Alto Ingredients, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report. This report and our consolidated financial statements and notes to consolidated financial statements contain forward-looking statements, which generally include the plans and objectives of management for future operations, including plans and objectives relating to our future economic performance and our current beliefs regarding revenues we might generate and profits we might earn if we are successful in implementing our business and growth strategies. The forward-looking statements and associated risks may include, relate to or be qualified by other important factors, including: ● fluctuations in the market prices of alcohols and essential ingredients; ● fluctuations in the costs of key production input commodities such as corn and natural gas; ● the projected growth or contraction in the alcohol and essential ingredients markets in which we operate; ● our strategies for expanding, maintaining or contracting our presence in these markets; ● anticipated trends in our financial condition and results of operations; and ● our ability to distinguis h ourselves from our current and future competitors. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this report, or in the case of a document incorporated by reference, as of the date of that document. We do not undertake to update, revise or correct any forward-looking statements, except as required by law. Any of the factors described immediately above, or referenced from time to time in our filings with the Securities and Exchange Commission or in the “Risk Factors” section below could cause our financial results, including our net income or loss or growth in net income or loss to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially. Overview We are a leading producer and distributor of specialty alcohols and essential ingredients, and the largest producer of specialty alcohols in the United States. - 16 - We operate five alcohol production facilities. Three of our production facilities are located in the Midwestern state of Illinois and two of our facilities are located in the Western states of Oregon and Idaho. We have an annual alcohol production capacity of 350 million gallons. We market and distribute all of the alcohols produced at our facilities as well as fuel-grade ethanol produced by third parties. In 2021, we marketed and distributed approximately 480 million gallons combined of our own alcohols as well as fuel-grade ethanol produced by third parties, and over 1.2 million tons of essential ingredients on a dry matter basis. We report our financial and operating performance in three segments: (1) marketing and distribution, which includes marketing and merchant trading for Company-produced alcohols and essential ingredients on an aggregated basis and third party fuel-grade ethanol sales, (2) Pekin production, which includes the production and sale of alcohols and essential ingredients produced at our Pekin, Illinois campus, or Pekin Campus, and (3) Other production, which includes the production and sale of renewable fuel and essential ingredients produced at all of our other production facilities on an aggregated basis, none of which are individually so significant as to be considered a reportable segment. Our mission is to expand our business as a leading producer and distributor 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. On January 14, 2022, we acquired Eagle Alcohol Company LLC, or Eagle Alcohol, for $14.0 million in cash plus an estimated net working capital adjustment of $1.3 million in cash. The members of Eagle Alcohol are eligible to receive up to an additional $14.0 million of contingent consideration, payable through a combination of cash and our common stock over the next five years, subject to the satisfaction of certain conditions, including continued employment. Eagle Alcohol specializes in break bulk distribution of specialty alcohols. Eagle Alcohol purchases bulk alcohol from suppliers. Eagle Alcohol then stores, denatures, packages, and resells alcohol products in smaller sizes, including tank trucks, totes, and drums, that garner a premium to bulk alcohols. Eagle Alcohol delivers products to customers in the beverage, food, pharma, and related-process industries via its own dedicated trucking fleet and common carrier. Eagle Alcohol generated over $35 million in revenues in 2021. Eagle Alcohol is now one of our wholly-owned subsidiaries, and its former president, Dan Croghan, who has many years of experience and expertise in the chemical and alcohol distribution industry, continues on as our employee. 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. - 17 - All of our production facilities are currently operating and have been operating through all of the first quarter. 