UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2020March 31, 2021

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to _______

 

Commission File Number: 000-21467

 

PACIFIC ETHANOL,ALTO INGREDIENTS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware 41-2170618
(State or other jurisdiction of
incorporation or organization)		 (I.R.S. Employer
Identification No.)
   

400 Capitol Mall, Suite 2060, Sacramento, California1300 South Second Street, Pekin, Illinois

 

9581461554

(Address of principal executive offices) (zip code)

(916) 403-2123

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each Class 

Trading Symbol

 

Name of Exchange on Which Registered

Common Stock, $0.001 par value PEIXALTO 

The Nasdaq Stock Market LLC
(Nasdaq Capital Market)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer☐Accelerated filer☐
Non-accelerated filer☒Smaller reporting company☒
Emerging growth company  ☐ 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

As of August 12, 2020,May 14, 2021, there were 56,985,21772,707,703 shares of Pacific Ethanol,Alto Ingredients, Inc. common stock, $0.001 par value per share, and 896 shares of Pacific Ethanol,Alto Ingredients, Inc. non-voting common stock, $0.001 par value per share, outstanding.

 

 

 

 

PART I

FINANCIAL INFORMATION

  Page
  
PART I
FINANCIAL INFORMATION
 
ITEM 1.FINANCIAL STATEMENTS.1
   
 Consolidated Balance Sheets as of June 30, 2020March 31, 2021 (unaudited) and December 31, 201920201
   
 Consolidated Statements of Operations for the Three and Six Months Ended June 30,March 31, 2021 and 2020 and 2019 (unaudited)3
   
 Consolidated Statements of Cash Flows for the SixThree Months Ended June 30,March 31, 2021 and 2020 and 2019 (unaudited)4
   
 Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30,March 31, 2021 and 2020 and 2019 (unaudited)5
   
 Notes to Consolidated Financial Statements (unaudited)6
   
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.1918
   
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.3530
   
ITEM 4.CONTROLS AND PROCEDURES.3530
   
PART II
OTHER INFORMATION
 
ITEM 1.LEGAL PROCEEDINGS.3731
   
ITEM 1A.RISK FACTORS.3731
   
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.4741
   
ITEM 3.DEFAULTS UPON SENIOR SECURITIES.4841
   
ITEM 4.MINE SAFETY DISCLOSURES.4841
   
ITEM 5.OTHER INFORMATION.4841
   
ITEM 6.EXHIBITS.4942
   
SIGNATURES5043

 

i

 

 

PART I - FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS.

 

PACIFIC ETHANOL,ITEM 1. FINANCIAL STATEMENTS.

ALTO INGREDIENTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)

 

 June 30, December 31, 
 2020 2019 
 (unaudited) *  March 31, December 31, 
ASSETS      2021 2020 
 (unaudited) * 
Current Assets:          
Cash and cash equivalents $29,783  $18,997  $44,146  $47,667 
Accounts receivable, net (net of allowance for doubtful accounts of $16 and $39, respectively)  48,871   74,307 
Accounts receivable (net of allowance for doubtful accounts of $351 and $260, respectively)  56,458   43,491 
Inventories  46,326   60,600   55,216   37,925 
Prepaid inventory  3,180   1,528   1,021   891 
Derivative instruments  22,355   17,149 
Assets held-for-sale  —   69,764   57,053   58,295 
Derivative instruments  —   2,438 
Other current assets  3,630   4,430   5,339   8,628 
Total current assets  131,790   232,064   241,588   214,046 
Property and equipment, net  317,950   332,526   226,183   229,486 
Other Assets:                
Right of use operating lease assets, net  22,625   24,346   11,704   11,046 
Notes receivable  16,500   —   13,556   14,337 
Assets held-for-sale  —   16,500 
Intangible assets  2,678   2,678 
Intangible asset  2,678   2,678 
Other assets  5,586   4,381   5,407   5,225 
Total other assets  47,389   47,905   33,345   33,286 
Total Assets $497,129  $612,495  $501,116  $476,818 

 

 

*Amounts derived from the audited consolidated financial statements for the year ended December 31, 2019.2020.

 

See accompanying notes to consolidated financial statements.

 


-1-

PACIFIC ETHANOL,

ALTO INGREDIENTS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(in thousands, except par value)

 

 June 30, December 31, 
 2020 2019 
 (unaudited) *  March 31, December 31, 
LIABILITIES AND STOCKHOLDERS’ EQUITY      2021 2020 
 (unaudited) * 
Current Liabilities:          
Accounts payable – trade $27,721  $29,277  $23,171  $13,047 
Accrued liabilities  13,628   22,331   13,623   11,101 
Current portion – operating leases  2,898   3,457   2,581   2,180 
Current portion – long-term debt  96,000   63,000   37,581   25,533 
Derivative instruments  4,741   — 
Liabilities held-for-sale  —   34,413   19,231   19,542 
Derivative instruments  —   1,860 
Other current liabilities  6,707   6,060   11,822   15,524 
Total current liabilities  146,954   160,398   112,750   86,927 
                
Long-term debt, net of current portion  95,888   180,795   64,396   71,807 
Operating leases, net of current portion  20,164   21,171   8,956   8,715 
Other liabilities  23,382   23,086   13,332   13,134 
        
Total Liabilities  286,388   385,450   199,434   180,583 
        
Commitments and Contingencies (Note 6)                
        
Stockholders’ Equity:                
Pacific Ethanol, Inc. Stockholders’ Equity:        
Preferred stock, $0.001 par value; 10,000 shares authorized;
Series A: 1,684 shares authorized; no shares issued and outstanding as of June 30, 2020 and December 31, 2019;
Series B: 1,581 shares authorized; 927 shares issued and outstanding as of June 30, 2020 and December 31, 2019; liquidation preference of $19,025 as of June 30, 2020		  1   1 
Common stock, $0.001 par value; 300,000 shares authorized; 55,482 and 55,508 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively  55   56 
Non-voting common stock, $0.001 par value; 3,553 shares authorized; 1 share issued and outstanding as of June 30, 2020 and December 31, 2019, respectively  —   — 
Alto Ingredients, Inc. Stockholders’ Equity:        
Preferred stock, $0.001 par value; 10,000 shares authorized;
Series A: 1,684 shares authorized; no shares issued and outstanding as of March 31, 2021 and December 31, 2020;
Series B: 1,581 shares authorized; 927 shares issued and outstanding as of March 31, 2021 and December 31, 2020; liquidation preference of $19,975 as of March 31, 2021		  1   1 
Common stock, $0.001 par value; 300,000 shares authorized; 73,161 and 72,487 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively  73   72 
Non-voting common stock, $0.001 par value; 3,553 shares authorized; 1 share issued and outstanding as of March 31, 2021 and December 31, 2020  —   — 
Additional paid-in capital  944,035   942,307   1,037,718   1,036,638 
Accumulated other comprehensive loss  (2,370)  (2,370)  (3,878)  (3,878)
Accumulated deficit  (730,980)  (720,214)  (732,232)  (736,598)
Total Pacific Ethanol, Inc. Stockholders’ Equity  210,741   219,780 
Noncontrolling interests  —   7,265 
Total Stockholders’ Equity  210,741   227,045   301,682   296,235 
Total Liabilities and Stockholders’ Equity $497,129  $612,495  $501,116  $476,818 

 

 


*		Amounts derived from the audited consolidated financial statements for the year ended December 31, 2019.2020.

 

See accompanying notes to consolidated financial statements.

 


-2-

PACIFIC ETHANOL,ALTO INGREDIENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share data)

 

 Three Months Ended
June 30,		 Six Months Ended
June 30,		 
 2020 2019 2020 2019  Three Months Ended
March 31,		 
          2021 2020 
Net sales $212,074  $346,301  $523,478  $702,104  $218,734  $311,404 
Cost of goods sold  180,892   342,330   505,186   700,422   204,897   324,294 
Gross profit  31,182   3,971   18,292   1,682 
Gross profit (loss)  13,837   (12,890)
Selling, general and administrative expenses  8,629   6,708   18,841   14,943   7,014   10,212 
Asset impairment  1,200   — 
Income (loss) from operations  22,553   (2,737)  (549)  (13,261)  5,623   (23,102)
Fair value adjustments  —   673 
Interest expense, net  (4,647)  (5,115)  (9,954)  (9,851)  (1,885)  (5,307)
Fair value adjustments  (1,314)  —   (641)  — 
Other income (expense), net  (1,738)  (438)  (1,158)  661 
Other income, net  940   580 
Income (loss) before benefit for income taxes  14,854   (8,290)  (12,302)  (22,451)  4,678   (27,156)
Benefit for income taxes  —   —   —   —   —   — 
Consolidated net income (loss)  14,854   (8,290)  (12,302)  (22,451)  4,678   (27,156)
Net loss attributed to noncontrolling interests  110   644   2,166   1,915   —   2,056 
Net income (loss) attributed to Pacific Ethanol, Inc. $14,964  $(7,646) $(10,136) $(20,536)
Net income (loss) attributed to Alto Ingredients, Inc. $4,678  $(25,100)
Preferred stock dividends $(315) $(315) $(630) $(627) $(312) $(315)
Net income (loss) available to common stockholders $14,649  $(7,961) $(10,766) $(21,163) $4,366  $(25,415)
Net income (loss) per share, basic and diluted $0.27  $(0.17) $(0.20) $(0.45)
Weighted-average shares outstanding, basic and diluted  54,498   47,771   54,163   46,651 
Net income (loss) per share, basic $0.06  $(0.47)
Net income (loss) per share, diluted $0.06  $(0.47)
Weighted-average shares outstanding, basic  70,351   53,828 
Weighted-average shares outstanding, diluted  72,464   53,828 

See accompanying notes to consolidated financial statements.

-3-

ALTO INGREDIENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

  Three Months Ended
March 31,		 
  2021  2020 
Operating Activities:      
Consolidated net income (loss) $4,678  $(27,156)
Adjustments to reconcile consolidated net income (loss) to net cash provided by (used in) operating activities:        
Depreciation  5,860   9,759 
Asset impairment  1,200   — 
Gains (losses) on derivative instruments  (10,543)  — 
Non-cash compensation  804   865 
Amortization of deferred financing fees  190   305 
Fair value adjustments  —   (673)
Inventory valuation  —   4,223 
Interest added to debt  —   133 
Bad debt expense  91   19 
Changes in operating assets and liabilities:        
Accounts receivable  (13,057)  22,024 
Inventories  (17,291)  10,845 
Prepaid expenses and other assets  3,832   (396)
Prepaid inventory  (129)  (181)
Operating leases  (1,037)  (2,348)
Assets held-for-sale  1,241   1,624 
Liabilities held-for-sale  (312)  9,370 
Accounts payable and accrued liabilities  20,391   (1,512)
Net cash provided by (used in) operating activities  (4,082)  26,901 
Investing Activities:        
Additions to property and equipment  (4,411)  (1,245)
Net cash used in investing activities  (4,411)  (1,245)
Financing Activities:        
Net proceeds (payments) from Kinergy’s line of credit  13,042   (18,156)
Proceeds from stock option exercises  462   — 
Proceeds from issuance of common stock  —   282 
Principal payments on borrowings  (8,532)  — 
Net cash provided by (used in) financing activities  4,972   (17,874)
Net increase (decrease) in cash and cash equivalents  (3,521)  7,782 
Cash and cash equivalents at beginning of period  47,667   18,997 
Cash and cash equivalents at end of period $44,146  $26,779 
         
Supplemental Information:        
Interest paid $1,825  $1,968 
Accrued preferred stock dividends $312  $315 

 

See accompanying notes to consolidated financial statements.

 

3-4-

 

 

PACIFIC ETHANOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

  Six Months Ended
June 30,		 
  2020  2019 
Operating Activities:      
Consolidated net loss $(12,302) $(22,451)
Adjustments to reconcile consolidated net loss to net cash provided by (used in) operating activities:        
Depreciation and amortization of intangibles  18,806   23,915 
Amortization of deferred financing fees  497   629 
Fair value adjustments  641   — 
Interest added to debt  133   — 
Non-cash compensation  1,441   1,518 
(Gain) loss on derivative instruments  —   (4,885)
Bad debt expense  1   27 
Changes in operating assets and liabilities:        
Accounts receivable  25,435   913 
Inventories  14,274   (19,670)
Prepaid expenses and other assets  (403)  7,994 
Prepaid inventory  (1,652)  (172)
Operating leases  (2,348)  (5,169)
Assets held-for-sale  1,012   — 
Liabilities held-for-sale  9,345   — 
Accounts payable and accrued expenses  (9,225)  (8,403)
Net cash provided by (used in) operating activities  45,655   (25,754)
Investing Activities:        
Proceeds from PAL Sale  19,896   — 
Additions to property and equipment  (2,510)  (1,536)
Net cash provided by (used in) investing activities  17,386   (1,536)
Financing Activities:        
Net (payments on) proceeds from Kinergy’s line of credit  (36,897)  20,881 
Proceeds from issuance of common stock  282   3,670 
Proceeds from borrowings  9,860   — 
Principal payments on borrowings  (25,500)  (6,748)
Preferred stock dividends paid  —   (627)
Net cash (used in) provided by financing activities  (52,255)  17,176 
Net change in cash and cash equivalents  10,786   (10,114)
Cash and cash equivalents at beginning of period  18,997   26,627 
Cash and cash equivalents at end of period $29,783  $16,513 
         
Supplemental Information:        
Interest paid $9,733  $9,088 
Accrued preferred stock dividends $630  $— 
Initial right of use assets and liabilities recorded under ASC 842 $—  $43,753 

See accompanying notes to consolidated financial statements.


PACIFIC ETHANOL,ALTO INGREDIENTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited, in thousands)

 

 Preferred Stock Common Stock Additional Paid-In Accumulated Accum. Other Comprehensive  Non-Controlling    Preferred Stock Common Stock Additional
Paid-In		 Accumulated Accum. Other
Comprehensive		 Non-Controlling
   
 Shares Amount Shares Amount Capital 

Deficit

 

Income (Loss)

 

Interests

 

Total

  Shares Amount Shares Amount Capital Deficit Income (Loss) Interests Total 
Balances, January 1, 2021  927  $1   72,487  $72  $1,036,638  $(736,598) $(3,878) $       —  $296,235 
Stock-based compensation expense – restricted stock issued to employees and directors, net of cancellations and tax  —   —   550   1   618   —   —   —   619 
Stock option exercises  —   —   124   —   462   —   —   —   462 
Preferred stock dividends  —   —   —   —   —   (312)  —   —   (312)
Net loss  —   —   —   —   —   4,678   —   —   4,678 
Balances, March 31, 2021  927  $1   73,161  $73  $1,037,718  $(732,232) $(3,878) $—  $301,682 
Balances, January 1, 2020  927  $1   55,508  $56  $942,307  $(720,214) $(2,370) $7,265  $227,045   927  $1   55,508  $56  $942,307  $(720,214) $(2,370) $7,265  $227,045 
Stock-based compensation expense – restricted stock issued to employees and directors, net of cancellations and tax  —   —   (38)  (4)  868   —   —   —   864   —   —   (38)  (4)  868   —   —   —   864 
Issuances of common stock  —   —   421   4   278   —   —   —   282   —   —   421   4   278   —   —   —   282 
Preferred stock dividends  —   —   —   —   —   (315)  —   —   (315)  —   —   —   —   —   (315)  —   —   (315)
Net loss  —   —   —   —   —   (25,100)  —   (2,056)  (27,156)  —   —   —   —   —   (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   927  $1   55,891  $56  $943,453  $(745,629) $(2,370) $5,209  $200,720 
Stock-based compensation expense – restricted stock issued to employees and directors, net of cancellations and tax  —   —   (409)  (1)  582   —   —   —   581 
Preferred stock dividends  —   —   —   —   —   (315)  —   —   (315)
Sale of interests in PAL  —   —   —   —   —   —   —   (5,099)  (5,099)
Net income (loss)  —   —   —   —   —   14,964   —   (110)  14,854 
Balances, June 30, 2020  927  $1   55,482  $55  $944,035  $(730,980) $(2,370) $—  $210,741 

  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, 2019  927  $1   45,771  $46  $932,179  $(630,000) $(2,459) $19,598  $319,365 
Stock-based compensation expense – restricted stock issued to employees and directors, net of cancellations and tax  —   —   (24)  —   797   —   —   —   797 
Issuances of common stock  —   —   3,137   3   3,667   —   —   —   3,670 
Preferred stock dividends  —   —   —   —   —   (312)  —   —   (312)
Net loss  —   —   —   —   —   (12,890)  —   (1,271)  (14,161)
Balances, March 31, 2019  927  $1   48,884  $49  $936,643  $(643,202) $(2,459) $18,327  $309,359 
Stock-based compensation expense – restricted stock issued to employees and directors, net of cancellations and tax  —   —   954   1   565   —   —   —   566 
Preferred stock dividends  —   —   —   —   —   (315)  —   —   (315)
Net loss  —   —   —   —   —   (7,646)  —   (644)  (8,290)
Balances, June 30, 2019  927  $1   49,838  $50  $937,208  $(651,163) $(2,459) $17,683  $301,320 

See accompanying notes to consolidated financial statements.

 


-5-

PACIFIC ETHANOL,ALTO INGREDIENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

1.

1. ORGANIZATION AND BASIS OF PRESENTATION.AND BASIS OF PRESENTATION.

Organization and Business– The consolidated financial statements include, for all periods presented, the accounts of Pacific Ethanol,Alto Ingredients, Inc., a Delaware corporation (“Pacific Ethanol”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”), Pacific Ag. Products,Alto Nutrients LLC, a California limited liability company (“PAP”Alto Nutrients”), PEAlto Op Co., a Delaware corporation (“PEAlto Op Co.”) and all nineseven of the Company’s ethanol production facilities through April 15, 2020. As discussed in Note 2, on April 15, 2020, the Company completed the saleas of its ownership interests in Pacific Aurora, LLC (“Pacific Aurora”), thereby divesting the Company’s two ethanol production facilities located in Nebraska.March 31, 2021.

The Company is a leading producer and marketer of high quality alcohol productsspecialty alcohols and low-carbon renewable fuels in the United States.essential ingredients. The Company also produces and markets fuel-grade ethanol. The Company’s plantsproduction facilities in Pekin, Illinois and Nebraska (together with their respective holding companies, the “Pacific Ethanol Central Plants”) are located in the heart of the Corn Belt, benefit from low-cost and abundant feedstock production and allow for access to many additional domestic markets. In addition, the Company’s ability to load unit trains and barges from these facilities in the Midwest allows for greater access to international markets. The Company’s four ethanol plantsproduction facilities in California, Oregon and Idaho, (together with their respective holding companies, the “Pacific Ethanol West Plants”) are located in close proximity to both feed and fuel-grade ethanol customers, and thus enjoy unique advantages in efficiency, logistics and product pricing.

 

Following the Company’s sale of its interest in Pacific Aurora, theThe Company hashad a combined production capacity of 450 million gallons per year, as of March 31, 2021, markets, on an annualized basis, nearly 1.0 billionover 500 million gallons combined of high quality alcohol and ethanol, based on historical volumes,alcohols, and produces, on an annualized basis, nearly 3.01.5 million tons of co-productsessential ingredients on a dry matter basis, such as wet and dry distillers grains, wet and dry corn gluten feed, condensed distillers solubles,dried yeast, corn gluten meal, corn gluten feed, and distillers grains and liquid feed used in commercial animal feed and pet foods.

The Company focuses on four key markets: Health, Home & Beauty; Food & Beverage; Essential Ingredients; and Renewable Fuels. Products for the Health, Home & Beauty market include specialty alcohols used in mouthwash, cosmetics, pharmaceuticals, hand sanitizers, disinfectants and cleaners. Products for the Food & Beverage markets include grain neutral spirits used in alcoholic beverages and vinegar as well as corn germ driedused for corn oils. Products for Essential Ingredients markets include yeast, corn gluten and CO2, based on historical volumes.distillers grains used in commercial animal feed and pet foods. Renewable Fuels includes fuel-grade ethanol and distillers corn oil used as a feedstock for renewable diesel fuel.

 

As of June 30, 2020,March 31, 2021, the Company was operating at approximately 50%64% of its 450then-450 million gallon annual production capacity. As market conditions change, the Company may increase, decrease or idle production at one or more operating facilities or resume operations at any idled facility.

Basis of Presentation–Interim Financial Statements – The accompanying unaudited consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Results for interim periods should not be considered indicative of results for a full year. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.2020. 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, 2019.2020. 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.


Liquidity – The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. During the three months ended June 30, 2020, the Company continued to experience significant adverse conditions in the ethanol fuel market as demand and pricing were at record lows due to reduced domestic transportation and resulting lower gasoline demand. In response, the Company reduced production at its facilities by more than 50% in an effort to conserve capital as a result of the substantial reduction in fuel ethanol demand due to stay-at-home orders issued in response to the coronavirus pandemic. The Company, however, has not only continued producing and selling its high quality alcohol, but also converted a portion of its fuel-grade ethanol production to higher quality alcohol to respond to increased demand from the sanitizer and disinfectant markets. These sales of high quality alcohol were at a mix of fixed and spot pricing, both of which resulted in positive net income and cash flows from operations during the quarter. The Company expects robust demand for its high quality alcohol to continue for at least the next twelve months as the Company continues to enter fixed-price contracts and hedge corn input costs, locking in profit margins on sales of high quality alcohol.

 

At June 30, 2020, the Company had $29.8 million in cash and $10.0 million available under Kinergy’s operating line of credit. During the first half of 2020, the Company generated $45.7 million in cash from its operations and realized $19.9 million in net cash proceeds from the sale of its interest in Pacific Aurora. These positive cash flows have allowed the Company to make net payments totaling $52.3 million on its debt. Further, subsequent to June 30, 2020, the Company made an additional $9.2 million in payments on its term debt.

