Alto Ingredients, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS. ALTO INGREDIENTS, INC. CONSOLIDATED BALANCE SHEETS (in thousands) September 30, December 31, 2022 2021 (unaudited) * ASSETS Current Assets: Cash and cash equivalents $ 28,458 $ 50,612 Restricted cash 3,955 11,513 Accounts receivable, net (net of allowance for doubtful accounts of $ 135 and $ 378 , respectively) 76,455 86,888 Inventories 61,088 54,373 Derivative instruments 7,384 15,839 Notes receivable, current — 3,125 Other current assets 8,966 7,176 Total current assets 186,306 229,526 Property and equipment, net 233,475 222,550 Other Assets: Right of use operating lease assets, net 12,895 13,413 Notes receivable, noncurrent — 11,641 Intangible assets, net 9,234 2,678 Goodwill 5,970 — Other assets 6,788 5,145 Total other assets 34,887 32,877 Total Assets $ 454,668 $ 484,953 * Amounts derived from the audited consolidated financial statements for the year ended December 31, 2021. See accompanying notes to consolidated financial statements. 1 ALTO INGREDIENTS, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) (in thousands, except par value) September 30, December 31, 2022 2021 (unaudited) * LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable – trade $ 17,493 $ 23,251 Accrued liabilities 22,172 21,307 Current portion – operating leases 3,646 3,909 Derivative instruments 1,106 13,582 Other current liabilities 10,096 7,553 Total current liabilities 54,513 69,602 Long-term debt, net of current portion 45,888 50,361 Operating leases, net of current portion 9,201 9,382 Other liabilities 10,068 10,394 Total Liabilities 119,670 139,739 Commitments and Contingencies (Note 7) Stockholders’ Equity: Alto Ingredients, Inc. Stockholders’ Equity: Preferred stock, $ 0.001 par value; 10,000 shares authorized; Series A: 1,684 shares authorized; no shares issued and outstanding as of September 30, 2022 and December 31, 2021; Series B: 1,581 shares authorized; 927 shares issued and outstanding as of September 30, 2022 and December 31, 2021; liquidation preference of $ 18,075 as of September 30, 2022 1 1 Common stock, $ 0.001 par value; 300,000 shares authorized; 73,956 and 72,778 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively 74 73 Non-voting common stock, $ 0.001 par value; 3,553 shares authorized; 1 share issued and outstanding as of September 30, 2022 and December 31, 2021 — — Additional paid-in capital 1,036,459 1,037,205 Accumulated other comprehensive loss ( 284 ) ( 284 ) Accumulated deficit ( 701,252 ) ( 691,781 ) Total Stockholders’ Equity 334,998 345,214 Total Liabilities and Stockholders’ Equity $ 454,668 $ 484,953 * Amounts derived from the audited consolidated financial statements for the year ended December 31, 2021. See accompanying notes to consolidated financial statements. 2 ALTO INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net sales $ 336,877 $ 305,556 $ 1,007,184 $ 822,400 Cost of goods sold 356,716 308,955 1,013,406 796,729 Gross profit (loss) ( 19,839 ) ( 3,399 ) ( 6,222 ) 25,671 Selling, general and administrative expenses ( 7,403 ) ( 5,533 ) ( 24,028 ) ( 19,777 ) Asset impairments — — — ( 3,100 ) Income (loss) from operations ( 27,242 ) ( 8,932 ) ( 30,250 ) 2,794 Interest expense, net ( 340 ) ( 429 ) ( 859 ) ( 3,359 ) Income from cash grant — — 22,652 — Income from loan forgiveness — 5,973 — 9,860 Other income (expense), net ( 456 ) 256 ( 68 ) 641 Income (loss) before provision for income taxes ( 28,038 ) ( 3,132 ) ( 8,525 ) 9,936 Provision for income taxes — — — — Net income (loss) $ ( 28,038 ) $ ( 3,132 ) $ ( 8,525 ) $ 9,936 Preferred stock dividends $ ( 319 ) $ ( 319 ) $ ( 946 ) $ ( 946 ) Income allocated to participating securities — — — ( 120 ) Net income (loss) available to common stockholders $ ( 28,357 ) $ ( 3,451 ) $ ( 9,471 ) $ 8,870 Net income (loss) per share, basic $ ( 0.39 ) $ ( 0.05 ) $ ( 0.13 ) $ 0.12 Net income (loss) per share, diluted $ ( 0.39 ) $ ( 0.05 ) $ ( 0.13 ) $ 0.12 Weighted-average shares outstanding, basic 73,011 71,383 71,815 71,002 Weighted-average shares outstanding, diluted 73,011 71,383 71,815 72,260 See accompanying notes to consolidated financial statements. 3 ALTO INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands) Nine Months Ended September 30, 2022 2021 Operating Activities: Net income (loss) $ ( 8,525 ) $ 9,936 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization of intangibles 19,122 17,520 Inventory valuation 7,963 — Asset impairments — 3,100 Income from loan forgiveness — ( 9,860 ) Non-cash compensation 2,546 2,283 Amortization of deferred financing fees 29 732 Bad debt expense (benefit) ( 187 ) 140 Changes in operating assets and liabilities, net of business acquisition: Accounts receivable 16,137 ( 35,072 ) Inventories ( 13,290 ) ( 20,192 ) Other assets ( 7,472 ) 8,011 Operating leases ( 3,799 ) ( 3,184 ) Assets held-for-sale — ( 2,874 ) Liabilities held-for-sale — 1,467 Accounts payable and accrued expenses ( 10,684 ) 8,482 Net cash provided by (used in) operating activities 1,840 ( 19,511 ) Investing Activities: Proceeds from principal payments on notes receivable 14,766 — Proceeds from asset sales — 19,500 Additions to property and equipment ( 25,233 ) ( 12,240 ) Purchase of Eagle Alcohol, net of cash acquired ( 14,685 ) — Net cash provided by (used in) investing activities ( 25,152 ) 7,260 Financing Activities: Net proceeds from (payments on) Kinergy’s line of credit ( 4,452 ) 38,198 Stock repurchases ( 1,002 ) — Proceeds from stock option exercises — 462 Principal payments on borrowings — ( 37,810 ) Preferred stock dividends paid ( 946 ) — Net cash provided by (used in) financing activities ( 6,400 ) 850 Net change in cash, cash equivalents and restricted cash ( 29,712 ) ( 11,401 ) Cash, cash equivalents and restricted cash at beginning of period 62,125 48,187 Cash, cash equivalents and restricted cash at end of period $ 32,413 $ 36,786 Reconciliation of total cash, cash equivalents and restricted cash: Cash and cash equivalents $ 28,458 $ 36,029 Restricted cash 3,955 757 Total cash, cash equivalents and restricted cash $ 32,413 $ 36,786 Supplemental Information: Interest paid $ 961 $ 3,194 Accrued preferred stock dividends $ — $ 946 See accompanying notes to consolidated financial statements. 