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 — Marketing and Distribution Segment We market and distribute all of the alcohols and essential ingredients we produce at our facilities. We also market and distribute alcohol 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 renewable fuel 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 producers. We arrange for transportation, storage and delivery of fuel-grade ethanol purchased by our customers through our agreements with third-party service providers in the Western United States as well as in the Midwest from a variety of sources. We market our essential ingredient feed products to dairies and feedlots, in many cases located near our production facilities. These customers use our feed products for livestock as a substitute for corn and other sources of starch and protein. We sell our corn oil to poultry and biodiesel customers. We do not market essential ingredients from other producers. See “Note 3 – Segments” to our Notes to Consolidated Financial Statements included elsewhere in this report for financial information about our business segments. Current Initiatives and Outlook Our decision to diversify further into specialty alcohols and essential ingredients provided a buffer against macroeconomic challenges and weak renewable fuel crush margins in the first quarter of 2022. As a result, we generated positive gross margins and, despite generating a net loss of $2.6 million, we generated positive Adjusted EBITDA of $4.4 million for the quarter notwithstanding a challenging market environment. We define Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, or EBITDA, adjusted for asset impairments, loss on extinguishment of debt, acquisition-related expense and fair value adjustments. A table reconciling Adjusted EBITDA to unaudited net income or loss attributed to Alto Ingredients, Inc. is included below. During the quarter, we remained focused on managing the areas of our business within our control by executing on our strategic goals, investing for future growth and further diversifying and high-grading our product offerings. As noted above, we acquired Eagle Alcohol, an established leader in premium alcohol distribution. The acquisition expands our product offerings and broadens our target markets, including by accelerating our ability to capture additional high-margin sales. We expect Eagle Alcohol to contribute $4.0 million in EBITDA for 2022 and $9.0 million in EBITDA annually starting in 2023, including synergies. We plan to invest $5.0 million in 2022 to further enhance our specialty alcohol quality and distribution before fourth quarter contract negotiations begin. - 18 - In February, we expanded our portfolio of certifications by qualifying for two additional internationally-recognized certifications at our Pekin Campus. We received a certification for active pharmaceutical ingredients and a second certification for the use of excipients. Together with the certifications we received in 2021, these new certifications create redundancy across our entire Pekin Campus. The certifications increase our appeal to customers who require a consistent, documented supply of high-grade alcohols for use in pharmaceutical, health, home and beauty, and distilled spirits products. As a result, we are expanding existing relationships and attracting new customers domestically and in growing international markets for these higher-margin specialty alcohols. As previously reported, we launched our first project to produce enhanced protein at our dry mill in Magic Valley, Idaho by installing Harvesting Technology’s patented CoPromax TM system. In the first quarter, we made progress installing the system and expect to see initial benefits from the corn oil extraction part of the system in the second half of this year, generating $4.0 million of EBITDA on an annualized basis. We expect to complete the protein enhancement part of the system by early 2023, producing an additional $5.0 million of EBITDA annually based on current market prices. We plan to roll out the CoPromax system at our three other dry mills following its successful installation at our Magic Valley facility with the goal of having them fully operational by 2025. The total investment for all four facilities is $70.0 million. Assuming similar economics across all four dry mills, we estimate that the systems will contribute $34.0 million in EBITDA annually based on current market values. We have begun expanding corn storage at our Pekin Campus to increase our corn-buying flexibility and reduce our need to purchase product at premium prices when farmers and elevators have stopped shipping corn, including during holidays or unfavorable weather conditions. This capital improvement project represents an investment of approximately $6.0 million, which we expect will yield over $2.0 million in EBITDA annually with a payback in less than three years beginning in the first quarter