The Company, as previously agreed with its lenders, has presented and continues to negotiate a comprehensive plan to restructure its assets and liabilities. The Company has appointed a chief restructuring officer to facilitate the development of such a plan and to assist in the Company’s current strategic initiatives. The Company expects the negotiated plan may include additional assets sales, soliciting new investments in its assets, further debt payments and further reductions to overhead expenses.

The Company believes that as of the date of this report, it is in compliance with all debt covenants contained in its credit facilities, except the Company’s obligation to obtain lender approval of a comprehensive plan to restructure its assets and liabilities with respect to its Pekin and ICP lenders. The Company has appointed a chief restructuring officer to facilitate the development of such a plan and has presented and continues to negotiate the plan with its lenders. As a result, the Company is not in compliance with its obligations to its lenders, which could result in their acceleration of the Company’s debt. Although the Company does not expect such an outcome, especially in light of its financial performance and debt prepayments during the second quarter and thereafter, the Company does not have sufficient liquidity or capital resources to immediately repay its debt if accelerated. Even though the Company doesn’t believe acceleration is probable, it has classified its related debt as current on the Company’s consolidated balance sheets. Given the above noted projected cash flows from operations and debt repayments, the Company believes it has alleviated substantial doubt about its ability to continue as a going concern. Therefore, the Company believes it has sufficient liquidity to meet its anticipated working capital, debt service and other liquidity needs for the next twelve months.

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 sells corn oil to poultry and biodiesel customers generally without requiring collateral.

-6-

 

The Company maintains an allowance for doubtful accounts for balances that appear to have specific collection issues. The collection process is based on the age of the invoice and requires attempted contacts with the customer at specified intervals. If, after a specified number of days, the Company has been unsuccessful in its collection efforts, a bad debt allowance is recorded for the balance in question. Delinquent accounts receivable are charged against the allowance for doubtful accounts once uncollectibility has been determined. The factors considered in reaching this determination are the apparent financial condition of the customer and the Company’s success in contacting and negotiating with the customer. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of ability to make payments, additional allowances may be required.

 

Of the accounts receivable balance, approximately $40,772,000$51,301,000 and $63,736,000$35,839,000 at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively, were used as collateral under Kinergy’s operating line of credit. The allowance for doubtful accounts was $16,000$351,000 and $39,000$260,000 as of June 30, 2020March 31, 2021 and December 31, 2019, respectively. The Company recorded a bad debt recovery of $18,000 and a bad debt expense of $1,000 for the three months ended June 30, 2020, and 2019, respectively. The Company recorded a bad debt expense of $1,000$91,000 and $27,000$19,000 for the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, respectively. The Company does not have any off-balance sheet credit exposure related to its customers.

Financial Instruments – The carrying values of cash and cash equivalents, accounts receivable, derivative assets, accounts payable, accrued liabilities and derivative liabilities are reasonable estimates of their fair values because of the short maturity of these items. The carrying value of the Company’s senior secured notes wereare recorded at fair value at December 31, 2019 and are considered Level 2 fair value measurements. The Company believes their carrying value approximates fair value at June 30, 2020. 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 instrumentsinstruments’ 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.

 

7

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.PACIFIC AURORA.

2. ASSETS AND LIABILITIES HELD-FOR-SALE.

On December 19, 2019, Pacific Ethanol Central, LLC (“PE Central”) entered into

In October 2020, the Company’s Board of Directors approved a term sheet coveringplan to sell the proposed sale of its 73.93% ownership interestCompany’s fuel-grade ethanol production facilities located in Pacific Aurora to Aurora Cooperative Elevator Company (“ACEC”) for $52.8 million,Madera and asStockton, California. As a result, the Company determined thatthe related long-lived asset groups should be classified as held-for-sale at December 31, 2020. During the three months ended March 31, 2021, the Company provided for an additional impairment charge of $1.2 million based on revised fair value estimates. On April 23, 2021, the Company entered into an asset purchase agreement to sell its Madera facility for total consideration of $28.3 million, comprised of $19.5 million in cash and $8.8 million in assumption of liabilities. On May 14, 2021, the Company closed the sale.

-7-

The Company classified the following assets and liabilities as held-for-sale as of March 31, 2021 (in thousands):

  Stockton  Madera 
Property and equipment, net $19,535  $27,813 
Right of use operating lease assets, net  9,705   - 
Assets held-for-sale $29,240  $27,813 

  Stockton  Madera 
Operating lease obligations $10,456  $— 
Assessment financing  —   8,775 
Liabilities held-for-sale $10,456  $8,775 

The Company classified the following assets and liabilities as held-for-sale as of December 31, 2019, the long-lived assets of Pacific Aurora should be classified as held-for-sale.2020 (in thousands):

 

On April 15, 2020, the Company closed the sale of its ownership interest in Pacific Aurora and preliminarily received total consideration of $52.8 million, subject to working capital adjustments of approximately $35.3 million, resulting in cash proceeds of $19.9 million and the balance of $16.5 million in long-term ACEC promissory notes, resulting in a net loss on sale of approximately $1.4 million, recorded as other income (expense) in the Company’s consolidated statements of operations. Approximately $14.5 million of the cash proceeds were used to repay a portion of the Company’s term debt.

  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 

 

The Company received two promissory notes in the amounts of $8.6 million and $7.9 million as part consideration for the sale, both maturing on April 15, 2025. The $8.6 million note accrues interest at an annual rate of 5.00%. Interest payments are due quarterly beginning July 1, 2020 and principal payments of $0.4 million are due quarterly beginning July 1, 2021. The $7.9 million note accrues interest at an annual rate of 4.50%. Interest payments are due quarterly beginning July 1, 2020 and principal payments of $0.4 million are due quarterly beginning January 3, 2022.

In addition, upon the sale, the Company no longer has noncontrolling interests on its balance sheet and no longer records income (loss) of noncontrolling interests for future periods.

  Stockton  Madera 
Operating lease obligations $10,435  $— 
Assessment financing  —   9,107 
Liabilities held-for-sale $10,435  $9,107 

 

For the three months ended June 30, 2020March 31, 2021, net sales attributed to the results of operations for Stockton and 2019, Pacific Aurora contributedMadera were $0.2 million and less than $0.1 million, and $45.4 million inrespectively. For the three months ended March 31, 2020, net sales $0.5attributed to the results of operations for Stockton and Madera were $21.9 million and $2.5$21.5 million, inrespectively. For the three months ended March 31, 2021, pre-tax loss, and $0.1 million and $0.6 million in net loss attributed to noncontrolling interests,the results of operations for Stockton and Madera was $0.8 million and $1.6 million, respectively. For the sixthree months ended June 30,March 31, 2020, and 2019, Pacific Aurora contributed $39.6 million and $81.9 million in net sales, $8.4 million and $7.4 million in pre-tax loss, and $2.2 million and $1.9 million in net loss attributed to noncontrolling interests,the results of operations for Stockton and Madera was $2.3 million and $1.8 million, respectively.

 


3.SEGMENTS.

3. SEGMENTS.

 

The Company reports its financial and operating performance in twothree segments: (1) ethanol production, which includes the production and sale of high quality alcohol, ethanol and co-products, with all of the Company’s production facilities aggregated, and (2) marketing and distribution, which includes marketing and merchant trading for Company-produced high quality alcohol,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 co-products and third-party ethanol.essential ingredients produced at all of the Company’s other production facilities on an aggregated basis (“Other production”), none of which are individually so significant as to be considered a reportable segment.

-8-

 

The following tables set forth certain financial data for the Company’s operating segments (in thousands):

 

  Three Months Ended
June 30,		  Six Months Ended
June 30,		 
  2020  2019  2020  2019 
             
Net Sales            
Production, recorded as gross:            
Ethanol/alcohol sales $105,321  $194,394  $289,989  $373,783 
Co-product sales  35,328   64,679   104,129   133,485 
Intersegment sales  503   421   1,097   784 
Total production sales  141,152   259,494   395,215   508,052 
                 
Marketing and distribution:                
Ethanol/alcohol sales, gross $71,118  $86,754  $128,624  $193,908 
Ethanol/alcohol sales, net  307   474   736   928 
Intersegment sales  893   1,942   2,785   3,760 
Total marketing and distribution sales  72,318   89,170   132,145   198,596 
                 
Intersegment eliminations  (1,396)  (2,363)  (3,882)  (4,544)
Net sales as reported $212,074  $346,301  $523,478  $702,104 
             
Cost of goods sold:            
Production $113,196  $257,187  $382,857  $515,782 
Marketing and distribution  69,092   87,741   126,211   189,569 
Intersegment eliminations  (1,396)  (2,598)  (3,882)  (4,929)
Cost of goods sold as reported $180,892  $342,330  $505,186  $700,422 
             
Income (loss) before benefit for income taxes:            
Production $17,811  $(7,117) $(7,219) $(24,683)
Marketing and distribution  1,664   (129)  2,605   5,989 
Corporate activities  (4,621)  (1,044)  (7,688)  (3,757)
  $14,854  $(8,290) $(12,302) $(22,451)
Depreciation and amortization:                
Production $9,034  $10,199  $18,540  $23,557 
Corporate activities  79   113   266   358 
  $9,113  $10,312  $18,806  $23,915 
             
Interest expense:            
Production $1,623  $2,048  $3,739  $3,755 
Marketing and distribution  313   774   940   1,362 
Corporate activities  2,711   2,293   5,275   4,734 
  $4,647  $5,115  $9,954  $9,851 
  Three Months Ended
March 31,		 
Net Sales 2021  2020 
Marketing and distribution:      
Alcohol sales, gross $57,010  $57,506 
Alcohol sales, net  452   429 
Intersegment sales  2,244   4,315 
Total marketing and distribution sales  59,706   62,250 
Pekin Campus production, recorded as gross:        
Alcohol sales $95,083  $84,132 
Essential ingredient sales  45,077   39,870 
Intersegment sales  9,985   2,332 
Total Pekin Campus sales  150,145   126,334 
Other production, recorded as gross:        
Alcohol sales $15,969  $99,230 
Essential ingredient sales  5,143   30,237 
Intersegment sales  305   291 
Total Other production sales  21,417   129,758 
         
Intersegment eliminations  (12,534)  (6,938)
Net sales as reported $218,734  $311,404 
         

Cost of goods sold:      
Marketing and distribution $53,957  $57,139 
Pekin Campus production  137,376   128,683 
Other production  24,118   142,310 
Intersegment eliminations  (10,554)  (3,838)
Cost of goods sold as reported $204,897  $324,294 

Income (loss) before benefit for income taxes:      
Marketing and distribution $3,973  $2,930 
Pekin Campus production  9,691   (6,849)
Other production  (5,137)  (16,621)
Corporate activities  (2,904)  (2,562)
  $5,623  $(23,102)
Depreciation:        
Pekin Campus production $4,345  $5,130 
Other production  1,498   4,530 
Corporate activities  17   99 
  $5,860  $9,759 

Interest expense:      
Marketing and distribution $202  $627 
Pekin Campus production  519   2,084 
Other production  136   32 
Corporate activities  1,028   2,564 
  $1,885  $5,307 

 


-9-

The following table sets forth the Company’s total assets by operating segment (in thousands): 

 

 June 30,
2020		 December 31,
2019		  March 31,
 December 31, 
Total assets:      2021 2020 
Production $397,331  $492,060 
Marketing and distribution  82,868   106,863  $119,546  $89,337 
Pekin Campus production  238,370   234,439 
Other production  120,351   102,409 
Corporate assets  16,930   13,572   22,849   50,633 
 $497,129  $612,495  $501,116  $476,818 

 

4.INVENTORIES.

4. INVENTORIES.

 

Inventories consisted primarily of bulk high quality alcohol, ethanol, specialty alcohols, corn, co-products, low-carbon and Renewable Identification Number (“RIN”) creditsessential ingredients and unleaded fuel, and are valued at the lower-of-cost-or-netlower of cost or net realizable value, with cost determined on a first-in, first-out basis. Inventory is net of a $0 and $1,290,000$1,033,000 valuation adjustment as of June 30, 2020 and December 31, 2019, respectively.2020. Inventory balances consisted of the following (in thousands):

 

 June 30,
2020		 December 31,
2019		  March 31, 2021 December 31,
2020		 
Finished goods $28,810  $38,194  $39,654  $25,154 
Work in progress  3,018   7,426   4,965   4,333 
Raw materials  6,655   7,890   9,233   7,074 
Low-carbon and RIN credits  6,443   5,690 
Other  1,400   1,400   1,364   1,364 
Total $46,326  $60,600  $55,216  $37,925 

 

5. DERIVATIVES.

The business and activities of the Company expose it to a variety of market risks, including risks related to changes in commodity prices. The Company monitors and manages these financial exposures as an integral part of its risk management program. This program recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effects that market volatility could have on operating results.


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5.DEBT.

Commodity Risk – Cash Flow Hedges – The Company uses derivative instruments to protect cash flows from fluctuations caused by volatility in commodity prices for periods of up to twelve months in order to protect gross profit margins from potentially adverse effects of market and price volatility on alcohol sales and purchase commitments where the prices are set at a future date and/or if the contracts specify a floating or index-based price. In addition, the Company hedges anticipated sales of alcohol to minimize its exposure to the potentially adverse effects of price volatility. These derivatives may be designated and documented as cash flow hedges and effectiveness is evaluated by assessing the probability of the anticipated transactions and regressing commodity futures prices against the Company’s purchase and sales prices. Ineffectiveness, which is defined as the degree to which the derivative does not offset the underlying exposure, is recognized immediately in cost of goods sold. For the three months ended March 31, 2021 and 2020, the Company did not designate any of its derivatives as cash flow hedges.

Commodity Risk – Non-Designated Hedges – The Company uses derivative instruments to lock in prices for certain amounts of corn and alcohols by entering into exchange-traded forward contracts or options for those commodities. These derivatives are not designated for hedge accounting treatment. The changes in fair value of these contracts are recorded on the balance sheet and recognized immediately in cost of goods sold. The Company recognized net gains of $10,543,000 and $0 as the change in the fair value of these contracts for the three months ended March 31, 2021 and 2020, respectively.

Non Designated Derivative Instruments – The classification and amounts of the Company’s derivatives not designated as hedging instruments, and related cash collateral balances, are as follows (in thousands):

 As of March 31, 2021
  Assets Liabilities
Type of Instrument Balance Sheet Location Fair
Value		  Balance Sheet Location Fair
Value		 
Commodity contracts Derivative assets $22,355  Derivative liabilities $4,741 

  As of December 31, 2020
  Assets Liabilities
Type of Instrument Balance Sheet Location Fair
Value		  Balance Sheet Location Fair
Value		 
Cash collateral balance Other current assets $520       
Commodity contracts Derivative assets $17,149  Derivative liabilities $— 

The classification and amounts of the Company’s recognized gains for its derivatives not designated as hedging instruments are as follows (in thousands):

    Realized Gains 
    For the three months Ended 
  March 31, 
Type of Instrument Statements of Operations Location  2021  2020 
Commodity contracts Cost of goods sold $6,185  $— 
    $6,185  $— 

    Unrealized Gains 
    For the three months Ended
March 31,		 
Type of Instrument Statements of Operations Location 2021  2020 
Commodity contracts Cost of goods sold $4,358  $— 
    $4,358  $— 

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6. DEBT.

 

Long-term borrowings are summarized as follows (in thousands):

 

 June 30,
2020		 December 31,
2019		  March 31,
2021		 December 31,
2020		 
Kinergy line of credit $41,441  $78,338  $45,554  $32,512 
Pekin term loan  26,000   39,500 
Pekin revolving loan  32,000   32,000   17,580   20,580 
ICP term loan  —   12,000 
ICP revolving loan  18,000   18,000   9,384   9,384 
Parent notes payable  20,001   25,533 
CARES Act loans  9,860   —   9,860   9,860 
Parent notes payable  65,782   65,649 
  193,083   245,487   102,379   97,869 
Less unamortized debt premium  346   461   174   230 
Less unamortized debt financing costs  (1,541)  (2,153)  (576)  (759)
Less short-term portion  (96,000)  (63,000)  (37,581)  (25,533)
Long-term debt $95,888  $180,795  $64,396  $71,807 

 

PE Pekin Credit Facilities – On March 20, 2020, Pacific Ethanol Pekin, LLC (“PE Pekin”) and its lender agreed to defer $1.0 million in aggregate interest payments due March 20, 2020 and April 20, 2020 until May 20, 2020. On that same date, the Company granted to the lender a security interest in all of the Company’s equity interests in PE Op Co., which indirectly owns the Company’s plants located on the West Coast. The Company and certain subsidiaries also entered into intercreditor agreements with the PE Pekin and Illinois Corn Processing, LLC (“ICP”) lenders, and the agent for the Company’s senior secured noteholders, to address issues of priority and the allocation of proceeds from asset sales. In July 2020, the Company reached a confidential settlement of an outstanding dispute resulting in a gain and cash proceeds of approximately $11.8 million. The Company used a portion of these funds to make approximately $7.4 million in additional principal payments on PE Pekin’s term debt.

ICP Credit Facilities – On March 20, 2020, ICP and its lender agreed to defer a $1.5 million principal payment due March 20, 2020 and $0.3 million in aggregate interest payments due March 20, 2020 and April 20, 2020 until May 20, 2020. On that same date, the Company granted to the lender a security interest in all of the Company’s equity interests in PE Op Co. The Company and certain of its subsidiaries also entered into intercreditor agreements with the PE Pekin and ICP lenders, and the agent for the Company’s senior secured noteholders, to address issues of priority and the allocation of proceeds from asset sales. The Company used a portion of the proceeds from the settlement noted above, in July 2020, to make approximately $1.8 million in additional principal payments on ICP’s term debt.

CARES Act LoansParent Notes Payable – On May 4, 2020, Pacific Ethanol, Inc. and PE Pekin received loan14, 2021, with proceeds from Bankthe Company’s sale of America, NA under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), through the Paycheck Protection Program administered by the U.S. Small Business Administration. Pacific Ethanol, Inc. received $6.0its Madera, California facility, it repaid $19.3 million and PE Pekin received $3.9of principal on its notes payable, with $0.7 million in loan proceeds. The loans mature in two years and bear interest at a rateremaining.

Maturities of 1.00% per annum. Under the terms of the loans, certain amounts may be forgiven if they are used for qualifying expenses as described in the CARES Act, but the Company can provide no assurance that it will be able to obtain forgiveness of all or any portion of the loans.

RestrictionsLong-term Debt – The Company’s long-term debt matures as follows (in thousands):

December 31:

   
2021 $20,001 
2022  82,378 
  $102,379 

Restrictions – At June 30, 2020,March 31, 2021, there were approximately $204.4$231.9 million of net assets at the Company’s subsidiaries that were not available to be transferred to Pacific Ethanol,Alto Ingredients, Inc. in the form of dividends, loans or advances due to restrictions contained in the credit facilities of the Company’s subsidiaries.


6.COMMITMENTS AND CONTINGENCIES.

7. COMMITMENTS AND CONTINGENCIES.

Sales Commitments – At June 30, 2020,March 31, 2021, the Company had entered into sales contracts with its major customers to sell certain quantities of ethanolalcohol and co-products.essential ingredients. The Company had open ethanolalcohol indexed-price contracts for 5,169,000102,526,000 gallons of ethanol as of June 30, 2020March 31, 2021 and open fixed-price ethanol and high quality alcohol sales contracts totaling $226,845,000$207,687,000 as of June 30, 2020.March 31, 2021. The Company had open fixed-price co-product sales contracts for essential ingredients totaling $9,320,000$18,170,000 and open indexed-price co-product sales contracts of essential ingredients for 179,000146,000 tons as of June 30, 2020.March 31, 2021. These sales contracts are scheduled to be completed throughout 2020 and 2021.

 

Purchase Commitments – At June 30, 2020,March 31, 2021, the Company had indexed-price purchase contracts to purchase 35,476,00015,626,000 gallons of ethanolalcohol and fixed-price purchase contracts to purchase $7,766,000$1,238,000 of ethanolalcohol from its suppliers. The Company had fixed-price purchase contracts to purchase $7,669,000$33,883,000 of corn from its suppliers as of June 30, 2020.March 31, 2021. These purchase commitments are scheduled to be satisfied throughout 2020. In July 2020, the Company entered into derivative contracts to hedge its corn costs for its fixed sales contracts.2021.

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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.

 

7.PENSION AND RETIREMENT BENEFIT PLANS.

8. PENSION PLANS.

 

The Company sponsors a defined benefit pension plan (the “Retirement Plan”) and a health care and life insurance plan (the “Postretirement Plan”). The Company assumed the Retirement Plan and the Postretirement Plan as part of its acquisition of PE Central on July 1, 2015.

 

The Retirement Plan is noncontributory, and covers only “grandfathered” unionized employees at the Company’s Pekin, Illinois facility who fulfill minimum age and service requirements. Benefits are based on a prescribed formula based upon the employee’s years of service. The Retirement Plan, which is part of a collective bargaining agreement, covers only union employees hired prior to November 1, 2010.

 

The Company uses a December 31 measurement date for its Retirement Plan. The Company’s funding policy is to make the minimum annual contribution required by applicable regulations. As of December 31, 2019,2020, the Retirement Plan’s accumulated projected benefit obligation was $21.6$24.6 million, with a fair value of plan assets of $15.7$17.6 million. The underfunded amount of $5.9$7.0 million is recorded on the Company’s consolidated balance sheet in other liabilities. For the three months ended March 31, 2021, the Retirement Plan’s net periodic expense was $22,000, comprised of $151,000 in interest cost and $109,000 in service cost, partially offset by $238,000 of expected return on plan assets. For the three months ended March 31, 2020, the Retirement Plan’s net periodic expense was $48,000, comprised of $173,000 in interest cost and $101,000 in service cost, partially offset by $226,000 of expected return on plan assets.

