EDGAR 10-K Filing

Company CIK: 778164
Filing Year: 2021
Filename: 778164_10-K_2021_0001213900-21-017995.json

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ITEM 1. BUSINESS
Item 1.	Business.
Business Overview
We are a leading producer and marketer of specialty alcohols and essential ingredients, and the largest producer of specialty alcohols in the United States based on annualized volumes.
We operate seven alcohol production facilities. Three of our production facilities are located in the Midwestern state of Illinois and four of our facilities are located in the Western states of California, Oregon and Idaho. We have an annual alcohol production capacity of 450 million gallons. We market all of the alcohols produced at our facilities as well as fuel-grade ethanol produced by third parties. In 2020, we marketed over 500 million gallons combined of our own alcohols as well as fuel-grade ethanol produced by third parties, and nearly 1.5 million tons of essential ingredients on a dry matter basis. Our business consists of three reportable segments: two production segments and a marketing segment.
Our mission is to expand our business as a leading producer and marketer of specialty alcohols and essential ingredients. We intend to accomplish this goal in part by investing in our specialized and higher value specialty alcohol production and distribution infrastructure, expanding production in high-demand essential ingredients, expanding and extending the sale of our products into new regional and international markets, building efficiencies and economies of scale and by capturing a greater portion of the value stream.
Production Segments
We produce specialty alcohols, fuel-grade ethanol and essential ingredients, focusing on four key markets: Health, Home & Beauty; Food & Beverage; Essential Ingredients; and Renewable Fuels. Products for the Health, Home & Beauty market include specialty alcohols used in mouthwash, cosmetics, pharmaceuticals, hand sanitizers, disinfectants and cleaners. Products for the Food & Beverage markets include grain neutral spirits used in alcoholic beverages and vinegar as well as corn germ used for corn oils. Products for Essential Ingredients markets include yeast, corn gluten and distillers grains used in commercial animal feed and pet foods. Our Renewable Fuels products include fuel-grade ethanol and distillers corn oil used as a feedstock for renewable diesel fuel.
We produce our alcohols and essential ingredients at our production facilities described below. Our production facilities located in the Midwest are in the heart of the Corn Belt, benefit from low-cost and abundant feedstock and enjoy logistical advantages that enable us to provide our products to both domestic and international markets via truck, rail or barge. Our production facilities located on the West Coast are near their respective fuel and feed customers, offering significant timing, transportation cost and logistical advantages.
We are currently operating at approximately 64% of our estimated maximum annual production capacity. Our Magic Valley, Stockton and Madera facilities are currently idled. As market conditions change, we may increase, decrease or idle production at one or more operating facilities or resume operations at any idled facility.
Annual Production Capacity
(estimated, in gallons)
Production Facility Location Fuel-Grade Ethanol Specialty Alcohol
Pekin Campus Pekin, IL 110,000,000 140,000,000
Magic Valley Burley, ID 60,000,000 -
Columbia Boardman, OR 40,000,000 -
Stockton Stockton, CA 60,000,000 -
Madera Madera, CA 40,000,000 -
Marketing Segment
We market all of the alcohols and essential ingredients we produce at our facilities. We also market fuel-grade ethanol produced by third parties.
We have extensive and long-standing customer relationships, both domestic and international, for our specialty alcohols and essential ingredients. These customers include producers and distributors of ingredients for cosmetics, sanitizers and related products, distilled spirits producers, food products manufacturers, producers of personal health/consumer health and personal care hygiene products, and global trading firms.
Our fuel-grade ethanol customers are located throughout the Western and Midwestern United States and consist of integrated oil companies and gasoline marketers who blend fuel-grade ethanol into gasoline. Our customers depend on us to provide a reliable supply of fuel-grade ethanol and manage the logistics and timing of delivery with very little effort on their part. Our customers collectively require fuel-grade ethanol volumes in excess of the supplies we produce at our facilities. We secure additional fuel-grade ethanol supplies from third-party fuel-grade ethanol plants in California and other third-party suppliers in the Midwest where a majority of fuel-grade ethanol producers are located. We arrange for transportation, storage and delivery of fuel-grade ethanol purchased by our customers through our agreements with third-party service providers in the Western United States as well as in the Midwest from a variety of sources.
We market our essential ingredient feed products to dairies and feedlots, in many cases located near our production facilities. These customers use our feed products for livestock as a substitute for corn and other sources of starch and protein. We sell our corn oil to poultry and biodiesel customers. We do not market essential ingredients from other producers.
See “Note 4 - Segments” to our Notes to Consolidated Financial Statements included elsewhere in this report for financial information about our business segments.
Company History
We are a Delaware corporation formed in February 2005. Our common stock trades on The Nasdaq Capital Market under the symbol “ALTO”. Our Internet website address is http://www.altoingredients.com. Information contained on our website is not part of this Annual Report on Form 10-K. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such reports filed with or furnished to the Securities and Exchange Commission and other Securities and Exchange Commission filings are available free of charge through our website as soon as reasonably practicable after the reports are electronically filed with, or furnished to, the Securities and Exchange Commission.
Business Strategy
Our goal is to expand our business as a leading producer and marketer of specialty alcohols and essential ingredients. The key elements of our business and growth strategy to achieve this objective include:
● Focus on our customer relationships. We have repositioned our business to focus on specialty alcohols and essential ingredients. As a result, our business is service-oriented and focused on specialty products compared to a price-oriented business focused on commodity products. We strive to make our business ever more customer-centric to enable our premium services to support premium prices and new differentiated and higher-margin products.
● Expand product offerings. We are pursuing initiatives to broaden our product offerings to appeal to a wider range of customers and uses in our key markets. For example, we have secured ISO 9001, ICH Q7 and EXCiPACT certifications. These certifications appeal to customers with stringent quality demands and enable us to offer alcohol certified for use as an active pharmaceutical ingredient, or API, and as an excipient-an inactive component of a drug or medication, such as solvents, carriers or tinctures-in the pharmaceutical industry. We are reviewing additional certifications and product positioning within our key markets to expand the range of customers we serve and the uses our products support.
● Implement new equipment and technologies. We are evaluating and plan to implement new equipment and technologies to increase our production yields, improve our operating efficiencies and reliability, reduce our overall carbon footprint, diversify our products and revenues, and increase our profitability as financial resources and market conditions justify these investments.
● Sell or repurpose underperforming production assets. We are pursuing the sale of our production facilities located in Stockton and Madera, California. We are also evaluating the sale or repurposing of other underperforming fuel-grade ethanol production assets. We have idled certain underperforming production facilities and intend to restart production at those facilities only when economic prospects indicate a level of production margins sufficient to justify resuming production. We may repurpose one or more underperforming production facilities to shift production to specialty alcohols if market demand justifies the expense. We are also exploring other potential repositioning activities, including an expansion into new markets such as essential oils and CBD oils, high protein development and protein pelletizing.
● Evaluate and pursue strategic opportunities. We are examining opportunities to expand our business such as joint ventures, strategic partnerships, synergistic acquisitions and other opportunities. We intend to pursue these opportunities as financial resources and business prospects make these opportunities desirable.
Competitive Strengths
We are the largest producer of specialty alcohols in the United States based on annualized volumes. We believe that our competitive strengths include:
● Our customer and supplier relationships. We have extensive and long-standing close customer and supplier relationships, both domestic and international, for our specialty alcohols and essential ingredients. We have an excellent reputation for developing specialty alcohols under stringent quality control standards, particularly at our Pekin, Illinois campus, or Pekin Campus. Our quality management systems are supported by ISO 9001, ICH Q7 and EXCiPACT certifications which are viewed by our customers as important attestations of our quality control standards.
● Barriers to entry. Our production facilities use specialized equipment, technologies and processes to achieve stringent quality controls, lower operating costs, higher yields, and efficient production of alcohols and essential ingredients. Our specialized equipment, technologies and processes, together with our quality management certifications, strict regulatory requirements, and close customer and supplier relationships create significant barriers to entry to new market participants.
● Our experienced management. Our senior management team has a proven track record with significant operational and financial expertise and many years of experience in the alcohol production industry. Our senior executives have successfully navigated a wide variety of business and industry-specific challenges and deeply understand the business of successfully producing and marketing specialty alcohols and essential ingredients.
● The strategic location of our Midwest production facilities. We operate three distinct but integrated production facilities at our Pekin Campus in the Midwest. We are able to participate from that location in the largest regional specialty alcohol market in the United States as well as international markets. In addition:
● Our Midwest location enhances our overall hedging opportunities with a greater correlation to the highly-liquid physical and paper markets in Chicago.
● Our Midwest location provides excellent logistical access via rail, truck and barge. In particular, barge access via the Illinois River to the Mississippi River enables us to efficiently bring our products to international markets.
● The relatively unique wet milling process at one of our production facilities at our Pekin Campus allows us to extract the highest use and value from each component of the corn kernel. As a result, the wet milling process generates a higher level of cost recovery from corn than that produced at a dry mill.
● Our Midwest location allows us deep market insight and engagement in major fuel-grade ethanol and feed markets, thereby improving pricing opportunities.
We believe that these competitive strengths will help us attain our goal of expanding our business as a leading producer and marketer of specialty alcohols and essential ingredients.
Overview of Our Key Markets and Market Opportunity
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.
Health, Home & Beauty
Our products for the health, home and beauty markets include specialty alcohols used in mouthwash, cosmetics, pharmaceuticals, hand sanitizers, disinfectants and cleaners. We offer a variety of specialty alcohols for the health, home and beauty markets, depending on usage and regulatory requirements, including API-grade, United States Pharmacopeia, or USP, -grade ethyl alcohols, and industrial-grade ethyl alcohol.
In 2020 we expanded our range of available product offerings within the health, home and beauty markets through quality management systems certifications. We have ISO 9001, ICH Q7 and EXCiPACT certifications at a key production facility at our Pekin Campus, all of which are viewed as important attestations of quality control standards. In particular, our ICH Q7 certification qualifies our specialty alcohols for use as an API, and our EXCiPACT certification qualifies our specialty alcohols for use as an excipient in the pharmaceutical industry. These certifications enable us to offer products to a wider group of customers and generally at more profitable margins.
Food & Beverage
Our products for the food and beverage market include specialty alcohols used in alcoholic beverages, flavor extracts and vinegar as well as corn germ used for corn oils and carbon dioxide, or CO2, used for beverage carbonation and dry ice. The principal specialty alcohol we offer for alcoholic beverages and vinegar is our grain neutral spirits, or GNS, alcohol.
We believe the key drivers in the food and beverage market include consumer preferences for the social currency of brand authenticity and heritage; consumers seeking unique and personalized experiences; younger adults drawn to the caché of luxury brands, including super-premium spirits; improved consumer access to spirits products; the growth of craft distillers; and the ability to meet wide-ranging consumer preferences through a broad diversity of spirits categories and cocktails.
Essential Ingredients
Our essential ingredients products include dried yeast, corn gluten meal, corn gluten feed, and distillers grains and liquid feed used in commercial animal feed and pet foods. The raw materials for our essential ingredients products are generated as co-products from our production of alcohols. These co-products are further manufactured, altered and refined into our essential ingredients products, including for special customer applications.
Many of our essential ingredients are used in a variety of food products to affect their nutrition, including protein and fat content, as well as other product attributes such as taste, texture, palatability and stability. Our high quality and high purity manufacturing enable our customers to use some of our essential ingredients in human foods while others are used in pet foods and animal feed. See “-Overview of Distillers Grains Market”.