of 2023. We continue to reinvest in our facilities by upgrading equipment and operating systems to increase efficiency and plant reliability. For example, after only a nominal expense, we are now able to load corn oil into railcars across all our facilities, expanding our access to higher value corn oil markets. We are planning similar capital expenditure projects that are ongoing in nature. We will provide periodic updates on these projects as they develop throughout the year. We are also evaluating an investment to bypass the local natural gas utility at our Pekin Campus, which we estimate would reduce natural gas prices by 11% based on 2021 values. This investment would also create an opportunity to sell renewable natural gas produced at our Pekin Campus directly into the pipeline. The investment would be approximately $9.0 million in 2023 and yield a return of approximately $5.0 million in EBITDA annually beginning in 2024. In addition, we remain actively engaged with third parties to evaluate a carbon capture and sequestration program at our Pekin Campus. We will continue to pursue additional profitable opportunities with a focus on 2024 and beyond. Earlier this year, we created an environmental, social and governance, or ESG, committee consisting of senior executives, subject matter experts and members of our board of directors. Our ESG committee completed an extensive review with a third party and refined our ESG strategy. As part of this process, we promoted Stacy Swanson, who led our rigorous certification efforts, to head our day-to-day ESG programs in the newly created position of Vice President of Quality and Sustainability. As a producer and distributor of high-quality, bio-based alcohols, we are committed to creating a greener environment. We have launched initiatives, set baselines and begun tracking resources to improve employee health and safety and further reduce environmental impacts. As illustrated by our quality certifications, we are committed to producing ingredients for our customers that embody the highest levels of integrity, purity and quality for products that touch multiple areas of people’s lives. We look forward to providing periodic updates on our ESG strategy and greater transparency of our many accomplishments to date and of our activities moving forward. - 19 - Use of Non-GAAP Measures Management believes that certain financial measures not in accordance with generally accepted accounting principles, or GAAP, are useful measures of operations. We define Adjusted EBITDA as unaudited net income (loss) attributed to Alto Ingredients, Inc. before interest expense, interest income, provision (benefit) for income taxes, asset impairments, loss on extinguishment of debt, acquisition-related expense, fair value adjustments, and depreciation and amortization expense. A table is provided below to reconcile Adjusted EBITDA to its most directly comparable GAAP measure, net income (loss) attributed to Alto Ingredients, Inc. Management provides this non-GAAP measure so that investors will have the same financial information that management uses, which may assist investors in properly assessing our performance on a period-over-period basis. Adjusted EBITDA is not a measure of financial performance under GAAP and should not be considered as an alternative to net income (loss) attributed to Alto Ingredients, Inc. or any other measure of performance under GAAP, or to cash flows from operating, investing or financing activities as an indicator of cash flows or as a measure of liquidity. Adjusted EBITDA has limitations as an analytical tool and you should not consider this measure in isolation or as a substitute for analysis of the company's results as reported under GAAP. Information reconciling forward-looking EBITDA to forward-looking net income (loss) attributed to Alto Ingredients, Inc. would require a forward-looking statement of net income (loss) attributed to Alto Ingredients, Inc. prepared in accordance with GAAP, which is unavailable to us without unreasonable effort. We are not able to provide a quantitative reconciliation of forward-looking EBITDA to forward-looking net income (loss) attributed to Alto Ingredients, Inc. because certain items required for reconciliation are uncertain, outside of our control and/or cannot be reasonably predicted, such as net sales, cost of goods sold, provision (benefit) for income taxes, asset impairments and fair value adjustments, which we view as the most material components of net income (loss) attributed to Alto Ingredients, Inc. that are not presently estimable. Reconciliation of Adjusted EBITDA to Net Income (Loss) Three Months Ended March 31, (in thousands) (unaudited) 2022 2021 Net income (loss) $ (2,602 ) $ 4,678 Adjustments: Interest expense 200 1,885 Interest income (158 ) (184 ) Acquisition-related expense 875 — Asset impairments — 1,200 