 

The Postretirement Plan provides postretirement medical benefits and life insurance to certain “grandfathered” unionized employees. Employees hired after December 31, 2000 are not eligible to participate in the Postretirement Plan. The Postretirement Plan is contributory, with contributions required at the same rate as active employees. Benefit eligibility under the plan reduces at age 65 from a defined benefit to a defined dollar cap based upon years of service. As of December 31, 2019,2020, the Postretirement Plan’s accumulated projected benefit obligation was $5.3 million and is recorded on the Company’s consolidated balance sheet in other liabilities. The Company’s funding policy is to make the minimum annual contribution required by applicable regulations. For the three months ended March 31, 2021, the Postretirement Plan’s net periodic expense was $42,000, comprised of $10,000 of interest cost, $26,000 of service cost and $6,000 of amortization expense. For the three months ended March 31, 2020, the Postretirement Plan’s net periodic expense was $59,000, comprised of $38,000 of interest cost, $14,000 of service cost and $7,000 of amortization expense.


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8.FAIR VALUE MEASUREMENTS.

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.

Warrants Long-Lived Assets Held-for-Sale– The Company’s warrants issued December 22, 2019, were valued using the Black-Scholes Valuation Model.

Significant assumptions usedCompany recorded its long-lived assets associated with its property and relatedequipment held-for-sale at fair value for the warrants as of June 30, 2020 were as follows:

Original Issuance Exercise
Price		  Volatility  Risk Free
Interest
Rate		  Term
(years)		  Warrants
Outstanding		  Fair
Value		 
12/22/19 $1.00   122.0%  0.16%  2.50   5,500,000  $1,618,100 

Significant assumptions usedat March 31, 2021 and related fair value for the warrants as of December 31, 2019 were as follows:

Original Issuance Exercise
Price		  Volatility  Risk Free
Interest
Rate		  Term
(years)		  Warrants
Outstanding		  Fair
Value		 
12/22/19 $1.00   76.0%  1.66%  3.00   5,500,000  $977,000 

2020 of $47,348,000 and $48,548,000, respectively. The fair values of the warrantsthese assets are based on unobservable inputsobservable values for the assets through corroboration with market data and are designated as Level 3 inputs.

Other Derivative Instruments – The Company’s other derivative instruments consist of commodity positions. The fair values of the commodity positions are based on quoted prices on the commodity exchanges and are designated as Level 1 inputs.


The following table summarizes recurring and nonrecurring fair value measurements by level at June 30, 2020March 31, 2021 (in thousands):

 

 Fair        Fair       
 Value Level 1 Level 2 Level 3  Value Level 1 Level 2 Level 3 
Assets:         
Derivative financial instruments $22,355  $22,355  $—  $— 
Long-lived assets held-for-sale  57,053   —   —   57,053 
   ��       $79,408  $22,355  $—  $57,053 
Liabilities:                         
Derivative financial instruments $(4,741) $(4,741) $—  $— 
          $(4,741) $(4,741) $—  $— 
Warrants $(1,618) $—  $—  $(1,618)
 $(1,618) $—  $—  $(1,618)

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The following table summarizes recurring and nonrecurring fair value measurements by level at December 31, 20192020 (in thousands):

 

         Benefit Plan          Benefit Plan 
 Fair       Percentage  Fair       Percentage 
 Value Level 1 Level 2 Level 3 Allocation  Value Level 1 Level 2 Level 3 Allocation 
Assets:                      
Derivative financial instruments $2,438  $2,438  $—  $—      $17,149  $17,149  $—  $—     
                    
Long-lived assets held-for-sale  70,400   —   —   70,400       58,295   —   —   58,295     
Defined benefit plan assets(1)                                        
(pooled separate accounts):                              ��   ��     
Large U.S. Equity(2)  4,654   —   4,654   —   30%  5,470   —   5,470   —   31%
Small/Mid U.S. Equity(3)  2,348   —   2,348   —   15%  2,605   —   2,605   —   15%
International Equity(4)  2,596   —   2,596   —   17%  2,921   —   2,921   —   17%
Fixed Income(5)  6,056   —   6,056   —   38%  6,592   —   6,592   —   37%
 $88,492  $2,438  $15,654  $70,400      $93,032  $17,149  $17,588  $58,295     
                                        
Liabilities:                                        
Derivative financial instruments $(1,860) $(1,860) $—  $—     
                                        
Warrants  (977)  —   —   (977)    
 $(2,837) $(1,860) $—  $(977)     $—  $—  $—  $—     

 

 

(1)Included in derivative instrumentsother 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.

9.EARNINGS PER SHARE.

10. EARNINGS PER SHARE.

 

The following tables compute basic and diluted earnings per share (in thousands, except per share data):

 

 Three Months Ended June 30, 2020  Three Months Ended
March 31, 2021		 
 Income
Numerator		 Shares
Denominator		 Per-Share
Amount		  Income Numerator Shares Denominator Per-Share Amount 
Net income attributed to Pacific Ethanol, Inc. $14,964         
Net income attributed to Alto Ingredients, Inc. $4,678         
Less: Preferred stock dividends  (315)          (312)        
Basic and diluted loss per share:            
Basic income per share:            
Income available to common stockholders $14,649   54,498  $0.27  $4,366   70,351  $0.06 
Add: Dilutive securities  —   2,113     
Diluted income per share:            
Income available to common stockholders $4,366   72,464  $0.06 

 

  Three Months Ended June 30, 2019 
  Loss
Numerator		  Shares
Denominator		  Per-Share
Amount		 
Net loss attributed to Pacific Ethanol, Inc. $(7,646)        
Less: Preferred stock dividends  (315)        
Basic and diluted loss per share:            
Loss available to common stockholders $(7,961)  47,771  $(0.17)

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  Six Months Ended June 30, 2020 
  Loss
Numerator		  Shares
Denominator		  Per-Share
Amount		 
Net loss attributed to Pacific Ethanol, Inc. $(10,136)        
Less: Preferred stock dividends  (630)        
Basic and diluted loss per share:            
Loss available to common stockholders $(10,766)  54,163  $(0.20)

 

  Six Months Ended June 30, 2019 
  Loss
Numerator		  Shares
Denominator		  Per-Share
Amount		 
Net loss attributed to Pacific Ethanol, Inc. $(20,536)        
Less: Preferred stock dividends  (627)        
Basic and diluted loss per share:            
Loss available to common stockholders $(21,163)  46,651  $(0.45)

  Three Months Ended
March 31, 2020		 
  Loss
Numerator		  Shares Denominator  Per-Share Amount 
Net loss attributed to Alto Ingredients, Inc. $(25,100)        
Less: Preferred stock dividends  (315)        
Basic and diluted loss per share:            
Net loss available to common stockholders $(25,415)  53,828  $(0.47)

There were an additional aggregate of 635,000 potentially dilutive weighted-average shares of 3,265,000 and 964,000 from convertible securities outstanding for the three and six months ended June 30, 2020March 31, 2021 and 2019.2020. These convertible securities were not considered in calculating diluted net income (loss) per share for the periods presented,three months ended March 31, 2021 and 2020, as their effect would have been anti-dilutive.

 

10.PARENT COMPANY FINANCIALS.

11. PARENT COMPANY FINANCIALS.

 

Restricted Net Assets – At June 30, 2020,March 31, 2021, the Company had approximately $204,432,000$231.9 million of net assets at its subsidiaries that were not available to be transferred to Pacific EthanolAlto Ingredients in the form of dividends, distributions, loans or advances due to restrictions contained in the credit facilities of these subsidiaries.

 

Parent company financial statements for the periods covered in this report are set forth below (in thousands):

 

 June 30,
2020		  December 31,
2019		 
ASSETS 

March 31, 2021

 

December 31,
2020

 
Current Assets:          
Cash and cash equivalents $8,687  $4,985  $16,534  $25,632 
Receivables from subsidiaries  14,264   13,057   16,412   15,548 
Other current assets  1,756   2,349   2,188   1,836 
Total current assets  24,707   20,391   35,134   43,016 
                
Property and equipment, net  202   269   125   142 
Other Assets:                
Investments in subsidiaries  214,898   218,464   257,547   246,518 
Pacific Ethanol West plant receivable  49,937   55,750 
Alto West, LLC receivable  42,649   42,649 
Right of use operating lease assets, net  3,121   3,253   2,915   2,985 
Other assets  1,344   1,452   1,087   1,088 
Total other assets  269,300   278,919   304,198   293,240 
Total Assets $294,209  $299,579  $339,457  $336,398 
        
Current Liabilities:                
Accounts payable and accrued liabilities $3,297  $5,907  $4,961  $2,001 
Accrued PE Op Co. purchase  3,829   3,829 
Accrued Alto Op Co. purchase  3,829   3,829 
Current portion of long-term debt  20,000   10,000   20,001   25,533 
Other current liabilities  678   659   394   473 
Total current liabilities  27,804   20,395   29,185   31,836 
                
Long-term debt, net of current portion  51,140   56,110   5,665   5,564 
Other liabilities  4,524   3,294   2,925   2,763 
Total Liabilities  83,468   79,799   37,775   40,163 
Stockholders’ Equity:                
Preferred stock  1   1   1   1 
Common and non-voting common stock  55   56   73   72 
Additional paid-in capital  944,035   942,307   1,037,718   1,036,638 
Accumulated other comprehensive loss  (2,370)  (2,370)  (3,878)  (3,878)
Accumulated deficit  (730,980)  (720,214)  (732,232)  (736,598)
Total Pacific Ethanol, Inc. stockholders’ equity  210,741   219,780 
Total Alto Ingredients, Inc. stockholders’ equity  301,682   296,235 
Total Liabilities and Stockholders’ Equity $294,209  $299,579  $339,457  $336,398 


-16-

  Three Months Ended
June 30,		  Six Months Ended
June 30,		 
  2020  2019  2020  2019 
             
Management fees from subsidiaries $2,873  $3,000  $6,126  $6,330 
Selling, general and administrative expenses  4,308   2,818   9,685   7,547 
Income (loss) from operations  (1,435)  182   (3,559)  (1,217)
Fair value adjustments  (1,314)  —   (641)  — 
Interest income  1,004   1,172   2,046   2,331 
Interest expense  (2,725)  (2,307)  (5,343)  (4,762)
Other expense  (140)  (83)  (162)  (84)
Loss before benefit for income taxes  (4,610)  (1,036)  (7,659)  (3,732)
Benefit for income taxes  —   —   —   — 
Loss before benefit for income taxes  (4,610)  (1,036)  (7,659)  (3,732)
Equity in income (losses) of subsidiaries  19,574   (6,610)  (2,477)  (16,804)
Consolidated net income (loss) $14,964  $(7,646) $(10,136) $(20,536)

  For the Six Months Ended
June 30,		 
  2020  2019 
Operating Activities:      
Net loss $(10,136) $(20,536)
Adjustments to reconcile net loss to cash used in operating activities:        
Equity in losses of subsidiaries  2,477   16,804 
Fair value adjustments  (641)  — 
Depreciation  67   142 
Amortization of debt (premiums) discounts  (115)  357 
Changes in operating assets and liabilities:        
Accounts receivable  (1,207)  1,871 
Other assets  714   (281)
Accounts payable and accrued expenses  —   1,363 
Accounts payable with subsidiaries  475   (600)
Net cash used in operating activities $(8,366) $(880)
Investing Activities:        
Additions to property and equipment $—  $(11)
Net cash used in investing activities $—  $(11)
Financing Activities:        
Proceeds from issuances of common stock $282  $3,670 
Proceeds from plant receivables  5,813   — 
Proceeds from long-term debt  5,973   — 
Payments on senior notes  —   (3,748)
Preferred stock dividend payments  —   (627)
Net cash provided by (used in) financing activities $12,068  $(705)
Net change in cash and cash equivalents  3,702   (1,596)
Cash and cash equivalents at beginning of period  4,985   6,759 
Cash and cash equivalents at end of period $8,687  $5,163 

  

Three Months Ended
March 31,

 
  

2021

  

2020

 
Management fees from subsidiaries $2,526  $3,253 
Selling, general and administrative expenses  4,651   5,377 
Loss from operations  (2,125)  (2,124)
Fair value adjustments  —   673 
Interest expense, net  (1,028)  (1,598)
Other income  807   — 
Loss before benefit for income taxes  (2,346)  (3,049)
Benefit for income taxes  —   — 
Loss before equity in losses of subsidiaries  (2,346)  (3,049)
Equity in income (losses) of subsidiaries  7,024   (24,107)
Consolidated net income (loss) $4,678  $(27,156)

  For the Three Months Ended
March 31,		 
  2021  2020 
Operating Activities:      
Consolidated net income (loss) $4,678  $(27,156)
Adjustments to reconcile net income (loss) to cash used in operating activities:        
Equity in (income) losses of subsidiaries  (7,024)  24,107 
Fair value adjustments  —   (673)
Depreciation  17   33 
Amortization (accretion) of debt discount (premium)  101   (57)
Changes in operating assets and liabilities:        
Receivables from subsidiaries  (864)  123 
Other assets  (281)  29 
Accounts payable and accrued expenses  (765)  — 
Accounts payable with subsidiaries  110   2,235 
Net cash used in operating activities $(4,028) $(1,359)
Investing Activities:        
Additions to property and equipment $—  $— 
Net cash used in investing activities $—  $— 
Financing Activities:        
Proceeds from issuances of common stock $462  $282 
Proceeds from plant receivable  —   5,813 
Payments on senior notes  (5,532)  — 
Preferred stock dividend payments  —   — 
Net cash provided by (used in) financing activities $(5,070) $6,095 
Net increase (decrease) in cash and cash equivalents  (9,098)  4,736 
Cash and cash equivalents at beginning of period  25,632   4,985 
Cash and cash equivalents at end of period $16,534  $9,721 

12. SUBSEQUENT EVENT.

Agreement to sell Madera facility – On April 23, 2021, the Company entered into an asset purchase agreement with Seaboard Energy California, LLC, for the purchase and sale of the Company’s Madera, California production facility for total consideration of $28.3 million, comprised of $19.5 million in cash and $8.8 million in assumption of liabilities. The Company closed the sale on May 14, 2021, and using net cash proceeds, repaid $19.3 million on its parent notes payable.


-17-

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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 our products;alcohols and essential ingredients;

 

●fluctuations in the costs of key production input commodities such as corn and natural gas;

 

●the projected growth or contraction in the alcohol and essential ingredients markets in which we operate;

 

●our strategies for expanding, maintaining or contracting our presence in these markets;

 

●anticipated trends in our financial condition and results of operations; and

 

●our ability to distinguish ourselves from our current and future competitors.

 

You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this report, or in the case of a document incorporated by reference, as of the date of that document. We do not undertake to update, revise or correct any forward-looking statements, except as required by law.

 

Any of the factors described immediately above, or referenced from time to time in our filings with the Securities and Exchange Commission or in the “Risk Factors” section below could cause our financial results, including our net income or loss or growth in net income or loss to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially.

 

Recent Developments

On April 23, 2021, we entered into an asset purchase agreement with Seaboard Energy California, LLC, for the purchase and sale of our Madera, California production facility for total consideration of $28.3 million, comprised of $19.5 million in cash and $8.8 million in assumption of liabilities. We closed the transaction on May 14, 2021, and with the net proceeds, repaid $19.3 million in principal on our senior notes.

Overview

 

We are a leading producer and marketer of high quality alcohol productsspecialty alcohols and low-carbon renewable fuelsessential ingredients, and the largest producer of specialty alcohols in the United States.States based on annualized volumes.

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We operate seven strategically-locatedsix alcohol production facilities. Three of our plantsproduction facilities are located in the Midwestern state of Illinois and fourthree of our plantsfacilities are located in the Western states of California, Oregon and Idaho. WeOur facility in California is held-for-sale as we are the seventh largest ethanol producer in the United States based on annualized production capacity. Our plantsprocess of marketing the Stockton facility for sale. We have a combined high qualityan annual alcohol and fuel ethanol production capacity of 450410 million gallons per year.gallons. We market all of the high quality alcohol, ethanol and co-productsalcohols produced at our plantsfacilities as well as fuel-grade ethanol produced by third parties. In 2019,2020, we marketed nearly 1.0 billionover 500 million gallons combined of high quality alcohol andour own alcohols as well as fuel-grade ethanol produced by third parties, and nearly 3.01.5 million tons of co-productsessential ingredients on a dry matter basis. Our business consists of three reportable segments: two operating segments: a production segmentsegments and a marketing segment.

 


We report our financial and operating performance in three segments: (1) marketing and distribution, which includes marketing and merchant trading for Company-produced alcohols and essential ingredients on an aggregated basis, and third party fuel-grade ethanol (2) Pekin production, which includes the production and sale of alcohols and essential ingredients produced at our Pekin, Illinois campus, and (3) Other production, which includes the production and sale of fuel-grade ethanol and essential ingredients produced at all of our other production facilities on an aggregate basis, none of which are individually so significant as to be considered a reportable segment.

Our mission is to beexpand our business as a leading producer and marketer of high quality alcohol products, low-carbon renewable fuelsspecialty alcohols and high-value animal feed in the United States.essential ingredients. We intend to accomplish this goal in part by investing in our specialized and higher value specialty alcohol production and distribution infrastructure, loweringexpanding production in high-demand essential ingredients, expanding and extending the carbon intensitysale of our products extending our marketing business into new regional and international markets, building efficiencies and implementing new technologies to promote higher production yieldseconomies of scale and by capturing a greater efficiencies.portion of the value stream.

 

Production SegmentSegments

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 high quality alcohol, ethanolour alcohols and co-productsessential ingredients at our production facilities described below. Our plantsproduction 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 and allow for access to many additional domestic markets. In addition, our ability to load unit trains and barges from our Pekin, Illinois plants, allows for greater access to international markets. Our plantsfacilities located on the West Coast are near their respective fuel and feed customers, offering significant timing, transportation cost and logistical advantages.

 

Currently, weWe are currently operating at approximately 52%64% of our estimated maximum annual production capacity. Our Magic Valley and Stockton facilities are currently idled. As market conditions change, we may increase, decrease or idle production at one or more operating facilities or resume operations at any idled facility.

 

Facility NameFacility LocationEstimated Annual Capacity
(gallons)		Operating Status
Magic ValleyBurley, ID60,000,000Idled
ColumbiaBoardman, OR40,000,000Operating
StocktonStockton, CA60,000,000Idled
MaderaMadera, CA40,000,000Idled
Pekin WetPekin, IL100,000,000Operating
Pekin DryPekin, IL60,000,000Idled*
Pekin ICPPekin, IL90,000,000Operating

*We anticipate restarting our Pekin dry mill in September 2020, which was idled due to river closures.

We produce high quality alcohol and ethanol co-products at our production facilities such as wet distillers grains, or WDG, dried distillers grains with solubles, or DDGS, wet and dry corn gluten feed, condensed distillers solubles, corn gluten meal, corn germ, corn oil, dried yeast and CO2.

    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 high quality alcohol products, low-carbon ethanol, high protein feedall of the alcohols and co-products produced byessential ingredients we produce at our facilities. We also market fuelfuel-grade ethanol produced by third parties.

 

We have extensive and long-standing customer relationships, both domestic and international, for our high quality alcohol products.specialty alcohols and essential ingredients. These customers include producers and distributors of ingredients for cosmetics, sanitizers and related products, distilled spirits producers, food products manufacturers, producers of personal health/consumer health and personal care hygiene products, and global trading firms.

 

Our fuelfuel-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 fuelfuel-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 Western production 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.

 


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We market our distillers grains and otheressential ingredient feed co-productsproducts to dairies and feedlots, in many cases located near our plants.production facilities. These customers use our feed co-productsproducts 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 co-productsessential 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

 

In the secondWe had a solid first quarter, we experienced an excellent margin environment forselling 19 million gallons of specialty alcohols through a combination of contracted volumes, spot sales and exports. The first quarter also represented our high quality alcohol,fourth consecutive quarter of gross profit, reflecting the benefits of our diversification strategy, expanded productionnew business focus on specialty alcohols and robust demand foressential ingredients. Our new business focus is more sustainable and profitable than our products usedprior focus on fuel-grade ethanol.

We are now the largest producer of specialty alcohols in sanitizers and disinfectants due to the ongoing coronavirus pandemic. To meet increased demand, we focusedUnited States based on debottlenecking production and other process improvements to generate additional production capacity for high quality alcohol of 25annualized volumes. We have 410 million gallons per year at our Pekin campus. In addition, we continue to modify and refurbish existing equipment to further increaseof annual production capacity, of USP-grade alcohol by an additional 30 million gallons per year by the end of 2020. As we move into 2021, our Pekin campus will have total production capacity for high quality alcohol ofwhich approximately 140 million gallons, per year,or 34%, is specialty alcohols and the majoritybalance is fuel-grade ethanol. We are currently operating production facilities with 290 million gallons of annual capacity, of which will meetnearly 50% is specialty alcohols. All of our operating facilities are running at break-even or exceed USP specifications.better on an earnings before interest, taxes, depreciation and amortization basis.

 

Our high quality alcohol products consistently achieve significantly better margins than fuel ethanol. Moreover, high-quality alcohol is typically soldWe remain on track for sales of our specialty alcohols to contribute a minimum of $60 million in gross profit for the full year based on 70 million gallons of specialty alcohols contracted in the fall of 2020 at fixed pricesvolumes and volumes with longer-term commitments than fuel ethanol, allowing us to lock inprices. Many variables could materially impact our input costs overresults, including export conditions, the contract term and better secure favorable margins. The majorityability of our high quality alcohol production iscustomers to take all of their contracted through 2020, and we are building a strong book of salesvolumes for 2021, as we add new customers and renew existing contracts.