We expect the essential ingredients market to grow significantly due to global demand for higher-grade protein feed, such as feed used in fisheries and other applications.
Renewable Fuels
Our renewable fuels products include fuel-grade ethanol used as transportation fuel and distillers corn oil used as a biodiesel feedstock. Our renewable fuels business is supported by our own production of fuel-grade ethanol as well as fuel-grade ethanol produced by third parties.
Renewable fuels, primarily fuel-grade ethanol, are used for a variety of purposes, including as octane enhancers for premium gasoline and to enable refiners to produce greater quantities of lower octane blend stock; for fuel blending to extend fuel supplies and reduce reliance on crude oil and refined products; and to comply with a variety of governmental programs, in particular, the national Renewable Fuel Standard, or RFS, which was enacted to promote alternatives to fossil fuels. Under the RFS, the mandated use of all renewable fuels rises incrementally and peaks at 36.0 billion gallons by 2022, of which 15.0 billion gallons are required from conventional, or corn-based, ethanol. The RFS allows the Environmental Protection Agency, or EPA, to adjust the annual requirement based on certain facts and circumstances. See “-Governmental Regulation”.
According to the Renewable Fuels Association, the domestic fuel-grade ethanol industry produced 13.8 billion gallons of ethanol in 2020. According to the United States Department of Energy, total annual gasoline consumption in the United States is approximately 123.5 billion gallons and total annual fuel-grade ethanol consumption represented approximately 11% of this amount in 2020. We anticipate that increased transportation and economic activity as the coronavirus pandemic subsides together with continued limited opportunities for gasoline refinery expansions and the growing importance of reducing CO2 emissions through the use of renewable fuels will generate additional growth in the demand for fuel-grade ethanol.
Overview of Alcohol Production Process
Alcohol production from starch- or sugar-based feedstock is a highly-efficient process. Modern alcohol production requires large amounts of corn, or other high-starch grains, and water as well as chemicals, enzymes and yeast, and denaturants including unleaded gasoline or liquid natural gas, in addition to natural gas and electricity.
Dry Milling Process
In the dry milling process, corn or other high-starch grain is first ground into meal, then slurried with water to form a mash. Enzymes are added to the mash to convert the starch into dextrose, a simple sugar. Ammonia is added for acidic (pH) control and as a nutrient for the yeast. The mash is processed through a high temperature cooking procedure, which reduces bacteria levels prior to fermentation. The mash is then cooled and transferred to fermenters, where yeast is added and the conversion of sugar to alcohol and CO2 begins.
After fermentation, the resulting “beer” is transferred to distillation, where the alcohol is separated from the residual “stillage”. The resulting alcohol is concentrated to 190 proof using conventional distillation methods and then is dehydrated to approximately 200 proof, representing 100% alcohol levels, in a molecular sieve system. For fuel-grade ethanol, the resulting anhydrous alcohol is then blended with approximately 2.5% denaturant, which is usually gasoline, and is then ready for shipment to renewable fuels markets.
The residual stillage is separated into a coarse grain portion and a liquid portion through a centrifugation process. The soluble liquid portion is concentrated to about 40% dissolved solids by an evaporation process. This intermediate state is called condensed distillers solubles, or syrup. The coarse grain and syrup portions are then mixed to produce wet distillers grains, or WDG, or can be mixed and dried to produce dried distillers grains with solubles, or DDGS. Both WDG and DDGS are high-protein animal feed products.
Wet Milling Process
In the wet milling process, corn or other high-starch grain is first soaked or “steeped” in water for 24 - 48 hours to separate the grain into its many components. After steeping, the grain slurry is processed first to separate the grain germ, from which the grain oil can be further separated. The remaining fiber, gluten and starch components are further separated and sold.
The steeping liquor is concentrated in an evaporator. The concentrated product, called heavy steep water, is co-dried with the fiber component and is then sold as gluten feed. The gluten component is filtered and dried to produce gluten meal.
The starch and any remaining water from the mash is then processed into alcohol or dried and processed into corn syrup. The fermentation process for alcohol at this stage is similar to the dry milling process.
Overview of Distillers Grains Market
Distillers grains are produced as a co-product of alcohol production and are valuable components of feed rations primarily to dairies and beef cattle markets, both nationally and internationally. Our plants produce both WDG and DDGS. WDG is sold to customers proximate to the plants and DDGS is delivered by truck, rail and barge to customers in domestic and international markets. Producing WDG also allows us to use up to one-third less process energy, thus reducing production costs and lowering the carbon footprint of our production facilities.
Historically, the market price for distillers grains has generally tracked the value of corn. We believe that the market price of WDG and DDGS is determined by a number of factors, including the market value of corn, soybean meal and other competitive ingredients, the performance or value of WDG and DDGS in a particular feed formulation and general market forces of supply and demand, including export markets for these co-products. The market price of distillers grains is also often influenced by nutritional models that calculate the feed value of distillers grains by nutritional content, as well as reliability of consistent supply.
Customers
We market and sell through our wholly-owned subsidiary, Kinergy Marketing LLC, or Kinergy, all of the alcohols we produce. Kinergy also markets fuel-grade ethanol produced by third parties. We market and sell through our wholly-owned subsidiary, Alto Nutrients, LLC, all of the essential ingredients we produce.
We have extensive and long-standing customer relationships, both domestic and international, for our specialty alcohols and essential ingredients. These customers include producers and distributors of ingredients for cosmetics, sanitizers and related products, distilled spirits producers, food products manufacturers, producers of personal health/consumer health and personal care hygiene products, and global trading firms.
Our fuel-grade ethanol customers are located throughout the Western and Midwestern United States and consist of integrated oil companies and gasoline marketers who blend fuel-grade ethanol into gasoline. Our customers depend on us to provide a reliable supply of fuel-grade ethanol and manage the logistics and timing of delivery with very little effort on their part. Our customers collectively require fuel-grade ethanol volumes in excess of the supplies we produce at our facilities. We secure additional fuel-grade ethanol supplies from third-party fuel-grade ethanol plants in California and other third-party suppliers in the Midwest where a majority of fuel-grade ethanol producers are located. We arrange for transportation, storage and delivery of fuel-grade ethanol purchased by our customers through our agreements with third-party service providers in the Western United States as well as in the Midwest from a variety of sources.
We market our essential ingredient feed products to dairies and feedlots, in many cases located near our production facilities. These customers use our feed products for livestock as a substitute for corn and other sources of starch and protein. We sell our corn oil to poultry and biodiesel customers. We do not market essential ingredients from other producers.
Our Pekin Campus production segment generated $330.4 million and $343.6 million in net sales for the years ended December 31, 2020 and 2019, respectively, from the sale of alcohols. Our Pekin Campus production segment generated $130.3 million and $139.0 million in net sales for the years ended December 31, 2020 and 2019, respectively, from the sale of essential ingredients.
During 2020 and 2019, our Pekin Campus production segment sold an aggregate of approximately 193.9 million and 218.5 million gallons of alcohols and 829,000 and 913,000 tons of essential ingredients, respectively, on a dry matter basis.
Our other production segment generated $137.7 million and $455.3 million in net sales for the years ended December 31, 2020 and 2019, respectively, from the sale of alcohols. Our other production segment generated $40.9 million and $130.0 million in net sales for the years ended December 31, 2020 and 2019, respectively, from the sale of essential ingredients.
During 2020 and 2019, our other production segment sold an aggregate of approximately 78.0 million and 272.5 million gallons of alcohols and 619,000 and 1,908,000 tons of essential ingredients, respectively, on a dry matter basis.
Our marketing segment generated $257.7 million and $356.9 million in net sales for the years ended December 31, 2020 and 2019, respectively, from the sale of alcohols.
During 2020 and 2019, we produced or purchased from third parties and resold an aggregate of 536.3 million and 819.4 million gallons of alcohols to approximately 65 and 109 customers, respectively. For 2020 and 2019, sales to our two largest customers, Chevron Products USA and Valero Energy Corporation represented an aggregate of approximately 14% and 24%, of our net sales, respectively. For 2020 and 2019, sales to each of our other customers represented less than 10% of our net sales.
Suppliers
Production Segments
Our production operations depend upon various raw materials suppliers, including suppliers of corn, natural gas, electricity and water. The cost of corn is the most important variable cost associated with our alcohol production. We source corn for our plants using standard contracts, including spot purchase, forward purchase and basis contracts. When resources are available, we seek to limit the exposure of our production operations to raw material price fluctuations by purchasing forward a portion of our corn requirements on a fixed price basis and by purchasing corn and other raw materials futures contracts.
During 2020 and 2019, purchases of corn from our two largest suppliers represented an aggregate of approximately 25% and 40% of our total corn purchases, respectively, for those periods. Purchases from each of our other corn suppliers represented less than 10% of total corn purchases in each of 2020 and 2019.
Marketing Segment
Our marketing operations cover alcohols and essential ingredients we produce but also depend upon various third-party producers of fuel-grade ethanol. In addition, we provide transportation, storage and delivery services through third-party service providers with whom we have contracted to receive fuel-grade ethanol at agreed upon locations from our third-party suppliers and to store and/or deliver the ethanol to agreed-upon locations on behalf of our customers. These contracts generally run from year-to-year, subject to termination by either party upon advance written notice before the end of the then current annual term.
During 2020 and 2019, we purchased and resold from third parties an aggregate of approximately 163 million and 213 million gallons, respectively, of fuel-grade ethanol.
During 2020 and 2019, purchases of fuel-grade ethanol from our two largest third-party suppliers represented 54% and 35%, respectively, of our total third-party ethanol purchases for each of those periods. Purchases from each of our other third-party ethanol suppliers represented less than 10% of total third-party ethanol purchases in each of 2020 and 2019.
Production Facilities
We operate seven production facilities. Three of our production facilities are located in the Midwestern state of Illinois and four of our facilities are located in the Western states of California, Oregon and Idaho. We have a combined annual alcohol production capacity of 450 million gallons. Our Magic Valley, Stockton and Madera 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. The tables below provide an overview of our seven production facilities.
Pekin Campus Production Facilities
Pekin
Wet Facility Pekin
Dry Facility Pekin
ICP Facility
Location	 Pekin, IL Pekin, IL Pekin, IL
Operating status	 Operating Operating Operating
Approximate maximum annual alcohol production capacity (in millions of gallons)	
Approximate maximum annual specialty alcohol production capacity (in millions of gallons)* -
Production milling process Wet Dry Dry
Primary energy source	 Natural Gas Natural Gas Natural Gas
* Included in approximate maximum annual alcohol production capacity.
Western Production Facilities
Madera
Facility Columbia
Facility Magic Valley
Facility Stockton
Facility
Location	 Madera, CA Boardman, OR Burley, ID Stockton, CA
Operating status	 Idled Operating Idled Idled
Approximate maximum annual fuel-grade ethanol production capacity (in millions of gallons)	 60
Production milling process Dry Dry Dry Dry
Primary energy source	 Natural Gas Natural Gas Natural Gas Natural Gas
Commodity Risk Management
We employ various risk mitigation techniques. For example, we may seek to mitigate our exposure to commodity price fluctuations by purchasing forward a portion of our corn and natural gas requirements through fixed-price or variable-price contracts with our suppliers, as well as entering into derivative contracts for fuel-grade ethanol, corn and natural gas. To mitigate fuel-grade ethanol inventory price risks, we may sell a portion of our production forward under fixed- or index-price contracts, or both. We may hedge a portion of the price risks by selling exchange-traded futures contracts. Proper execution of these risk mitigation strategies can reduce the volatility of our gross profit margins.