4 ALTO INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited, in thousands) Additional Accum. Other Non- Preferred Stock Common Stock Paid-In Accumulated Comprehensive Controlling Shares Amount Shares Amount Capital Deficit Loss Interests Total Balances, January 1, 2022 927 $ 1 72,778 $ 73 $ 1,037,205 $ ( 691,781 ) $ ( 284 ) $ — $ 345,214 Restricted stock issued to employees and directors, net of cancellations and tax — — 684 — ( 9 ) — — — ( 9 ) Stock-based compensation — — — — 673 — — — 673 Shares issued for Eagle Alcohol acquisition — — 949 1 — — — — 1 Preferred stock dividends — — — — — ( 312 ) — — ( 312 ) Net loss — — — — — ( 2,602 ) — — ( 2,602 ) Balances, March 31, 2022 927 $ 1 74,411 $ 74 $ 1,037,869 $ ( 694,695 ) $ ( 284 ) $ — $ 342,965 Restricted stock issued to employees and directors, net of cancellations and tax — — ( 223 ) — ( 2,283 ) — — — ( 2,283 ) Stock-based compensation — — — — 1,106 — — — 1,106 Preferred stock dividends — — — — — ( 315 ) — — ( 315 ) Net income — — — — — 22,115 — — 22,115 Balances, June 30, 2022 927 $ 1 74,188 $ 74 $ 1,036,692 $ ( 672,895 ) $ ( 284 ) $ — $ 363,588 Restricted stock issued to employees and directors, net of cancellations and tax — — 27 — 2 — — — 2 Stock repurchases — — ( 259 ) — ( 1,002 ) — — — ( 1,002 ) Stock-based compensation — — — — 767 — — — 767 Preferred stock dividends — — — — — ( 319 ) — — ( 319 ) Net loss — — — — — ( 28,038 ) — — ( 28,038 ) Balances, September 30, 2022 927 $ 1 73,956 $ 74 $ 1,036,459 $ ( 701,252 ) $ ( 284 ) $ — $ 334,998 Balances, January 1, 2021 927 $ 1 72,487 $ 72 $ 1,036,638 $ ( 736,598 ) $ ( 3,878 ) $ — $ 296,235 Restricted stock issued to employees and directors, net of cancellations and tax — — 550 1 ( 186 ) — — — ( 185 ) Stock-based compensation — — — — 804 — — — 804 Issuances of common stock — — 124 — 462 — — — 462 Preferred stock dividends — — — — — ( 312 ) — — ( 312 ) Net income — — — — — 4,678 — — 4,678 Balances, March 31, 2021 927 $ 1 73,161 $ 73 $ 1,037,718 $ ( 732,232 ) $ ( 3,878 ) $ — $ 301,682 Restricted stock issued to employees and directors, net of cancellations and tax — — ( 350 ) — ( 2,589 ) — — — ( 2,589 ) Stock-based compensation — — — — 851 — — — 851 Preferred stock dividends — — — — — ( 315 ) — — ( 315 ) Net income — — — — — 8,390 — — 8,390 Balances, June 30, 2021 927 $ 1 72,811 $ 73 $ 1,035,980 $ ( 724,157 ) $ ( 3,878 ) $ — $ 308,019 Restricted stock issued to employees and directors, net of cancellations and tax — — ( 11 ) — — — — — — Stock-based compensation — — — — 628 — — — 628 Preferred stock dividends — — — — — ( 319 ) — — ( 319 ) Net loss — — — — — ( 3,132 ) — — ( 3,132 ) Balances, September 30, 2021 927 $ 1 72,800 $ 73 $ 1,036,608 $ ( 727,608 ) $ ( 3,878 ) $ — $ 305,196 See accompanying notes to consolidated financial statements. 5 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND BASIS OF PRESENTATION. Organization and Business – The consolidated financial statements include, for all periods presented, the accounts of Alto Ingredients, Inc., a Delaware corporation (“Alto Ingredients”), and its direct and indirect wholly-owned subsidiaries (collectively, the “Company”), including Kinergy Marketing LLC, an Oregon limited liability company (“Kinergy”), Alto Nutrients, LLC, a California limited liability company (“Alto Nutrients”), Alto Op Co., a Delaware corporation (“Alto Op Co.”), Alto Pekin, LLC, a Delaware limited liability company (“Alto Pekin”) and Alto ICP, LLC, a Delaware limited liability company (“ICP”), and the Company’s production facilities in Oregon and Idaho. On May 14, 2021 and November 4, 2021, the Company completed the sale of its production facilities located in Madera and Stockton, California, respectively. The results of these facilities are included in the Company’s results reported for the three and nine months ended September 30, 2021. As discussed in Note 2, on January 14, 2022, the Company acquired 100 % ownership of Eagle Alcohol Company LLC, a Missouri limited liability company (“Eagle Alcohol”), which is now a wholly-owned subsidiary of Alto Ingredients, Inc. The results of Eagle Alcohol since the date of the acquisition are included in the Company’s results reported for the three and nine months ended September 30, 2022. The Company is a leading producer and distributor of specialty alcohols and essential ingredients. The Company also produces, markets and distributes renewable fuel. The Company’s production facilities in Pekin, Illinois are located in the heart of the Corn Belt, benefit from low-cost and abundant feedstock and allow for access to many additional domestic markets. In addition, the Company’s ability to load barges, rail and trucks from these facilities allows for greater access to international markets. The Company’s two production facilities in Oregon