The market for high quality alcohol requires that manufacturers have specialized equipment and systems, and also strong quality controls, experience and operational capabilities to produce alcohol products that meet customers’ precise and unique specifications. The coronavirus pandemic significantly increased demand for sanitizers and disinfectants, which quickly outstripped available supplies. In response,our ability to timely sell our Stockton, California production facility, and fuel-grade ethanol crush margins. We are optimistic that we can add additional contracted specialty alcohol volumes in 2022 and future years, improving utilization over time from our expanded specialty alcohol production capacity and our ISO 9001, ICH Q7 and EXCiPACT certifications.

As noted above, we have completed the federal government temporarily loosened quality-control requirements, which had the unintended consequencesale of allowing questionable third-party products into the marketplace.our idled fuel-grade ethanol production facility in Madera, California for total consideration of $28.3 million. We expect to save approximately $0.7 million per quarter in interest expense and approximately $0.4 million per quarter in carrying costs associated with the idled facility.

We have capital improvement projects totaling $18.0 million in process or scheduled for 2021. We expect these projects to expand revenue and increase efficiencies and plant reliability. For example, we are increasing our yeast facility’s annual production capacity by approximately 15%. We will also have the ability to further expand production of even higher value yeast derivatives with similar payback profiles. In addition, we are upgrading our feed dryers at our Pekin Campus that quality-control requirements will be retightened, highlighting a competitive advantage we hold over various third-party producers.produce even higher value feed and improve overall plant efficiency and reliability. These two projects are scheduled for completion by the third quarter with an expected payback in less than two years, or approximately $5.0 million in additional annual earnings before interest, taxes, depreciation and amortization.

 

Our Pekin campus has produced industrial, chemicalCampus 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 beverage grade alcoholsequestration program at our Pekin site, which generates over 600,000 tons of CO2 annually, and expect to be an active player in the carbon capture space.

Finally, among many other projects under development is our plan to expand protein production at our dry-mill production facilities, which collectively represent 250 million gallons of annual production capacity. We believe the economics of expanded protein production are compelling and would expect to achieve protein concentrations in excess of 50% and an improvement in corn oil production by 50%.

Over the past twelve months, we have improved operations and our production footprint, and reduced controllable expenses and our overall cost of capital, to build a strong foundation for over 100 years. We have newthe future which will enable us to aggressively pursue organic opportunities to reinvest in quality, proven high-value projects, as well as many long-standing relationships with key domestic and international customers who benefit from our quality products, service and logistics advantages, including our ability to ship products via truck, rail or barge. Given our quality control capabilities, we intend to continue to meet or exceed our stringent customer and regulatory standards.pursue accretive strategic acquisitions.

 

We also continue to enjoy strong demand for our high protein meal and dried yeast products, which our Pekin facilities have manufactured for over 20 years. For example, we offer a high quality yeast used in pet and human food and a high protein corn meal used in poultry, pet food and aquaculture. Despite the slowdown in our production of fuel ethanol co-products as a result of the coronavirus pandemic, we have been able to consistently maintain production of these high value products at our Pekin campus, resulting in strong co-product returns.

With regard to our fuel grade ethanol operations, we continued to experience a poor margin environment in the second quarter resulting from low demand from the impact of the coronavirus pandemic. Industry-wide ethanol production had declined by more than 50% at the beginning of the second quarter. Most of our fuel ethanol commitments for the quarter were met through our third party marketing business.

Although we have seen some resurgence in both production and demand, the current market environment for fuel ethanol remains volatile and uncertain, with overall demand off by more than 10% from a year ago. In addition, fuel ethanol production crush margins remain variable and unpredictable over the longer term. Given these market conditions, we do not intend to restart our idled fuel ethanol plants in the Western states until we can better secure positive forward operating margins for the facilities. We anticipate that reopening may also entail either repurposing certain facilities or restarting with high value complementary or differentiated products. We are considering all options for maximizing or monetizing the value of our fuel ethanol plants, and we are in discussions with various parties in this regard.

We continue to pursue a number of strategic initiatives focused on the sale of additional production assets, a reduction of our debt levels, a strengthening of our cash and liquidity position, and opportunities for strategic partnerships and capital raising activities, positioning us to optimize our business performance.

We remain focused on implementing initiatives and investing in our assets to further diversify our sales through additional products and revenue streams, improve our production yields and other operating efficiencies, and reduce costs, both at the operating and corporate levels.


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, 2019.2020.

 

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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 
  2020  2019  Variance  2020  2019  Variance 
Production gallons sold (in millions)  56.9   118.6   (52.0)%  179.5   235.5   (23.8)%
Third party gallons sold (in millions)  73.9   83.2   (11.2)%  136.3   178.0   (23.4)%
Total gallons sold (in millions)  130.8   201.8   (35.2)%  315.8   413.5   (23.6)%
                         
Total gallons produced (in millions)  47.6   121.3   (60.8)%  163.9   243.8   (32.8)%
                         
Production capacity utilization  40%  80%  (50.0)%  82%  82%  — 
                        
Average sales price per gallon $1.59  $1.61   (1.2)% $1.55  $1.57   (1.3)%
                         
Corn cost per bushel – CBOT equivalent $3.39  $3.81   (11.0)% $3.59  $3.77   (4.8)%
Average basis (1) $0.20  $0.41   (51.2)% $0.32  $0.40   (20.0)%
Delivered cost of corn $3.59  $4.22   (14.9)% $3.91  $4.17   (6.2)%
                         
Total co-product tons sold (in thousands)  250.1   691.5   (63.8)%  922.0   1,375.6   (33.0)%
                         
Co-product revenues as % of delivered cost of corn(2)  46.5%  35.5%  31.0%  41.8%  37.2%  12.4%
                         
Average CBOT ethanol price per gallon $1.08  $1.41   (23.4)% $1.16  $1.36   (14.7)%
Average CBOT corn price per bushel $3.23  $3.90   (17.2)% $3.59  $3.82   (6.0)%

  Three Months Ended
March 31,		  Percentage 
  2021  2020  Change 
Fuel-grade ethanol production gallons sold (in millions)  39.0   100.2   (61.1)%
Specialty alcohol production gallons sold (in millions)  19.0   22.3   (14.8)%
Third party fuel-grade ethanol gallons sold (in millions)  54.0   62.4   (13.5)%
Total gallons sold (in millions)  112.0   184.9   (39.4)%
             
Total gallons produced (in millions)  58.0   116.2   (50.1)%
Production capacity utilization  52%  77%  (32.5)%
             
Average sales price per gallon $1.94  $1.51   28.5%
             
Corn cost per bushel—CBOT equivalent $4.98  $3.79   31.4%
Average basis(1)  0.29   0.44   (34.1)%
Delivered cost of corn $5.27  $4.23   24.6%
             
Total essential ingredients tons sold (in thousands)  276.9   671.9   (58.8)%
Essential ingredients revenues as % of delivered cost of corn(2)  40.0%  37.0%  8.1%
             
Average CBOT ethanol price per gallon $1.60  $1.24   29.0%
Average CBOT corn price per bushel $5.40  $3.74   44.4%

 

 

(1)Corn basis represents the difference between the immediate cash price of delivered corn and the future price of corn for Chicago delivery.

(2)Co-productEssential ingredients revenues as a percentage of delivered cost of corn shows our yield based on sales of co-products,essential ingredients, including WDGwet distillers grains and corn oil, generated from ethanolalcohol we produced.


Net Sales, Cost of Goods Sold and Gross Profit (Loss)

 

The following table presents our net sales, cost of goods sold and gross profit (loss) in dollars and gross profit (loss) as a percentage of net sales (in thousands, except percentages):

 

 

Three Months Ended June 30,

  Variance in  

Six Months Ended
June 30,

  Variance in  

Three Months Ended

March 31,

  Change in 
 2020  2019  Dollars  Percent  2020  2019  Dollars  Percent  2021  2020  Dollars  Percent 
                          
Net sales $212,074  $346,301  $(134,227)  (38.8)% $523,478  $702,104  $(178,626)  (25.4)% $218,734  $311,404  $(92,670)  (29.8)%
Cost of goods sold  180,892   342,330   (161,438)  (47.2)%  505,186   700,422   (195,236)  (27.9)%  204,897   324,294   (119,397)  (36.8)%
Gross profit $31,182  $3,971  $27,211   685.2% $18,292  $1,682  $16,610   987.5%
Gross profit (loss) $13,837  $(12,890) $26,727   

NM*

 
Percentage of net sales  14.7%  1.1%          3.5%  0.2%          6.3%  (4.1)%        

 

*Not meaningful

Net Sales

 

The declinedecrease in our consolidated net sales for the three and six months ended June 30, 2020March 31, 2021 as compared to the same periodsperiod in 20192020 was primarily due to a significant declinedecrease in our ethanoltotal gallons sold, partially offset by an increase in our average sales price per gallon.

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Our production gallons sold.

We sold fewer ethanol production gallons and co-productsour volume of essential ingredients sold declined for the three and six months ended June 30, 2020March 31, 2021 as compared to the same periodsperiod in 2019. These declines are2020. Our third-party gallons sold also declined. Our production gallons and essential ingredients sold declined primarily due to significantly reduced transportation fuel demand from the effects of stay-at-home orders as a result of the coronavirus pandemic. As a result, we reducedan intentional reduction in our production capacity utilizationof fuel-grade ethanol due to 40% on a consolidated basisadverse market conditions as well as the sale of our Nebraska facilities in the second quarter. Demand for our high quality alcohol, however, increased significantly in the sanitizer and disinfectant markets. These markets have historically, and even more so in the second quarter, provided a premium price over fuel ethanol markets.April 2020. Our third-party gallons sold declined in the quarter, but less than the decline in overallas we focused our efforts on selling our own fuel-grade ethanol demand, as most of our fuel ethanol commitments for the quarter were met through our third party marketing business.

Three Months Ended June 30, 2020 and 2019production.

 

On a consolidated basis, our average sales price per gallon declined 1.2%increased 28.5% to $1.59$1.94 for the three months ended June 30, 2020March 31, 2021 as compared to $1.61$1.51 for the same period in 2019.2020. The average Chicago Board of Trade, or CBOT, fuel-grade ethanol price per gallon, declined 23.4%increased 29.0% to $1.08$1.60 for the three months ended June 30, 2020March 31, 2021 as compared to $1.41$1.24 for the same period in 2019.

2020.

Production Segment

Net sales of alcohol and ethanol from our production segment declined by $89.1 million, or 46%, to $105.3 million for the three months ended June 30, 2020 as compared to $194.4 million for the same period in 2019. Our total volume of production gallons sold declined by 61.7 million gallons, or 52%, to 56.9 million gallons for the three months ended June 30, 2020 as compared to 118.6 million gallons for the same period in 2019. Our production segment’s average sales price per gallon increased 13% to $1.85 for the three months ended June 30, 2020 compared to $1.64 for the same period in 2019. At our production segment’s average sales price per gallon of $1.85 for the three months ended June 30, 2020, we generated $114.3 million less in net sales from our production segment from the 61.7 million fewer gallons of produced alcohol and ethanol sold in the three months ended June 30, 2020 as compared to the same period in 2019. The increase of $0.21 in our production segment’s average sales price per gallon for the three months ended June 30, 2020 as compared to the same period in 2019 increased our net sales of alcohol and ethanol from our production segment by $25.2 million.


Net sales of co-products declined $29.4 million, or 45%, to $35.3 million for the three months ended June 30, 2020 as compared to $64.7 million for the same period in 2019. Our total volume of co-products sold declined by 441.4 thousand tons, or 64%, to 250.1 thousand tons for the three months ended June 30, 2020 from 691.5 thousand tons for the same period in 2019, however, our average sales price per ton improved to $141.26 for the three months ended June 30, 2020 from $93.53 for the same period in 2019. At our average sales price per ton of $141.26 for the three months ended June 30, 2020, we generated $62.4 million less in net sales from the 441.4 thousand ton decline in co-products sold in the three months ended June 30, 2020 as compared to the same period in 2019. The increase in our average sales price per ton of $47.73, or 51%, for the three months ended June 30, 2020 as compared to the same period in 2019 increased our net sales of co-products by $33.0 million.

Marketing Segment

 

Net sales of alcohol andfuel-grade ethanol from our marketing segment, excluding intersegment sales, declineddecreased by $15.8$0.5 million, or 18%1%, to $71.4$57.4 million for the three months ended June 30, 2020March 31, 2021 as compared to $87.2$57.9 million for the same period in 2019. 2020.

Our total volume of alcohol andthird party fuel-grade ethanol gallons sold reported gross by our marketing segment declineddecreased by 71.07.2 million gallons, or 35%21%, to 130.826.7 million gallons for the three months ended June 30, 2020March 31, 2021 as compared to 201.833.9 million gallons for the same period in 2019. The 71.0 million decline in gallons sold by our marketing segment is comprised of 61.7 million fewer production gallons sold and 9.3 million fewer third party gallons sold. The 9.3 million gallon decline in third party gallons sold is comprised of 0.3 million fewer gallons sold on a gross basis and 9.0 million fewer gallons sold on a net basis.

Our marketing segment’s average fuel ethanol sales price per gallon declined 17% to $1.34 for the three months ended June 30, 2020 compared to $1.62 for the same period in 2019.2020. At our marketing segment’s average sales price per gallon of $1.34$2.14 for the three months ended June 30, 2020,March 31, 2021, we generated $0.4$15.3 million less in net sales from our marketing segment from the 0.37.2 million fewer gallons in third partyof third-party fuel-grade ethanol sold gross in the three months ended June 30, 2020March 31, 2021 as compared to the same period in 2019.2020.

Our volume of third party fuel-grade ethanol gallons sold reported net by our marketing segment decreased by 1.2 million gallons, or 4%, to 27.3 million gallons for the three months ended March 31, 2021 as compared to 28.5 million gallons for the same period in 2020. The decline of $0.28decrease in third-party fuel-grade ethanol gallons sold reported net reduced net sales by less than $0.1 million.

The $0.44 per gallon, or 26%, increase in our marketing segment’s average sales price per gallon for the three months ended June 30, 2020March 31, 2021 as compared to the same period in 2019 reduced2020 resulted in a $14.8 million increase in our net sales from third partythird-party fuel-grade ethanol sold by our marketing segment by $15.4 million.

segment.

Six Months Ended June 30, 2020 and 2019

On a consolidated basis, our average sales price per gallon declined 1.3% to $1.55 for the six months ended June 30, 2020 compared to $1.57 for the same period in 2019. The average CBOT ethanol price per gallon declined 14.7% to $1.16 for the six months ended June 30, 2020 compared to $1.36 for the same period in 2019.

Pekin Campus Production Segment

 

Net sales of alcohol and ethanol from our Pekin Campus production segment declinedincreased by $83.8$11.0 million, or 22%13%, to $290.0$95.1 million for the sixthree months ended June 30, 2020March 31, 2021 as compared to $373.8$84.1 million for the same period in 2019.2020. Our total volume of production gallons sold declineddecreased by 56.07.4 million gallons, or 24%13%, to 179.550.6 million gallons for the sixthree months ended June 30, 2020March 31, 2021 as compared to 235.558.0 million gallons for the same period in 2019. Our production segment’s average sales price per gallon increased 2% to $1.62 for the six months ended June 30, 2020 compared to $1.59 for the same period in 2019.2020. At our Pekin Campus production segment’s average sales price per gallon of $1.62$1.88 for the sixthree months ended June 30, 2020,March 31, 2021, we generated $90.7$13.9 million less in net sales from our Pekin Campus production segment from the 56.07.4 million fewer gallons of produced alcohol and ethanol sold in the sixthree months ended June 30, 2020March 31, 2021 as compared to the same period in 2019.2020. The increase of $0.03$0.43, or 30%, in our Pekin Campus production segment’s average sales price per gallon in the three months ended March 31, 2021 as compared to the same period in 2020 improved our net sales from our Pekin Campus production segment by $24.9 million.

Net sales of essential ingredients increased $5.2 million, or 13%, to $45.1 million for the three months ended March 31, 2021 as compared to $39.9 million for the same period in 2020. Our total volume of essential ingredients sold decreased by 27,000 tons, or 11%, to 211,000 tons for the three months ended March 31, 2021 from 238,000 tons for the same period in 2020. At our average sales price per ton of $213.18 for the three months ended March 31, 2021, we generated $5.6 million less in net sales from the 27,000 fewer tons of essential ingredients sold in the three months ended March 31, 2021 as compared to the same period in 2020. The increase of $45.59, or 27%, in our average sales price per ton for the three months ended March 31, 2021 as compared to the same period in 2020 increased our net sales from our Pekin Campus production segment by $10.8 million.

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Other Production Segment

Net sales of alcohol from our other production segment decreased by $83.3 million, or 84%, to $16.0 million for the three months ended March 31, 2021 as compared to $99.3 million for the same period in 2020. Our total volume of gallons sold decreased by 57.1 million gallons, or 89%, to 7.4 million gallons for the three months ended March 31, 2021 as compared to 64.5 million gallons for the same period in 2020. At our other production segment’s average sales price per gallon of $2.16 for the three months ended March 31, 2021, we generated $123.2 million less in net sales from our other production segment from the 57.1 million fewer gallons of alcohol sold in the three months ended March 31, 2021 as compared to the same period in 2020. The increase of $0.62, or 40%, in our other production segment’s average sales price per gallon for the sixthree months ended June 30, 2020March 31, 2021 as compared to the same period in 2019 increased2020 improved our net sales of alcohol and ethanol from our other production segment by $6.9$39.9 million.

 


Net sales of co-products declined $29.3essential ingredients decreased $25.1 million, or 22%83%, to $104.1$5.1 million for the sixthree months ended June 30, 2020March 31, 2021 as compared to $133.4$30.2 million for the same period in 2019.2020. Our total volume of co-productsessential ingredients sold declineddecreased by 453.6 thousand369,000 tons, or 33%85%, to 922.0 thousand65,000 tons for the sixthree months ended June 30, 2020March 31, 2021 from 1,375.6 thousand434,000 tons for the same period in 2019, and our average sales price per ton increased to $112.94 for the six months ended June 30, 2020 from $97.04 for the same period in 2019.2020. At our average sales price per ton of $112.94$78.64 for the sixthree months ended June 30, 2020,March 31, 2021, we generated $51.2$29.0 million less in net sales from the 453.6 thousand ton decline in co-products369,000 fewer tons of essential ingredients sold in the sixthree months ended June 30, 2020March 31, 2021 as compared to the same period in 2019.2020. The increase of $8.97, or 12.9%, in our average sales price per ton of $15.90, or 16%, for the sixthree months ended June 30, 2020March 31, 2021 as compared to the same period in 20192020 increased our net sales of co-products by $21.9 million.

Marketing Segment

Net sales of alcohol and ethanol from our marketing segment, excluding intersegment sales, declined by $65.4 million, or 34%, to $129.4 million for the six months ended June 30, 2020 as compared to $194.8 million for the same period in 2019. Our total volume of alcohol and ethanol gallons sold by our marketing segment declined by 97.7 million gallons, or 24%, to 315.8 million gallons for the six months ended June 30, 2020 as compared to 413.5 million gallons for the same period in 2019. The 97.7 million decline in gallons sold by our marketing segment is comprised of 56.0 million fewerother production gallons sold and 41.7 million fewer third party gallons sold. The 41.7 million decline in third party gallons sold is comprised of 31.7 million fewer gallons sold on a gross basis and 10.0 million fewer gallons sold on a net basis.

Our marketing segment’s average fuel ethanol sales price per gallon declined 9.8% to $1.47 for the six months ended June 30, 2020 as compared to $1.63 for the same period in 2019. At our marketing segment’s average sales price per gallon of $1.47 for the six months ended June 30, 2020, we generated $46.7 million less in net sales from our marketing segment from the 41.7 million fewer gallons in third party ethanol sold in the six months ended June 30, 2020 as compared to the same period in 2019. The decline of $0.16 in our marketing segment’s average sales price per gallon for the six months ended June 30, 2020 as compared to the same period in 2019 reduced our net sales from third party ethanol sold by our marketing segment by $18.7$3.9 million.

Cost of Goods Sold and Gross Profit (Loss)

 

Our consolidated gross profit (loss) improved to $31.2a gross profit of $13.8 million for the three months ended March 31, 2021 from a gross loss of $12.9 million for the same period in 2020, representing a gross profit margin of 14.7%,6.3% for the three months ended June 30, 2020March 31, 2021 compared to $4.0 million, representing a gross profit margin of 1.1%,negative 4.1% for the same period in 2019.2020. Our consolidated gross profit (loss) improved to $18.3 million, representing a gross profit margin of 3.5%, for the six months ended June 30, 2020 compared to $1.7 million, representing a gross profit margin of 0.2%, for the same period in 2019. Our gross profit and gross profit margin improved primarily due to significantly higher margins frommargin sales of our high quality alcohol.

specialty alcohols and a substantial reduction in negative margin sales of fuel-grade ethanol as we have idled a significant amount of our fuel-grade ethanol production.

Three Months Ended June 30, 2020 and 2019

Production Segment

Our production segment’s gross profit from external sales improved by $25.6 million to $27.9 million for the three months ended June 30, 2020 as compared to $2.3 million for the same period in 2019. Of this improvement, $55.6 million is attributable to our production segment’s higher margins for the three months ended June 30, 2020 as compared to the same period in 2019, partially offset by $30.0 million in lower gross profit attributable to decreased ethanol production volumes for the three months ended June 30, 2020 as compared to the same period in 2019.


Marketing Segment

Our marketing segment’s gross profit increased by $1.7 million to $3.3 million for the three months ended June 30, 2020 as compared to $1.6 million for the same period in 2019. Of this improvement, nearly all of it relates to our marketing segment’s higher margins per gallon for the three months ended June 30, 2020 as compared to the same period in 2019.

Six Months Ended June 30, 2020 and 2019

Production Segment

Our production segment’s gross profit from external sales improved by $20.1 million to $12.3 million for the six months ended June 30, 2020 as compared to a gross loss of $7.8 million for the same period in 2019. Of this improvement, $23.9 million is attributable to our production segment’s higher margins for the six months ended June 30, 2020 as compared to the same period in 2019, partially offset by $3.8 million in lower gross profit attributable to reduced ethanol production volumes for the six months ended June 30, 2020 as compared to the same period in 2019.