Depreciation and amortization expense 6,134 5,860 Total adjustments 7,051 8,761 Adjusted EBITDA $ 4,449 $ 13,439 Critical Accounting Policies and Estimates 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. We believe that of our significant accounting policies, the following critical accounting policies and estimates are 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; accounting for business combinations; impairment of long-lived assets and held-for-sale classification; valuation allowance for deferred taxes and derivative instruments. Except as noted below, these significant accounting principles are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2021. Accounting for Business Combinations Determining the fair value of assets acquired and liabilities assumed in a business combination is considered a critical accounting estimate because the allocation of the purchase price to assets acquired and liabilities assumed based upon fair values requires significant management judgment and the use of subjective measurements. Variability in industry conditions and changes in assumptions or subjective measurements used to allocate fair value are reasonably possible and may have a material impact on our financial position, liquidity or results of operations. - 20 - Results of Operations The following selected financial information should be read in conjunction with our consolidated financial statements and notes to our consolidated financial statements included elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report. Certain performance metrics that we believe are important indicators of our results of operations include: Three Months Ended March 31, Percentage 2022 2021 Change Renewable fuel production gallons sold (in millions) 49.2 39.0 26.2 % Specialty alcohol production gallons sold (in millions) 23.3 19.0 22.6 % Third party renewable fuel gallons sold (in millions) 30.7 54.0 (43.1 )% Total gallons sold (in millions) 103.2 112.0 (7.9 )% Total gallons produced (in millions) 74.3 58.0 28.1 % Production capacity utilization 86 % 52 % 65.4 % Average sales price per gallon $ 2.46 $ 1.94 26.8 % Corn cost per bushel—CBOT equivalent $ 6.22 $ 4.98 24.9 % Average basis (1) 0.64 0.29 120.7 % Delivered cost of corn $ 6.86 $ 5.27 30.2 % Total essential ingredients tons sold (in thousands) 398.8 276.9 44.0 % Essential ingredients revenues as % of delivered cost of corn (2) 36.4 % 40.0 % (9.0 )% Average CBOT ethanol price per gallon $ 2.16 $ 1.60 35.0 % Average CBOT corn price per bushel $ 6.73 $ 5.40 24.6 % (1) Corn basis represents the difference between the immediate cash price of delivered corn and the future price of corn for Chicago delivery. (2) Essential ingredients revenues as a percentage of delivered cost of corn shows our yield based on sales of essential ingredients, including wet distillers grains and corn oil, generated from alcohol we produced. Net Sales, Cost of Goods Sold and Gross Profit The following table presents our net sales, cost of goods sold and gross profit in dollars and gross profit as a percentage of net sales (in thousands, except percentages): Three Months Ended March 31, Change in 2022 2021 Dollars Percent Net sales $ 308,118 $ 218,734 $ 89,384 40.9 % Cost of goods sold 303,345 204,897 98,448 48.0 % Gross profit $ 4,773 $ 13,837 $ (9,064 ) (65.5 )% Percentage of net sales 1.5 % 6.3 % Net Sales The increase in our consolidated net sales for the three months ended March 31, 2022 as compared to the same period in 2021 was primarily due to an increase in our average sales price per gallon sold and an increase in our production gallons sold, partially offset by a decrease in third-party gallons sold. We marketed fewer third-party gallons during the quarter as we ended our contractual relationship with one of the ethanol plants for which we previously sold its production. On a consolidated basis, our average sales price per gallon increased 26.8% to $2.46 for the three months ended March 31, 2022 as compared to $1.94 for the same period in 2021. The increase in our average sales price per gallon primarily reflects supply constraints that translated into higher ethanol prices. The average Chicago Board of Trade, or CBOT, fuel-grade ethanol price per gallon, increased 35.0% to $2.16 for the three months ended March 31, 2022 as compared to $1.60 for the same period in 2021. - 21 - Pekin Campus Production Segment Net sales of alcohol from our Pekin Campus production segment increased by $21.0 million, or 22%, to $116.1 million for the three months ended March 31, 2022 as compared to $95.1 million for the same period in 2021. Our total volume of production gallons sold declined by 1.3 million gallons, or 3%, to 49.3 million gallons for the three months ended March 31, 2022 as compared to 50.6 million gallons for the same period in 2021. At our Pekin Campus production segment’s average sales price