Alto Ingredients, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report. This report and our consolidated financial statements and notes to consolidated financial statements contain forward-looking statements, which generally include the plans and objectives of management for future operations, including plans and objectives relating to our future economic performance and our current beliefs regarding revenues we might generate and profits we might earn if we are successful in implementing our business and growth strategies. The forward-looking statements and associated risks may include, relate to or be qualified by other important factors, including: ● fluctuations in the market prices of alcohols and essential ingredients; ● fluctuations in the costs of key production input commodities such as corn and natural gas; ● the projected growth or contraction in the alcohol and essential ingredients markets in which we operate; ● our strategies for expanding, maintaining or contracting our presence in these markets; ● anticipated trends in our financial condition and results of operations; and ● our ability to distinguish ourselves from our current and future competitors. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this report, or in the case of a document incorporated by reference, as of the date of that document. We do not undertake to update, revise or correct any forward-looking statements, except as required by law. Any of the factors described immediately above, or referenced from time to time in our filings with the Securities and Exchange Commission or in the “Risk Factors” section below could cause our financial results, including our net income or loss or growth in net income or loss to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially. Overview We are a leading producer and distributor of specialty alcohols and essential ingredients, and the largest producer of specialty alcohols in the United States. 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. 18 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, and related-process industries via its own dedicated trucking fleet and common carrier. Eagle Alcohol generated over $35.0 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 dried yeast, corn gluten meal, corn gluten feed, corn germ, and distillers grains and liquid feed 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 and biodiesel fuels. 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. All of our production facilities are currently operating and have been operating through all of 2022. 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 — 19 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 continues to serve us well. As a result, we generated positive net income and $29.9 million in Adjusted EBITDA for the second quarter, which included $22.7 million in cash from the USDA’s Biofuel Producer Program under the Cares Act of 2020. 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, and despite macro-economic challenges, we remained focused on our plans and managing the areas of our business within our control, including upgrades to equipment and operating systems to increase plant efficiency and reliability; corn storage capacity expansion; enhancement and broader distribution of our specialty alcohol production; and investment in our essential ingredients business. These capital improvement projects will strengthen and improve our asset base and generate greater profitability over time. In the second quarter, with our improved liquidity, we accelerated many repair and maintenance projects as well as several equipment upgrades throughout our asset portfolio. Through the end of the second quarter, we invested over $15.0 million in capital improvements and repair and maintenance projects. For example, we purchased two new state-of-the-art boilers for our Pekin Campus to enhance our steam capabilities and increase interconnectivity between our Pekin and ICP facilities. This increased capacity will allow us to replace three older boiler units. Our new boiler system will be more reliable and efficient resulting in lower energy use and costs. Additional redundancy from the new boilers will also increase our control of energy access across our Pekin Campus. We prioritized upgrades to specialty alcohol equipment at our Pekin wet mill to align with higher quality standards for our beverage customers. With these upgrades, our equipment will be best-in-class and enable us to meet the highest quality requirements for specialty alcohols and service additional beverage customers, further increasing the strategic synergies of our Eagle Alcohol acquisition. 