Marketing Segment

 

Our marketing segment’s gross profit declinedimproved by $3.5$2.0 million to $5.9$3.5 million for the sixthree months ended June 30, 2020March 31, 2021 as compared to $9.4$1.5 million for the same period in 2019.2020. Of this decline, $1.3improvement, $3.0 million is attributable to our marketing segment’s lowerhigher margins per gallon and $2.2from sales of third-party fuel-grade ethanol, partially offset by a reduction of $1.0 million is attributable to the reduction in third-partylower marketing volumes of third-party fuel-grade ethanol for the sixthree months ended June 30, 2020March 31, 2021 as compared to the same period in 2019.2020.

Pekin Campus Production Segment

 

Our Pekin Campus production segment’s gross profit improved by $15.2 million to a gross profit of $13.2 million for the three months ended March 31, 2021 as compared to a gross loss of $2.0 million for the same period in 2020. Of this improvement, $17.1 million is attributable to increased margins from our specialty alcohols, partially offset by $1.9 million less in gross profit attributable to decreased sales volumes in the three months ended March 31, 2021 as compared to the same period in 2020.

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Other Production Segment

Our other production segment’s gross profit improved by $9.5 million to a gross loss of $2.9 million for the three months ended March 31, 2021 as compared to a gross loss of $12.4 million for the same period in 2020. Of this improvement, $22.6 million is attributable to lower sales volumes at negative margins, partially offset by $13.1 million in lower gross profit attributable to a negative margin environment for fuel-grade ethanol for the three months ended March 31, 2021 as compared to the same period in 2020.

Selling, General and Administrative Expenses

 

The following table presents our selling, general and administrative, or SG&A, expenses in dollars and as a percentage of net sales (in thousands, except percentages):

 

 Three Months Ended
June 30,		  Variance in  Six Months Ended
June 30,		  Variance in  

Three Months Ended

March 31,

  Change in 
 2020  2019  Dollars  Percent  2020  2019  Dollars  Percent  2021  2020  Dollars  Percent 
Selling, general and administrative expenses $8,629  $6,708  $1,921   28.6% $18,841  $14,943  $3,898   26.1% $7,014  $10,212  $(3,198)  (31.3)%
Percentage of net sales  4.1%  1.9%          3.6%  2.1%          3.2%  3.3%        

 

Our SG&A expenses increaseddecreased for the three and six months ended June 30, 2020March 31, 2021 as compared to the same period in 2019.2021. The increase$3.2 million period over period decrease in SG&A expenses is primarily due to increases inhigher professional fees associatedincurred in the three months ended March 31, 2021 in connection with our debt restructuring and asset sale efforts. We anticipate SG&A expenses of $20.0 million to $25.0 million for all of 2021.

Interest Expense, net

The following table presents our interest expense, net in dollars and as a percentage of net sales (in thousands, except percentages):

  

Three Months Ended

March 31,

  Change in 
  2021  2020  Dollars  Percent 
Interest expense, net $1,885  $5,307  $(3,422)  (64.5)%
Percentage of net sales  0.9%  1.7%        

Our interest expense, net decreased for the salethree months ended March 31, 2021 as compared to the same period in 2021. The $3.4 million period over period decrease in interest expense, net is primarily due to lower average borrowings outstanding as a result of our interest in Pacific Aurora, LLC, or Pacific Aurora, and our other strategic initiatives.significant principal payments on outstanding debt over the past year.

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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  

Three Months Ended

March 31,

  Change in 
 2020  2019  Dollars  Percent 2020  2019  Dollars  Percent  2021 2020 Dollars Percent 
Net income (loss) available to common stockholders $14,649  $(7,961) $22,610  NM $(10,766) $(21,163) $10,397   49.1%
Net income (loss) available to Common Stockholders $4,366  $(25,415) $29,781   

NM

 
Percentage of net sales  6.9%  (2.3)%        (2.1)%  (3.0)%          2.0%  (8.2)%        

 

The improvementincrease in net income (loss) available to common stockholders is primarily due to significantlyour higher margins from our high quality alcohol salesgross profit and lower SG&A expenses and interest expense, for the three and six months ended June 30, 2020March 31, 2021 as compared to the same periodsperiod in 2019.2020.

 

Liquidity and Capital Resources

 

During the sixthree months ended June 30, 2020,March 31, 2021, we funded our operations primarily from cash generated by our operations, proceeds from lines of credit and cash on hand. These funds were also used to make payments on our term debt and under our other credit facilities and for capital expenditures and to make lease payments.

Our financial statements have been prepared on a going concern basis, which contemplates the realizationexpenditures. As of assets and the satisfaction of liabilities in the normal course of business. During the six months ended June 30, 2020, we continued to experience significant adverse conditions in the ethanol fuel market as demand and pricing were at record lows due to reduced domestic transportation and resulting lower gasoline demand. In response, we reduced production at our facilities by more than 50% in an effort to conserve capital as a result of a substantial reduction in demand due to stay-at-home orders issued in response to the coronavirus pandemic. We have, however, not only continued producing and selling high quality alcohol, but also converted a portion of our fuel ethanol production to higher quality alcohol to respond to increased demand from the sanitizer and disinfectant markets. These sales of high quality alcohol were at a mix of fixed and spot pricing, both of which resulted in positive net income and cash flows from operations during the second quarter. We expect robust demand for our high quality alcohol to continue for at least the next twelve months as we continue to enter fixed price contracts and hedge corn input costs, locking in profit margins on sales of high quality alcohol.

At June 30, 2020,March 31, 2021, we had $29.8$44.1 million in cash and $10.0cash equivalents and $4.7 million available under our operating line of credit for our marketing subsidiary, Kinergy Marketing LLC, or Kinergy. During the first half of 2020, we generated $45.7 million in cash from our operations and realized $19.9 million in net cash from the sale of our interest in Pacific Aurora. These positive cash flows have allowed us to make net payments totaling $52.3 million on our debt. Further, subsequent to June 30, 2020, we made an additional $9.2 million in payments on our term debt.

As previously agreed with our lenders, we have presented and continue to negotiate a comprehensive plan to restructure our assets and liabilities. We have appointed a chief restructuring officer to facilitate the development of such a plan and to assist in our current strategic initiatives. We expect the negotiated plan may include additional assets sales, soliciting new investments in us or our assets, further debt payments and further reductions to overhead expenses.

Our current available capital resources consist of cash on hand and amounts available for borrowing under our credit facilities. We expect that our future available capital resources will consist primarilyKinergy’s operating line of any cash generated from our operations, cash balances, any availability under our lines of credit, net cash proceeds from any sale of our production assets and net cash proceeds from any equity sales or debt financing transactions.


As of June 30, 2020, our current liabilities of $147.0 million exceeded our current assets of $131.8 million, resulting in a working capital deficit of $15.2 million.

credit. We believe that as of the date of this report, we are in compliance with all debt covenants contained in our credit facilities, except our obligation to obtain lender approval of a comprehensive plan to restructure our assets and liabilities with respect to our Pekin and ICP lenders. As noted above, we appointed a chief restructuring officer to facilitate the development of such a plan and we have presented and continue to negotiate the plan with our lenders. As a result, we are not in compliance with our obligations to our lenders, which could result in their acceleration of our debt. Although we do not expect such an outcome, especially in light of our financial performance and debt prepayments during the second quarter and thereafter, we do not have sufficient liquidity or capital resources to immediately repay our debt if accelerated. Even though we do not believe acceleration is probable, we have classified our related debt as current on our consolidated balance sheets. Given our cash flows from operations and debt prepayments, we believe we have alleviated substantial doubt about our ability to continue as a going concern. We therefore believe that we will have sufficient liquidity to meet our anticipated working capital, debt service and other liquidity needs for the next twelve months.months from the date of this report.

Quantitative Quarter-EndYear-End Liquidity Status

 

We believe that the following amounts provide insight into our liquidity and capital resources. The following selected financial information should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report (dollars in thousands):.

 

  March 31, 2021  December 31, 2020  Change 
Cash and cash equivalents $44,146  $47,667   (7.4)%
Current assets $241,588  $214,046   12.9%
Property and equipment, net $226,183  $229,486   (1.4)%
Current liabilities $112,750  $86,927   29.7%
Long-term debt, noncurrent portion $64,396  $71,807   (10.3)%
Working capital $128,838  $127,119   1.4%
Working capital ratio  2.14   2.46   (13.0)%

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  June 30, 2020  December 31, 2019  Change 
Cash and cash equivalents $29,783  $18,997   56.8%
Current assets $131,790  $232,064   (43.2)%
Property and equipment, net $317,950  $332,526   (4.4)%
Current liabilities $146,954  $160,398   (8.4)%
Long-term debt, net of current portion $95,888  $180,795   (47.0)%
Working capital (deficit) $(15,164) $71,666   NM 
Working capital ratio  0.90   1.45   (37.9)%

Restricted Net Assets

 

At June 30, 2020,March 31, 2021, we had approximately $204.4$231.9 million of net assets at our subsidiaries that were not available to be transferred to Pacific Ethanol,Alto Ingredients, Inc. in the form of dividends, distributions, loans or advances due to restrictions contained in the credit facilities of ourthe subsidiaries.

Changes in Working Capital and Cash Flows

 

Our workingWorking capital declinedimproved to a deficit of $15.2$128.8 million at June 30, 2020March 31, 2021 from working capital of $71.7$127.1 million at December 31, 20192020 as a result of a decreasean increase of $100.3$27.5 million in current assets, partially offset by a decreasean increase of $13.4$25.8 million in current liabilities.

 

Current assets decreasedincreased primarily due to a decrease in assets held-for-sale associated with the completed sale of our interest in Pacific Aurora, and decreasesan increase in accounts receivable and inventories,higher inventory values due to increased commodity prices for both alcohol and corn from the timing of collections, and lower ethanol production and sales.prior period.

 

Our current liabilities decreasedincreased primarily due to a decrease in liabilities held-for-sale associated with the completed sale of our interest in Pacific Aurora, partially offset by an increase in theaccounts payable due to timing of payments and an increase in current portion of our long-term debt primarilyas amounts due to our failure to obtain lender approval of a comprehensive plan to restructure our assets and liabilities.within one year increased.

 

Our cash and cash equivalents increaseddeclined by $10.8$3.5 million at June 30, 2020 as compared to December 31, 2019 primarily due to $45.7$4.1 million in cash used in our operating activities and $4.4 million in cash used in our investing activities, partially offset by $5.0 million in cash provided by our financing activities.

Cash used in our Operating Activities

We used $4.1 million in cash in our operating activities and $17.4during the three months ended March 31, 2021, as compared to $26.9 million in cash provided by our investing activities, partially offset by $52.3 million in cash used in our financing activities.


Cash provided by our Operating Activities

Cash provided by our operating activities increased by $71.4 millionoperations for the six months ended June 30, 2020, as compared to the same period in 2019. We generated $45.7 million in cash from our operating activities during the first half of 2020. Specific factors that contributed to the increasechange in cash provided byfrom our operating activities include:

 

●a decrease of $24.5$35.1 million related to higher accounts receivable primarilybalances due to the timing of collections;payments

 

●a decrease of $34.0$28.1 million related to higher inventories as we reduced production during the period;due to increased commodity prices; and

 

●a decrease of $10.1$10.5 million in our consolidated net lossfrom losses on derivative instruments due to higher margins from our sales of high quality alcohol; and

●an increase of $9.4 million related to liabilities held-for-salethe recent rise in connection with the sale of our interests in Pacific Aurora.corn prices.

 

These amounts were partially offset by:

 

●a decreasean increase of $9.9$31.8 million related to prepaid expenses and other assetsin our consolidated net income due to the timinghigher margins from our sales of payments;specialty alcohols; and

 

●a decreasean increase of $5.1$21.9 million in depreciation expense resulting from the salerelated to accounts payable due to timing of Pacific Aurora.payments.

Cash used in our Investing Activities

We used $4.4 million of cash in our investing activities for the three months ended March 31, 2021 for additions to property and equipment resulting from our capital expenditure projects.

Cash provided by our InvestingFinancing Activities

 

Cash provided by our investingfinancing activities was $17.4$5.0 million for the sixthree months ended June 30, 2020,March 31, 2021, which included $19.9 million inreflected net proceeds of $13.0 million from the sale of Pacific Aurora, partially offset by $2.5 million of additions to property and equipment.

Cash used in our Financing Activities

Cash used in our financing activities was $52.3 million for the six months ended June 30, 2020. Cash used in our financing activities was primarily due to $36.9 million in net payments under Kinergy’s operating line of credit and $25.5$0.5 million in stock option exercises, partially offset by $8.5 million in principal payments on our term debt, partially offset by $9.9 million in proceeds under our CARES Act loans and $0.3 million from the issuance of common stock.

Capital Expenditures

Our capital expenditures totaled $2.5 million for the first six months of 2020, largely attributable to enhancements made to the production process of our operating facilities.

other indebtedness.

Kinergy

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Kinergy’s Operating Line of Credit

 

Kinergy maintains an operating line of credit for an aggregate amount of up to $100.0 million. The credit facility matures on August 2, 2022. Interest accrues under the credit facility at a rate equal to (i) the three-month London Interbank Offered Rate (“LIBOR”), plus (ii) a specified applicable margin ranging from 1.50% to 2.00%. The credit facility’s monthly unused line fee is 0.25% to 0.375% of the amount by which the maximum credit under the facility exceeds the average daily principal balance during the immediately preceding month. Payments that may be made by Kinergy to Pacific EthanolAlto Ingredients, Inc. as reimbursement for management and other services provided by Pacific EthanolAlto 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 Pacific Ag. Products,our wholly-owned subsidiary, Alto Nutrients, LLC, or PAP,Alto Nutrients, as additional collateral. Payments that may be made by PAPAlto Nutrients to Pacific EthanolAlto Ingredients, Inc. as reimbursement for management and other services provided by Pacific EthanolAlto Ingredients, Inc. to PAPAlto Nutrients are limited under the terms of the credit facility to $0.5 million per fiscal quarter. PAP,Alto Nutrients, one of our indirect wholly-owned subsidiaries, markets our co-productsessential 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 PAPAlto Nutrients must collectively maintain a fixed-charge coverage ratio (calculated as a twelve-month rolling earnings before interest, taxes, depreciation and amortization (EBITDA) 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). Kinergy’sThe obligations of Kinergy and PAP’s obligationsAlto Nutrients under the credit facility are secured by a first-priority security interest in all of their respective assets in favor of the lender.

We believe Kinergy and PAPAlto Nutrients are in compliance with the fixed-charge coverage ratio covenant as of the filing of this covenant.report. The following table summarizes Kinergy’ssets forth the fixed-charge coverage ratio financial covenantscovenant and the actual results for the periods presented:

 

 Three Months Ended
June 30,		 Years Ended
December 31,		  Three Months Ended
March 31,		 Years Ended
December 31,		 
 2020 2019 2019 2018  2021 2020 2020 2019 
                  
Fixed-Charge Coverage Ratio Requirement  2.00   2.00   2.00   2.00   2.00   2.00   2.00   2.00 
Actual  4.84   11.58   5.71   19.06   7.71   4.05   5.35   5.71 
Excess  2.84   9.58   3.71   17.06   5.71   2.05   3.35   3.71 

 

Pacific EthanolAlto Ingredients, Inc. has guaranteed all of Kinergy’s obligations under the credit facility. As of June 30, 2020,March 31, 2021, Kinergy had an outstanding balance of $41.4$45.5 million with additionaland $4.7 million of unused borrowing availability under the credit facility of $10.0 million.

facility.

Alto Pekin Credit Facilities

 

On December 15, 2016, Pacific EthanolAlto Pekin, LLC, or PEAlto Pekin, one of our indirect wholly-owned subsidiaries and the entity that holds two of our production facilities in Pekin, Illinois, entered into terma Credit Agreement, or the Pekin Credit Agreement, with 1st Farm Credit Services, PCA and revolving credit facilities. PECoBank, ACB, or CoBank. Under the terms of the Pekin Credit Agreement, Alto Pekin borrowed from 1st 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 creditterm loan facility that matures on February 1, 2022.2022, or the Pekin Revolving Loan, and together with the Pekin Term Loan, the Pekin Credit Facility. The PE Pekin credit facilities areCredit Facility is secured by a first-priority security interest in all of PEAlto Pekin’s assets. Interest initially accrued under the PE

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The Pekin credit facilities at an annual rate equal to the 30-day LIBOR plus 3.75%, payable monthly. PECredit 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, is required to make quarterly principal payments in the amount of $3.5 million on the term loan beginning on May 20, 2017, with the remaining principal balance payable at maturity on August 20, 2021. PE Pekin is required to pay monthly in arrears a fee on any unused portion of the revolving credit facility at a rate of 0.75% per annum. Prepayment of these facilities is subject to a prepayment penalty. Under the initialits lenders and their agent, certain terms of the credit facilities, PE Pekin was required to maintain not less than $20.0 million in working capital and an annual debt service coverage ratio of not less than 1.25 to 1.0.agreements are as follows:

 

On August 7, 2017, PE Pekin amended its term and revolving credit facilities by agreeing to increase the interest rate under the facilities by 25 basis points to an annual rate equal to the 30-day LIBOR plus 4.00%. PE Pekin and its lender also agreed that PE Pekin is required to maintain working capital of not less than $17.5 million from August 31, 2017 through December 31, 2017 and working capital of not less than $20.0 million from January 1, 2018 and continuing at all times thereafter. In addition, the required debt service coverage ratio was reduced to 0.15 to 1.00 for the fiscal year ended December 31, 2017. PE Pekin’s actual debt service coverage ratio was 0.17 to 1.00 for the fiscal year ended December 31, 2017, 0.02 in excess of the required 0.15 to 1.00. For the month ended January 31, 2018, PE Pekin was not in compliance with its working capital requirement due to larger than anticipated repair and maintenance expenses to replace faulty equipment. PE Pekin received a waiver from its lender for this noncompliance. Further, the lender decreased PE Pekin’s working capital covenant requirement to $13.0 million for the month ended February 28, 2018, excluding from the calculation a $3.5 million principal payment previously due in May 2018.

●Interest accrues under the Pekin Credit Facility at an annual rate equal to the 30-day LIBOR plus 5.00%.

 


●Alto Pekin is required to pay a monthly fee on any unused portion of the Pekin Revolving Loan at a rate of 0.75% per annum.

On March 30, 2018, PE Pekin further amended its term loan facility by reducing the amount of working capital it is required to maintain to not less than $13.0 million from March 31, 2018 through November 30, 2018 and not less than $16.0 million from December 1, 2018 and continuing at all times thereafter. In addition, a principal payment in the amount of $3.5 million due for May 2018 was deferred until the maturity date of the term loan.

●Alto Pekin and Alto ICP, LLC, or ICP, one of our indirect wholly-owned subsidiaries and the entity that holds one of our production facilities in Pekin, Illinois, are collectively required to maintain working capital of not less than 50% of the combined outstanding revolving lines of credit, which was $27.0 million at March 31, 2021; and an annual debt service coverage ratio of not less than 1.25 to 1.00, in addition to various other affirmative and negative covenants.

 

At December 31, 2018 and January 31, 2019, PE Pekin experienced certain covenant violations under its term and revolving credit facilities. In February 2019, PE Pekin reached an agreement with its lender to forbear until March 11, 2019 and to deferNet proceeds arising from a $3.5 million principal payment until that date.

On March 21, 2019, PE Pekin amended its term and revolving credit facilities by agreeing to increase the interest rate under the facilities by 125 basis points to an annual rate equal to the 30-day LIBOR plus 5.00%. PE Pekin and its lender also agreed that it is required to maintain working capital of not less than $15.0 million from March 21, 2019 through July 15, 2019 and working capital of not less than $30.0 million from July 15, 2019 and continuing at all times thereafter. On July 15, 2019, PE Pekin and its lender agreed to a further amendment extending the aforementioned July 15, 2019 dates to November 15, 2019. On August 6, 2019, PE Pekin paid its $3.5 million principal payment scheduled for August 20, 2019.

Under these amendments, the lender agreed to temporarily waive financial covenant violations, working capital maintenance violations and intercompany accounts receivable collections violations that occurred with respect to the credit agreement. The lenders also agreed to defer all scheduled principal payments, including further deferral of principal payments in the amount of $3.5 million each due on February 20, 2019 and May 20, 2019.

The waivers and principal deferral expired on November 15, 2019, at which time the waivers were to become permanent if PE Pekin’s parent, Pacific Ethanol Central, LLC, or PE Central, made a contribution to PE Pekin in an amount equal to $30.0 million, minus the then-existing amount of PE Pekin’s working capital, plus the amount of any accounts receivable owed by PE Central to PE Pekin, plus $12.0 million, or the Parent Contribution Amount. In addition, if the Parent Contribution Amount was timely received, the lender agreed to waive PE Pekin’s debt service coverage ratio financial covenant for the year ended December 31, 2019. If the Parent Contribution Amount was not timely made, then the temporary waivers would automatically expire.

PE Pekin was also required to pay by November 15, 2019 the aggregate amount of $10.5 million representing all deferred and unpaid scheduled principal payments and all additional scheduled principal payments for the remainder of 2019.

On November 15, 2019, PE Pekin amended its term and revolving credit facilities by agreeing to extend the temporary waiver of violations of financial and other covenants relating to working capital maintenance, intercompany accounts receivable collections, financial projections, cash flow forecasts, and sales reports. The lender also agreed to extend the deferral of all scheduled principal payments payable on February 20, 2019, May 20, 2019 and November 15, 2019 to December 15, 2019. The amendment also made a payment default of $250,000 or more under Kinergy’s credit facility or the senior secured notes, or any acceleration of indebtedness, or any termination of any commitment to lend or termination of any forbearance or other accommodation, an event of default.