and Idaho are located in close proximity to both feed and renewable fuel customers and thus enjoy unique advantages in efficiency, logistics and product pricing. The Company has a combined alcohol production capacity of 350 million gallons per year and produces, on an annualized basis, over 1.5 million tons of essential ingredients, such as dried yeast, corn gluten meal, corn gluten feed, corn germ, and distillers grains and liquid feed used in commercial animal feed and pet foods. In addition, the Company sells alcohols acquired from other producers, and markets and distributes fuel-grade ethanol produced by third parties. The Company focuses on four key markets: Health, Home & Beauty ; Food & Beverage ; Essential Ingredients ; and Renewable Fuels . Products for the Health, Home & Beauty market include specialty alcohols used in mouthwash, cosmetics, pharmaceuticals, hand sanitizers, disinfectants and cleaners. Products for the Food & Beverage markets include grain neutral spirits used in alcoholic beverages and vinegar as well as corn germ used for corn oils. Products for Essential Ingredients markets include dried yeast, corn gluten meal, corn gluten feed, corn germ, and distillers grains and liquid feed used in commercial animal feed and pet foods. Renewable Fuels includes fuel-grade ethanol and distillers corn oil used as a feedstock for renewable diesel and biodiesel fuels. As of September 30, 2022, all of the Company’s production facilities were operating. As market conditions change, the Company may increase, decrease or idle production at one or more operating facilities or resume operations at any then-idled facility. 6 Basis of Presentation – Interim Financial Statements – The accompanying unaudited consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Results for interim periods should not be considered indicative of results for a full year. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. The accounting policies used in preparing these consolidated financial statements are the same as those described in Note 1 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included. All significant intercompany accounts and transactions have been eliminated in consolidation. Accounts Receivable and Allowance for Doubtful Accounts – Trade accounts receivable are presented at face value, net of the allowance for doubtful accounts. The Company sells specialty alcohols to large consumer products companies, sells fuel-grade ethanol to gasoline refining and distribution companies, sells essential ingredients to animal feed customers, including distillers grains and other feed co-products to dairy operators and animal feedlots and corn oil to poultry and biodiesel customers generally without requiring collateral. The Company maintains an allowance for doubtful accounts for balances that appear to have specific collection issues. The collection process is based on the age of the invoice and requires attempted contacts with the customer at specified intervals. If, after a specified number of days, the Company has been unsuccessful in its collection efforts, a bad debt allowance is recorded for the balance in question. Delinquent accounts receivable are charged against the allowance for doubtful accounts once uncollectibility has been determined. The factors considered in reaching this determination are the apparent financial condition of the customer and the Company’s success in contacting and negotiating with the customer. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of ability to make payments, additional allowances may be required. Of the accounts receivable balance, approximately $ 54,972,000 and $ 63,929,000 at September 30, 2022 and December 31, 2021, respectively, were used as collateral under Kinergy’s operating line of credit. The allowance for doubtful accounts was $ 135,000 and $ 378,000 as of September 30, 2022 and December 31, 2021, respectively. The Company recorded a bad debt recovery of $ 253,000 and $ 3,000 for the three months ended September 30, 2022 and 2021, respectively. The Company recorded a bad debt recovery of $ 187,000 and bad debt expense of $ 140,000 for the nine months ended September 30, 2022 and 2021, respectively. The Company does not have any off-balance sheet credit exposure related to its customers. Financial Instruments – The carrying values of cash and cash equivalents, restricted cash, accounts receivable, notes receivable, derivative assets, accounts payable, accrued liabilities and derivative liabilities are reasonable estimates of their fair values because of the short maturity of these items. The Company believes the carrying value of its long-term debt instruments are not considered materially different than fair value because the interest rates on these instruments are variable. Business Combinations – Business acquisitions are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 “Business Combinations”. FASB ASC 805 requires the reporting entity to identify the acquirer, determine the acquisition date, recognize and measure the identifiable tangible and intangible assets acquired and liabilities assumed and recognize and measure goodwill or a gain from the purchase. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts assigned is recorded as goodwill. Adjustments to fair value assessments are recorded to goodwill over the measurement period (not longer than twelve months). 