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. The project consists of two phases, the first for further extracting corn oil and the second for separating and producing enhanced protein. The corn oil extraction phase is complete. Based on better than expected preliminary results, we intend to accelerate installation of corn oil extraction technologies at our three other dry mills. We remain on track to begin producing high-protein co-products at our Magic Valley facility in early 2023 which will assist in our decision on how to roll out the technology to our other facilities. For our Magic Valley facility alone, on an annual basis and at current market values, we expect the system will enable us to produce over 33,000 tons of greater than 50% protein content feed, increase corn oil yields to approximately 50%, or 9 million pounds, and contribute over $9.0 million in EBITDA. Assuming similar economics across all four dry mills, we estimate that the systems, when installed and fully operational, will contribute in total $34.0 million in EBITDA annually based on current market values. We are expanding our corn storage capacity at our Pekin Campus to increase our corn-buying flexibility and reduce the need to purchase product at premium prices when farmers and elevators have stopped shipping corn, including during holidays or unfavorable weather conditions. We expect to complete this project by mid-November. The project will approximately double our days of storage capacity at the site and meet our goal of additional capacity prior to the 2022 holidays and winter weather. We expect this project to yield over $2.0 million in EBITDA annually beginning in the fourth quarter of 2022. 20 Other upgrades include enhancements and expansion of our corn oil production at our ICP facility; increased corn oil storage and railcar loadout capabilities across all locations; logistics improvements for our ICP facility, which include truck access to the plant and scale upgrades; control systems upgrades at our wet mill’s front-end; and a rebuild of one of two turbines at our wet mill. These projects are examples of our commitment to upgrade our facilities to improve efficiency and reliability. We are also working on longer-term projects. We are in the engineering and design phase of a project to bypass the local natural gas utility at our Pekin Campus with the goal of yielding an impact by the end of 2023. This investment would also create an opportunity to sell renewable natural gas produced at our Pekin Campus directly into the pipeline. We expect this investment to yield a return of approximately $5.0 million in EBITDA annually beginning in 2024. We also remain active in evaluating a carbon capture and sequestration program at our Pekin Campus. The U.S. Senate’s recent approval of the Inflation Reduction Act, if ultimately signed into law, would significantly improve project economics, raising the carbon capture tax credit from $50 per metric ton to $85 per metric ton. We produce over 700,000 metric tons of CO 2 per year at our Pekin Campus. This site sits atop the Mt. Simon formation, identified as one of the best and largest aquafers in the country for sequestration. To maximize the value of our CO 2 , we have actively pursued numerous options ranging from development of a stand-alone project to the sale of CO 2 to one of the various pipelines currently under development in the area. Approval of this legislation, if it occurs, will help us clarify our strategy and alternatives, and accelerate our decisions around, and implementation of, this important project. As previously disclosed, in the first quarter we acquired Eagle Alcohol, an established leader in premium alcohol distribution. Thus far, Eagle Alcohol’s break bulk, tote and drum sales are in-line with our expectations, although higher freight costs have resulted in some profit compression. We have completed Eagle Alcohol’s physical integration into our broader business. We have also made progress against our plan to leverage Eagle Alcohol’s distribution base to offer our products in totes and drums. In addition, we have expanded our customer base through Eagle Alcohol’s relationships, which we believe will yield significant benefits in the coming years. We expect Eagle Alcohol to contribute $4.0 million in EBITDA for 2022 and between $8.0 million and $9.0 million in EBITDA annually starting in 2023, including synergies. Looking ahead to the third quarter, although forward crush margins remain positive, we are coming into a late harvest with high corn basis and low corn inventories. We anticipate a moderation in corn basis and corn prices once we progress into the harvesting period. In anticipation of these factors, we have scheduled much of our fall maintenance and repairs in August to reduce our relative use of corn and minimize the impact of short-term higher commodity prices. This maintenance and these repairs will entail brief multi-day shutdowns of our dry mills. Our wet mill, the shut-down of which would have the most significant adverse financial impact, is not scheduled for shut down during this period. 