The waivers and principal deferral expired on December 15, 2019. On December 15, 2019, the waivers were to become permanent if PE Central made a contribution to PE Pekin in an amount equal to the Parent Contribution Amount. In addition, if the Parent Contribution Amount was timely received, the lender agreed to waive PE Pekin’s debt service coverage ratio financial covenant for the year ended December 31, 2019. If the Parent Contribution Amount was not timely made, then the temporary waivers would automatically expire.

On December 16, 2019, PE Pekin amended its term and revolving credit facilities by agreeing to extend the deferral of all scheduled principal payments payable on February 20, 2019, May 20, 2019 and November 20, 2019 to December 20, 2019.

On December 20, 2019, PE Pekin’s lender agreed to temporarily waive working capital covenant violations, debt service coverage ratio covenant violations, reporting covenant violations and certain other covenant violations that occurred under the PE Pekin credit agreement, and replaced those covenants with new EBITDA and production volume covenants. PE Pekin’s lender also agreed to defer all scheduled principal installments payable under the term note on February 20, 2019, May 20, 2019 and November 20, 2019 until August 20, 2021. In addition, PE Pekin was not required to make its prior scheduled quarterly principal payments of $3.5 million until September 30, 2020, at which time $3.5 million will be due, with the same amount due quarterly thereafter until maturity.

Under the amendment, PE Pekin, collectively with Illinois Corn Processing, LLC, or ICP, agreed to pay the lenders an aggregate of $40.0 million on or before September 30, 2020 to reduce the outstanding balances of the term loans under the PE Pekin credit agreement and the ICP credit agreement. The $40.0 million is an aggregate amount payable to ICP’s lender and PE Pekin’s lender, and allocated between them. The $40.0 million is to be funded through asset sales, proceeds of any award, judgment or settlement of litigation, or, at our election, from funds contributed to PE Pekin by us. Following receipt by the lenders under the ICP credit agreement and the PE Pekin credit agreement, collectively, of $40.0 million in full, and once any loans corresponding to the particular midwestern asset sold are repaid, additional proceeds from the sale of any of our midwestern plantproduction facility assets will generally be allocated 33/34/33% among Alto Pekin’s and ICP’s lender and PE Pekin’s lender,lenders, collectively, the selling security holders,our senior secured noteholders, and us, respectively. ProceedsNet proceeds arising from the sale of any of our western production facility assets will generally be allocated first to the senior secured noteholders up to $20.0 million and then allocated 33/34/33% among PEAlto Pekin’s lender and ICP’s lender,lenders, collectively, the selling security holders, and us, respectively.

PE Pekin’s lender also imposed cross-default terms such that, until PE Pekin’s lender and ICP’s lender receive $40.0 million, a default under the ICP credit agreement would constitute a default under the PE Pekin credit agreement. PE Pekin agreed to provide additional collateral security to support its obligations under the PE Pekin credit agreement, including second lien positions in our western plants, which will terminate and be released upon PE Pekin’s lender’s receipt of $40.0 million.

On December 29, 2019, PE Pekin agreed to amend the secured obligations under its security agreement to include PE Pekin’s unconditional guarantee of the payment of up to an aggregate $40.0 million to satisfy the obligations of ICP to ICP’s lender under the ICP credit agreement.

On March 20, 2020, PE Pekin and its lender agreed to defer $1.0 million in aggregate interest payments due March 20, 2020 and April 20, 2020 until May 20, 2020. On that same date, we granted to the lender a security interest in all of our equity interests in our wholly-owned subsidiary, PE Op Co., which indirectly owns our plants located on the West Coast. We also entered into intercreditor agreements with our PE Pekin and ICP lenders, and the agent for our senior secured noteholders, to address issues of priority and the allocation of proceeds from asset sales.


On April 15, 2020, upon the closing of the sale of our interests in Pacific Aurora, we repaid approximately $11.6 million in principal on our PE Pekin term debt.

On June 26, 2020, we repaid approximately $1.9 million in additional principal on our PE Pekin term debt.

On July 22, 2020, we repaid approximately $7.4 million in additional principal on our PE Pekin term debt.us, respectively.

 

As of the filing of this report, we believe we are in compliance with all debt covenants under our PE Pekin credit facilities, except our obligation to obtain lender approvalthe terms and conditions of a comprehensive plan to restructure our assets and liabilities.the Notes.

ICP Credit Facilities

 

On September 15, 2017, ICP, Compeer Financial, PCA, or Compeer, and CoBank as agent, entered into term and revolving credit facilities.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 creditterm loan facility that matures on September 1, 2022.2022, or the ICP Revolving Loan, and together with the ICP Term Loan, the ICP Credit Facility. The ICP credit facilities areCredit Facility is secured by a first-priority security interest in all of ICP’s assets. Interest accrues under the

The ICP credit facilities at an annual rate equal to the 30-day LIBOR plus 3.75%, payable monthly.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, is required to make quarterly consecutive principal payments in the amount of $1.5 million. ICP is required to pay monthly in arrears a fee on any unused portion of the revolving credit facility at a rate of 0.75% per annum. Prepayment of these facilities is subject to a prepayment penalty. Under theits lenders and their agent, certain terms of the credit facilities, ICP is required to maintain not less than $8.0 million in working capital and an annual debt service coverage ratio of not less than 1.5 to 1.0, beginning for the year ended December 31, 2018. As of September 30, 2019, ICP had no additional borrowing availability under its revolving credit facility. As of September 30, 2019, ICP did not meet its minimum working capital requirement, however, ICP’s lender subsequently waived the minimum working capital deficiency.agreements are as follows:

 

●Interest accrues under the ICP Credit Facility at an annual rate equal to the 30-day LIBOR plus 3.75%.

On December 20, 2019, ICP amended its term and revolving credit facilities under which ICP’s lender granted waivers for certain ICP covenant defaults and replaced those covenants with new EBITDA and production volume covenants. ICP’s lender also imposed cross-default terms such that, until ICP’s lender and PE Pekin’s lender receive an aggregate of $40.0 million, a default under the PE Pekin credit agreement would constitute a default under the ICP credit agreement. ICP agreed to provide additional collateral security to support its obligations under the ICP credit agreement, including second lien positions in our western plants, which will terminate and be released upon ICP’s lender’s receipt of an aggregate of $40.0 million. ICP’s prior scheduled principal payment of $1.5 million, originally due on December 20, 2019, was deferred to the maturity date of September 20, 2021. Scheduled quarterly principal payments of $1.5 million will resume March 20, 2020.

●ICP is required to pay an annual nonrefundable commitment fee, calculated as 0.75% multiplied by the average daily positive difference between (i) the ICP Revolving Loan commitment (which may be reduced by ICP from time to time in increments of $0.5 million), minus (ii) the aggregate principal amounts outstanding under the ICP Revolving Loan.

●ICP and Alto Pekin are collectively required to maintain working capital of not less than 50% of the combined outstanding revolving lines of credit, which was $27.0 million at March 31, 2021; and an annual debt service coverage ratio of not less than 1.50 to 1.00, in addition to various other affirmative and negative covenants.

 

Under

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Net proceeds arising from the amendment, ICP, collectively with PE Pekin, agreed to pay the lenders an aggregatesale of $40.0 million on or before September 30, 2020 to reduce the outstanding balances of the term loans under the ICP credit agreement and the PE Pekin credit agreement. The $40.0 million is an aggregate amount payable to ICP’s lender and PE Pekin’s lender, and allocated between them. The $40.0 million is to be funded through asset sales, proceeds of any award, judgment or settlement of litigation, or, at our election, from funds contributed to ICP by us. Following receipt by the lenders under the ICP credit agreement and the PE Pekin credit agreement, collectively, of $40.0 million in full, and once any loans corresponding to the particular midwestern asset sold are repaid, any additional proceeds from a sale of our midwestern plantproduction facility assets will generally be allocated 33/34/33% among Alto Pekin’s and ICP’s lender and PE Pekin’s lender,lenders, collectively, the selling security holders,our senior secured noteholders, and us, respectively. ProceedsNet proceeds arising from the sale of any of our western production facility assets will generally be allocated first to the senior secured noteholders up to $20.0 million and then allocated 33/34/33% among PEAlto Pekin’s lender and ICP’s lender,lenders, collectively, the selling security holders, and us, respectively.


On December 29, 2019, ICP agreed to amend the secured obligations under its security agreement to include ICP’s unconditional guarantee of the payment of up to an aggregate $40.0 million to satisfy the obligations of PE Pekin to PE Pekin’s lender under the PE Pekin credit agreement.

On March 20, 2020, ICP and its lender agreed to defer a $1.5 million principal payment due March 20, 2020 and $0.3 million in aggregate interest payments due March 20, 2020 and April 20, 2020 until May 20, 2020. On that same date, we granted to the lender a security interest in all of our equity interests in PE Op Co. We also entered into intercreditor agreements with our PE Pekin and ICP lenders, and the agent for our senior secured noteholders, to address issues of priority and the allocation of proceeds from asset sales.

On April 15, 2020, upon the closing of the sale of our interests in Pacific Aurora, we repaid approximately $2.9 million in principal on our ICP term debt.

On June 26, 2020, we repaid approximately $6.1 million in additional principal on our ICP term debt, fully repaying the ICP term debt.

On July 22, 2020, we repaid approximately $1.8 million in additional principal on our ICP revolving debt.us, respectively.

 

As of the filing of this report, we believe we are in compliance with all debt covenants underthe terms and conditions of our ICP credit facilities, except our obligation to obtain lender approval of a comprehensive plan to restructure our assets and liabilities. 

Credit Facility.

Pacific Ethanol, Inc.

Senior Secured Notes Payable

 

On December 12, 2016, we entered into a Note Purchase Agreement with five accredited investors. On December 15, 2016, under the terms of the Note Purchase Agreement, weinvestors and sold $55.0 million in aggregate principal amount of our 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. On June 30, 2017, under the terms of the second Note Purchase Agreement, weinvestors and sold an additional $13.9 million in aggregate principal amount of our senior secured notes to the investors in a private offering for aggregate gross proceeds of 97% of the principal amount of the notes sold, for a total of $68.9 million in aggregate principal amount of senior secured notes.

The notes had an original maturity date of December 15, 2019. Interest onand collectively with the notes accrued at an annual rate equal to (i)previously sold, the greater of 1% and the three-month LIBOR, plus 7.0% from the closing through December 14, 2017, (ii) the greater of 1% and three-month LIBOR, plus 9% between December 15, 2017 and December 14, 2018, and (iii) the greater of 1% and three-month LIBOR plus 11% between December 15, 2018 and the maturity date.Notes. The interest rate would increase by an additional 2% per annum above the interest rate otherwise applicable upon the occurrence and during the continuance of an event of default until cured. Interest was payable in cash in arrears on the 15th calendar day of each March, June, September and December. We are required to pay all outstanding principal and any accrued and unpaid interest on the notes on the maturity date. We may, at our option, prepay the outstanding principal amount of the notes at any time without premium or penalty. Pacific Ethanol, Inc. issued the notes, whichNotes are secured by a first-priority security interest in theall of our equity interest held by Pacific Ethanol, Inc.interests in PE Op.Alto Op Co.

 

On December 16, 2019, we amendedThe Notes and related agreements contain a variety of representations, warranties, covenants and events of default. Following a series of amendments and waivers with the notesholders 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 extend the maturity date from December 15, 2019 to December 23, 2019 and amended the interest rate from the greater of 1% and the three-month LIBOR, plus 11% between December 15, 2018 through December 14, 2019 to 15% commencing on September 15, 2019. Under the amendment, we also agreedissue equity for purposes other than to pay down a portion of the December 15, 2019 interest payment 50% in cash and 50% in-kind throughoutstanding balance of the issuance of an additional note in the principal amount equal thereto.


On December 22, 2019, we amended and restated the notes which extended the maturity date from December 23, 2019 to December 15, 2021. Interest on the Notes accrues at a rate of 15% per annum, payable quarterly.Notes.

 

OnIn March 20, 2020, we and the noteholders agreed to defer a $2.5 million aggregate interest payment due March 15, 2020 until May 20, 2020. On that same date, ICP granted to the senior secured noteholders a junior liensecurity interest in certain of its personal propertyproperty. In addition, Alto Central granted to the senior secured noteholders and PE Central granted a junior liensecurity interest in certain of its personal property to the noteholders. PEproperty. Alto Central also pledged its equity interests in Pacific Aurora, PEAlto Pekin and ICP in favor of the senior secured noteholders as additional collateral securing our obligations to the senior secured noteholders. In addition, PE Op Co. and Pacific Ethanol West, LLC, which directly owns our plants located onAlto Op. Co also granted to the West Coast, grantedsenior secured noteholders a security interest in certain of theirits personal property to the noteholders.property. We and certain subsidiaries also entered into intercreditor agreements with our PE Pekinthe ICP’s and ICPAlto Pekin’s lenders, and the agent for our senior secured noteholders, to address issues of priority and the allocation of proceeds from asset sales.

 

On May 14, 2021, in connection with the sale of our Madera, California fuel-grade ethanol production facility, we repaid $19.3 million in principal on these Notes.

As of the filing of this report, we believe we are in compliance with all debt covenants under our senior secured notes.the terms and conditions of the Notes.

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CARES Act Loans

 

On May 4, 2020, Pacific Ethanol,Alto Ingredients, Inc. and PEAlto Pekin received loan proceeds from Bank of America, NA under the recently enacted Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, through the Paycheck Protection Program administered by the U.S. Small Business Administration. Pacific Ethanol,Alto Ingredients, Inc. received $6.0 million and PEAlto Pekin received $3.9 million in loan proceeds. The loans mature in two years and bear interest at a rate of 1.00% per annum. Under the terms of the loans, certain amounts may be forgiven if they are used for qualifying expenses as described in the CARES Act, but we can provide no assurance that we will be able to obtain forgiveness of all or any portion of the loans. We have applied for loan forgiveness.

 

Effects of Inflation

 

The impact of inflation was not significant to our financial condition or results of operations for the three and six months ended June 30, 2020March 31, 2021 and 2019.2020.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable.

ITEM 4.CONTROLS AND PROCEDURES.

 

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation under the supervision and with the participation of our management, including our Co-ChiefChief Executive OfficersOfficer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Co-ChiefChief Executive OfficersOfficer and Chief Financial Officer concluded as of June 30, 2020March 31, 2021 that our disclosure controls and procedures were effective at a reasonable assurance level.

 


Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on the Effectiveness of Controls

 

Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected.

 

These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

 


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PART II - OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS.

ITEM 1. LEGAL PROCEEDINGS.

 

We are subject to legal proceedings, claims and litigation arising in the ordinary course of business. While the amounts claimed may be substantial, the ultimate liability cannot presently be determined because of considerable uncertainties that exist. Therefore, it is possible that the outcome of those legal proceedings, claims and litigation could adversely affect our quarterly or annual operating results or cash flows when resolved in a future period. However, based on facts currently available, management believes such matters will not adversely affect in any material respect our financial position, results of operations or cash flows.

ITEM 1A.RISK FACTORS.

 

ITEM 1A. RISK FACTORS.

Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the other information contained in this Report and in our other filings with the Securities and Exchange Commission, including subsequent reports on Forms 10-Q and 8-K. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on Pacific Ethanol,Alto Ingredients, our business, financial condition, results of operations and/or liquidity could be seriously harmed. In that event, the market price for our common stock will likely decline, and you may lose all or part of your investment.

 

Risks Related to our Business

The effects of the coronavirus pandemic, or its abatement, may further materially and adversely affect our business, results of operations and liquidity.

 

The coronavirus pandemic has resulted in businesses suspending or substantially curtailing global operations and travel, quarantines, and an overall substantial slowdown of economic activity. Federal, state and foreign governments have implemented measures to contain the virus, including social distancing requirements, travel restrictions, border closures, limitations on public gatherings, work-from-home orders, and closure of non-essential businesses. Many of these measures remain or have been curtailed only partially. Transportation fuels in particular, including fuel-grade ethanol, have experienced significant price declines and reduced demand. A further or extended ongoing downturn in global economic growth,activity, or recessionary conditions in major geographic regions, willgeneral, would likely lead to poor demand for, ethanol and negatively affect the market prices of, our products, furtherfuel-grade ethanol, materially and adversely affecting our business, results of operations and liquidity.

 

Our plant indebtedness exposes usFurthermore, to many risks thatprotect the health and well-being of our employees and customers, we have implemented work-from-home requirements, made substantial modifications to employee travel policies, and cancelled or shifted marketing and other corporate events to virtual-only formats for the foreseeable future. While we continue to monitor our circumstances and may adjust our current policies as more information and public health guidance become available, these precautionary measures could negatively impactaffect our business,sales and marketing efforts, delay and lengthen our business prospects, our liquidity and our cash flows and resultssales cycles, or create operational or other challenges, any of operations.

Our plants located in the Midwest have significant indebtedness. In addition, we have significant indebtedness under our senior secured notes issued at the parent-company level. The terms of our loans require amortizing payments of principal over the lives of the loans and our borrowing availability under our plant revolving credit facilities periodically and automatically declines through the maturity dates of those facilities. Our indebtedness could:

●make it more difficult to pay or refinance our debts as they become due during adverse economic and industry conditions because any decrease in revenues could cause us to not have sufficient cash flows from operations to make our scheduled debt payments;

●limit our flexibility to pursue strategic opportunities or react to changes in our business and the industry in which we operate and, consequently, place us at a competitive disadvantage to our competitors who have less debt;

●require a substantial portion of our cash flows from operations to be used for debt service payments, thereby reducing the availability of our cash flows to fund working capital, capital expenditures, acquisitions, dividend payments and other general corporate purposes; and/or

●limit our ability to procure additional financing for working capital or other purposes.

Our term loans and credit facilities also require compliance with numerous financial and other covenants.

We are not in compliance with our obligation to obtain lender approval of a comprehensive plan to restructure our assets and liabilities, which could result in their acceleration ofharm our debt. We do not have sufficient liquidity or capital resources to immediately repay our debt if accelerated. 


In addition, our plant indebtedness bears interest at variable rates. An increase in prevailing interest rates would likewise increase our debt service obligations and could materially and adversely affect our cash flowsbusiness and results of operations.

 

In addition, if one or more of our employees or customers becomes ill from coronavirus and attributes their infection to us, including through exposure at one of our offices or production facilities, we could be subject to allegations of failure to adequately mitigate the risk of exposure. Such allegations could harm our reputation and expose us to the risks of litigation and liability.

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Our abilityspecialty alcohols business has benefitted significantly from the coronavirus pandemic due to generate sufficient casha substantial increase in demand for alcohol-based sanitizers and disinfectants. As the coronavirus pandemic abates, demand for alcohol-based sanitizers and disinfectants may decline, ultimately exerting downward pressure on prices for our specialty alcohols used in those products. In addition, higher industry production levels in response to make all principalthe coronavirus pandemic and interest payments when due dependsany resulting oversupply of specialty alcohols for sanitizers and disinfectants would also exert downward pressure on prices. Reduced demand and prices for our specialty alcohols used in sanitizers and disinfectants, or industry oversupply of those specialty alcohols, may materially and adversely affect our business, performance, which is subject to a variety of factors beyond our control, including the supply of and demand for ethanol and co-products, ethanol and co-product prices, the cost of key production inputs, and many other factors incident to the ethanol production and marketing industry. We cannot provide any assurance that we will be able to timely satisfy such obligations. Our failure to timely satisfy our debt obligations could have a material adverse effect on our business, business prospects, liquidity, cash flows and results of operations and could force us to seek protection under the U.S. Bankruptcy Code.

We have incurred significant losses and negative operating cash flow in the past and we may incur losses and negative operating cash flow in the future, which may hamper our operations and impede us from expanding our business.

We have incurred significant losses and negative operating cash flow in the past. For the six months ended June 30, 2020 and 2019, we incurred consolidated net losses of $12.3 million and $22.5 million, respectively. For the years ended December 31, 2019 and 2018, we incurred consolidated net losses of approximately $101.3 million and $68.0 million, respectively. For the year ended December 31, 2019, we incurred negative operating cash flow of approximately $23.4 million. We may incur losses and negative operating cash flow in the future. We expect to rely on cash on hand, cash, if any, generated from our operations, borrowing availability under our lines of credit and proceeds from future financing activities, if any, to fund all of the cash requirements of our business. Continued losses and negative operating cash flow may hamper our operations and impede us from expanding our business.liquidity.

 

Our results of operations and our ability to operate at a profit isare largely dependent on managingour ability to manage the costs of corn, and natural gas and other production inputs, with the prices of high quality alcohol, ethanol, distillers grainsour alcohols and other co-products,essential ingredients, all of which are subject to significant volatility and uncertainty.

 

Our results of operations are highly impacted by commodity prices, including the cost of corn, and natural gas and other production inputs that we must purchase, and the prices of high quality alcohol, ethanol, distillers grainsalcohols and other co-productsessential ingredients that we sell. Prices and supplies are subject to and determined by market and other forces over which we have no control, such as weather, domestic and global demand, supply shortages, export prices and various governmental policies in the United States and aroundthroughout the world.

 

As a result of pricePrice volatility of corn, natural gas high quality alcohol, ethanol, distillers grains and other co-products,production inputs, and alcohols and essential ingredients, may cause our results of operations mayto fluctuate substantially. In addition, increasesWe may fail to generate expected levels of net sales and profits even under fixed-price and other contracts for the sale of specialty alcohols used in cornconsumer products. Our customers may not pay us timely or natural gasat all, even under longer-term, fixed-price contracts for our specialty alcohols, and may seek to renegotiate prices under those contracts during periods of falling prices or decreases in high qualityprice volatility.