Specialty alcohols have relatively low price volatility and are usually priced at significant premiums to fuel-grade ethanol. The market price of fuel-grade ethanol is volatile, however, and subject to large fluctuations. Given the nature of our business, we cannot effectively hedge against extreme volatility or certain market conditions. For example, fuel-grade ethanol prices, as reported by the Chicago Board of Trade, or CBOT, ranged from $0.81 to $1.62 per gallon during 2020 and from $1.25 to $1.70 per gallon during 2019; and corn prices, as reported by the CBOT, ranged from $3.03 to $4.84 per bushel during 2020 and from $3.41 to $4.55 per bushel during 2019.
Marketing Arrangements
We market all the alcohols and essential ingredients produced at our facilities. In addition, we have exclusive fuel-grade ethanol marketing arrangements with two third-party ethanol producers, Calgren Renewable Fuels, LLC and Aemetis Advanced Fuels Keyes, Inc., to market and sell their entire fuel-grade ethanol production volumes. Calgren Renewable Fuels, LLC owns and operates a fuel-grade ethanol production facility in Pixley, California with annual production capacity of 55 million gallons. Aemetis Advanced Fuels Keyes, Inc. owns and operates a fuel-grade ethanol production facility in Keyes, California with annual production capacity of 60 million gallons.
Competition
We are the largest producer of specialty alcohols in the United States based on annualized volumes.
Other significant producers of specialty alcohols in the United States are Archer-Daniels-Midland Company, MGP Ingredients, Inc., Grain Processing Corporation, CIE and Greenfield Global Inc., which collectively make up a significant majority of the total installed specialty alcohol production capacity in the United States along with many smaller producers.
The largest producers of fuel-grade ethanol in the United States are POET, LLC, Valero Renewable Fuels Company, LLC, Archer-Daniels-Midland Company, Green Plains Inc. and Flint Hills Resources, collectively with approximately 41% of the total installed fuel-grade ethanol production capacity in the United States. In addition, there are many mid-sized fuel-grade ethanol producers with several plants under ownership, smaller producers with one or two plants, and several fuel-grade ethanol marketers that create significant competition. Overall, we believe there are over 200 fuel-grade ethanol production facilities in the United States with a total installed production capacity of approximately 17.4 billion gallons and many brokers and marketers with whom we compete for sales of fuel-grade ethanol and its co-products.
Our fuel-grade ethanol also competes on a global market against production from other countries, such as Brazil, which may have lower production costs than United States producers. Lower feedstock input costs such as sugarcane used in Brazil as compared to corn used in the Unites States may give foreign producers a competitive advantage. In addition, fuel-grade ethanol from sugarcane feedstock qualifies as an advanced biofuel, unlike corn ethanol, allowing required parties to economically satisfy an advanced biofuel standard. Moreover, new products and production technologies are under continuous development, many of which, if adopted by competitors, could harm ability to compete.
We believe that our competitive strengths include our customer and supplier relationships, the barriers to entry to our most profitable lines of business-including our modern technologies at our production facilities-our experienced management, and the strategic location of our Midwest production facilities. We believe that these advantages will help us to attain our goal to expand our business as a leading producer and marketer of specialty alcohols and essential ingredients. See “-Competitive Strengths”.
Governmental Regulation
Our business is subject to a wide range of federal, state and local laws and regulations directed at protecting public health and the environment, including those promulgated by the Occupational Safety and Health Administration, or OSHA, the U.S. Food and Drug Administration, or FDA, the EPA, and numerous state and local authorities. These laws, their underlying regulatory requirements and their potential enforcement, some of which are described below, impact, or may impact, nearly every aspect of our operations, including our production of alcohols (including distillation), our production of essential ingredients, our storage facilities, and our water usage, waste water discharge, disposal of hazardous wastes and emissions, and other matters pertaining to our existing and proposed business by imposing:
● restrictions on our existing and proposed operations and/or the need to install enhanced or additional controls;
● special requirements applicable to food and drug additives;
● the need to obtain and comply with permits and authorizations;
● liability for exceeding applicable permit limits or legal requirements, in some cases for the remediation of contaminated soil and groundwater at our production facilities, contiguous and adjacent properties and other properties owned and/or operated by third parties; and
● other specifications for the specialty alcohols and essential ingredients we produce and market.
In addition, some governmental regulations are helpful to our production and marketing business. The fuel-grade ethanol industry in particular is supported by federal and state mandates and environmental regulations that favor the use of fuel-grade ethanol in motor fuel blends in North America. Some of the governmental regulations applicable to our production and marketing business are briefly described below.
Food and Drug Regulation
Our products for the Health, Home & Beauty, Food & Beverage and some Essential Ingredients markets are subject to regulation by the FDA as well as similar state agencies. Under the Federal Food, Drug, and Cosmetic Act, or FDCA, the FDA regulates the processing, formulation, safety, manufacture, packaging, labeling and distribution of food ingredients, vitamins and cosmetics. Many of the FDA’s and FDCA’s rules and regulations apply directly to us as well as indirectly through their application in our customers’ products. To be properly marketed and sold in the United States, a relevant product must be generally recognized as safe, approved and not adulterated or misbranded under the FDCA and relevant regulations issued under the FDCA. The FDA has broad authority to enforce the provisions of the FDCA. Failure to comply with the laws and regulations of the FDA or similar state agencies could prevent us from selling certain of our products or subject us to liability.
Renewable Fuels Energy Legislation
Under the RFS, the mandated use of all renewable fuels, including fuel-grade ethanol, rises incrementally and peaks at 36.0 billion gallons by 2022, of which 15.0 billion gallons are required from conventional, or corn-based, ethanol. Under the provisions of the Energy Independence and Security Act of 2007, the EPA has the authority to waive the mandated RFS requirements in whole or in part. To grant a waiver, the EPA administrator must determine, in consultation with the Secretaries of Agriculture and Energy, that there is inadequate domestic renewable fuel supply or implementation of the requirement would severely harm the economy or environment of a state, region or the United States as a whole.
Various 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, or 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.
The EPA has allowed fuel and fuel-additive manufacturers to introduce into commercial gasoline that contains greater than 10% fuel-grade ethanol by volume, up to 15% fuel-grade ethanol by volume, or E15, for vehicles from model year 2001 and beyond. Commercial sale of E15 has begun in a majority of states, and the EPA has enacted a rule allowing for year-round use of E15.
Various states including California, Oregon and Washington, and other regions such as the Canadian province of British Columbia, have implemented low-carbon fuel standards focused on reducing the carbon intensity of transportation fuels. Blending fuel-grade ethanol into gasoline is one of the primary means of attaining these goals.
Additional Environmental Regulations
In addition to the governmental regulations applicable to the alcohol production and marketing industry described above, our business is subject to additional federal, state and local environmental regulations, including regulations established by the EPA and state regulatory agencies related to water quality and air pollution control. We cannot predict the manner or extent to which these regulations will harm or help our business or the alcohol production and marketing industry in general.
Employees
As of March 25, 2021, we had approximately 370 employees, including 369 full-time employees. We believe that our employees are highly-skilled, and our success will depend in part upon our ability to retain our employees and attract new qualified employees, many of whom are in great demand. Approximately 51% of our employees are presently represented by a labor union and covered by a collective bargaining agreement. We have never had a work stoppage or strike and we consider our relations with our employees to be good.

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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 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 materially and adversely affect our business, results of operations and liquidity.
The coronavirus pandemic has resulted in businesses suspending or substantially curtailing 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, experienced significant price declines and reduced demand. A further or extended ongoing downturn in global economic activity, or recessionary conditions in general, would likely lead to poor demand for, and negatively affect the prices of, fuel-grade ethanol, materially and adversely affecting our business, results of operations and liquidity.
Furthermore, to protect 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 affect our sales and marketing efforts, delay and lengthen our sales cycles, or create operational or other challenges, any of which could harm our business 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.
Our specialty alcohols business has benefitted significantly from the coronavirus pandemic due to a 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 the coronavirus pandemic and any 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, results of operations and liquidity.
Our results of operations and our ability to operate at a profit are largely dependent on our ability to manage the costs of corn, natural gas and other production inputs, with the prices of our alcohols and essential ingredients, all of which are subject to volatility and uncertainty.
Our results of operations are highly impacted by commodity prices, including the cost of corn, natural gas and other production inputs that we must purchase, and the prices of alcohols and essential 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 throughout the world.
Price volatility of corn, natural gas and other production inputs, and alcohols and essential ingredients, may cause our results of operations to fluctuate substantially. We 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 consumer products. Our customers may not pay us timely or at 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 high price 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, and 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 all of our facilities.
In 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 of third-party marketing arrangements 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.
We can provide no assurance that corn, natural gas or other production inputs can be purchased at or near current or any particular prices, or that our alcohols or essential 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 prices of corn, natural gas and other production inputs or decreases in the prices of our alcohols and essential ingredients.
Increased alcohol or essential ingredient production or higher inventory levels may cause a decline in prices for those products, and may have other negative effects, adversely impacting our results of operations, cash flows and financial condition.
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 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 production 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. Increases in the supply of alcohols and essential ingredients may not be commensurate with increases in demand for alcohols and essential ingredients, thus leading to lower prices. Moreover, higher industry production levels in response to the coronavirus pandemic and any resulting oversupply of alcohols for sanitizers and disinfectants, and corresponding oversupply of 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 prices of our products are volatile and subject to large fluctuations, which may cause our results of operations to fluctuate significantly.
The prices of our products are volatile and subject to large fluctuations. For 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. 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 $1.62 per gallon in 2020 and from $1.25 to $1.70 per gallon in 2019. In addition, even under longer-term, fixed-price contracts for our specialty alcohols, our customers may seek to renegotiate prices under those contracts during periods of falling prices or high price volatility. Fluctuations in the prices of our products may cause our results of operations to fluctuate significantly.
Disruptions in our production or distribution 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 production facilities and other considerations related to production efficiencies, our facilities depend on just-in-time delivery of corn. The production of 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 fail to reliably supply the water, electricity and natural gas that our production facilities need or may fail 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 facilities located in the Midwest is transported to market. In addition, we recently 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, whether caused by labor difficulties, 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 production facilities, any of which could have a material adverse effect on our business, results of operations and financial condition.
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 our product prices, in particular fuel-grade ethanol, corn and natural gas costs, we may enter into contracts to fix the price of a portion of our 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 hedging activities and fluctuations in the price of corn, natural gas, fuel-grade ethanol and unleaded gasoline may adversely affect our results of operations, financial condition and liquidity.
The 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 expense.
The industries in which we operate are extremely competitive. Many of our significant competitors have substantially greater production and financial resources than we do. 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 facility maintenance. We may fail to anticipate or respond adequately to new industry developments and other competitive pressures due to our limited resources relative to many significant competitors. 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, 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 prices 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 motors, pumps, pipes and electrical parts. In addition, our production facilities require periodic shutdowns to perform major maintenance and upgrades. These scheduled shutdowns result in lower sales and increased costs in the periods during 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 shutdown.
Risks Related to our Finances
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 years ended December 31, 2020 and 2019, we incurred consolidated net losses of approximately $17.3 million and $101.3 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 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 operations.
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 and 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 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.