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 and asset impairments, 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 Three Months Ended June 30, Six Months Ended June 30, (in thousands) (unaudited) 2022 2021 2022 2021 Net income $ 22,115 $ 8,390 $ 19,513 $ 13,068 Adjustments: Interest expense 319 1,045 519 2,930 Interest income (145 ) (186 ) (303 ) (370 ) Asset impairments — 1,900 — 3,100 Acquisition-related expense 875 — 1,750 — Depreciation and amortization expense 6,728 5,811 12,861 11,669 Total adjustments 7,777 8,570 14,827 17,329 Adjusted EBITDA $ 29,892 $ 16,960 $ 34,340 $ 30,397 21 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. Results of Operations The following selected financial information should be read in conjunction with our consolidated financial statements and notes to our consolidated financial statements included elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report. Certain performance metrics that we believe are important indicators of our results of operations include: Three Months Ended June 30, Percentage Six Months Ended June 30, Percentage 2022 2021 Variance 2022 2021 Variance Renewable fuel production gallons sold (in millions) 51.3 41.4 23.9 % 100.4 80.4 24.9 % Specialty alcohol production gallons sold (in millions) 25.8 24.3 6.2 % 49.1 43.3 13.4 % Third party renewable fuel gallons sold (in millions) 30.0 59.3 (49.4 )% 60.8 113.3 (46.3 )% Total gallons sold (in millions) 107.1 125.0 (14.3 )% 210.3 237.0 (11.3 )% Total gallons produced (in millions) 77.0 63.6 21.1 % 151.3 121.5 24.5 % Production capacity utilization 88 % 59 % 49.2 % 85 % 56 % 51.8 % Average sales price per gallon $ 2.84 $ 2.41 17.8 % $ 2.65 $ 2.17 22.1 % Corn cost per bushel – CBOT equivalent $ 7.46 $ 6.05 23.3 % $ 6.84 $ 5.51 24.1 % Average basis (1) $ 0.69 $ 0.41 68.3 % $ 0.66 $ 0.36 83.3 % Delivered cost of corn $ 8.15 $ 6.46 26.2 % $ 7.50 $ 5.87 27.8 % Total essential ingredients tons sold (in thousands) 414.1 304.0 36.2 % 812.9 580.9 39.9 % Essential ingredients revenues as % of delivered cost of corn (2) 32.7 % 32.2 % 1.6 % 34.6 % 35.9 % (3.6 )% Average CBOT ethanol price per gallon $ 2.16 $ 2.30 (6.1 )% $ 2.16 $ 2.00 8.0 % Average CBOT corn price per bushel $ 7.78 $ 6.62 17.5 % $ 7.25 $ 6.01 20.6 % (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. 22 Net Sales, Cost of Goods Sold and Gross Profit The following table presents our net sales, cost of goods sold and gross profit in dollars and gross profit as a percentage of net sales (in thousands, except percentages): Three Months Ended June 30, Variance in Six Months Ended June 30, Variance in 2022 2021 Dollars Percent 2022 2021 Dollars Percent Net sales $ 362,189 $ 298,110 $ 64,079 21.5 % $ 670,307 $ 516,844 $ 153,463 29.7 % Cost of goods sold 353,345 282,877 70,468 24.9 % 656,690 487,774 168,916 34.6 % Gross profit $ 8,844 $ 15,233 $ (6,389 ) (41.9 )% $ 13,617 $ 29,070 $ (15,453 ) (53.2 )% Percentage of net sales 2.4 % 5.1 % 2.0 % 5.6 % The increase in our consolidated net sales for the three and six months ended June 30, 2022 as compared to the same period in 2021 was primarily due to an increase in our average sales price per gallon, partially offset by a decrease in our total gallons sold. Our production gallons sold and our volume of essential ingredients sold increased for both the three and six months ended June 30, 2022 as compared to the same periods in 2021 primarily due to production from our Magic Valley facility operating in the first half of 2022, whereas the facility was idled during the first half of 2021, and from increased export and industrial demand. Specialty alcohols contributed 25.8 million gallons for the three months ended June 30, 2022, in line with our 2022 contracted volume of 90 million gallons. Our third-party gallons sold declined as compared to the same periods in 2021, reflecting our strategy to focus our marketing and sales efforts around our own core production assets. Three Months Ended June 30, 2022 and 2021 On a consolidated basis, our average sales price per gallon increased by 18% to $2.84 for the three months ended June 30, 2022 as compared to $2.41 for the same period in 2021. The average Chicago Board of Trade, or CBOT, fuel-grade ethanol price per gallon, however, decreased 6% to $2.16 for the three months ended June 30, 2022 as compared to $2.30 for the same period in 2021. Pekin Campus Production Segment Net sales of alcohol from our Pekin Campus production segment increased by $11.5 million, or 9%, to $143.8 million for the