Over the past several years, for example, the spread between corn and fuel-grade ethanol prices has fluctuated significantly. Fluctuations are likely to continue to occur. A sustained narrow spread, whether as a result of sustained high or increased corn prices or sustained low or decreased alcohol or essential ingredient prices, would adversely affect our results of operations and financial position. Revenues from sales of alcohols, particularly fuel-grade ethanol, distillers grainsand essential ingredients could decline below the marginal cost of production, which may force us to further suspend production, particularly fuel-grade ethanol production, at some or other co-product prices may make it unprofitable to operate. all of our facilities.

In fact,addition, some of our fuel-grade ethanol marketing activities will likely be unprofitable in a market of generally declining prices due to the nature of our business. For example, to satisfy customer demands, we maintain certain quantities of fuel-grade ethanol inventory for subsequent resale. Moreover, we procure much of our fuel-grade ethanol inventory outside the context of athird-party marketing arrangementarrangements and therefore must buy fuel-grade ethanol at a price established at the time of purchase and sell fuel-grade ethanol at an index price established later at the time of sale that is generally reflective of movements in the market price of fuel-grade ethanol. As a result, our margins for fuel-grade ethanol sold in these transactions generally decline and may turn negative as the market price of fuel-grade ethanol declines.

 

NoWe can provide no assurance can be given that corn, or natural gas or other production inputs can be purchased at or near current or any particular prices, or that high quality alcohol, ethanol, distillers grainsour alcohols or other co-productsessential ingredients will sell at or near current or any particular prices. Consequently, our results of operations and financial position may be adversely affected by increases in the priceprices of corn, or natural gas and other production inputs or decreases in the price of high quality alcohol, ethanol, distillers grains or other co-products.


Over the past several years, the spread between ethanol and corn prices has fluctuated significantly. Fluctuations are likely to continue to occur. A sustained narrow spread, whether as a result of sustained high or increased corn prices or sustained low or decreased ethanol or high quality alcohol prices, would adversely affect our results of operations and financial position. Further, combined revenues from sales of ethanol, distillers grains and other co-products could decline below the marginal cost of production, which may force us to suspend production of ethanol, distillers grains and other co-products at some or all of our plants.alcohols and essential ingredients.

Increased ethanolalcohol or essential ingredient production or higher inventory levels may cause a decline in ethanol prices or prevent ethanol prices from rising,for those products, and may have other negative effects, adversely impacting our results of operations, cash flows and financial condition.

 

We

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The prices of our alcohols and essential ingredients are impacted by competing third-party supplies of those products. For example, we believe that the most significant factor influencing the price of fuel-grade ethanol has been the substantial increase in ethanol production. According to the Renewable Fuels Association, domestic fuel-grade ethanol production capacity increased from an annualized rate of 1.5 billion gallons per year in January 1999 to a record 16.1 billion gallons in 2018. In addition, if fuel-grade ethanol production margins improve, we anticipate that owners of ethanolproduction facilities operating at below capacity, or owners of idled production facilities, will increase production levels, thereby resulting in more abundant fuel-grade ethanol supplies and inventories. Any increaseIncreases in the supply of ethanolalcohols and essential ingredients may not be commensurate with increases in the demand for ethanol,alcohols and essential ingredients, thus leading to lower ethanol prices. Also, demandMoreover, higher industry production levels in response to the coronavirus pandemic and any resulting oversupply of alcohols for ethanol could be impaired due to a numbersanitizers and disinfectants, and corresponding oversupply of factors, including regulatory developments and reduced United States gasoline consumption. Reduced gasoline consumption has occurred in the past and could occur in the future as a result of increased gasoline or oil prices or other factors such as increased automobile fuel efficiency.essential ingredient co-products, may also exert downward pressure on prices. Any of these outcomes could have a material adverse effect on our results of operations, cash flows and financial condition.

 

The market priceprices of ethanol isour products are volatile and subject to large fluctuations, which may cause our profitability or lossesresults of operations to fluctuate significantly.

The market priceprices of ethanol isour products are volatile and subject to large fluctuations. TheFor example, the market price of fuel-grade ethanol is dependent upon many factors, including the supply of ethanol and the price of gasoline, which is in turn dependent upon the price of petroleum which itself is highly volatile and difficult to forecast. For example,Our fuel-grade ethanol sales are tied to prevailing spot market prices rather than long-term, fixed-price contracts. Fuel-grade ethanol prices, as reported by the CBOT, ranged from $0.81 to $1.37$1.62 per gallon for the six months ended June 30,in 2020 and from $1.25 to $1.70 per gallon in 2019 and from $1.202019. In addition, even under longer-term, fixed-price contracts for our specialty alcohols, our customers may seek to $1.53 per gallonrenegotiate prices under those contracts during 2018.periods of falling prices or high price volatility. Fluctuations in the market priceprices of ethanolour products may cause our profitability or lossesresults of operations to fluctuate significantly.

 

Some of our marketing activities will likely be unprofitable in a market of generally declining ethanol prices due to the nature of our business.

Some of our marketing activities will likely be unprofitable in a market of generally declining ethanol prices due to the nature of our business. For example, to satisfy customer demands, we maintain certain quantities of ethanol inventory for subsequent resale. Moreover, we procure much of our inventory outside the context of a marketing arrangement and therefore must buy ethanol at a price established at the time of purchase and sell ethanol at an index price established later at the time of sale that is generally reflective of movements in the market price of ethanol. As a result, our margins for ethanol sold in these transactions generally decline and may turn negative as the market price of ethanol declines.


Disruptions in our production or distribution infrastructure may adversely affect our business, results of operations and financial condition.

 

Our business depends on the continuing availability of rail, road, port, storage and distribution infrastructure. In particular, due to limited storage capacity at our plantsproduction facilities and other considerations related to production efficiencies, our plantsfacilities depend on just-in-time delivery of corn. The production of ethanol and high quality alcohols also requires a significant and uninterrupted supply of other raw materials and energy, primarily water, electricity and natural gas. Local water, electricity and gas utilities may not be ablefail to reliably supply the water, electricity and natural gas that our plantsproduction facilities need or may not be ablefail to supply those resources on acceptable terms. In the past, poor weather has caused disruptions in rail transportation, which slowed the delivery of fuel-grade ethanol by rail, the principle manner by which fuel-grade ethanol from our plantsfacilities located in the Midwest is transported to market. In addition, in 2020, we experienced closure of the Illinois River for lock repairs which required greater use of less cost-effective modes of product transport such as via rail and truck, which resulted in higher costs and negatively affected our results of operations.

Disruptions in production or distribution, infrastructure, whether caused by labor difficulties, earthquakes, storms,unscheduled downtimes and other operational hazards inherent in the alcohol production industry, including equipment failures, fires, explosions, abnormal pressures, blowouts, pipeline ruptures, transportation accidents and natural disasters such as earthquakes, floods and storms, or human error or malfeasance or other reasons, could prevent timely deliveries of corn or other raw materials and energy, and could delay transport of our products to market, and may require us to halt production at one or more plants,production facilities, any of which could have a material adverse effect on our business, results of operations and financial condition.

 

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Some of these operational hazards may also cause personal injury or loss of life, severe damage to or destruction of property and equipment or environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. Our insurance may not fully cover the potential hazards described above or we may be unable to renew our insurance on commercially reasonable terms or at all.

We may engage in hedging transactions and other risk mitigation strategies that could harm our results of operations and financial condition.

 

In an attempt to partially offset the effects of volatility of ethanolour product prices, andin particular fuel-grade ethanol, corn and natural gas costs, we may enter into contracts to fix the price of a portion of our ethanol production or purchase a portion of our corn or natural gas requirements on a forward basis. In addition, we may engage in other hedging transactions involving exchange-traded futures contracts for corn, natural gas and unleaded gasoline from time to time. The financial statement impact of these activities is dependent upon, among other things, the prices involved and our ability to sell sufficient products to use all of the corn and natural gas for which forward commitments have been made. Hedging arrangements also expose us to the risk of financial loss in situations where the other party to the hedging contract defaults on its contract or, in the case of exchange-traded contracts, where there is a change in the expected differential between the underlying price in the hedging agreement and the actual prices paid or received by us. In addition, our open contract positions may require cash deposits to cover margin calls, negatively impacting our liquidity. As a result, our results of operations and financial condition may be adversely affected by our hedging activities and fluctuations in the price of corn, natural gas, fuel-grade ethanol and unleaded gasoline.gasoline may adversely affect our results of operations, financial condition and liquidity.

 

Operational difficultiesThe industries in which we operate are extremely competitive. Many of our significant competitors have greater production and financial resources and could use their greater resources to gain market share at our plants could negatively impact sales volumes and could cause us to incur substantial losses.expense.

 

Operations atThe industries in which we operate are extremely competitive. Many of our plants are subjectsignificant competitors have substantially greater production and financial resources than we do. As a result, our competitors may be able to labor disruptions, unscheduled downtimescompete more aggressively and sustain that competition over a longer period of time. Successful competition will require a continued high level of investment in facility maintenance. We may fail to anticipate or respond adequately to new industry developments and other operational hazards inherentcompetitive pressures due to our limited resources relative to many significant competitors. This failure could reduce our competitiveness and cause a decline in the ethanol production industry, including equipment failures, fires, explosions, abnormal pressures, blowouts, pipeline ruptures, transportation accidentsmarket share, sales and natural disasters. Some of these operational hazards may cause personal injury or loss of life, severe damage to or destruction of property and equipment or environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. Our insurance may not be adequate to fully cover the potential operational hazards described above orprofitability. Even if sufficient funds are available, we may not be able to renew this insurance on commercially reasonable terms or at all.make the modifications and improvements necessary to compete successfully.

 

Moreover,We also face competition from international suppliers, particularly of fuel-grade ethanol, many of whom have cost structures substantially lower than ours. An increase in domestic or foreign competition could force us to reduce our plants may notprices and take other steps to compete effectively, which could adversely affect our business, financial condition and results of operations.

We incur significant expenses to maintain and upgrade our production facilities and operating equipment, and any interruption in our operations would harm our operating performance.

We regularly incur significant expenses to maintain and upgrade our production facilities and operating equipment. The machines and equipment we use to produce our alcohols and manufacture our essential ingredients are complex, have many parts, and some operate on a continuous basis. We must perform routine equipment maintenance and must periodically replace a variety of parts such as planned or expected. All of thesemotors, pumps, pipes and electrical parts. In addition, our production facilities are designedrequire periodic shutdowns to operate at or aboveperform major maintenance and upgrades. These scheduled shutdowns result in lower sales and increased costs in the periods during which a specified production capacity. The operation of these facilities isshutdown occurs and will be, however, subject to various uncertainties. Ascould result in unexpected operational issues in future periods as a result these facilitiesof changes to equipment and operational and mechanical processes made during shutdown.

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Risks Related to our Finances

We have incurred significant losses and negative operating cash flow in the past and we may not produce ethanol, high quality alcoholincur losses and co-products at expected levels. Innegative operating cash flow in the eventfuture, which may hamper our operations and impede us from expanding our business.

We have incurred significant losses and negative operating cash flow in the past. For the years ended December 31, 2020 and 2019, we incurred consolidated net losses of approximately $17.3 million and $101.3 million, respectively. For the three months ended March 31, 2021 and for the year ended December 31, 2019, we incurred negative operating cash flow of approximately $4.1 million and $23.4 million, respectively. We may incur losses and negative operating cash flow in the future. We expect to rely on cash on hand, cash, if any, generated from our operations, borrowing availability under our lines of these facilities do not run at their expected capacity levels,credit and proceeds from our future financing activities, if any, to fund all of the cash requirements of our business. Additional losses and negative operating cash flow may hamper our operations and impede us from expanding our business.

Our indebtedness exposes us to many risks that could negatively impact our business, our business prospects, our liquidity and our cash flows and results of operationsoperations.

Our production facilities located in the Midwest have significant indebtedness. In addition, we have significant indebtedness under our senior secured notes issued at the parent-company level. The terms of our loans require amortizing payments of principal over the lives of the loans and our borrowing availability under our revolving credit facilities periodically and automatically declines through the maturity dates of those facilities. Our indebtedness could:

●make it more difficult to pay or refinance our debts as they become due during adverse economic and industry conditions because those conditions could result in insufficient cash flows from operations to make our scheduled debt payments;

●limit our flexibility to pursue strategic opportunities or react to changes in our business and the industry in which we operate and, consequently, place us at a competitive disadvantage to our competitors who have less debt;

●require a substantial portion of our cash flow from operations, if any, to be used for debt service payments, thereby reducing our ability to fund working capital, capital expenditures, new business ventures, dividend payments and other general corporate purposes; and/or

●limit our ability to procure additional financing for working capital or other purposes.

Our term loans and credit facilities also require compliance with numerous financial condition may beand other covenants, the violation of which could result in an acceleration of our indebtedness.

Much of our indebtedness bears interest at variable rates. An increase in prevailing interest rates would likewise increase our debt service obligations and could materially and adversely affected.affect our cash flows and results of operations.

 

Our ability to generate sufficient cash to make all principal and interest payments when due depends on our business performance, which is subject to a variety of factors beyond our control, including the supply of and demand for our alcohols and other products, product prices, the cost of key production inputs, and many other factors incident to the alcohol production and marketing industry. We cannot provide any assurance that we will be able to timely satisfy such obligations.


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Our ability to utilize net operating loss carryforwards and certain other tax attributes may be limited.

Federal and state income tax laws impose restrictions on our use of net operating loss, or NOL, and tax credit carryforwards in the event that an “ownership change” occurs for tax purposes, as defined by Section 382 of the Internal Revenue Code, or Code. In general, an ownership change occurs when stockholders owning 5% or more of a corporation entitled to use NOL or other loss carryforwards have increased their ownership by more than 50 percentage points during any three-year period. The annual base limitation under Section 382 of the Code is calculated by multiplying the corporation’s value at the time of the ownership change by the greater of the long-term tax-exempt rate determined by the Internal Revenue Service in the month of the ownership change or the two preceding months. Our ability to utilize our NOL and other loss carryforwards may be substantially limited. These limitations could result in increased future tax obligations, which could have a material adverse effect on our financial condition and results of operations.

Risks Related to Legal and Regulatory Matters

Future demand for fuel-grade ethanol is uncertain and may be affected by changes to federal mandates, public perception, consumer acceptance and overall consumer demand for transportation fuel, any of which could negatively affect demand for fuel-grade ethanol and our results of operations.

 

Although many trade groups, academics and governmental agencies have supported fuel-grade ethanol as a fuel additive that promotes a cleaner environment, others have criticized fuel-grade ethanol production as consuming considerably more energy and emitting more greenhouse gases than other biofuels and potentially depleting water resources. Some studies have suggested that corn-based ethanol is less efficient than ethanol produced from other feedstock and that it negatively impacts consumers by causing increased prices for dairy, meat and other food generated from livestock that consume corn. Additionally, critics of fuel-grade ethanol critics contend that corn supplies are redirected from international food markets to domestic fuel markets. If negative views of corn-based ethanol production gain acceptance, support for existing measures promoting use and domestic production of corn-based ethanol as a fuel additive could decline, leading to reduction or repeal of federal ethanol usage mandates, which couldwould materially and adversely affect the demand for fuel-grade ethanol. These views could also negatively impact public perception of the fuel-grade ethanol industry and acceptance of ethanol as an alternative fuel.

 

There are limited markets for fuel-grade ethanol beyond those established by federal mandates. Discretionary blending and E85 blending (i.e., gasoline blended with up to 85% fuel-grade ethanol by volume) are important secondary markets. Discretionary blending is often determined by the price of fuel-grade ethanol versus the price of gasoline. In periods when discretionary blending is financially unattractive, the demand for fuel-grade ethanol may be reduced.decline. Also, the demand for fuel-grade ethanol is affected by the overall demand for transportation fuel. Demand for transportation fuel is affected by the number of miles traveled by consumers and thevehicle fuel economy of vehicles. Market acceptance of E15 may partially offset the effects of decreases in transportation fuel demand. A reduction in theeconomy. Lower demand for fuel-grade ethanol and ethanol co-products may depresswould reduce the value of our ethanol and related products, erode our overall margins and reducediminish our ability to generate revenue or to operate profitably. ConsumerIn addition, we believe that consumer acceptance of E15 and E85 fuels is needednecessary before fuel-grade ethanol can achieve any significant growth in market share relative to other transportation fuels.

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The United States fuel-grade ethanol industry is highly dependent upon certainvarious federal and state legislation and regulationlaws and any changes in legislation or regulationthose laws could have a material adverse effect on our results of operations, cash flows and financial condition.

 

The Environmental Protection Agency, or EPA, has implemented the Renewable Fuel Standard, or RFS, pursuant tounder the Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007. The RFS program sets annual quotas for the quantity of renewable fuels (such as fuel-grade ethanol) that must be blended into motor fuels consumed in the United States. The domestic market for fuel-grade ethanol is significantly impacted by federal mandates under the RFS program for volumes of renewable fuels (such as ethanol) required to be blended with gasoline. Future demand for fuel-grade ethanol will be largely dependent upondepend on incentives to blend ethanol into motor fuels, including the price of ethanol relative to the price of gasoline, the relative octane value of ethanol, constraints in the ability of vehicles to use higher ethanol blends, the RFS, and other applicable environmental requirements. Any significant increase in production capacity above the RFS minimum requirements may have an adverse impact on ethanol prices.


Legislation aimed at reducing or limiting the renewable fuel use required by the RFS has been introduced in the United States Congress. On January 3, 2019, a bill (H.R. 104) was introduced into the House of Representatives aiming to repeal certain amendments to the Clean Air Act relating to the expansion of the renewable fuel program, and for other purposes. This bill revises the renewable fuel program, including the RFS. Under current law, the RFS specifies the minimum volume of renewable fuel, such as ethanol, that must be contained in gasoline sold in the United States, except in noncontiguous states or territories. The RFS annually increases until 2022 when a minimum of 36 billion gallons of renewable fuel must be blended into gasoline. This bill decreases the volume of renewable fuel that must be contained in gasoline to 7.5 billion gallons each year. The bill also revises the RFS to eliminate separate volume requirements for the following renewable fuel categories: advanced biofuels, cellulosic biofuel, and biomass-based diesel. The bill was referred to a congressional subcommittee where it awaits further consideration. On May 7, 2019, the Food and Fuel Consumer Protection Act of 2019 (H.R. 2540), was introduced in the House of Representatives. The bill aims to prevent RFS blending obligations from requiring ethanol to make up more than 9.7 percent of the total volume of gasoline projected to be sold or introduced into commerce in the United States for a given calendar year. The bill was referred to a congressional committee, which will consider it before possibly sending the bill to the House of Representatives as a whole. On June 21, 2019, a bill (H.R. 3427) was introduced in the House of Representatives aiming to repeal the EPA’s Renewable Fuel Standard program, which requires transportation fuel to contain a minimum volume of renewable fuel. The bill was referred to a congressional committee, which will consider it before possibly sending the bill to the House of Representatives as a whole. On July 25, 2019, a bill (S.2298) was introduced in the United States Senate, to amend the Clean Air Act to eliminate the corn ethanol mandate for renewable fuel. The bill was read twice and referred to the Committee on Environment and Public Works. Our results of operations, cash flows and financial condition could be adversely impacted if any legislation is enacted that reduces or limits the RFS volume requirements.

 

Under the provisions of the Clean Air Act, as amended by the Energy Independence and Security Act of 2007, the EPA has limited authority to waive or reduce the mandated RFS requirements, which authority is subject to consultation with the Secretaries of Agriculture and Energy, and based on a determination that there is inadequate domestic renewable fuel supply or implementation of the applicable requirements would severely harm the economy or environment of a state, region or the United States.States in general. Our results of operations, cash flows and financial condition could be adversely impacted if the EPA reduces the RFS requirements from the statutory levels specified in the RFS.

 

The ethanol production and marketing industry is extremely competitive. ManyVarious bills in Congress introduced from time to time are also directed at altering existing renewable fuels energy legislation, but none has passed in recent years. Some legislative bills are directed at halting or reversing expansion of, our significant competitors have greater productionor even eliminating, the renewable fuel program, while other bills are directed at bolstering the program or enacting further mandates or grants that would support the renewable fuels industry. Our results of operations, cash flows and financial resources and one or more of these competitorscondition could use their greater resources to gain market share at our expense.

The ethanol production and marketing industrybe adversely impacted if any legislation is extremely competitive. Many of our significant competitors inenacted that reduces the ethanol production and marketing industry, including Archer-Daniels-Midland Company, POET, LLC, Green Plains, Inc. and Valero Renewable Fuels Company, LLC, have substantially greater production and/or financial resources. As a result, our competitors may be able to compete more aggressively and sustain that competition over a longer period of time. Successful competition will require a continued high level of investment in marketing and customer service and support. Our limited resources relative to many significant competitors may cause us to fail to anticipate or respond adequately to new developments and other competitive pressures. This failure could reduce our competitiveness and cause a decline in market share, sales and profitability. Even if sufficient funds are available, we may not be able to make the modifications and improvements necessary to compete successfully.


We also face competition from international suppliers. Currently, international suppliers produce ethanol primarily from sugar cane and have cost structures that are generally substantially lower than our cost structures. Any increase in domestic or foreign competition could cause us to reduce our prices and take other steps to compete effectively, which could adversely affect our business, financial condition and results of operations.

Our independent registered public accounting firm’s report for the year ended December 31, 2019 includes an explanatory note describing a substantial doubt as to our ability to continue as a going concern.

As a result of ethanol industry conditions that negatively affected our business, our independent registered public accounting firm included in its report on our audited consolidated financial statements as of and for the year ended December 31, 2019 an explanatory note describing a substantial doubt as to our ability to continue as a going concern. A “going concern” opinion indicates that the financial statements have been prepared assuming we will continue as a going concern, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities, that may result if we do not continue as a going concern. The presence of a going concern note to our financial statements may have an adverse impact on our business relationships with third parties, and could make it more difficult for us to raise additional financing, all of which could have a material adverse impact on our business and prospects.