per gallon of $2.35 for the three months ended March 31, 2022, we generated $3.0 million less in net sales from our Pekin Campus production segment from the 1.3 million fewer gallons of alcohol sold in the three months ended March 31, 2022 as compared to the same period in 2021. The increase of $0.47, or 25%, in our Pekin Campus production segment’s average sales price per gallon in the three months ended March 31, 2022 as compared to the same period in 2021 improved our net sales from our Pekin Campus production segment by $24.0 million. Net sales of essential ingredients increased $10.2 million, or 23%, to $55.3 million for the three months ended March 31, 2022 as compared to $45.1 million for the same period in 2021. Our total volume of essential ingredients sold increased by 12,000 tons, or 5%, to 242,000 tons for the three months ended March 31, 2022 from 230,000 tons for the same period in 2021. At our average sales price per ton of $228.31 for the three months ended March 31, 2022, we generated $2.8 million more in net sales from the 12,000 additional tons of essential ingredients sold in the three months ended March 31, 2022 as compared to the same period in 2021. The increase of $32.36, or 17%, in our average sales price per ton for the three months ended March 31, 2022 as compared to the same period in 2021 increased our net sales from our Pekin Campus production segment by $7.4 million. Marketing and Distribution Segment Net sales of alcohol from our marketing and distribution segment, excluding intersegment sales, decreased by $3.2 million, or 6%, to $54.2 million for the three months ended March 31, 2022 as compared to $57.4 million for the same period in 2021. Our volume of third party alcohol sold reported gross by our marketing and distribution segment decreased by 6.8 million gallons, or 25%, to 19.9 million gallons for the three months ended March 31, 2022 as compared to 26.7 million gallons for the same period in 2021. At our marketing and distribution segment’s average sales price per gallon of $2.71 for the three months ended March 31, 2022, we generated $18.4 million less in net sales from our marketing and distribution segment from the 6.8 million fewer gallons of third-party alcohol sold gross in the three months ended March 31, 2022 as compared to the same period in 2021. Our volume of alcohol sold reported net by our marketing and distribution segment decreased by 16.5 million gallons, or 60%, to 10.8 million gallons for the three months ended March 31, 2022 as compared to 27.3 million gallons for the same period in 2021. The decrease in third-party alcohol volume sold reported net reduced net sales by less than $0.1 million. The $0.57 per gallon, or 27%, increase in our marketing and distribution segment’s average sales price per gallon for the three months ended March 31, 2022 as compared to the same period in 2021 resulted in a $15.3 million increase in our net sales from third-party fuel-grade ethanol sold by our marketing and distribution segment. Other Production Segment Net sales of alcohol from our other production segment increased by $43.8 million, or 274%, to $59.8 million for the three months ended March 31, 2022 as compared to $16.0 million for the same period in 2021. Our total volume of alcohol sold increased by 15.8 million gallons, or 214%, to 23.2 million gallons for the three months ended March 31, 2022 as compared to 7.4 million gallons for the same period in 2021. At our other production segment’s average sales price per gallon of $2.58 for the three months ended March 31, 2022, we generated $40.7 million of additional net sales from our other production segment from the 15.8 million additional gallons of alcohol sold in the three months ended March 31, 2022 as compared to the same period in 2021. The increase of $0.42, or 20%, in our other production segment’s average sales price per gallon for the three months ended March 31, 2022 as compared to the same period in 2021 improved our net sales from our other production segment by $3.1 million. Net sales of essential ingredients increased by $13.8 million, or 271%, to $18.9 million for the three months ended March 31, 2022 as compared to $5.1 million for the same period in 2021. Our total volume of essential ingredients sold increased by 110,000 tons, or 234%, to 157,000 tons for the three months ended March 31, 2022 from 47,000 tons for the same period in 2021. At our average sales price per ton of $120.87 for the three months ended March 31, 2022, we generated $13.2 million of additional net sales from our other production segment from the 110,000 additional tons of essential ingredients sold in the three months ended March 31, 2022 as compared to the same period in 2021. The increase of $11.12, or 10%, in our average sales price per ton for the three months ended March 31, 2022 as compared to the same period in 2021 