three months ended June 30, 2022 as compared to $132.3 million for the same period in 2021. Our total volume of production gallons sold decreased by 3.0 million gallons, or 5%, to 54.5 million gallons for the three months ended June 30, 2022 as compared to 57.5 million gallons for the same period in 2021. At our Pekin Campus production segment’s average sales price per gallon of $2.64 for the three months ended June 30, 2022, we generated $7.9 million less in net sales from our Pekin Campus production segment from the 3.0 million fewer gallons of alcohol sold in the three months ended June 30, 2022 as compared to the same period in 2021. The increase of $0.34, or 15%, in our Pekin Campus production segment’s average sales price per gallon in the three months ended June 30, 2022 as compared to the same period in 2021 improved our net sales from our Pekin Campus production segment by $19.4 million. Net sales of essential ingredients increased by $10.3 million, or 21%, to $59.9 million for the three months ended June 30, 2022 as compared to $49.6 million for the same period in 2021. Our total volume of essential ingredients sold decreased by 4,300 tons, or 2%, to 217,900 tons for the three months ended June 30, 2022 from 222,200 tons for the same period in 2021. The increase of $51.56, or 23%, in our average sales price per ton for the three months ended June 30, 2022 as compared to the same period in 2021 increased our net sales from our Pekin Campus production segment by $11.5 million. At our average sales price per ton of $274.68 for the three months ended June 30, 2022, we generated $1.2 million less in net sales from the 4,300 fewer tons of essential ingredients sold in the three months ended June 30, 2022 as compared to the same period in 2021. 23 Marketing and Distribution Segment Net sales of fuel-grade ethanol from our marketing and distribution segment reported gross, excluding intersegment sales, decreased by $23.0 million, or 26%, to $63.8 million for the three months ended June 30, 2022 as compared to $86.8 million for the same period in 2021. Our volume of third party fuel-grade ethanol gallons sold reported gross by our marketing and distribution segment declined by 12.6 million gallons, or 38%, to 20.8 million gallons for the three months ended June 30, 2022 as compared to 33.4 million gallons for the same period in 2021. At our marketing and distribution segment’s average sales price per gallon of $3.06 for the three months ended June 30, 2022, we generated $38.5 million less in net sales from our marketing and distribution segment from the 12.6 million fewer gallons of third-party fuel-grade ethanol sold gross in the three months ended June 30, 2022 as compared to the same period in 2021. The $0.47 per gallon, or 18%, increase in our marketing and distribution segment’s average sales price per gallon for the three months ended June 30, 2022 as compared to the same period in 2021 resulted in a $15.8 million increase in our net sales from third-party fuel-grade ethanol sold reported gross by our marketing segment. Our volume of third party fuel-grade ethanol gallons sold reported net by our marketing and distribution segment decreased by 16.7 million gallons, or 64%, to 9.2 million gallons for the three months ended June 30, 2022 as compared to 25.9 million gallons for the same period in 2021. The decrease in third-party fuel-grade ethanol gallons sold reported net reduced net sales by $0.3 million. Other Production Segment Net sales of alcohol from our other production segment increased by $45.0 million, or 203%, to $67.2 million for the three months ended June 30, 2022 as compared to $22.2 million for the same period in 2021. Our total volume of gallons sold increased by 14.4 million gallons, or 176%, to 22.6 million gallons for the three months ended June 30, 2022 as compared to 8.2 million gallons for the same period in 2021. At our other production segment’s average sales price per gallon of $2.97 for the three months ended June 30, 2022, we generated an additional $42.8 million in net sales from our other production segment from the 14.4 million additional gallons of alcohol sold in the three months ended June 30, 2022 as compared to the same period in 2021. The increase of $0.27, or 10%, in our other production segment’s average sales price per gallon for the three months ended June 30, 2022 as compared to the same period in 2021 improved our net sales from our other production segment by $2.2 million. Net sales of essential ingredients increased by $16.1 million, or 221%, to $23.4 million for the three months ended June 30, 2022 as compared to $7.3 million for the same period in 2021. Our total volume of essential ingredients sold increased by 114,400 tons, or 140%, to 196,200 tons for the three months ended June 30, 2022 from 81,800 tons for the same period in 2021. At our average sales price per ton of $119.12 for the three months ended June 30, 2022, we generated an additional $13.6 million in net sales from the 114,400 additional tons of essential ingredients sold in the three months ended June 30, 2022 as compared to the same period in 2021. The increase of $30.47, or 34%, in our average sales price per ton for the three months ended June 30, 2022 as compared to the same period in 2021 increased our net sales from our other production segment by $2.5 million. 