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 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 would 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 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 vehicle fuel economy. Lower demand for fuel-grade ethanol and co-products would reduce the value of our ethanol and related products, erode our overall margins and diminish our ability to generate revenue or to operate profitably. In addition, we believe that consumer acceptance of E15 and E85 fuels is necessary before fuel-grade ethanol can achieve any significant growth in market share relative to other transportation fuels.
The United States fuel-grade ethanol industry is highly dependent upon various federal and state laws and any changes in those laws could have a material adverse effect on our results of operations, cash flows and financial condition.
The EPA has implemented the RFS under 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 largely depend 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.
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 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.
Various 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, or 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 condition could be adversely impacted if any legislation is enacted that reduces the 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 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 production 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.
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 will likely result in increased future investments for environmental controls at our 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 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.
Risks Related to Ownership of our Common Stock
Future sales of substantial amounts of our common stock, or perceptions that those sales could occur, could adversely affect the market price of our common stock and our ability to raise capital.
Future sales of substantial amounts of our common stock into the public market, including up to 8.9 million shares of our 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 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:
● fluctuations in the market prices of our products;
● fluctuations in the costs of key production input 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 financial condition and results of operations;
● changes in market valuations of companies similar to us;
● stock market price and volume fluctuations generally;
● regulatory developments or increased enforcement;
● fluctuations in our quarterly or annual operating results;
● additions or departures of key personnel;
● our ability to obtain any necessary financing;
● our financing activities and future sales of our common stock or other securities; and
● our ability to maintain contracts that are critical to our operations.
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. See “Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Dividend Policy”.
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.
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.
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.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
We have received no written comments regarding our periodic or current reports from the staff of the Securities and Exchange Commission that were issued 180 days or more preceding the end of our 2020 fiscal year and that remain unresolved.

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ITEM 2. PROPERTIES
Item 2. Properties.
Our corporate headquarters, located in Pekin, Illinois, consists of plants and facilities totaling 145 acres on land we own. In Sacramento, California, we lease office space totaling 10,000 square feet under a lease expiring in 2029. We have plants located in Madera, California, at a 137 acre facility; Boardman, Oregon, at a 25 acre facility; Burley, Idaho, at a 25 acre facility; and Stockton, California, at a 30 acre facility. We own the land in Madera, California and Burley, Idaho. The land in Boardman, Oregon and Stockton, California are leased under leases expiring in 2026 and 2022, respectively. We also own an idled ethanol production facility in Canton, Illinois on a 110 acre facility, of which a significant portion is farmland. Our production segments include our ethanol production facilities. See “Business-Production Facilities”.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. 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.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5.	Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock trades on The Nasdaq Capital Market under the symbol “ALTO”. Prior to February 1, 2021, our common stock traded on The Nasdaq Capital Market under the symbol “PEIX”. We also have non-voting common stock outstanding which is not listed on an exchange.
Security Holders
As of March 25, 2021, we had 73,167,785 shares of common stock outstanding held of record by approximately 290 stockholders and 896 shares of non-voting common stock outstanding held of record by one stockholder. These holders of record include depositories that hold shares of stock for brokerage firms which, in turn, hold shares of stock for numerous beneficial owners. On March 25, 2021, the closing sales price of our common stock on The Nasdaq Capital Market was $5.36 per share.
Dividend Policy
We have never paid cash dividends on our common stock and do not intend to pay cash dividends on our common stock in the foreseeable future. We anticipate that we will retain any earnings for use in the continued development of our business.
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. Further, the holders of our outstanding Series B Preferred Stock are entitled to dividends of 7% per annum, payable quarterly in arrears. For the first nine months of 2019, we declared and paid in cash dividends on our outstanding shares of Series B Preferred Stock as they became due; however, for the fourth quarter of 2019, and for all of 2020, we accrued but did not declare or pay cash dividends under an agreement with the holders of our Series B Preferred Stock in an effort to preserve liquidity. 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.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6.	Selected Financial Data.
Not Applicable.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report. This discussion contains forward-looking statements, reflecting our plans and objectives that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors” and elsewhere in this report.
Overview
We are a leading producer and marketer of specialty alcohols and essential ingredients, and the largest producer of specialty alcohols in the United States based on annualized volumes.
We operate seven alcohol production facilities. Three of our production facilities are located in the Midwestern state of Illinois and four of our facilities are located in the Western states of California, Oregon and Idaho. We have an annual alcohol production capacity of 450 million gallons. We market all of the alcohols produced at our facilities as well as fuel-grade ethanol produced by third parties. In 2020, we marketed over 500 million gallons combined of our own alcohols as well as fuel-grade ethanol produced by third parties, and nearly 1.5 million tons of essential ingredients on a dry matter basis. Our business consists of three reportable segments: two production segments and a marketing segment.
Our mission is to expand our business as a leading producer and marketer of specialty alcohols and essential ingredients. We intend to accomplish this goal in part by investing in our specialized and higher value specialty alcohol production and distribution infrastructure, expanding production in high-demand essential ingredients, expanding and extending the sale of our products into new regional and international markets, building efficiencies and economies of scale and by capturing a greater portion of the value stream.
Production Segments
We produce specialty alcohols, fuel-grade ethanol and essential ingredients, focusing on four key markets: Health, Home & Beauty; Food & Beverage; Essential Ingredients; and Renewable Fuels. Products for the Health, Home & Beauty market include specialty alcohols used in mouthwash, cosmetics, pharmaceuticals, hand sanitizers, disinfectants and cleaners. Products for the Food & Beverage markets include grain neutral spirits used in alcoholic beverages and vinegar as well as corn germ used for corn oils. Products for Essential Ingredients markets include yeast, corn gluten and distillers grains used in commercial animal feed and pet foods. Our Renewable Fuels products include fuel-grade ethanol and distillers corn oil used as a feedstock for renewable diesel fuel.
We produce our alcohols and essential ingredients at our production facilities described below. Our production facilities located in the Midwest are in the heart of the Corn Belt, benefit from low-cost and abundant feedstock and enjoy logistical advantages that enable us to provide our products to both domestic and international markets via truck, rail or barge. Our production facilities located on the West Coast are near their respective fuel and feed customers, offering significant timing, transportation cost and logistical advantages.
We are currently operating at approximately 64% of our estimated maximum annual production capacity. Our Magic Valley, Stockton and Madera facilities are currently idled. As market conditions change, we may increase, decrease or idle production at one or more operating facilities or resume operations at any idled facility.
Annual Production Capacity
(estimated, in gallons)
Production Facility Location Fuel-Grade Ethanol Specialty Alcohol
Pekin Campus Pekin, IL 110,000,000 140,000,000
Magic Valley Burley, ID 60,000,000 -
Columbia Boardman, OR 40,000,000 -
Stockton Stockton, CA 60,000,000 -
Madera Madera, CA 40,000,000 -
Marketing Segment
We market all of the alcohols and essential ingredients we produce at our facilities. We also market fuel-grade ethanol produced by third parties.
We have extensive and long-standing customer relationships, both domestic and international, for our specialty alcohols and essential ingredients. These customers include producers and distributors of ingredients for cosmetics, sanitizers and related products, distilled spirits producers, food products manufacturers, producers of personal health/consumer health and personal care hygiene products, and global trading firms.
Our fuel-grade ethanol customers are located throughout the Western and Midwestern United States and consist of integrated oil companies and gasoline marketers who blend fuel-grade ethanol into gasoline. Our customers depend on us to provide a reliable supply of fuel-grade ethanol and manage the logistics and timing of delivery with very little effort on their part. Our customers collectively require fuel-grade ethanol volumes in excess of the supplies we produce at our facilities. We secure additional fuel-grade ethanol supplies from third-party fuel-grade ethanol plants in California and other third-party suppliers in the Midwest where a majority of fuel-grade ethanol producers are located. We arrange for transportation, storage and delivery of fuel-grade ethanol purchased by our customers through our agreements with third-party service providers in the Western United States as well as in the Midwest from a variety of sources.
We market our essential ingredient feed products to dairies and feedlots, in many cases located near our production facilities. These customers use our feed products for livestock as a substitute for corn and other sources of starch and protein. We sell our corn oil to poultry and biodiesel customers. We do not market essential ingredients from other producers.
See “Note 4 - Segments” to our Notes to Consolidated Financial Statements included elsewhere in this report for financial information about our business segments.
Current Initiatives and Outlook
Last year was a transformative year. We started 2020 with 605 million gallons of annual production capacity, of which approximately 85 million gallons, or 14%, was specialty alcohols and the balance was fuel-grade ethanol. While our long-standing specialty alcohols business has been profitable, those favorable results were obscured in recent years by a challenging renewable fuels business environment and related operating losses. In 2020, we reduced fuel-grade ethanol production capacity by 55% through a combination of idling unprofitable facilities and selling underperforming production assets.
We maximized production of specialty alcohols at our Pekin Campus where spot demand for those products grew rapidly due to the coronavirus pandemic. We first expanded specialty alcohol production capacity to 110 million gallons annually in 2020 and then, by refurbishing our grain neutral spirits system, further increased specialty alcohol production capacity to 140 million gallons annually in early 2021.
We are now the largest producer of specialty alcohols in the United States based on annualized volumes. We currently have 450 million gallons of annual production capacity, of which approximately 140 million gallons, or 31%, is specialty alcohols and the balance is fuel-grade ethanol. We are currently operating production facilities with 290 million gallons of annual capacity, of which nearly 50% is specialty alcohols. All of our operating facilities are running at break-even or better on an earnings before interest, taxes, depreciation and amortization basis.
In 2020, we sold assets and generated substantial cash flow from operations. We also completed an equity capital raise in the fourth quarter. These results provided funds for substantial repayments of debt, reducing our interest expense, strengthening our balance sheet and positioning us for growth opportunities. We also announced a corporate rebranding and changed our name to Alto Ingredients, Inc., which reflects our goal to deliver the highest levels of integrity, purity, and quality to create greater value for our customers, partners and shareholders.
Strong demand for hand sanitizer contributed to our results for 2020, but in the fourth quarter, and through the first quarter of 2021, abundant supplies tempered prices. In response, we focused our efforts on strengthening our sales in product lines other than sanitizers by working with dominant, name brand consumer product leaders. Our product mix is well-diversified with over 90% of our contracted volumes sold to major producers of food and beverage and home and beauty products, while only 10% of our contracted volumes are for sanitizers. While demand for sanitizer has returned to pre-pandemic levels, we expect demand resurgence and firmer pricing as restaurants, arenas, theaters, offices, stadiums and other public places reopen. In addition, we expect that higher quality sanitizers utilizing USP-grade alcohol will replace low-quality sanitizer inventories. We believe we are well positioned to support customer needs for USP, API and beverage-grade specialty alcohols for 2021 and beyond and to provide quality products for consumer goods and sanitizers as needed.
We have contracted approximately 65% of the 110 million gallons of specialty alcohol production capacity available during last fall’s contracting cycle, or 50% of our now expanded annual production capacity of 140 million gallons of specialty alcohols. This represents a significant increase in both total gallons contracted and our average price as compared to our 2020 contracts negotiated in the fall 2019 contracting cycle. This also reflects reductions we made to address the current dynamics in the market for sanitizers. We are working with our customers to facilitate the blending and extending of contracted volumes for sanitizer products into 2022 and 2023 if consumer demand is less than anticipated.