7 Income from Cash Grant – The Company applied for and received $ 22,652,000 in cash from the USDA’s Biofuel Producer Program. The program was created as part of the CARES Act in 2020, which allocated $ 700,000,000 to support biofuel producers who experienced market losses due to the pandemic. The cash grant is not required to be repaid. Since these funds are provided to subsidize historical losses of the Company, and are not required to be repaid, the Company accounted for the proceeds by analogy to International Accounting Standards 20, Accounting for Government Grants and Disclosure of Government Assistance , and reported the amount as income from cash grant in the accompanying consolidated statements of operations. Share Repurchase Program – On September 12, 2022, the Company announced a share repurchase program under which it may repurchase up to $ 50 million of its common stock with an initial purchase authorization of $ 10 million. Amounts in excess of the initial purchase authorization of $ 10 million will require additional board and preferred stockholder authorization. The share repurchase program does not have an expiration date, does not require the repurchase of any particular amount of shares, and may be implemented, modified, suspended or discontinued in whole or in part at any time and without further notice. As repurchases are made, the Company will retire the shares, resulting in a reduction of issued and outstanding shares. For the three and nine months ended September 30, 2022, the Company repurchased an aggregate of 259,000 shares for $ 1,002,000 in cash. Estimates and Assumptions – The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates are required as part of determining the allowance for doubtful accounts, net realizable value of inventory, estimated lives of property and equipment, long-lived asset impairments, fair value of warrants, valuation allowances on deferred income taxes, the potential outcome of future tax consequences of events recognized in the Company’s financial statements or tax returns, and the valuation of assets acquired and liabilities assumed as a result of business combinations. Actual results and outcomes may materially differ from management’s estimates and assumptions. 2. ACQUISITION OF EAGLE ALCOHOL. On January 14, 2022, the Company purchased 100 % of the membership interests of Eagle Alcohol. The purchase price was $ 14.0 million in cash plus an estimated net working capital adjustment of $ 1.3 million in cash. The selling members of Eagle Alcohol are eligible to receive up to an additional $ 14.0 million of contingent consideration, payable through a combination of $ 9.0 million in cash over the next three years and an aggregate of $ 5.0 million in the Company’s common stock on the fourth and fifth year anniversaries of the closing date, subject to the satisfaction of certain conditions, including continued employment with the Company. With respect to these payments, the Company has recognized an estimated $ 0.9 million and $ 2.6 million for the three and nine months ended September 30, 2022, respectively, in selling, general and administrative expenses in the accompanying consolidated statements of operations. Eagle Alcohol specializes in break bulk distribution of specialty alcohols. Eagle Alcohol purchases bulk alcohol from suppliers and 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. The acquisition has provided the Company further vertical integration and access to new markets in the specialty alcohol industry. 8 Eagle Alcohol’s unaudited results for the three months ended September 30, 2022 and 2021 generated $ 4.2 million and $ 9.9 million in net sales and $ 0.0 million and $ 1.0 million in net income, respectively. Eagle Alcohol’s unaudited results for the nine months ended September 30, 2022 and 2021 generated $ 12.1 million and $ 27.5 million in net sales and $ 0.1 million and $ 3.0 million in net income, respectively. The following table presents unaudited pro forma combined financial information assuming the acquisition occurred on January 1, 2021 (dollars in thousands except per share amounts): Three Months Ended September 30, 2022 2021 Revenues – pro forma $ 336,877 $ 311,821 Net loss available to common stockholders – pro forma $ ( 28,357 ) $ ( 3,424 ) Diluted net loss per share – pro forma $ ( 0.38 ) $ ( 0.05 ) Diluted shares 73,960 72,332 Nine Months Ended September 30, 2022 2021 Revenues – pro forma $ 1,007,711 $ 840,947 Net income (loss) available to common stockholders – pro forma $ ( 9,538 ) $ 8,474 Diluted net income (loss) per share – pro forma $ ( 0.13 ) $ 0.12 Diluted shares 72,764 73,209 The following preliminary allocation of the estimated purchase price assumes, with the exception of property and equipment and intangibles, carrying values approximate fair value. Estimates of uncollectible accounts receivable are not considered material due to the short-term nature and customer collection history. The preliminary estimate of working capital is under review by management and is subject to change. Based upon these assumptions, the preliminary purchase price allocation is as follows (in thousands): Cash and equivalents $ 705 Accounts receivable 5,517 Inventories 1,388 Other assets 29 Total current assets 7,639 Property and equipment 1,067 Right of use assets 2,749 Total tangible assets $ 11,455 Current liabilities $ 6,262 Right of use liability 2,749 Total liabilities $ 9,011 Net tangible assets acquired $ 2,444 Customer relationships 6,556 Tradename 420 Goodwill 5,970 Total Purchase Price $ 15,390 Goodwill represents the value of the downstream integration that the