24 Corporate and other Net sales of alcohol from corporate and other represented $4.1 million associated with our sales from Eagle Alcohol for the three months ended June 30, 2022. Six Months Ended June 30, 2022 and 2021 On a consolidated basis, our average sales price per gallon increased by 22% to $2.65 for the six months ended June 30, 2022 as compared to $2.17 for the same period in 2021. The average CBOT fuel-grade ethanol price per gallon, increased by 8% to $2.16 for the six months ended June 30, 2022 as compared to $2.00 for the same period in 2021. Pekin Campus Production Segment Net sales of alcohol from our Pekin Campus production segment increased by $32.4 million, or 14%, to $259.8 million for the six months ended June 30, 2022 as compared to $227.4 million for the same period in 2021. Our total volume of production gallons sold declined by 4.4 million gallons, or 4%, to 103.8 million gallons for the six months ended June 30, 2022 as compared to 108.2 million gallons for the same period in 2021. The increase of $0.40, or 19%, in our Pekin Campus production segment’s average sales price per gallon in the six months ended June 30, 2022 as compared to the same period in 2021 improved our net sales from our Pekin Campus production segment by $43.4 million. At our Pekin Campus production segment’s average sales price per gallon of $2.50 for the six months ended June 30, 2022, we generated $11.0 million less in net sales from our Pekin Campus production segment from the 4.4 million fewer gallons of alcohol sold in the six months ended June 30, 2022 as compared to the same period in 2021. Net sales of essential ingredients increased by $20.5 million, or 22%, to $115.1 million for the six months ended June 30, 2022 as compared to $94.6 million for the same period in 2021. Our total volume of essential ingredients sold declined by 6,900 tons, or 2%, to 426,800 tons for the six months ended June 30, 2022 from 433,700 tons for the same period in 2021. At our average sales price per ton of $269.76 for the six months ended June 30, 2022, we generated $1.8 million less in net sales from the 6,900 fewer tons of essential ingredients sold in the six months ended June 30, 2022 as compared to the same period in 2021. The increase of $51.51, or 24%, in our average sales price per ton for the six months ended June 30, 2022 as compared to the same period in 2021 increased our net sales from our Pekin Campus production segment by $22.3 million. Marketing and Distribution Segment Net sales of fuel-grade ethanol from our marketing and distribution segment reported gross, excluding intersegment sales, decreased by $26.1 million, or 18%, to $118.2 million for the six months ended June 30, 2022 as compared to $144.3 million for the same period in 2021. Our volume of third party fuel-grade ethanol gallons sold reported gross by our marketing and distribution segment declined by 19.5 million gallons, or 32%, to 40.7 million gallons for the six months ended June 30, 2022 as compared to 60.2 million gallons for the same period in 2021. At our marketing segment’s average sales price per gallon of $2.89 for the six months ended June 30, 2022, we generated $56.2 million less in net sales from our marketing and distribution segment from the 19.5 million fewer gallons of third-party fuel-grade ethanol sold gross in the six months ended June 30, 2022 as compared to the same period in 2021. The $0.51 per gallon, or 21%, increase in our marketing segment’s average sales price per gallon for the six months ended June 30, 2022 as compared to the same period in 2021 resulted in a $30.4 million increase in our net sales from third-party fuel-grade ethanol sold reported gross by our marketing and distribution segment. 