Aside from the many other variables in our business, including the sale of fuel-grade ethanol and our uncontracted specialty alcohols, we expect our existing contracted specialty alcohol sales to contribute at least $60.0 million dollars in gross profit for 2021. Many variables could materially impact our results, including export conditions, the ability of our customers to take all of their contracted volumes for 2021, market demand for sanitizers and disinfectants, our ability to timely sell our Stockton and Madera, California production facilities, and fuel-grade ethanol crush margins, which year-to-date are running at negative 25 cents per gallon, compared to negative 11 cents per gallon in the first quarter of 2020. We expect that as businesses reopen and travel resumes, fuel-grade ethanol margins will improve, with each 5 cent increase in crush margins improving earnings before interest, taxes, depreciation and amortization by $5.0 million.
We are producing a wide selection of essential ingredients products such as corn meal and feed, corn germ, and yeast for use in human and pet foods. We produce most of these higher value and higher margin ingredients at our Pekin Campus wet mill, generating co-product returns in excess of 54% and lifting our average co-product return across all operating facilities to around 44%. Some of our highest quality essential ingredients products are sold under fixed-price, one-year or longer contracts to name brand companies.
We will continue to produce fuel-grade ethanol to support our specialty alcohol production and to capitalize on ethanol’s beneficial low-carbon characteristics integral to the ultimate decarbonization of the environment. We remain optimistic over industry discussions around carbon reduction. That said, fuel-grade ethanol margins remain depressed, especially for our Western operations. In light of these conditions, we have decided to sell our Stockton and Madera, California fuel-grade ethanol production facilities, both of which are currently idled. We came to this decision after considering all reasonable alternatives and how and where to best deploy our resources. Sales of these production assets, if they occur, will further strengthen our balance sheet and improve profitability by eliminating the fixed carrying costs from idled assets.
We are focused on a number of longer term opportunities. As previously reported, we have worked diligently and collaboratively with key customers to obtain three critical certifications for specialty alcohol production at our ICP production facility at our Pekin Campus, specifically, ISO 9001, the world’s most widely recognized quality management system certification; ICH Q7, which sets forth good manufacturing practices for active pharmaceutical ingredients; and EXCiPACT, which sets standards for excipient safety and quality. These certifications support further market penetration of our specialty alcohols, both domestically and internationally, for applications that require the highest quality products. Most of our specialty alcohol products for these applications are contracted under fixed terms each fall for the following year. We plan to continue to expand our market share within the health, home and beauty and food and beverage markets to sell our increased specialty alcohol production at favorable prices.
In addition, we are in the process of increasing our yeast facility’s annual production capacity by approximately 15%. We remain on schedule and within budget to complete this expansion by the third quarter of 2021. This project entails a relatively low capital investment of $5.5 million and we expect payback in less than two years, or over $3.0 million annually in earnings before interest, taxes, depreciation and amortization. We will also have the ability to further expand production of even higher value yeast derivatives with similar payback profiles.
We have earmarked an additional $14.0 million for various other projects we expect will expand revenue, increase efficiencies or improve plant reliability. For example, an upgrade of our feed dryers at our Pekin Campus, a $3.5 million dollar enhancement, will produce even higher value feed, improve overall plant efficiency and reliability and increase annual earnings before interest, taxes, depreciation and amortization by an estimated $1.4 million dollars beginning in the fourth quarter of 2021.
Finally, as recently mentioned in congressional subcommittee hearings on climate change, our Pekin Campus sits on the Mt. Simon sandstone formation, considered one of the most significant potential carbon storage resources in the United States. As a member of the Carbon Capture Coalition, we are actively engaged in discussions to develop a carbon capture and sequestration program at our Pekin site and expect to be an active player in the carbon capture space. We also have additional projects under development with attractive return profiles.
We have transformed our company to build a foundation based on consumer demand. We have suspended and sought to minimize the impact of unprofitable operations and reduced operating and overhead expenses. That said, our transformation is not yet complete. Given our significantly improved balance sheet we are actively exploring and developing new build or buy opportunities to grow and expand our business to further increase revenues and profitability while controlling expenses.
2020 Financial Performance Summary
Summary
Our consolidated net sales declined to $0.9 billion for 2020 compared to $1.4 billion for 2019. Our net loss available to common stockholders decreased by $73.8 million from $90.2 million for 2019 to $16.4 million for 2020.
Factors that contributed to our results of operations for 2020 include:
● Net sales. Our net sales for 2020 declined by $0.5 billion, or 37%, to $0.9 billion for 2020 from $1.4 billion for 2019 as a result of a decrease in total alcohol gallons sold, partially offset by an increase in our average sales price per gallon. Our total gallons sold declined by 283 million gallons, or 35%, to 536 million gallons for 2020 from 819 million gallons for 2019. Our production sales volume declined by 219 million gallons, or 45%, to 272 million gallons for 2020 from 491 million gallons for 2019. These declines are due primarily to the negative effects of the coronavirus pandemic on the demand for transportation fuels and fuel-grade ethanol. In response, we reduced production and idled fuel-grade ethanol production facilities. Moreover, we completed the sale of our two fuel-grade ethanol production facilities in Nebraska in April 2020, resulting in no further sales volumes from those facilities. Our third-party sales volume declined by 64 million gallons, or 20%, to 264 million gallons for 2020 from 328 million gallons for 2019. We intentionally reduced sales of third-party fuel-grade ethanol to focus on sales of inventory from our own production. The above declines and challenges were partially offset by robust demand for our specialty alcohols used in sanitizers and disinfectants as a result of the coronavirus pandemic.
● Gross Profit (loss). Our gross profit (loss) improved by $62.8 million to a gross profit of $52.9 million for 2020 from a gross loss of $9.9 million for 2019 as a result of substantially higher margins due to strong demand for our specialty alcohols used in sanitizers and disinfectants as a result of the coronavirus pandemic. We also idled or sold unprofitable fuel-grade ethanol production facilities, substantially reducing costs in a challenging market environment.
● Asset impairments. We have evaluated for impairment our production facilities located in the Western United States, including our plan to sell our Madera and Stockton facilities, and as such we recognized an aggregate impairment charge of $24.4 million.
Sales and Margins
We generate sales by marketing all of the alcohols produced by our production facilities, all of the fuel-grade ethanol produced by two other production facilities in the Western United States and fuel-grade ethanol purchased from other third-party suppliers throughout the United States. We also market essential ingredients produced by our production facilities, including dried yeast, corn gluten meal, corn gluten feed, and distillers grains and liquid feed used in commercial animal feed and pet foods.
Our profitability is highly dependent on various commodity prices, including the market prices of corn, natural gas and fuel-grade ethanol.
Our consolidated average alcohol sales price increased by 1.2% to $1.63 per gallon for 2020 compared to $1.61 per gallon for 2019. The average price of fuel-grade ethanol as reported by the Chicago Board of Options Trade, or CBOT, decreased 10.1% to $1.25 per gallon for 2020 compared to $1.39 per gallon for 2019. Our average cost of corn decreased 9.9% to $3.84 per bushel for 2020 from $4.26 per bushel for 2019. The average price of corn as reported by the CBOT decreased 5.2% to $3.63 per bushel for 2020 from $3.83 per bushel for 2019.
We believe that our gross profit margins depend primarily on six key factors:
● the prices of our specialty alcohols and the market price of fuel-grade ethanol, the latter of which is impacted by the price of gasoline and related petroleum products, and government regulation, including government ethanol mandates;
● the market price of key production input commodities, including corn and natural gas;
● the prices of our essential ingredients;
● our ability to anticipate trends in the prices of our alcohols, essential ingredients, and key input commodities, and our ability to implement appropriate risk management and opportunistic pricing strategies;
● the proportion of our sales of specialty alcohols to our sales of fuel-grade ethanol produced at our facilities; and
● the proportion of our sales of fuel-grade ethanol produced at our facilities to our sales of fuel-grade ethanol produced by unrelated third-parties.
We seek to optimize our gross profit margins by anticipating the factors above and, when resources are available, implementing hedging transactions and taking other actions designed to limit risk and address these factors. For example, we may seek to reduce inventory levels in anticipation of declining alcohol or essential ingredient prices and increase production and inventory levels in anticipation of rising alcohol or essential ingredient prices. We may also seek to alter our proportion or timing, or both, of purchase and sales commitments.
Our limited resources to act upon the anticipated factors described above and/or our inability to anticipate these factors or their relative importance, and adverse movements in the factors themselves, could result in declining or even negative gross profit margins over certain periods of time. Our ability to anticipate these factors or favorable movements in these factors may enable us to generate above-average gross profit margins. However, given the difficulty associated with successfully forecasting any of these factors, we are unable to estimate our future gross profit margins.
Results of Operations
Selected Financial Information
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:
Years Ended December 31, Percentage
Change
2020 vs 2019
Production gallons sold (in millions) 271.9 491.0 (44.6 )%
Third-party gallons sold (in millions) 264.4 328.4 (19.5 )%
Total gallons sold (in millions) 536.3 819.4 (34.5 )%
Total gallons produced (in millions) 262.1 494.6 (47.0 )%
Production capacity utilization 53 % 82 % (35.4 )%
Average sales price per gallon $ 1.63 $ 1.61 1.2 %
Corn cost per bushel-CBOT equivalent $ 3.56 $ 3.83 (7.0 )%
Average basis(1) $ 0.28 $ 0.43 (34.9 %
Delivered cost of corn $ 3.84 $ 4.26 (9.9 )%
Total co-product tons sold (in thousands) 1,447.5 2,821.7 (48.7 )%
Co-product revenues as % of delivered cost of corn(2) 44.1 % 35.1 % 25.6 %
Average CBOT ethanol price per gallon $ 1.25 $ 1.39 (10.1 )%
Average CBOT corn price per bushel $ 3.63 $ 3.83 (5.2 )%
(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-product revenues as a percentage of delivered cost of corn shows our yield based on sales of co-products, including WDG and corn oil, generated from ethanol we produced.
Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
Years Ended Dollar
Change Percentage
Change Results as a Percentage
of Net Sales for the
Years Ended
December 31, Favorable Favorable December 31,
(Unfavorable) (Unfavorable)
(dollars in thousands)
Net sales	 $ 897,023 $ 1,424,881 $ (527,858 ) (37.0 )% 100.0 % 100.0 %
Cost of goods sold	 844,164 1,434,819 590,655 41.2 % 94.1 % 100.7 %
Gross profit (loss)	 52,859 (9,938 ) 62,797 NM 5.9 % (0.7 )%
Selling, general and administrative expenses	 (31,980 ) (35,453 ) 3,473 9.8 % (3.6 )% (2.5 )%
Gain on litigation settlement	 11,750 - 11,750 NM 1.3 % - %
Gain on sale of assets	 1,580 - 1,580 NM 0.2 % - %
Asset impairments	 (24,356 ) (29,292 ) 4,936 16.9 % (2.7 )% (2.1 )%
Income (loss) from operations 	 9,853 (74,683 ) 84,536 NM 1.1 % (5.2 )%
Fair value adjustments	 (9,959 ) - (9,959 ) NM (1.1 )% - %
Loss on debt extinguishment	 - (6,517 ) 6,517 NM - % (0.5 )%
Interest expense, net	 (17,943 ) (20,206 ) 2,263 11.2 % (2.0 )% (1.4 )%
Other income, net	 621.2 % 0.1 % 0.0 %
Loss before benefit for income taxes	 (17,299 ) (101,302 ) 84,003 82.9 % (1.9 )% (7.1 )%
Benefit for income taxes	 (3 ) (15.0 )% 0.0 % 0.0 %
Consolidated net loss	 (17,282 ) (101,282 ) 84,000 82.9 % (1.9 )% (7.1 )%
Net loss attributed to noncontrolling interests	 2,166 12,333 (10,167 ) (82.4 )% 0.2 % 0.9 %
Net loss attributed to Alto Ingredients, Inc.	 $ (15,116 ) $ (88,949 ) $ 73,833 83.0 % (1.7 )% (6.2 )%
Preferred stock dividends	 (1,268 ) (1,265 ) (3 ) (0.2 )% (0.1 )% (0.1 )%
Loss available to common stockholders	 $ (16,384 ) $ (90,214 ) $ 73,830 81.8 % (1.8 )% (6.3 )%
Net Sales
The decrease in our consolidated net sales for 2020 as compared to 2019 was primarily due to a decrease in our total gallons sold, partially offset by an increase in our average sales price per gallon.