increased our net sales of essential ingredients from our other production segment by $0.6 million. - 22 - Corporate and other Net sales of alcohol from corporate and other represented $3.8 million associated with our sales from Eagle Alcohol. Cost of Goods Sold and Gross Profit Our consolidated gross profit declined to $4.8 million for the three months ended March 31, 2022 from $13.8 million for the same period in 2021, representing a gross profit margin of 1.5% for the three months ended March 31, 2022 compared to 6.3% for the same period in 2021. Our consolidated gross profit declined due to extreme commodity price volatility, drawn-out supply chains, rail and operational disruptions, rising transportation costs and weak renewable fuel crush margins. In addition, our cost of goods sold includes $7.0 million in non-cash mark-to-market inventory adjustments and unrealized losses recorded on our forward derivative positions. Pekin Campus Production Segment Our Pekin Campus production segment’s gross profit declined by $9.9 million to $3.3 million for the three months ended March 31, 2022 as compared to $13.2 million for the same period in 2021. This decline in gross profit is largely attributable to lower margins from sales of essential ingredients. Our higher sales prices for essential ingredients did not outweigh higher corn prices. In addition, we had lower sales volumes from our Pekin Campus due to a lower capacity utilization rate for the three months ended March 31, 2022 as compared to the same period in 2021 due to plant maintenance and related shutdowns. Marketing and Distribution Segment Our marketing and distribution segment’s gross profit (loss) declined by $4.0 million to a gross loss of $0.4 million for the three months ended March 31, 2022 as compared to $3.6 million for the same period in 2021. Of this decline, $3.9 million is attributable to lower margins from sales of third-party fuel-grade ethanol due to increased volatility in ethanol pricing and $0.1 million is attributable to lower sales volumes for the three months ended March 31, 2022 as compared to the same period in 2021 as we ended our contractual relationship with one of the third-party ethanol plants for which we previously sold its production. Other Production Segment Our other production segment’s gross profit improved by $4.0 million to a gross profit of $1.0 million for the three months ended March 31, 2022 as compared to a gross loss of $3.0 million for the same period in 2021. Of this improvement, $3.3 million is attributable to improved margins on fuel-grade ethanol and $0.7 million is attributable to higher sales volumes as we restarted our Magic Valley facility in November 2021. Corporate and other Gross profit from corporate and other of $0.9 million was associated with our sales from Eagle Alcohol. Selling, General and Administrative Expenses The following table presents our selling, general and administrative, or SG&A, expenses in dollars and as a percentage of net sales (in thousands, except percentages): Three Months Ended March 31, Change in 2022 2021 Dollars Percent Selling, general and administrative expenses $ 7,629 $ 7,014 $ 615 8.8 % Percentage of net sales 2.5 % 3.2 % Our SG&A expenses increased for the three months ended March 31, 2022 as compared to the same period in 2021. The $0.6 million period over period increase in SG&A expenses is primarily due to a $0.9 million acquisition-related accrual for future cash payments attributable to our acquisition of Eagle Alcohol, partially offset by lower professional fees. Net Income (Loss) Available to Common Stockholders The following table presents our net income (loss) available to common stockholders in dollars and as a percentage of net sales (in thousands, except percentages): Three Months Ended March 31, Change in 2022 2021 Dollars Percent Net income (loss) available to Common Stockholders $ (2,914 ) $ 4,366 $ (7,280 ) * Percentage of net sales (0.9 )% 2.0 % * Not meaningful - 23 - The decrease in net income available to common stockholders is primarily due to our lower gross profit and higher SG&A expenses, partially offset by lower interest expense, for the three months ended March 31, 2022 as compared to the same period in 2021. Liquidity and Capital Resources During the three months ended March 31, 2022, we funded our operations primarily from cash generated by our operations, proceeds from lines of credit and cash on hand. These funds were also used to acquire Eagle Alcohol and for capital expenditures. As of March 31, 2022, we had $60.0 million in cash, cash equivalents and restricted cash and $15.2 million available for borrowing under Kinergy’s operating line of credit. We believe we have sufficient liquidity to meet our anticipated working capital, debt service and other liquidity needs for the next twelve months from the date of this report. We may, however, in the future, seek and obtain additional capital in the form of secured debt to provide additional funds for accretive projects. 