25 Our volume of third party fuel-grade ethanol gallons sold reported net by our marketing and distribution segment decreased by 33.0 million gallons, or 62%, to 20.1 million gallons for the six months ended June 30, 2022 as compared to 53.1 million gallons for the same period in 2021. The decrease in third-party fuel-grade ethanol gallons sold reported net reduced net sales by $0.3 million. Other Production Segment Net sales of alcohol from our other production segment increased $88.9 million, or 233%, to $127.0 million for the six months ended June 30, 2022 as compared to $38.1 million for the same period in 2021. Our total volume of gallons sold increased by 30.2 million gallons, or 195%, to 45.7 million gallons for the six months ended June 30, 2022 as compared to 15.5 million gallons for the same period in 2021. At our other production segment’s average sales price per gallon of $2.78 for the six months ended June 30, 2022, we generated $83.9 million in additional net sales from the 30.2 million additional gallons of alcohol sold in the six months ended June 30, 2022 as compared to the same period in 2021. The increase of $0.32, or 13%, in our other production segment’s average sales price per gallon for the six months ended June 30, 2022 as compared to the same period in 2021 improved our net sales from our other production segment by $5.0 million. Net sales of essential ingredients increased by $29.9 million, or 241%, to $42.3 million for the six months ended June 30, 2022 as compared to $12.4 million for the same period in 2021. Our total volume of essential ingredients sold increased by 238,900 tons, or 162%, to 386,100 tons for the six months ended June 30, 2022 from 147,200 tons for the same period in 2021. At our average sales price per ton of $109.58 for the six months ended June 30, 2022, we generated an additional $26.2 million in net sales from the 238,900 additional tons of essential ingredients sold in the six months ended June 30, 2022 as compared to the same period in 2021. The increase of $25.38, or 30%, in our average sales price per ton for the six months ended June 30, 2022 as compared to the same period in 2021 increased our net sales from our other production segment by $3.7 million. Corporate and other Net sales of alcohol from corporate and other represented $7.9 million associated with our sales from Eagle Alcohol for the six months ended June 30, 2022. Cost of Goods Sold and Gross Profit Our consolidated gross profit declined to $8.8 million, representing a gross profit margin of 2.4%, for the three months ended June 30, 2022 compared to $15.2 million, representing a gross profit margin of 5.1%, for the same period in 2021. Our consolidated gross profit declined to $13.6 million, representing a gross profit margin of 2.0%, for the six months ended June 30, 2022 compared to $29.1 million, representing a gross profit margin of 5.6%, for the same period in 2021. Our consolidated gross profit for both the three and six month periods declined due to higher overall commodity prices and extreme commodity price volatility due to inflationary pressures, including drawn-out supply chains and greater delivery costs, and logistical and service disruptions. In the second quarter of 2022, our freight costs significantly increased year-over-year and doubled sequentially from the first quarter. We also recorded $10.0 million in non-cash, unrealized gains on our forward derivative positions, which was, however, largely offset by $10.0 million in non-cash, lower-of-cost-or-market adjustments on ending inventories largely related to an unplanned power outage at our Pekin Campus resulting from a lightning struck at the utility servicing our Pekin Campus. Three Months Ended June 30, 2022 and 2021 Pekin Campus Production Segment Our Pekin Campus production segment’s gross profit declined by $3.0 million to a gross profit of $8.6 million for the three months ended June 30, 2022 as compared to $11.6 million for the same period in 2021. Of this decline, $2.5 million is attributable to lower margins from our specialty alcohols and $0.5 million is attributable to decreased sales volumes in the three months ended June 30, 2022 as compared to the same period in 2021. 26 Marketing and Distribution Segment Our marketing and distribution segment’s gross profit declined by $1.3 million to $0.1 million for the three months ended June 30, 2022 as compared to $1.4 million for the same period in 2021. Of this reduction, less than $0.1 million is attributable to lower marketing volumes of third-party fuel-grade ethanol and nearly $1.2 million is attributable to lower margins from sales of third-party fuel-grade ethanol for the three months ended June 30, 2022 as compared to the same period in 2021. Other Production Segment Our other production segment’s gross profit declined by $2.8 million to a gross loss of $0.8 million for the three months ended June 30, 2022 as compared to a gross profit of $2.0 million for the same period in 2021. Of this decline, $2.5 million is attributable to lower margins for fuel-grade ethanol and $0.3 million is attributable to increased volumes at lower margins of fuel-grade ethanol for the three months ended June 30, 2022 as