Our production gallons sold and our volume of essential ingredients sold declined for 2020 as compared to 2019 in addition to declines in our third-party gallons sold. Our production gallons and essential ingredients sold declined primarily due to an intentional reduction in our production of fuel-grade ethanol at our facilities due to adverse market conditions as well as the sale of our Nebraska facilities.
Marketing Segment
Net sales of fuel-grade ethanol from our marketing segment, excluding intersegment sales, decreased by $99.2 million, or 28%, to $257.7 million for 2020 as compared to $356.9 million for 2019.
Our volume of third party fuel-grade ethanol gallons sold reported gross by our marketing segment decreased by 48.9 million gallons, or 23%, to 163.9 million gallons for 2020 as compared to 212.8 million gallons for 2019. At our marketing segment’s average sales price per gallon of $1.55 for 2020, we generated $75.8 million less in net sales from our marketing segment from the 48.9 million fewer gallons of third-party fuel-grade ethanol sold gross in 2020 as compared to 2019.
Our volume of third party fuel-grade ethanol gallons sold reported net by our marketing segment decreased by 15.1 million gallons, or 13%, to 100.5 million gallons for 2020 as compared to 115.6 million gallons for 2019. The decrease in third-party fuel-grade ethanol gallons sold reported net had an approximately $0.3 million impact reducing net sales.
The decrease of $0.11 per gallon, or 7%, in our marketing segment’s average sales price per gallon in 2020 as compared to 2019 decreased our net sales from third-party fuel-grade ethanol sold by our marketing segment by $23.1 million.
Pekin Campus Production Segment
Net sales of alcohol from our Pekin Campus production segment decreased by $13.2 million, or 4%, to $330.4 million for 2020 as compared to $343.6 million for 2019. Our total volume of production gallons sold decreased by 24.6 million gallons, or 11%, to 193.9 million gallons for 2020 as compared to 218.5 million gallons for 2019. At our Pekin Campus production segment’s average sales price per gallon of $1.70 for 2020, we generated $41.9 million less in net sales from our Pekin Campus production segment from the 24.6 million reduction in gallons of alcohol sold in 2020 as compared to 2019. The increase of $0.13, or 8%, in our Pekin Campus production segment’s average sales price per gallon in 2020 as compared to 2019 improved our net sales from our Pekin Campus production segment by $28.7 million.
Net sales of essential ingredients decreased $8.7 million, or 6%, to $130.3 million for 2020 as compared to $139.0 million for 2019. Our total volume of essential ingredients sold decreased by 84,000 tons, or 9%, to 829,000 tons for 2020 from 913,000 tons for 2019. At our average sales price per ton of $157.19 for 2020, we generated $13.3 million less in net sales from the 84,000 fewer tons of essential ingredients sold in 2020 as compared to 2019. The increase of $5.01, or 3.3%, in our average sales price per ton in 2020 as compared to 2019 increased our net sales from our Pekin Campus production segment by $4.6 million.
Other Production Segment
Net sales of alcohol from our other production segment decreased by $317.6 million, or 70%, to $137.7 million for 2020 as compared to $455.3 million for 2019. Our total volume of gallons sold decreased by 194.5 million gallons, or 71%, to 78.0 million gallons for 2020 as compared to 272.5 million gallons for 2019. At our other production segment’s average sales price per gallon of $1.77 for 2020, we generated $343.3 million less in net sales from our other production segment from the 194.5 million fewer gallons of alcohol sold in 2020 as compared to 2019. The increase of $0.09, or 5%, in our other production segment’s average sales price per gallon in 2020 as compared to 2019 improved our net sales from our other production segment by $25.7 million.
Net sales of essential ingredients decreased $89.1 million, or 69%, to $40.9 million for 2020 as compared to $130.0 million for 2019. Our total volume of essential ingredients sold decreased by 1,289,000 tons, or 68%, to 619,000 tons for 2020 from 1,908,000 tons for 2019. At our average sales price per ton of $66.07 for 2020, we generated $85.2 million less in net sales from the 1,289,000 fewer tons of essential ingredients sold in 2020 as compared to 2019. The decrease of $2.06, or 3.0%, in our average sales price per ton in 2020 as compared to 2019 decreased our net sales from our other production segment by $3.9 million.
Cost of Goods Sold and Gross Profit (Loss)
Our consolidated gross profit (loss) improved to a gross profit of $52.9 million for 2020 from a gross loss of $9.9 million for 2019, representing a gross profit margin of 5.9% for 2020 compared to negative 0.7% for 2019. Our consolidated gross profit (loss) improved due to significantly higher margin sales of our specialty alcohols due to high demand for alcohols used in sanitizers and disinfectants and a substantial reduction in negative margin sales of fuel-grade ethanol as we idled a significant amount of our fuel-grade ethanol production capacity and sold unprofitable assets.
Marketing Segment
Our marketing segment’s gross profit declined by $5.0 million to $5.9 million for 2020 as compared to $10.9 million for 2019. Of this decline, $3.2 million is attributable to lower margins from sales of third-party fuel-grade ethanol and $1.8 million is attributable to lower marketing volumes of third-party fuel-grade ethanol in 2020 as compared to 2019.
Pekin Campus Production Segment
Our Pekin Campus production segment’s gross profit improved by $70.2 million to a gross profit of $74.2 million for 2020 as compared to $4.0 million for 2019. Of this improvement, $80.0 million is attributable to increased margins from our specialty alcohols, partially offset by $9.8 million less in gross profit attributable to decreased sales volumes in 2020 as compared to 2019.
Other Production Segment
Our other production segment’s gross profit declined by $2.4 million to a gross loss of $27.2 million for 2020 as compared to a gross loss of $24.8 million for 2019. Of this decline, $70.3 million is attributable to a negative margin environment for fuel-grade ethanol, offset by a $67.9 million improvement in gross profit attributable to lower sales volumes at negative margins in 2020 as compared to 2019.
Selling, General and Administrative Expenses
Our selling, general and administrative, or SG&A, expenses decreased $3.5 million to $32.0 million for 2020 as compared to $35.5 million for the same period in 2019. SG&A expenses declined primarily due to reduced legal and consulting expenses. We expect to reduce SG&A expenses by $7.0 million to $12.0 million year over year in 2021.
Asset Impairments
We assess the impairment of long-lived assets, including property and equipment, when events or changes in circumstances indicate that the fair value of an asset could be less than the net book value of the asset. In addition, with the anticipated sale of our Madera and Stockton, California production facilities, we also reviewed their fair values compared to their estimated sales prices, less estimated selling costs. As a result, we recorded an aggregate impairment charge of $24.4 million for 2020. Further, in connection with the anticipated sales, we classified those facilities as held-for-sale on the accompanying consolidated balance sheets. As of December 31, 2019, in connection with the sale of our ownership interest in two fuel-grade ethanol production facilities in Nebraska, we recorded the related long-lived assets to fair value, less estimated selling costs, and classified them as held-for-sale on the accompanying consolidated balance sheets. As a result, we recorded an aggregate impairment charge of $29.3 million for 2019.
Interest Expense, net
Interest expense decreased $2.3 million to $17.9 million for 2020 from $20.2 million for 2019. The decrease in interest expense is primarily due to principal payments on our outstanding indebtedness during the year, resulting in lower average debt balances. We expect to reduce interest expense by as much as $14.0 million year over year in 2021.
Liquidity and Capital Resources
During the year ended December 31, 2020, we funded our operations primarily from cash generated by our operations, sales of common stock and warrants, and cash on hand. These funds were also used to make payments on our term debt and our other credit facilities, for capital expenditures and to make lease payments.
During 2020, we experienced significant adverse conditions in the fuel-grade ethanol market as demand and pricing reached record lows due to reduced domestic transportation and resulting lower gasoline demand resulting from stay-at-home orders issued in response to the coronavirus pandemic. In response, we reduced fuel-grade ethanol production by more than 50% in an effort to conserve capital. We continued producing and selling our specialty alcohols, and also converted a portion of our fuel-grade ethanol production to specialty alcohol production to respond to substantial increased demand from the sanitizer and disinfectant markets. Sales of specialty alcohols were at a mix of fixed and spot prices, both of which resulted in significant cash flow from operations during the year. We expect continued demand for our specialty alcohols for at least the next twelve months and, as appropriate, will endeavor to sign fixed-price contracts and hedge corn input costs to lock in profit margins.
As of December 31, 2020, we had $47.7 million in cash and $16.0 million available for borrowing under Kinergy’s operating line of credit. During 2020, we generated $71.8 million in cash from our operations. We also realized $19.9 million in net cash proceeds from the sale of our interest in two production facilities in Nebraska and $10.0 million from the sale of certain real property and related assets at our Magic Valley production facility. In addition, we received net proceeds of approximately $75.8 million from issuances of common stock and warrants and $5.5 million from warrant exercises. These sources of cash enabled us to make principal payments totaling $157.6 million on our debt during 2020, resulting in our return to compliance with our lenders. As a result, we believe we have sufficient liquidity to meet our anticipated working capital, debt service and other liquidity needs for the next twelve months from the date of this report.
Quantitative Year-End Liquidity Status
We believe that the following amounts provide insight into our liquidity and capital resources. The following selected financial information should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report (dollars in thousands).
December 31,
Change
Cash and cash equivalents	 $ 47,667 $ 18,997 150.9 %
Current assets	 $ 214,046 $ 232,064 (7.8 )%
Property and equipment, net	 $ 229,486 $ 332,526 (31.0 )%
Current liabilities	 $ 86,927 $ 160,398 (45.8 )%
Long-term debt, noncurrent portion	 $ 71,807 $ 180,795 (60.3 )%
Working capital	 $ 127,119 $ 71,666 77.4 %
Working capital ratio	 2.46 1.45 69.7 %
Restricted Net Assets
At December 31, 2020, we had approximately $262.1 million of net assets at our subsidiaries that were not available to be transferred to Alto Ingredients, Inc. in the form of dividends, distributions, loans or advances due to restrictions contained in the credit facilities of the subsidiaries.
Changes in Working Capital and Cash Flows
Working capital improved to $127.1 million at December 31, 2020 from $71.7 million at December 31, 2019 as a result of a decrease of $73.4 million in current liabilities, partially offset by a decrease in current assets of $18.0 million.
Current assets decreased primarily due to a decrease in assets held-for-sale associated with the completed sale of our interests in two fuel-grade ethanol production facilities in Nebraska, and decreases in accounts receivable and inventories due to lower sales volumes and the timing of collections, partially offset by an increase in cash and cash equivalents.