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). March 31, 2022 December 31, 2021 Change Cash, cash equivalents and restricted cash $ 59,983 $ 62,125 (3.4 )% Current assets $ 241,213 $ 229,526 5.1 % Property and equipment, net $ 220,996 $ 222,550 (0.7 )% Current liabilities $ 80,181 $ 69,602 15.2 % Long-term debt $ 53,681 $ 50,361 6.6 % Working capital $ 161,032 $ 159,924 0.7 % Working capital ratio 3.01 3.30 (8.8 )% Changes in Working Capital and Cash Flows Working capital improved to $161.0 million at March 31, 2022 from $159.9 million at December 31, 2021 as a result of an increase of $11.7 million in current assets, partially offset by an increase of $10.6 million in current liabilities. Current assets increased primarily due to an increase in notes receivable as they became current due to their revised maturity date to June 30, 2022. Our current liabilities increased primarily due to an increase in derivative instruments due to the end of period change in commodity prices for open contracts. Our cash, cash equivalents and restricted cash declined by $2.1 million primarily due to $17.0 million used in our investing activities, partially offset by $11.1 million in cash provided by our operating activities and $3.8 million in cash provided by our financing activities. Cash provided by our Operating Activities We generated $11.1 million in cash from our operating activities during the three months ended March 31, 2022, as compared to $4.5 million in cash used in our operations for the same period in 2021. Specific factors that contributed to the change in cash from our operating activities include: ● an increase of $24.8 million related to higher accounts receivable balances due to the timing of payments ● an increase of $14.5 million related to higher inventories due to increased commodity prices; ● an increase of $10.8 million related to other assets primarily related to derivative activity; and ● an increase of $5.2 million from gains on derivative instruments due to the recent rise in corn prices. - 24 - These amounts were partially offset by: ● a decrease of $7.3 million in our consolidated net income due to lower margins from alcohol sales; and ● a decrease of $30.1 million related to accounts payable due to the timing of payments. Cash used in our Investing Activities We used $14.7 million of cash to acquire Eagle Alcohol, net of cash acquired, and $2.3 million of cash for additions to property and equipment in our investing activities for the three months ended March 31, 2022. Cash provided by our Financing Activities Cash provided by our financing activities was $3.8 million for the three months ended March 31, 2022, which reflects net proceeds of $3.3 million from Kinergy’s operating line of credit and $0.8 million in principal payments received on our notes receivable, partially offset by $0.3 million paid in preferred dividends. Kinergy’s Operating Line of Credit Kinergy maintains an operating line of credit for an aggregate amount of up to $100.0 million. The credit facility matures on August 8, 2023. Interest accrues under the credit facility at a rate equal to (i) the daily Secured Overnight Financing Rate, plus (ii) a specified applicable margin ranging from 1.75% to 2.25%. The credit facility’s monthly unused line fee is 0.25% to 0.375% of the amount by which the maximum credit under the facility exceeds the average daily principal balance during the immediately preceding month. Payments that may be made by Kinergy to Alto Ingredients, Inc. as reimbursement for management and other services provided by Alto Ingredients, Inc. to Kinergy are limited under the terms of the credit facility to $1.5 million per fiscal quarter. The credit facility also includes the accounts receivable of our indirect 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 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. - 25 - We believe Kinergy and Alto Nutrients are in compliance with the fixed-charge coverage ratio covenant as of the filing of this report. The following table sets forth the fixed-charge coverage ratio financial covenant and the actual results for the periods presented: Three Months Ended March 31, Years Ended December 31, 2022 2021 2021 2020 Fixed-Charge Coverage Ratio Requirement 2.00 2.00 2.00 2.00 Actual 10.18 7.71 13.32 5.35 Excess 8.18 5.71 11.32 3.35 Alto Ingredients, Inc. has guaranteed all of Kinergy’s obligations under the credit facility. As of March 31, 2022, Kinergy had an outstanding balance of $53.7 million and $15.2 million of unused borrowing availability under the credit facility. Effects of Inflation The impact of inflation was not significant to our financial condition or results of operations for the three months ended March 31, 2022 and 2021.