operations of Eagle Alcohol will add to the Company. The Company expects the amortization of goodwill to be deductible for tax purposes. For the identifiable intangible assets, the Company has estimated 12 years for useful lives for customer relationships and 10 years for tradename. For the three months ended September 30, 2022, the Company recorded amortization expense of $ 137,000 and $ 10,000 for customer relationships and tradename, respectively. For the nine months ended September 30, 2022, the Company recorded amortization expense of $ 390,000 and $ 30,000 for customer relationships and tradename, respectively. Any changes to the initial estimates of the fair value of the acquired assets and assumed liabilities will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill if net assets acquired are less than the purchase price. The Company did not incur any material acquisition costs. 9 3. SEGMENTS. The Company reports its financial and operating performance in three segments: (1) marketing and distribution, which includes marketing and merchant trading for Company-produced alcohols and essential ingredients on an aggregated basis and third-party fuel-grade ethanol sales (2) Pekin production, which includes the production and sale of alcohols and essential ingredients produced at the Company’s Pekin, Illinois campus (“Pekin Campus”), and (3) Other production, which includes the production and sale of renewable fuel and essential ingredients produced at all of the Company’s other production facilities on an aggregated basis (“Other production”), none of which are individually so significant as to be considered a reportable segment. The following tables set forth certain financial data for the Company’s operating segments (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net Sales Pekin Campus, recorded as gross: Alcohol sales $ 133,680 $ 114,587 $ 393,498 $ 341,967 Essential ingredient sales 54,537 46,016 169,670 140,670 Intersegment sales 332 293 857 919 Total Pekin Campus sales 188,549 160,896 564,025 483,556 Marketing and distribution: Alcohol sales, gross $ 55,262 $ 112,391 $ 172,746 $ 255,702 Alcohol sales, net 308 505 975 1,489 Intersegment sales 3,121 2,415 9,360 7,277 Total marketing and distribution sales 58,691 115,311 183,081 264,468 Other production, recorded as gross: Alcohol sales $ 64,492 $ 25,190 $ 191,483 $ 63,311 Essential ingredient sales 24,439 6,867 66,748 19,261 Intersegment sales 3 259 14 896 Total Other production sales 88,934 32,316 258,245 83,468 Corporate and other 4,159 — 12,064 — Intersegment eliminations ( 3,456 ) ( 2,967 ) ( 10,231 ) ( 9,092 ) Net sales as reported $ 336,877 $ 305,556 $ 1,007,184 $ 822,400 Cost of goods sold: Pekin Campus $ 207,939 $ 169,721 $ 572,512 $ 468,972 Marketing and distribution 55,159 105,902 173,670 245,606 Other production 91,663 35,613 261,514 87,055 Corporate and other 2,925 — 8,995 — Intersegment eliminations ( 970 ) ( 2,281 ) ( 3,285 ) ( 4,904 ) Cost of goods sold as reported $ 356,716 $ 308,955 $ 1,013,406 $ 796,729 Gross profit (loss): Pekin Campus $ ( 19,390 ) $ ( 8,825 ) $ ( 8,487 ) $ 14,584 Marketing and distribution 3,532 9,409 9,411 18,862 Other production ( 2,729 ) ( 3,297 ) ( 3,269 ) ( 3,587 ) Corporate and other 1,234 — 3,069 — Intersegment eliminations ( 2,486 ) ( 686 ) ( 6,946 ) ( 4,188 ) Gross profit (loss) as reported $ ( 19,839 ) $ ( 3,399 ) $ ( 6,222 ) $ 25,671 Income (loss) before provision for income taxes: Pekin Campus $ ( 22,664 ) $ ( 11,830 ) $ ( 6,252 ) $ 8,907 Marketing and distribution 1,622 7,517 3,444 12,929 Other production ( 4,958 ) ( 4,856 ) 1,404 ( 12,467 ) Corporate and other ( 2,038 ) 6,037 ( 7,121 ) 567 $ ( 28,038 ) $ ( 3,132 ) $ ( 8,525 ) $ 9,936 Depreciation and amortization of intangibles: Pekin Campus $ 4,758 $ 4,372 $ 14,381 $ 13,043 Other production 1,273 1,468 4,095 4,433 Corporate and other 229 11 646 44 $ 6,260 $ 5,851 $ 19,122 $ 17,520 Interest expense, net of capitalized interest: Pekin Campus $ ( 48 ) $ 176 $ ( 81 ) $ 767 Marketing and distribution 487 295 1,060 721 Other production ( 74 ) — ( 128 ) 182 Corporate and other ( 25 ) ( 42 ) 8 1,689 $ 340 $ 429 $ 859 $ 3,359 10 The following table sets forth the Company’s total assets by operating segment (in thousands): September 30, 2022 December 31, 2021 Total assets: Pekin Campus $ 247,449 $ 266,197 Marketing and distribution 111,900 130,302 Other production 63,904 57,046 Corporate and other 31,415 31,408 $ 454,668 $ 484,953 4. INVENTORIES. Inventories consisted primarily of bulk ethanol, specialty alcohols, corn, essential ingredients and unleaded fuel, and are valued at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Inventory is net of a valuation adjustment of $ 7,963,000 and $ 0 as of September 30, 2022 and December 31, 2021, respectively. Inventory balances consisted of the following (in thousands): September 30, 2022 December 31, 2021 Finished goods $ 40,630 $ 35,509 Work in progress 8,084 6,909 Raw materials 11,321 10,837 Other 1,053 1,118 Total $ 61,088 $ 54,373 11 5. DERIVATIVES. The business and activities of the Company expose it to a variety of market risks, including risks related to changes in commodity prices. The Company monitors and manages these financial exposures as an integral part of its risk management program. This program recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effects that market volatility could have on operating results. Commodity Risk – Cash Flow Hedges – The Company uses derivative instruments to protect cash flows from fluctuations