Our current liabilities declined primarily due to a decrease in liabilities held-for-sale associated with the completed sale of our interests in two fuel-grade ethanol production facilities in Nebraska and reductions in our current portion of long-term debt as we paid down indebtedness during the year.
Our cash and cash equivalents increased by $28.7 million primarily due to $71.8 million in cash provided by our operating activities and $23.3 million in cash provided by our investing activities, partially offset by $66.4 million in cash used in our financing activities.
Cash provided by our Operating Activities
Cash provided by our operating activities increased by $95.1 million for the year ended December 31, 2020, as compared to the same period in 2019. We generated $71.8 million in cash from our operating activities during the year. Specific factors that contributed to the increase in cash provided by our operating activities include:
● a decrease of $84.0 million in our consolidated net loss due to higher margins from our sales of specialty alcohols;
● a decrease of $37.3 million related to accounts receivable primarily due to lower sales volumes and the timing of collections;
● a decrease of $21.9 million related to lower inventory levels as we reduced fuel-grade ethanol production during the period;
● an increase of $10.0 million related to noncash fair value adjustments associated with outstanding warrants to purchase common stock; and
● an increase of $9.1 million related to liabilities held-for-sale in connection with the sale of our interests in two fuel-grade ethanol production facilities in Nebraska.
These amounts were partially offset by:
● a decrease of $17.6 million in noncash depreciation expense resulting from the sale of two fuel-grade ethanol production facilities in Nebraska;
● a decrease of $17.2 million in accounts payable and accrued expenses, primarily due to increased payments of past due amounts;
● an increase of $14.2 million in derivative instruments due to the recent rise in corn prices; and
● a decrease of $9.2 million related to prepaid expenses and other assets due to the timing of payments.
Cash provided by our Investing Activities
Cash provided by our investing activities was $23.3 million for the year, which included $19.9 million in net proceeds from the sale of two fuel-grade ethanol production facilities in Nebraska and $10.0 million from the sale of certain real property and related assets at our Magic Valley production facility, partially offset by $6.6 million of additions to property and equipment resulting from our capital expenditure projects, such as the expansion of our grain neutral spirits system capacity completed at the end of 2020 and the expansion of our yeast production capacity still in process.
Cash used in our Financing Activities
Cash used in our financing activities was $66.4 million for the year. The increase in cash used in our financing activities was primarily due to $45.8 million in net payments on Kinergy’s operating line of credit and $111.8 million in principal payments on our other indebtedness, partially offset by $75.8 million in proceeds from the sale of common stock and warrants, $9.9 million in proceeds under our CARES Act loans and $5.5 million in proceeds from warrant exercises.
Kinergy’s Operating Line of Credit
Kinergy maintains an operating line of credit for an aggregate amount of up to $100.0 million. The credit facility matures on August 2, 2022. Interest accrues under the credit facility at a rate equal to (i) the three-month London Interbank Offered Rate (“LIBOR”), plus (ii) a specified applicable margin ranging from 1.50% to 2.00%. The credit facility’s monthly unused line fee is 0.25% to 0.375% of the amount by which the maximum credit under the facility exceeds the average daily principal balance during the immediately preceding month. Payments that may be made by Kinergy to Alto Ingredients, Inc. as reimbursement for management and other services provided by Alto Ingredients, Inc. to Kinergy are limited under the terms of the credit facility to $1.5 million per fiscal quarter. The credit facility also includes the accounts receivable of our wholly-owned subsidiary, Alto Nutrients, LLC, or Alto Nutrients, as additional collateral. Payments that may be made by Alto Nutrients to Alto Ingredients, Inc. as reimbursement for management and other services provided by Alto Ingredients, Inc. to Alto Nutrients are limited under the terms of the credit facility to $0.5 million per fiscal quarter. Alto Nutrients, one of our indirect wholly-owned subsidiaries, markets our essential ingredients and also provides raw material procurement services to our subsidiaries.
For all monthly periods in which excess borrowing availability falls below a specified level, Kinergy and Alto Nutrients must collectively maintain a fixed-charge coverage ratio (calculated as a twelve-month rolling earnings before interest, taxes, depreciation and amortization divided by the sum of interest expense, capital expenditures, principal payments of indebtedness, indebtedness from capital leases and taxes paid during such twelve-month rolling period) of at least 2.0 and are prohibited from incurring certain additional indebtedness (other than specific intercompany indebtedness). The obligations of Kinergy and Alto Nutrients under the credit facility are secured by a first-priority security interest in all of their respective assets in favor of the lender.
We believe Kinergy and Alto Nutrients are in compliance with the fixed-charge coverage ratio covenant as of the filing of this report. The following table sets forth the fixed-charge coverage ratio financial covenant and the actual results for the periods presented:
Years Ended
December 31,
Fixed Charge Coverage Ratio Requirement 2.00 2.00
Actual 5.35 5.71
Excess 3.35 3.71
Alto Ingredients, Inc. has guaranteed all of Kinergy’s obligations under the credit facility. As of December 31, 2020, Kinergy had an outstanding balance of $32.5 million and $16.0 million of unused borrowing availability under the credit facility.
Alto Pekin Credit Facilities
On December 15, 2016, Alto Pekin, LLC, or Alto Pekin, one of our indirect wholly-owned subsidiaries and the entity that holds two of our production facilities in Pekin, Illinois, entered into a Credit Agreement, or the Pekin Credit Agreement, with 1st Farm Credit Services, PCA and CoBank, 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 term loan facility that matures on February 1, 2022, or the Pekin Revolving Loan, and together with the Pekin Term Loan, the Pekin Credit Facility. The Pekin Credit Facility is secured by a first-priority security interest in all of Alto Pekin’s assets.
The Pekin Credit Facility and related agreements contain a variety of representations, warranties, covenants and events of default. Following a series of amendments and waivers among Alto Pekin, its lenders and their agent, certain terms of the agreements are as follows:
● Interest accrues under the Pekin Credit Facility at an annual rate equal to the 30-day LIBOR plus 5.00%.
● Alto Pekin is required to pay a monthly fee on any unused portion of the Pekin Revolving Loan at a rate of 0.75% per annum.
● Alto Pekin and Alto ICP, LLC, or ICP, one of our indirect wholly-owned subsidiaries and the entity that holds one of our production facilities in Pekin, Illinois, are collectively required to maintain working capital of not less than 50% of the combined outstanding revolving lines of credit, which was $30.0 million at December 31, 2020; 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.
Alto Pekin and ICP collectively agreed to pay Alto Pekin’s and ICP’s lenders an aggregate of $40.0 million on or before September 30, 2020, or the September Paydown Amount, to reduce the outstanding balances of Alto Pekin’s and ICP’s respective term loans, to be allocated between them. Alto Pekin, ICP and their lenders contemplated funding the September Paydown Amount through asset sales, proceeds of any award, judgment or settlement of litigation, or, at our election, from funds contributed by us to Alto Pekin or ICP.
In March 2020, we granted to Alto Pekin’s lender a security interest in all of our equity interests in Alto Op Co., the entity which indirectly owns our western production facilities. We and certain subsidiaries also entered into intercreditor agreements with the Alto Pekin’s and ICP’s lenders, and the agent for our senior secured noteholders, to address issues of priority and the allocation of proceeds from asset sales.
On December 18, 2020, Alto Pekin and its lender further amended the Pekin Credit Facility to waive certain covenant defaults, including the covenant requiring Alto Pekin and ICP to pay the September Paydown Amount from an approved source of funds on or before September 30, 2020. The effect of this amendment was, in part, to deem the September Paydown Amount to have been timely paid. The parties also agreed to amend the Pekin Credit Facility to provide for a payment to Alto Pekin’s and ICP’s lenders of an aggregate of $24.9 million, or the December Paydown Amount, on or prior to December 21, 2020, with $19.9 million allocated to Alto Pekin’s lenders and $5.0 million allocated to ICP’s lenders. On December 18, 2020, Alto Pekin and ICP paid the December Paydown Amount in full.
Following receipt of the December Paydown Amount, any additional proceeds arising from the sale of any of our midwestern production facility assets will be allocated 33/34/33% among Alto Pekin’s and ICP’s lenders, collectively, our senior secured noteholders, and us, respectively; and any additional proceeds arising from the sale of any of our western production facility assets will be allocated first to the senior secured noteholders up to $20.0 million and then allocated 33/34/33% among Alto Pekin’s and ICP’s lenders, collectively, our senior secured noteholders, and us, respectively.
As of the filing of this report, we believe we are in compliance with the terms and conditions of our Pekin Credit Facility.
ICP Credit Facilities
On September 15, 2017, ICP, Compeer Financial, PCA, or Compeer, and CoBank as agent, entered into a Credit Agreement, or the ICP Credit Agreement. Under the terms of the ICP Credit Agreement, ICP borrowed from Compeer $24.0 million under a term loan facility that matures on September 20, 2021, or the ICP Term Loan, and up to $18.0 million under a revolving term loan facility that matures on September 1, 2022, or the ICP Revolving Loan, and together with the ICP Term Loan, the ICP Credit Facility. The ICP Credit Facility is secured by a first-priority security interest in all of ICP’s assets.
The ICP Credit Facility and related agreements contain a variety of representations, warranties, covenants and events of default. Following a series of amendments and waivers among ICP, its lenders and their agent, certain terms of the agreements are as follows:
● Interest accrues under the ICP Credit Facility at an annual rate equal to the 30-day LIBOR plus 3.75%.
● ICP is required to pay an annual nonrefundable commitment fee, calculated as 0.75% multiplied by the average daily positive difference between (i) the ICP Revolving Loan commitment (which may be reduced by ICP from time to time in increments of $0.5 million), minus (ii) the aggregate principal amounts outstanding under the ICP Revolving Loan.
● ICP and Alto Pekin are collectively required to maintain working capital of not less than 50% of the combined outstanding revolving lines of credit, which was $30.0 million at December 31, 2020; 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.
ICP and Alto Pekin collectively agreed to pay ICP’s and Alto Pekin’s lenders an aggregate of $40.0 million on or before September 30, 2020, the same amount referred to above as the September Paydown Amount, to reduce the outstanding balances of ICP’s and Alto Pekin’s respective term loans, to be allocated between them. ICP, Alto Pekin, and their lenders contemplated funding the September Paydown Amount through asset sales, proceeds of any award, judgment or settlement of litigation, or, at our election, from funds contributed by us to ICP or Alto Pekin.
In March 2020, we granted to Alto Pekin’s lender a security interest in all of our equity interests in Alto Op Co. We and certain subsidiaries also entered into intercreditor agreements with the ICP’s and Alto Pekin’s lenders, and the agent for our senior secured noteholders, to address issues of priority and the allocation of proceeds from asset sales.
On December 18, 2020, ICP and its lender further amended the ICP Credit Facility to waive certain covenant defaults, including the covenant requiring ICP and Alto Pekin to pay the September Paydown Amount from an approved source of funds on or before September 30, 2020. The effect of this amendment was, in part, to deem the September Paydown Amount to have been timely paid. The parties also agreed to amend the ICP Credit Facility to provide for a payment to ICP’s and Alto Pekin’s lenders of an aggregate of $24.9 million, the same amount referred to above as the December Paydown Amount, on or prior to December 21, 2020, with $5.0 million allocated to ICP’s lenders and $19.9 million allocated to Alto Pekin’s lenders. On December 18, 2020, ICP and Alto Pekin paid the December Paydown Amount in full.