Our ability to utilize net operating loss carryforwards and certain other tax attributes may be limited.

Federal and state income tax laws impose restrictions on the utilization of net operating loss, or NOL, and tax credit carryforwards in the event that an “ownership change” occurs for tax purposes, as defined by Section 382 of the Internal Revenue Code, or Code. In general, an ownership change occurs when stockholders owning 5% or more of a “loss corporation” (a corporation entitled to use NOL or other loss carryovers) have increased their ownership of stock in such corporation by more than 50 percentage points during any three-year period. The annual base limitation under Section 382 of the Code is calculated by multiplying the loss corporation’s value at the time of the ownership change by the greater of the long-term tax-exempt rate determined by the Internal Revenue Service in the month of the ownership change or the two preceding months.

As of December 31, 2019, of our $228.8 million of federal NOLs, we had $82.1 million of federal NOLs that are limited in their annual use under Section 382 of the Code beyond 2019. Accordingly, our ability to utilize these NOL carryforwards may be substantially limited. These limitations could in turn result in increased future tax obligations, which could have a material adverse effect on our business, financial condition and results of operations.

The high concentration of our sales within the ethanol production and marketing industry could result in a significant reduction in sales and negatively affect our profitability if demand for ethanol further declines.

Our sales are highly concentrated within the ethanol production and marketing industry. An industry shift away from ethanol, or the emergence of new competing products, may significantly reduce the demand for ethanol. An ongoing or further downturn in the demand for ethanol would likely materially and adversely affect our sales and profitability.RFS volume requirements.

 

We may be adversely affected by environmental, health and safety laws, regulations and liabilities.

 

We are subject to various federal, state and local environmental laws and regulations, including those relating to the discharge of materials into the air, water and ground, the generation, storage, handling, use, transportation and disposal of hazardous materials and wastes, and the health and safety of our employees. In addition, some of these laws and regulations require us to operate under permits that are subject to renewal or modification. These laws, regulations and permits can often require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment. A violation of these laws and regulations or permit conditions can result in substantial fines, natural resource damages, criminal sanctions, permit revocations and/or production facility shutdowns. In addition, we have made, and expect to make, significant capital expenditures on an ongoing basis to comply with increasingly stringent environmental laws, regulations and permits.

 


We may be liable for the investigation and cleanup of environmental contamination at each of our plantsproduction facilities and at off-site locations where we arrange for the disposal of hazardous substances or wastes. If these substances or wastes have been or are disposed of or released at sites that undergo investigation and/or remediation by regulatory agencies, we may be responsible under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, or other environmental laws for all or part of the costs of investigation and/or remediation, and for damages to natural resources. We may also be subject to related claims by private parties alleging property damage and personal injury due to exposure to hazardous or other materials at or from those properties. Some of these matters may require us to expend significant amounts for investigation, cleanup or other costs.

 

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In addition, new laws, new interpretations of existing laws, increased governmental enforcement of environmental laws or other developments could require us to make significant additional expenditures. Continued government and public emphasis on environmental issues can be expected towill likely result in increased future investments for environmental controls at our plants.production facilities. Present and future environmental laws and regulations, and interpretations of those laws and regulations, applicable to our operations, more vigorous enforcement policies and discovery of currently unknown conditions may require substantial expenditures that could have a material adverse effect on our results of operations and financial condition.

 

The hazards and risks associated with producing and transporting our products (including fires, natural disasters, explosions and abnormal pressures and blowouts) may also result in personal injury claims or damage to property and third parties. As protection against operating hazards, we maintain insurance coverage against some, but not all, potential losses. However, we could sustain losses for uninsurable or uninsured risks, or in amounts in excess of existing insurance coverage.coverages. Events that result in significant personal injury or damage to our property or third parties or other losses that are not fully covered by insurance could have a material adverse effect on our results of operations and financial condition.

 

If we are unable to attract or retain key personnel, our ability to operate effectively may be impaired, which could have a material adverse effect on our business, financial condition and results of operations.

Our ability to operate our business and implement strategies depends, in part, on the efforts of our executive officers and other key personnel. Our future success will depend on, among other factors, our ability to retain our current key personnel and attract and retain qualified future key personnel, particularly executive management. If we are unable to attract or retain key personnel, our ability to operate effectively may be impaired, which could have a material adverse effect on our business, financial condition and results of operations.

We depend on a small number of customers for the majority of our sales. A reduction in business from any of these customers could cause a significant decline in our overall sales and profitability.

The majority of our sales are generated from a small number of customers. During 2019 and 2018, two customers accounted for an aggregate of approximately $336 million and $367 million in net sales, representing 24% and 25% of our net sales, respectively, for those periods. Our agreements with these customers generally do not require them to purchase any specified volume or dollar value of ethanol or co-products, or to make any purchases whatsoever. Therefore, in any future period, our sales generated from these customers, individually or in the aggregate, may not equal or exceed historical levels. If sales to any of these customers cease or decline, we may be unable to replace these sales with sales to either existing or new customers in a timely manner, or at all. A cessation or reduction of sales to one or more of these customers could cause a significant decline in our overall sales and profitability.


We incur significant expenses to maintain and upgrade our operating equipment and plants, and any interruption in the operation of our facilities may harm our operating performance.

We regularly incur significant expenses to maintain and upgrade our equipment and facilities. The machines and equipment we use to produce our products are complex, have many parts and some are run on a continuous basis. We must perform routine maintenance on our equipment and will have to periodically replace a variety of parts such as motors, pumps, pipes and electrical parts. In addition, our facilities require periodic shutdowns to perform major maintenance and upgrades. These scheduled facility shutdowns result in decreased sales and increased costs in the periods in which a shutdown occurs and could result in unexpected operational issues in future periods as a result of changes to equipment and operational and mechanical processes made during the shutdown period.

Our lack of long-term ethanol orders and commitments by our customers could lead to a rapid decline in our sales and profitability.

We cannot rely on long-term ethanol orders or commitments by our customers for protection from the negative financial effects of a decline in the demand for ethanol or a decline in the demand for our marketing services. The limited certainty of ethanol orders can make it difficult for us to forecast our sales and allocate our resources in a manner consistent with our actual sales. Moreover, our expense levels are based in part on our expectations of future sales and, if our expectations regarding future sales are inaccurate, we may be unable to reduce costs in a timely manner to adjust for sales shortfalls. Furthermore, because we depend on a small number of customers for a significant portion of our sales, the ramifications of these risks are greater in magnitude than if our sales were less concentrated. As a result of our lack of long-term ethanol orders and commitments, we may experience a rapid decline in our sales and profitability.

There are limitations on our ability to receive distributions from our subsidiaries.

We conduct most of our operations through subsidiaries and are dependent upon dividends or other intercompany transfers of funds from our subsidiaries to generate free cash flow. Moreover, some of our subsidiaries are limited in their ability to pay dividends or make distributions, loans or advances to us by the terms of their financing arrangements. At June 30, 2020, we had approximately $204.4 million of net assets at our subsidiaries that were not available to be distributed in the form of dividends, distributions, loans or advances due to restrictions contained in their financing arrangements.

Risks Related to Ownership of our Common Stock

The conversion of convertible securities and the exercise of outstanding options and warrants to purchase our common stock could substantially dilute your investment, impede our ability to obtain additional financing and cause us to incur additional expenses.

 

Our Series B Preferred Stock, which are convertible into our common stock, and outstanding options to acquire our common stock issued to employees, directors and others, and warrants to purchase our common stock, allow the holdersFuture sales of these securities an opportunity to profit from a rise in the market pricesubstantial amounts of our common stock, suchor perceptions that conversion or exercise of the securities will result in dilution of the equity interests of our common stockholders. The terms on which we may obtain additional financing may be adversely affected by the existence and potentially dilutive impact of our Series B Preferred Stock, options and warrants. In addition, holders of our Series B Preferred Stock and warrants have registration rights with respect to the common stock underlying those Series B Preferred Stock and warrants, the registration of which may involve substantial expense.


The market price of our common stock and the value of your investment could substantially decline if shares of our Series B Preferred Stock are converted into shares of our common stock and if our options and warrants are exercised for shares of our common stock and all of these shares of common stock are resold into the market, or if a perception exists that a substantial number of shares of common stock will be issued upon conversion of our Series B Preferred Stock or upon exercise of our warrants or options and then resold into the market.

Sales of a substantial number of shares of common stock issued upon conversion of our Series B Preferred Stock and upon exercise of our options and warrants, or even the perception that these sales could occur, could adversely affect the market price of our common stock. As a result, you could experience astock and our ability to raise capital.

Future sales of substantial decline in the value of your investment as a result of both the actual and potential conversionamounts of our outstandingcommon stock into the public market, including up to 8.9 million shares of Series B Preferred Stock andour common stock that may be issued upon the exercise of outstanding warrants, or perceptions that those sales could occur, could adversely affect the prevailing market price of our outstanding options or warrants.common stock and our ability to raise capital.

Our stock price is highly volatile, which could result in substantial losses for investors purchasing shares of our common stock and in litigation against us.

The market price of our common stock has fluctuated significantly in the past and may continue to fluctuate significantly in the future. The market price of our common stock may continue to fluctuate in response to one or more of the following factors, many of which are beyond our control:

 

●our ability to continue as a going concern;

●actions taken by our lenders;

●fluctuations in the market prices of our products;

 

●fluctuations in the costcosts of key production inputs, includinginput commodities such as corn and natural gas;

 

●the volume and timing of the receipt of orders for our products from major customers;

 

●the coronavirus pandemic, including governmental and public response to the pandemic;

●competitive pricing pressures;

 

●anticipated trends in our ability to timelyfinancial condition and cost-effectively produce, sell and deliver our products;results of operations;

 

●the announcement, introduction and market acceptance of alternatives to our products;

●changes in market valuations of companies similar to us;

 

●stock market price and volume fluctuations generally;

 

●regulatory developments or increased enforcement;

 

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●fluctuations in our quarterly or annual operating results;

 

●additions or departures of key personnel;

 

●the timing and results of our strategic initiatives;

●our inabilityability to obtain any necessary financing;

 

●our financing activities and future sales of our common stock or other securities, as well as stockholder dilution;securities; and

 

●our ability to maintain contracts that are critical to our operations.

 

Demand for ethanol could also be adversely affected by a slow-down in overall demand for oxygenate and gasoline additive products. The levels of our ethanol production and purchases for resale will be based upon forecasted demand. Accordingly, any inaccuracy in forecasting anticipated revenues and expenses could adversely affect our business. The failure to receive anticipated orders or to complete delivery in any quarterly period could adversely affect our results of operations for that period. Quarterly and annual results are not necessarily indicative of future performance for any particular period, and we may not experience revenue growth or profitability on a quarterly or an annual basis.


The price at which you purchase shares of our common stock may not be indicative of the price that will prevail in the trading market. You may be unable to sell your shares of common stock at or above your purchase price, which may result in substantial losses to you and which may include the complete loss of your investment. In the past, securities class action litigation has often been brought against a company following periods of high stock price volatility. We may be the target of similar litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and our resources away from our business.

 

Any of the risks described above could have a material adverse effect on our results of operations, the price of our common stock, or both.

Because we do not intend to pay any cash dividends on our shares of common stock in the near future, our stockholders will not be able to receive a return on their shares unless and until they sell them.

We intend to retain a significant portion of any future earnings to finance the development, operation and expansion of our business. We do not anticipate paying any cash dividends on our common stock in the near future. The declaration, payment, and amount of any future dividends will be made at the discretion of our board of directors, and will depend upon, among other things, our results of operations, cash flows, and financial condition, operating and capital requirements, and other factors as our board of directors considers relevant. There is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend. Unless our board of directors determines to pay dividends, our stockholders will be required to look to appreciation of our common stock to realize a gain on their investment. There can be no assurance that this appreciation will occur.

Our bylaws contain an exclusive forum provision, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.

 

Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Delaware Court of Chancery shall be the sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of us, (b) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of us to us or our stockholders, (c) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or (d) any action asserting a claim governed by the internal affairs doctrine.

 

For the avoidance of doubt, the exclusive forum provision described above does not apply to any claims arising under the Securities Act of 1933, as amended, or the Securities Act, or the Securities Exchange Act of 1934, as amended, or the Exchange Act. Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder, and Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder.

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The choice of forum provision in our bylaws may limit our stockholders’ ability to bring a claim in a judicial forum that they find favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and our directors, officers, employees and agents even though an action, if successful, might benefit our stockholders. The applicable courts may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments or results may be more favorable to us than to our stockholders. With respect to the provision making the Delaware Court of Chancery the sole and exclusive forum for certain types of actions, stockholders who do bring a claim in the Delaware Court of Chancery could face additional litigation costs in pursuing any such claim, particularly if they do not reside in or near Delaware. Finally, if a court were to find this provision of our bylaws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could have a material adverse effect on us.

 

General Risk Factors

Cyberattacks through security vulnerabilities could lead to disruption of business, reduced revenue, increased costs, liability claims, or harm to our reputation or competitive position.

Security vulnerabilities may arise from our hardware, software, employees, contractors or policies we have deployed, which may result in external parties gaining access to our networks, data centers, cloud data centers, corporate computers, manufacturing systems, and/or access to accounts we have at our suppliers, vendors, and customers. External parties may gain access to our data or our customers’ data, or attack the networks causing denial of service or attempt to hold our data or systems in ransom. The vulnerability could be caused by inadequate account security practices such as failure to timely remove employee access when terminated. To mitigate these security issues, we have implemented measures throughout our organization, including firewalls, backups, encryption, employee information technology policies and user account policies. However, there can be no assurance these measures will be sufficient to avoid cyberattacks. If any of these types of security breaches were to occur and we were unable to protect sensitive data, our relationships with our business partners and customers could be materially damaged, our reputation could be materially harmed, and we could be exposed to a risk of litigation and possible significant liability.

Further, if we fail to adequately maintain our information technology infrastructure, we may have outages and data loss. Excessive outages may affect our ability to timely and efficiently deliver products to customers or develop new products. Such disruptions and data loss may adversely impact our ability to fulfill orders and interrupt other processes. Delayed sales or lost customers resulting from these disruptions could adversely affect our financial results, stock price and reputation.

The State of California enacted the California Consumer Privacy Act of 2018, or CCPA, effective on January 1, 2020. Our and our business partners’ or contractors’ failure to fully comply with the CCPA and other laws could lead to significant fines and require onerous corrective action. In addition, data security breaches experienced by us or our business partners or contractors could result in the loss of trade secrets or other intellectual property, public disclosure of sensitive commercial data, and the exposure of personally identifiable information (including sensitive personal information) of our employees, customers, suppliers, contractors and others.

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Unauthorized use or disclosure of, or access to, any personal information maintained by us or on our behalf, whether through breach of our systems, breach of the systems of our suppliers or vendors by an unauthorized party, or through employee or contractor error, theft or misuse, or otherwise, could harm our business. If any such unauthorized use or disclosure of, or access to, such personal information was to occur, our operations could be seriously disrupted, and we could be subject to demands, claims and litigation by private parties, and investigations, related actions, and penalties by regulatory authorities. In addition, we could incur significant costs in notifying affected persons and entities and otherwise complying with the multitude of foreign, federal, state and local laws and regulations relating to the unauthorized access to, or use or disclosure of, personal information. Finally, any perceived or actual unauthorized access to, or use or disclosure of, such information could harm our reputation, substantially impair our ability to attract and retain customers and have an adverse impact on our business, financial condition and results of operations.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Unregistered Sales of Equity Securities

 

None.

 

Use of Proceeds from Registered Securities

Not applicable.


Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

We granted to certain employees shares of restricted stock under our 2006 and 2016 Stock Incentive Plans pursuant to Restricted Stock Agreements dated and effective as of their respective grant dates by and between us and those employees.None.

 

We were obligated to withhold minimum withholding tax amounts with respect to vested shares of restricted stock and upon future vesting of shares of restricted stock granted to our employees. Each employee was entitled to pay the minimum withholding tax amounts to us in cash or to elect to have us withhold a vested amount of shares of restricted stock having a value equivalent to our minimum withholding tax requirements, thereby reducing the number of shares of vested restricted stock that the employee ultimately receives. If an employee failed to timely make such election, we automatically withheld the necessary shares of vested restricted stock.

For the three months ended June 30, 2020, in connection with satisfying our withholding requirements, we withheld the following number of shares of our common stock and remitted cash payments to cover the minimum withholding tax amounts, thereby effectively repurchasing from the employees such number of shares of our common stock at the following deemed purchase prices:

Month Number of
Shares Withheld		  Deemed Purchase
Price Per Share		  Aggregate
Purchase Price		 
April  357,239  $0.25  $89,489 

Dividends

 

Our current and future debt financing arrangements may limit or prevent cash distributions from our subsidiaries to us, depending upon the achievement of specified financial and other operating conditions and our ability to properly service our debt, thereby limiting or preventing us from paying cash dividends.

 

For the three and six months ended June 30,March 31, 2021 and 2020, we accrued an aggregate of $0.3 million and $0.6 million, respectively, in dividends on our Series B Cumulative Convertible Preferred Stock, or Series B Preferred Stock, but did not declare or pay cash dividends, as permitted under an agreement with the holders of our Series B Preferred Stock, in an effort to preserve liquidity. For the three and six months ended June 30, 2019, we declared and paid in cash an aggregate of $0.3 million and $0.6 million, respectively, in dividends on our Series B Preferred Stock.

 

We have never declared or paid cash dividends on our common stock and do not currently intend to pay cash dividends on our common stock in the foreseeable future. We currently anticipate that we will retain any earnings for use in the continued development of our business.

 

The holders of our outstanding Series B Preferred Stock are entitled to dividends of 7% per annum, payable quarterly. Accrued and unpaid dividends in respect of our Series B Preferred Stock must be paid prior to the payment of any dividends in respect of shares of our common stock.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

Not applicable.

ITEM 4.MINE SAFETY DISCLOSURES.

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

ITEM 5.OTHER INFORMATION.

ITEM 5. OTHER INFORMATION.

 

Not applicable.

 


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ITEM 6.EXHIBITS.

ITEM 6. EXHIBITS.

 

Exhibit
Number		 Description
10.13.1Certificate of Incorporation (*)
3.2 Third Amendment to Membership Interest Purchase Agreement dated asCertificate of April 15, 2020 byDesignations, Powers, Preferences and among Pacific Ethanol Central, LLC, Pacific Aurora, LLC and Aurora Cooperative Elevator Company (1)Rights of the Series A Cumulative Redeemable Convertible Preferred Stock (*)
10.23.3 Secured Promissory Note (Negotiable) dated April 15, 2020 inCertificate of Designations, Powers, Preferences and Rights of the amount of $8,580,000 by Pacific Aurora, LLC in favor of Pacific Ethanol Central, LLC (1)Series B Cumulative Convertible Preferred Stock (*)
10.33.4 Secured Promissory Note (Non-Negotiable)Certificate of Amendment to Certificate of Incorporation dated April 15, 2020 in the amount of $7,920,000 by Pacific Aurora, LLC in favor of Pacific Ethanol Central, LLC (1)June 3, 2010 (*)
10.43.5 AssignmentCertificate of Notes and DeedsAmendment to Certificate of Trust dated April 15, 2020 by and among Pacific Ethanol Central, LLC, Pacific Aurora, LLC and CoBank, ACB (1)Incorporation effective June 8, 2011 (*)
10.53.6 Partial ReleaseCertificate of Collateral Letter dated April 15, 2020 by Pacific Ethanol, Inc. and its Subsidiaries named therein, and CoBank, ACB (1)Amendment to Certificate of Incorporation effective May 14, 2013 (*)
10.63.7 Partial ReleaseCertificate of Collateral Letter dated April 15, 2020 by Pacific Ethanol, Inc. and its Subsidiaries named therein, Cortland Products Corp., and the Noteholders named therein (1)Amendment to Certificate of Incorporation effective July 1, 2015 (*)
10.73.8 Promissory Note dated April 29, 2020 in the amountCertificate of $5,973,138 by Pacific Ethanol, Inc. in favorAmendment to Certificate of Bank of America, NA (2)Incorporation effective January 12, 2021 (*)
10.8Promissory Note dated May 1, 2020 in the amount of $3,886,729 by Pacific Ethanol Pekin, LLC in favor of Bank of America, NA (2)
10.9Security Agreement dated May 5, 2020 by Pacific Ethanol Pekin, LLC in favor of Cortland Products Corp. as collateral agent for the Noteholders identified therein (3)
10.10Note Amendment No. 6 dated May 26, 2020 by and among Pacific Ethanol, Inc. and the Noteholders identified therein (4)
10.113.9 Second Amendment to Amended and Restated Employment Agreement for Neil M. Koehler dated May 22, 2020 by and between Pacific Ethanol, Inc. and Neil M. Koehler (4)Bylaws (*)
31.1 Certifications Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (*)
31.2Certifications Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (*)
31.3 Certifications Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (*)
32.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (*)
101.INS XBRL Instance Document (*)
101.SCH XBRL Taxonomy Extension Schema (*)
101.CAL XBRL Taxonomy Extension Calculation Linkbase (*)
101.DEF XBRL Taxonomy Extension Definition Linkbase (*)
101.LAB XBRL Taxonomy Extension Label Linkbase (*)
101.PRE XBRL Taxonomy Extension Presentation Linkbase (*)

 

 

(*)Filed herewith.
(1)Filed as an exhibit to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 21, 2020.
(2)Filed as an exhibit to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 7, 2020.
(3)Filed as an exhibit to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 11, 2020.
(4)Filed as an exhibit to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 29, 2020.

 


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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 PACIFIC ETHANOL,ALTO INGREDIENTS, INC.
   
Dated: August 13, 2020May 17, 2021By:/S/ BRYON T. MCGREGOR
 Bryon T. McGregor
 Chief Financial Officer
 (Principal Financial and Accounting Officer)

 

 

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