caused by volatility in commodity prices for periods of up to twelve months in order to protect gross profit margins from potentially adverse effects of market and price volatility on alcohol sales and purchase commitments where the prices are set at a future date and/or if the contracts specify a floating or index-based price. In addition, the Company hedges anticipated sales of alcohol to minimize its exposure to the potentially adverse effects of price volatility. These derivatives may be designated and documented as cash flow hedges and effectiveness is evaluated by assessing the probability of the anticipated transactions and regressing commodity futures prices against the Company’s purchase and sales prices. Ineffectiveness, which is defined as the degree to which the derivative does not offset the underlying exposure, is recognized immediately in cost of goods sold. For the three and nine months ended September 30, 2022 and 2021, the Company did not designate any of its derivatives as cash flow hedges. Commodity Risk – Non-Designated Hedges – The Company uses derivative instruments to lock in prices for certain amounts of corn and alcohols by entering into exchange-traded forward contracts or options for those commodities. These derivatives are not designated for hedge accounting treatment. The changes in fair value of these contracts are recorded on the balance sheet and recognized immediately in cost of goods sold. The Company recognized net losses of $ 1,772,000 and $ 976,000 as the change in the fair value of these contracts for the three months ended September 30, 2022 and 2021, respectively. The Company recognized net gains of $ 20,164,000 and $ 18,435,000 as the change in the fair value of these contracts for the nine months ended September 30, 2022 and 2021, respectively. Non Designated Derivative Instruments – The classification and amounts of the Company’s derivatives not designated as hedging instruments, and related cash collateral balances, are as follows (in thousands): As of September 30, 2022 Assets Liabilities Type of Instrument Balance Sheet Location Fair Value Balance Sheet Location Fair Value Cash collateral balance Restricted cash $ 3,955 Commodity contracts Derivative assets $ 7,384 Derivative liabilities $ 1,106 As of December 31, 2021 Assets Liabilities Type of Instrument Balance Sheet Location Fair Value Balance Sheet Location Fair Value Cash collateral balance Restricted cash $ 11,513 Commodity contracts Derivative assets $ 15,839 Derivative liabilities $ 13,582 The above amounts represent the gross balances of the contracts; however, the Company does have a right of offset with each of its derivative brokers, but its intent is to close out positions individually, therefore, they are reported at gross. The classification and amounts of the Company’s recognized gains (losses) for its derivatives not designated as hedging instruments are as follows (in thousands): Realized Losses For the Three Months Ended September 30, Type of Instrument Statements of Operations Location 2022 2021 Commodity contracts Cost of goods sold $ ( 13,332 ) $ ( 2,894 ) $ ( 13,332 ) $ ( 2,894 ) 12 Realized Gains Type of Instrument Statements of Operations Location For the Nine Months Ended September 30, 2022 2021 Commodity contracts Cost of goods sold $ 16,143 $ 21,449 $ 16,143 $ 21,449 Unrealized Gains For the Three Months Ended September 30, Type of Instrument Statements of Operations Location 2022 2021 Commodity contracts Cost of goods sold $ 11,560 $ 1,918 $ 11,560 $ 1,918 Unrealized Gains (Losses) For the Nine Months Ended September 30, Type of Instrument Statements of Operations Location 2022 2021 Commodity contracts Cost of goods sold $ 4,021 $ ( 3,014 ) $ 4,021 $ ( 3,014 ) 6. DEBT. Long-term borrowings are summarized as follows (in thousands): September 30, 2022 December 31, 2021 Kinergy line of credit $ 45,949 $ 50,401 Less unamortized debt financing costs ( 61 ) ( 40 ) Less short-term portion — — Long-term debt $ 45,888 $ 50,361 As of September 30, 2022, Kinergy had $ 30.7 million in unused borrowing availability under its line of credit. The Company believes it was in compliance with its covenants under the line of credit as of September 30, 2022. 13 7. COMMITMENTS AND CONTINGENCIES. Sales Commitments – At September 30, 2022, the Company had entered into sales contracts with its major customers to sell certain quantities of alcohol and essential ingredients. The Company had open alcohol indexed-price contracts for 92,771,000 gallons as of September 30, 2022 and open fixed-price alcohol sales contracts totaling $ 101,427,000 as of September 30, 2022. The Company had open fixed-price sales contracts for essential ingredients totaling $ 17,274,000 as of September 30, 2022. These sales contracts are scheduled to be completed throughout 2022 and 2023. Purchase Commitments – At September 30, 2022, the Company had indexed-price purchase contracts to purchase 13,988,000 gallons of alcohol and fixed-price purchase contracts to purchase $ 45,599,000 of alcohol from its suppliers. The Company had fixed-price purchase contracts to purchase $ 38,769,000 of corn from its suppliers as of September 30, 2022. The Company had fixed-price purchase contracts for natural gas totaling $ 1,947,000 and indexed-price purchase contracts for natural gas totaling 4,463,000 MMBTU. The Company also had future commitments for certain capital projects totaling $ 46,796,000 . These purchase commitments are scheduled to be satisfied throughout 2022 and 2023. Litigation – General – The Company is subject to various claims and contingencies in the ordinary course of its business, including those related to litigation, business transactions, employee-related matters, environmental regulations, and others. When the Company is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the Company will record a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the claim if the likelihood of a potential loss is reasonably possible and the amount involved could be material. While there can be no assurances, the Company does not expect that any of its pending legal proceedings will have a material impact on the Company’s financial condition or results of operations. 