness 5,973 — 5,973 — Interest income (expense), net 42 ( 1,490 ) ( 1,689 ) ( 4,787 ) Fair value adjustments — ( 6,856 ) — ( 7,497 ) Other income (expense) 295 ( 41 ) 1,513 ( 203 ) Income (loss) before benefit for income taxes 5,611 ( 8,890 ) 1,066 ( 16,549 ) Benefit for income taxes — — — — Income (loss) before benefit for income taxes 5,611 ( 8,890 ) 1,066 ( 16,549 ) Equity in income (losses) of subsidiaries ( 8,743 ) 24,105 8,870 21,628 Net income (loss) $ ( 3,132 ) $ 15,215 $ 9,936 $ 5,079 17 For the Nine Months Ended September 30, 2021 2020 Operating Activities: Net income $ 9,936 $ 5,079 Adjustments to reconcile net income to cash used in operating activities: Equity in (income) losses of subsidiaries ( 8,870 ) ( 21,628 ) Income from loan forgiveness ( 5,973 ) — Fair value adjustments — 7,497 Depreciation 44 97 Amortization of debt discounts 409 ( 173 ) Changes in operating assets and liabilities: Accounts receivable ( 7,617 ) ( 288 ) Other assets 1,449 1,184 Accounts payable and accrued expenses ( 2,213 ) ( 19 ) Accounts payable with subsidiaries 32 — Net cash used in operating activities $ ( 12,803 ) $ ( 8,251 ) Investing Activities: Additions to property and equipment $ — $ — Net cash used in investing activities $ — $ — Financing Activities: Proceeds from issuances of common stock $ 462 $ 5,296 Proceeds from plant receivables 15,057 5,813 Proceeds from warrant exercises — 5,500 Proceeds from long-term debt — 5,973 Payments on senior notes ( 24,810 ) ( 5,500 ) Dividend from subsidiary 3,500 — Preferred stock dividend payments — — Net cash (used in) provided by financing activities $ ( 5,791 ) $ 17,082 Net change in cash and cash equivalents ( 18,594 ) 8,831 Cash and cash equivalents at beginning of period 25,632 4,985 Cash and cash equivalents at end of period $ 7,038 $ 13,816 18