compared to the same period in 2021. Corporate and other Gross profit from corporate and other represented $0.9 million associated with our sales from Eagle Alcohol for the three months ended June 30, 2022. Six Months Ended June 30, 2022 and 2021 Pekin Campus Production Segment Our Pekin Campus production segment’s gross profit declined by $12.2 million to a gross profit of $12.1 million for the six months ended June 30, 2022 as compared to $24.3 million for the same period in 2021. Of this decline, $0.7 million is attributable to lower sales volumes and $11.6 million is attributable to lower margins from our specialty alcohols in the six months ended June 30, 2022 as compared to the same period in 2021. Marketing and Distribution Segment Our marketing segment’s gross profit declined by $5.7 million to a gross loss of $0.3 million for the six months ended June 30, 2022 as compared to a gross profit of $5.4 million for the same period in 2021. Of this decline, $5.8 million is attributable to lower margins from sales of third-party fuel-grade ethanol, partially offset by $0.1 million in gross profit attributable to lower marketing volumes of third-party fuel-grade ethanol for the six months ended June 30, 2022 as compared to the same period in 2021. Other Production Segment Our other production segment’s gross profit improved by $0.7 million to a gross loss of less than $0.1 million for the six months ended June 30, 2022 as compared to a gross loss of $0.8 million for the same period in 2021. Of this improvement, $0.7 million is attributable to higher margins and less than $0.1 million is attributable to lower sales volumes at negative margins for the six months ended June 30, 2022 as compared to the same period in 2021. Corporate and other Gross profit from corporate and other represented $1.8 million associated with our sales from Eagle Alcohol for the six months ended June 30, 2022. 27 Selling, General and Administrative Expenses The following table presents our selling, general and administrative, or SG&A, expenses in dollars and as a percentage of net sales (in thousands, except percentages): Three Months Ended June 30, Variance in Six Months Ended June 30, Variance in 2022 2021 Dollars Percent 2022 2021 Dollars Percent Selling, general and administrative expenses $ 8,996 $ 7,230 $ 1,766 24.4 % $ 16,625 $ 14,244 $ 2,381 16.7 % Percentage of net sales 2.5 % 2.4 % 2.5 % 2.8 % Our SG&A expenses increased for the three and six months ended June 30, 2022 as compared to the same period in 2021. The period over period increases in SG&A expenses are primarily due to increased stock compensation expenses and an acquisition-related accrual for future cash payments attributable to our acquisition of Eagle Alcohol of $0.8 million and $1.6 million for the three and six months ended June 30, 2022, respectively. Interest Expense, net The following table presents our interest expense, net in dollars and as a percentage of net sales (in thousands, except percentages): Three Months Ended June 30, Variance in Six Months Ended June 30, Variance in 2022 2021 Dollars Percent 2022 2021 Dollars Percent Interest Expense, net $ 319 $ 1,045 $ (726 ) (69.5 )% $ 519 $ 2,930 $ (2,411 ) (82.3 )% Percentage of net sales 0.1 % 0.4 % 0.1 % 0.6 % Our interest expense declined for the three and six months ended June 30, 2022 as compared to the same period in 2021. The declines are primarily due to lower debt balances for 2022 as compared to 2021 as we paid down all of our high interest rate term debt in the second half of 2021. Income from Cash Grant We applied for and received $22.7 million in cash from the USDA’s Biofuel Producer Program. The program was created as part of the CARES Act in 2020, which allocated $700 million to support biofuel producers who experienced market losses due to the pandemic. The cash grant is not required to be repaid nor will it recur in the future. . 28 Net Income Available to Common Stockholders The following table presents our net income available to common stockholders in dollars and as a percentage of net sales (in thousands, except percentages): Three Months Ended June 30, Variance in Six Months Ended June 30, Variance in 2022 2021 Dollars Percent 2022 2021 Dollars Percent Net income available to common stockholders $ 21,516 $ 7,967 $ 13,549 170.1 % $ 18,635 $ 12,274 $ 6,361 51.8 % Percentage of net sales 5.9 % 2.7 % 2.8 % 2.4 % The improvement in our net income available to common stockholders for the three and six months ended June 30, 2022 as compared to the same periods in 2021 is primarily due to income from a CARES Act cash grant in the amount of $22.7 million. Liquidity and Capital Resources During the six months ended June 30, 2022, we funded our operations primarily from cash generated by our operations, income from a cash grant under the CARES Act, collection of notes receivable, proceeds from lines of credit and cash on hand. These funds were also used to acquire Eagle Alcohol and for capital expenditures. As of June 30, 2022, we had $74.7 million in cash, cash equivalents and restricted cash and $28.6 million available for borrowing under Kinergy’s operating line of credit. Other than amounts outstanding under Kinergy’s credit facility, we have no debt and we expect to further strengthen our liquidity as we complete the renewal of our revolving line of credit in the third quarter. 