8. PENSION AND RETIREMENT BENEFIT PLANS. The Company sponsors a defined benefit pension plan (the “Retirement Plan”) and a healthcare and life insurance plan (the “Postretirement Plan”). The Retirement Plan is noncontributory, and covers only “grandfathered” unionized employees at the Company’s Pekin, Illinois facility who fulfill minimum age and service requirements. Benefits are based on a prescribed formula based upon the employee’s years of service. The Retirement Plan, which is part of a collective bargaining agreement, covers only union employees hired prior to November 1, 2010. The Company uses a December 31 measurement date for its Retirement Plan. The Company’s funding policy is to make the minimum annual contribution required by applicable regulations. As of December 31, 2021, the Retirement Plan’s accumulated projected benefit obligation was $ 23.8 million, with a fair value of plan assets of $ 20.0 million. The underfunded amount of $ 3.8 million is recorded on the Company’s consolidated balance sheet in other liabilities. For the three months ended September 30, 2022, the Retirement Plan’s net periodic benefit was $ 8,000 , comprised of $ 273,000 of expected return on plan assets, partially offset by $ 164,000 in interest cost and $ 101,000 in service cost. For the three months ended September 30, 2021, the Retirement Plan’s net periodic expense was $ 22,000 , comprised of $ 151,000 in interest cost and $ 109,000 in service cost, partially offset by $ 238,000 of expected return on plan assets. For the nine months ended September 30, 2022, the Retirement Plan’s net periodic benefit was $ 24,000 , comprised of $ 819,000 of expected return on plan assets, partially offset by $ 492,000 in interest cost and $ 303,000 in service cost. For the nine months ended September 30, 2021, the Retirement Plan’s net periodic expense was $ 66,000 , comprised of $ 453,000 in interest cost and $ 327,000 in service cost, partially offset by $ 714,000 of expected return on plan assets. The Postretirement Plan provides postretirement medical benefits and life insurance to certain “grandfathered” unionized employees. Employees hired after December 31, 2000 are not eligible to participate in the Postretirement Plan. The Postretirement Plan is contributory, with contributions required at the same rate as active employees. Benefit eligibility under the plan declines at age 65 from a defined benefit to a defined dollar cap based upon years of service. As of December 31, 2021, the Postretirement Plan’s accumulated projected benefit obligation was $ 4.3 million and is recorded on the Company’s consolidated balance sheet in other liabilities. The Company’s funding policy is to make the minimum annual contribution required by applicable regulations. For the three months ended September 30, 2022, the Postretirement Plan’s net periodic expense was $ 32,000 , comprised of $ 6,000 of interest cost and $ 26,000 of service cost. For the three months ended September 30, 2021, the Postretirement Plan’s net periodic expense was $ 42,000 , comprised of $ 10,000 of interest cost, $ 26,000 of service cost and $ 6,000 of amortization expense. For the nine months ended September 30, 2022, the Postretirement Plan’s net periodic expense was $ 96,000 , comprised of $ 18,000 of interest cost and $ 78,000 of service cost. For the nine months ended September 30, 2021, the Postretirement Plan’s net periodic expense was $ 126,000 , comprised of $ 30,000 of interest cost, $ 78,000 of service cost and $ 18,000 of amortization expense. 14 9. FAIR VALUE MEASUREMENTS. The fair va lue hierarchy prioritizes the inputs used in valuation techniques into three levels, as follows: ● Level 1 – Observable inputs – unadjusted quoted prices in active markets for identical assets and liabilities; ● Level 2 – Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data; and ● Level 3 – Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable. For fair value measurements using significant unobservable inputs, a description of the inputs and the information used to develop the inputs is required along with a reconciliation of Level 3 values from the prior reporting period. Pooled separate accounts – Pooled separate accounts invest primarily in domestic and international stocks, commercial paper or single mu tual funds. The net asset value is used as a practical expedient to determine fair value for these accounts. Each pooled separate account provides for redemptions by the Retirement Plan at reported net asset values per share, with little to no advance notice requirement, therefore these funds are classified within Level 2 of the valuation hierarchy. Long-Lived Assets Held-for-Sale – The Company recorded its long-lived assets associated with its property and equipment held-for-sale at fair value at December 