Following receipt of the December Paydown Amount, any additional proceeds arising from the sale of any of our midwestern production facility assets will be allocated 33/34/33% among Alto Pekin’s and ICP’s lenders, collectively, our senior secured noteholders, and us, respectively; and any additional proceeds arising from the sale of any of our western production facility assets will be allocated first to the senior secured noteholders up to $20.0 million and then allocated 33/34/33% among Alto Pekin’s and ICP’s lenders, collectively, our senior secured noteholders, and us, respectively.
As of the filing of this report, we believe we are in compliance with the terms and conditions of our ICP Credit Facility.
Senior Secured Notes
On December 12, 2016, we entered into a Note Purchase Agreement with five accredited investors and sold $55.0 million in aggregate principal amount of senior secured notes to the investors in a private offering for aggregate gross proceeds of 97% of the principal amount of the notes sold. On June 26, 2017, we entered into a second Note Purchase Agreement with five accredited investors and sold an additional $13.9 million in aggregate principal amount of senior secured notes to the investors in a private offering for aggregate gross proceeds of 97% of the principal amount of the notes sold, and collectively with the notes previously sold, the Notes. The Notes are secured by a first-priority security interest in all of our equity interests in Alto Op Co.
The Notes and related agreements contain a variety of representations, warranties, covenants and events of default. Following a series of amendments and waivers with the senior secured note holders and their agent, certain terms of the agreements are as follows:
● The Notes mature on December 15, 2021.
● Payments due under the Notes rank senior to all other indebtedness of Alto Ingredients, Inc. other than permitted senior indebtedness.
● Interest on the Notes accrues at a rate of 15% per annum.
● Any voluntary prepayments must be made at 102% of the principal amount prepaid.
The Notes also contain a variety of limitations, including a prohibition on parent company indebtedness; restrictions on redemption, repurchase or payment of any dividend or distribution in respect of our or our subsidiaries’ equity interests; restrictions on asset sales and other dispositions; and restrictions on our or our subsidiaries’ ability to issue equity for purposes other than to pay down a portion of the outstanding balance of the Notes.
In March 2020, ICP granted to the senior secured noteholders a security interest in certain of its personal property. In addition, Alto Central granted to the senior secured noteholders a security interest in certain of its personal property. Alto Central also pledged its equity interests in Alto Pekin and ICP in favor of the senior secured noteholders as additional collateral securing our obligations to the noteholders. Alto Op. Co also granted to the senior secured noteholders a security interest in certain of its personal property. We and certain subsidiaries also entered into intercreditor agreements with the ICP’s and Alto Pekin’s lenders, and the agent for our senior secured noteholders, to address issues of priority and the allocation of proceeds from asset sales.
In November 2020, we repaid $35.3 million in principal under the Notes using a portion of the net proceeds of our then-recent offerings of common stock and warrants and the sale of certain real property assets at our Magic Valley production facility.
As of the filing of this report, we believe we are in compliance with the terms and conditions of the Notes.
CARES Act Loans
On May 4, 2020, Alto Ingredients, Inc. and Alto Pekin received loan proceeds from Bank of America, NA under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), through the Paycheck Protection Program administered by the U.S. Small Business Administration. Alto Ingredients, Inc. received $6.0 million and Alto Pekin received $3.9 million in loan proceeds. The loans mature in two years and bear interest at a rate of 1.00% per annum. Under the terms of the loans, certain amounts may be forgiven if they are used for qualifying expenses as described in the CARES Act, but we can provide no assurance that we will be able to obtain forgiveness of all or any portion of the loans. We are in the process of applying for loan forgiveness.
Effects of Inflation
The impact of inflation was not significant to our financial condition or results of operations for 2020 or 2019.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments 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 amount of net sales and expenses for each period. The following represents a summary of our critical accounting policies, defined as those policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.
Revenue Recognition
We recognize revenue primarily from sales of alcohols and essential ingredients.
We have seven alcohol production facilities from which we produce and sell alcohols to our customers through our subsidiary Kinergy. Kinergy enters into sales contracts with customers under exclusive intercompany sales agreements with each of our seven production facilities. Kinergy also acts as a principal when it purchases third party fuel-grade ethanol which it resells to its customers. Finally, Kinergy has exclusive sales agreements with other third-party owned fuel-grade ethanol plants under which it sells their fuel-grade ethanol production for a fee plus the costs to deliver the ethanol to Kinergy’s customers. These sales are referred to as third-party agent sales. Revenue from these third-party agent sales is recorded on a net basis, with Kinergy recognizing its predetermined fees and any associated delivery costs.
We have seven production facilities from which we produce and sell essential ingredients to our customers through our subsidiary Alto Nutrients. Alto Nutrients enters into sales contracts with essential ingredient customers under exclusive intercompany sales agreements with each of our seven production facilities.
We recognize revenue from sales of alcohols and essential ingredients at the point in time when the customer obtains control of the products, which typically occurs upon delivery depending on the terms of the underlying contracts. In some instances, we enter into contracts with customers that contain multiple performance obligations to deliver volumes of alcohols or essential ingredients over a contractual period of less than 12 months. We allocate the transaction price to each performance obligation identified in the contract based on relative standalone selling prices and recognize the related revenue as control of each individual product is transferred to the customer in satisfaction of the corresponding performance obligations.
When we are the agent, the supplier controls the products before they are transferred to the customer because the supplier is primarily responsible for fulfilling the promise to provide the product, has inventory risk before the product has been transferred to a customer and has discretion in establishing the price for the product. When we are the principal, we control the products before they are transferred to the customer because we are primarily responsible for fulfilling the promise to provide the products, we have inventory risk before the product has been transferred to a customer and we have discretion in establishing the price for the product.
See “Note 4 - Segments” of the Notes to Consolidated Financial Statements commencing on page of this report for our revenue-breakdown by type of contract.
Impairment of Long-Lived Assets and Held-for-Sale Classification
Our long-lived assets have been primarily associated with our production facilities, reflecting their original cost, adjusted for depreciation and any subsequent impairment.
We assess the impairment of long-lived assets, including property and equipment, when events or changes in circumstances indicate that the fair value of an asset could be less than the net book value of the asset. Generally, we assess long-lived assets for impairment by first determining the forecasted, undiscounted cash flows each asset is expected to generate plus the net proceeds expected from the sale of the asset. If the total amount of the undiscounted cash flows is less than the carrying value of the asset, we then determine the fair value of the asset. An impairment loss would be recognized when the fair value is less than the related net book value, and an impairment expense would be recorded in the amount of the difference. Forecasts of future cash flows are judgments based on our experience and knowledge of our operations and the industry in which we operate. These forecasts could be significantly affected by future changes in market conditions, the economic environment, including inflation, and the purchasing decisions of our customers.
We review our intangible assets with indefinite lives at least annually or more frequently if impairment indicators arise. In our review, we determine the fair value of these assets using market multiples and discounted cash flow modeling and compare it to the net book value of the acquired assets.
Assets held-for-sale are assessed for impairment by comparing the carrying value to their expected net sales proceeds. We entered into a term sheet dated December 19, 2019 with Aurora Cooperative Elevator Company for the sale of our interest in two fuel-grade ethanol production facilities in Nebraska. We reviewed the criteria for held-for-sale classification of the long-lived assets associated with the pending transaction. Our analysis concluded that these long-lived assets should be classified as held-for-sale with a related impairment of $29.3 million to fair value. We did not recognize any other asset impairment charges in 2019.
In October 2020, our Board of Directors approved a plan to sell our fuel-grade ethanol production facilities in Madera and Stockton, California. Consequently, we determined the long-lived asset groups should be classified as held-for-sale at December 31, 2020. The analysis of these potential sales resulted in an aggregate asset impairment of $22.3 million. We further reviewed indicators of impairment for our other production facilities, resulting in an additional asset impairment of $2.1 million in 2020.
Valuation Allowance for Deferred Taxes
We account for income taxes under the asset and liability approach, where deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
We evaluate our deferred tax asset balance for realizability. To the extent we believe it is more likely than not that some portion or all of our deferred tax assets will not be realized, we will establish a valuation allowance against the deferred tax assets. Realization of our deferred tax assets is dependent upon future taxable income during the periods in which the associated temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. These changes, if any, may require possible material adjustments to these deferred tax assets, resulting in a reduction in net income or an increase in net loss in the period when such determinations are made.
Our pre-tax consolidated losses were $17.3 million and $101.3 million for the years ended December 31, 2020 and 2019, respectively. Based on our current and prior results, we do not have significant evidence to support a conclusion that we will more likely than not be able to benefit from our remaining deferred tax assets. As such, we have recorded a valuation allowance against our net deferred tax assets.
Derivative Instruments
We evaluate our contracts to determine whether the contracts are derivative instruments. Management may elect to exempt certain forward contracts that meet the definition of a derivative from derivative accounting as normal purchases or normal sales. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from the fair value accounting and reporting requirements of derivative accounting.
We enter into short-term cash, option and futures contracts as a means of securing purchases of corn, natural gas and sales of fuel-grade ethanol and managing exposure to changes in commodity prices. All of our exchange-traded derivatives are designated as non-hedge derivatives for accounting purposes, with changes in fair value recognized in net income. Although the contracts are economic hedges of specified risks, they are not designated or accounted for as hedging instruments.
Realized and unrealized gains and losses related to exchange-traded derivative contracts are included as a component of cost of goods sold in the accompanying financial statements. The fair values of contracts entered through commodity exchanges are presented on the accompanying balance sheet as derivative assets or liabilities. The selection of normal purchase or sales contracts, and use of hedge accounting, are accounting policies that can change the timing of recognition of gains and losses in the statement of operations.
Impact of New Accounting Pronouncements
Not applicable.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8.	Financial Statements and Supplementary Data.
Reference is made to the financial statements, which begin at page of this report.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A.	Controls and Procedures.
We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer 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 and 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 Chief Executive Officer and Chief Financial Officer concluded as of December 31, 2020 that our disclosure controls and procedures were effective at a reasonable assurance level.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is defined by the Public Company Accounting Oversight Board’s Audit Standards AS 2201 as being a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework set forth in Internal Control - Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2020.
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.
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.

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ITEM 9B. OTHER INFORMATION
Item 9B.	Other Information.
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10.	Directors, Executive Officers and Corporate Governance.
The information under the captions “Information about our Board of Directors, Board Committees and Related Matters” appearing in the Proxy Statement, is hereby incorporated by reference.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11.	Executive Compensation.
The information under the caption “Executive Compensation and Related Information,” appearing in the Proxy Statement, is hereby incorporated by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information,” appearing in the Proxy Statement, is hereby incorporated by reference.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13.	Certain Relationships and Related Transactions, and Director Independence.
The information under the captions “Certain Relationships and Related Transactions” and “Information about our Board of Directors, Board Committees and Related Matters-Director Independence” appearing in the Proxy Statement, is hereby incorporated by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14.	Principal Accounting Fees and Services.
The information under the caption “Audit Matters-Principal Accountant Fees and Services,” appearing in the Proxy Statement, is hereby incorporated by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15.	Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements
Reference is made to the financial statements listed on and attached following the Index to Consolidated Financial Statements contained on page of this report.
(a)(2) Financial Statement Schedules
None.
(a)(3) Exhibits
Reference is made to the exhibits listed on the Index to Exhibits.