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 filing 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 Period-End Liquidity Status We believe that the following amounts provide insight into our liquidity and capital resources. The following selected financial information should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report (dollars in thousands). June 30, 2022 December 31, 2021 Change Cash, cash equivalents and restricted cash $ 74,737 $ 62,125 20.3 % Current assets $ 273,488 $ 229,526 19.2 % Property and equipment, net $ 222,946 $ 222,550 0.2 % Current liabilities $ 95,124 $ 69,602 36.7 % Long-term debt $ 52,518 $ 50,361 4.3 % Working capital $ 178,364 $ 159,924 11.5 % Working capital ratio 2.88 3.30 (12.7 )% Changes in Working Capital and Cash Flows Working capital improved to $178.4 million at June 30, 2022 from $159.9 million at December 31, 2021 as a result of an increase of $44.0 million in current assets, partially offset by an increase of $25.5 million in current liabilities. 29 Current assets increased primarily due to an increase in accounts receivable, inventories and derivative assets due to higher average commodity prices for the six months ended 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 increased by $12.6 million primarily due to $20.7 million in cash provided by our operating activities and $16.3 million in cash provided by our financing activities, partially offset by $24.4 million in cash used in our investing activities. Cash provided by our Operating Activities We generated $20.7 million in cash from our operating activities during the six months ended June 30, 2022, as compared to $4.0 million for the same period in 2021. Specific factors that contributed to the change in cash from our operating activities include: ● an increase of $6.4 million in our consolidated net income due to a cash grant under the CARES Act and positive margins from specialty alcohol sales; ● an increase of $23.3 million related to higher accounts receivable balances due to the timing of payments and higher commodity prices; ● an increase of $3.8 million related to higher inventories due to increased commodity prices; and ● a reduction of asset impairments of $3.1 million due to plants recorded as held-for-sale in the prior period. These amounts were partially offset by: ● a decrease of $13.2 million related to accounts payable due to the timing of payments; ● an increase in other assets of $9.0 million due to changes in derivative assets related to commodity price changes; and ● a decrease in income from loan forgiveness of $3.9 million due to a CARES Act loan forgiven in the prior period. Cash used in our Investing Activities We used $14.7 million of cash to acquire Eagle Alcohol, net of cash acquired, and $9.8 million of cash for additions to property and equipment in our investing activities for the six months ended June 30, 2022. Our additions to property and equipment increased by $5.6 million for the six months ended June 30, 2022 as compared to the same period in 2021 due to higher capital expenditures associated with our plant improvement initiatives in 2022. Cash provided by our Financing Activities Cash provided by our financing activities was $16.3 million for the six months ended June 30, 2022, which reflects collections of $14.8 million from notes receivable held in connection with the sale in 2020 of our ethanol production facilities in Aurora, Nebraska, and net proceeds of $2.2 million from Kinergy’s operating line of credit, partially offset by $0.6 million paid in cash dividends on our preferred stock. 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. 30 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: Three Months Ended June 30, Years Ended December 31, 2022 2021 2021 2020 Fixed-Charge Coverage Ratio Requirement 2.00 2.00 2.00 2.00 Actual 8.72 7.92 13.32 5.35 Excess 6.72 5.92 11.32 3.35 Alto Ingredients, Inc. has guaranteed all of Kinergy’s obligations under the credit facility. As of June 30, 2022, Kinergy had an outstanding balance of $52.5 million and $28.6 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 and six months ended June 30, 2022 and 2021.