31, 2021 of $ 1,000,000 . These assets were sold during the three months ended September 30, 2022. The fair values of these assets are based on observable values for the assets through corroboration with market data and are designated as Level 3 inputs. Other Derivative Instruments – The Company’s other derivative instruments consist of commodity positions. The fair values of the commodity positions are based on quoted prices on the commodity exchanges and are designated as Level 1 inputs. The following table summarizes recurring and nonrecurring fair value measurements by level at September 30, 2022 (in thousands): Fair Value Level 1 Level 2 Level 3 Assets: Derivative financial instruments $ 7,384 $ 7,384 $ — $ — Liabilities: Derivative financial instruments $ ( 1,106 ) $ ( 1,106 ) $ — $ — The following table summarizes recurring and nonrecurring fair value measurements by level at December 31, 2021 (in thousands): Benefit Plan Fair Percentage Value Level 1 Level 2 Level 3 Allocation Assets: Derivative financial instruments $ 15,839 $ 15,839 $ — $ — Long-lived assets held-for-sale 1,000 — — 1,000 Defined benefit plan assets (1) (pooled separate accounts): Large U.S. Equity(2) 5,612 — 5,612 — 28 % Small/Mid U.S. Equity(3) 3,684 — 3,684 — 18 % International Equity(4) 2,909 — 2,909 — 15 % Fixed Income(5) 7,782 — 7,782 — 39 % $ 36,826 $ 15,839 $ 19,987 $ 1,000 Liabilities: Derivative financial instruments $ ( 13,582 ) $ ( 13,582 ) $ — $ — (1) Included in other assets in the consolidated balance sheets. (2) This category includes investments in funds comprised of equity securities of large U.S. companies. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. (3) This category includes investments in funds comprised of equity securities of small- and medium-sized U.S. companies. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. (4) This category includes investments in funds comprised of equity securities of foreign companies including emerging markets. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. (5) This category includes investments in funds comprised of U.S. and foreign investment-grade fixed income securities, high-yield fixed income securities that are rated below investment-grade, U.S. treasury securities, mortgage-backed securities, and other asset-backed securities. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. 15 10. EARNINGS (LOSS) PER SHARE. The following tables compute basic and diluted earnings (loss) per share (in thousands, except per share data): Three Months Ended September 30, 2022 Loss Numerator Shares Denominator Per-Share Amount Net loss $ ( 28,038 ) Less: Preferred stock dividends ( 319 ) Basic and Diluted loss per share: Loss available to common stockholders $ ( 28,357 ) 73,011 $ ( 0.39 ) Three Months Ended September 30, 2021 Loss Numerator Shares Denominator Per-Share Amount Net loss $ ( 3,132 ) Less: Preferred stock dividends ( 319 ) Basic and Diluted loss per share: Loss available to common stockholders $ ( 3,451 ) 71,383 $ ( 0.05 ) Nine Months Ended September 30, 2022 Loss Numerator Shares Denominator Per-Share Amount Net loss $ ( 8,525 ) Less: Preferred stock dividends ( 946 ) Basic and Diluted loss per share: Loss available to common stockholders $ ( 9,471 ) 71,815 $ ( 0.13 ) Nine Months Ended September 30, 2021 Income Numerator Shares Denominator Per-Share Amount Net income $ 9,936 Less: Preferred stock dividends ( 946 ) Less: Income allocated to participating securities ( 120 ) Basic income per share: Income available to common stockholders $ 8,870 71,002 $ 0.12 Add: Dilutive instruments — 1,258 Diluted income per share: Income available to common stockholders $ 8,870 72,260 $ 0.12 There were an additional aggregate potentially dilutive weighted-average shares of 964,000 from convertible securities outstanding for the three and nine months ended September 30, 2022 and 2021. These securities were not considered in calculating diluted net income (loss) per share for the three and nine months ended September 30, 2022 and 2021, as their effect would have been anti-dilutive. At December 31, 2021, the Company had outstanding unexercised warrants to purchase 8.9 million shares of its common stock at an exercise price of $ 9.76 per share. These warrants expired unexercised on April 28, 2022 . 11. SUBSEQUENT EVENTS. New Term Loan Facility – On November 7, 2022, the Company closed on a senior secured term loan credit facility with certain funds managed by Orion Infrastructure Capital for up to $125 million. The term loan allows for periodic draws in an aggregate amount of up to $100 million, with an additional $25 million available upon the attainment of certain performance conditions. As of November 7, 2022, no amounts had been drawn. The six-year term loan has a fixed annual interest rate of 10% and will be issued at an original issue discount of 1.5%. The term loan does not require scheduled principal amortization payments but includes customary prepayment obligations as well as semi-annual sweeps of a portion of excess cash flow commencing for the six-month period ending December 31, 2023. The Company’s obligations under the term loan are secured by all of the Company’s tangible and intangible assets. In connection with the term loan facility, the Company will issue to the lenders an aggregate of up to 1,602,564 shares of the Company’s common stock. Kinergy Operating Line of Credit Extension – On November 7, 2022, the Company amended Kinergy’s operating line of credit to extend the maturity to 2027. 16