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 manageme nt for future operations, including plans and objectives relating to our future economic performance and our current beliefs regarding revenues we might generate and profits we might earn if we are successful in implementing our business and growth strategies. The forward-looking statements and associated risks may include, relate to or be qualified by other important factors, including: ● fluctuations in the market prices of our products; ● fluctuations in the costs of key production input commodities such as corn and natural gas; ● the projected growth or contraction in the 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; ● the timing, cost and results of our capital improvement projects; and ● our ability to distinguish ourselves from our current and future competitors. You are cautioned not to plac e 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 Illinois, one is located in Oregon and another is located in Idaho. We have an annual alcohol production capacity of 350 million gallons, comprised of 210 million gallons of fuel-grade ethanol and up to 140 million gallons of specialty alcohols. 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. 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. Our wholly-owned subsidiary, Eagle Alcohol Company, LLC, or 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. 17 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 Illinois 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 in Oregon and Idaho 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 Alcohol Production Capacity (estimated, in gallons) Production Facility Location Fuel-Grade Ethanol Specialty Alcohol Pekin Campus Pekin, IL 110,000,000 140,000,000 Magic Valley Burley, ID 60,000,000 — Columbia Boardman, OR 40,000,000 — Marketing and Distribution Segment We market and distribute all of the alcohols and essential ingredients we produce at our facilities. We also market and distribute alcohol produced by third parties. We have extensive and long-standing customer relationships, both domestic and international, for our specialty alcohols and essential ingredients. These customers include producers and distributors of ingredients for cosmetics, sanitizers and related products, distilled spirits producers, food products manufacturers, producers of personal health/consumer health and personal care hygiene products, and global trading firms. Our renewable fuel customers are located throughout the Western and Midwestern United States and consist of integrated oil companies and gasoline marketers who blend fuel-grade ethanol into gasoline. Our customers depend on us to provide a reliable supply of fuel-grade ethanol and manage the logistics and timing of delivery with very little effort on their part. Our customers collectively require fuel-grade ethanol volumes in excess of the supplies we produce at our facilities. We secure additional fuel-grade ethanol supplies from third-party producers. We arrange for transportation, storage and delivery of fuel-grade ethanol purchased by our customers through our agreements with third-party service providers in the Western United States as well as in the Midwest from a variety of sources. We market our essential ingredient feed products to dairies and feedlots, in many cases located near our production facilities. These customers use our feed products for livestock as a substitute for corn and other sources of starch and protein. We sell our corn oil to poultry and biodiesel customers. We do not market essential ingredients from other producers. See “Note 3 – Segments” to our Notes to Consolidated Financial Statements included elsewhere in this report for financial information about our business segments. 18 Current Initiatives and Outlook During the third quarter, we continued our efforts to lay the groundwork for long-term success by upgrading equipment and operating systems to increase plant efficiency, reliability and redundancy, and corn storage capacity. We also have plans for larger capital-intensive growth projects. In November, we secured debt financing for up to $125 million to accelerate and fund our diversification growth strategies, including carbon capture sequestration, additional corn oil production, expansion of our protein and yeast products, and renewable natural gas and natural gas pipeline installations. This financing will facilitate, without the need to rely solely on our cash flow from operations, the simultaneous undertaking and timely completion of larger capital projects with a greater cost-benefit return to all stakeholders through a more stable business. We expect these projects when completed to contribute significantly to our revenues and net income and to help insulate our results of operations from commodity price and margin volatility. We rescheduled many of our fall repair and maintenance activities to August to reduce our use of corn and minimize the impact of short-term higher commodity prices. However, our third quarter results were negatively affected by logistical constraints and rail interruptions resulting in plant outages in excess of six days that contributed to negative margins at our Western plants. We also experienced overall higher transportation costs and lower commodity margins. Our personnel nevertheless skillfully managed through supply chain and logistical challenges to prevent disruption with our customer base. Through the third quarter, we invested and capitalized over $25 million in infrastructure improvements and spent an additional $3 million in related costs, negatively affecting our cost of goods sold, operating margins and our net income for the quarter. We spent $15 million during the third quarter on capital improvement projects in anticipation of our debt financing transaction. 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 phase – corn oil extraction – is complete and yields have grown significantly, meeting our initial expectations. Based on these positive results, we intend to install corn oil extraction technologies at our three other dry mills. The second phase – separating and producing enhanced protein – is on schedule for completion in the first quarter of 2023. Once the system is fully operational and tested, we will evaluate additional deployments at our other plants. We are doubling 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 are less inclined to ship corn, including during holidays, unfavorable weather conditions, or due to supply chain and logistical constraints. We expect this increased storage capacity to reduce the volatility of our production input costs. We are well into construction of the new storage facilities and expect completion before year-end. We prioritized upgrades to specialty alcohol equipment at our Pekin wet mill to align with higher quality standards for our beverage customers. We installed additional equipment, including a demethylizer column, which we expect will be fully operational in the first quarter of 2023. With these upgrades and our process and quality certifications, our equipment will be best-in-class and enable us to meet the highest quality requirements for specialty alcohols and service additional beverage customers from both our ICP distillery and our Pekin wet mill. This production redundancy, which will also provide surety of supply to our customers, will enable us to improve our product mix and capture higher premiums in the alcohol value chain. We also continue to replace or upgrade older equipment at our Pekin Campus. For example, we recently purchased two new state-of-the-art boilers to enhance our steam capabilities and increase interconnectivity among our Pekin Campus 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 process steam across our Pekin Campus. 19 Consistent with our sustainability improvement program, we intend to add new renewable natural gas and natural gas pipelines at our Pekin Campus with direct access to nearby major hubs. These pipelines will increase our access to more competitively priced natural gas, better address our future energy needs, including our support for carbon capture sequestration, and facilitate the monetization and sale of the renewable natural gas we produce and currently flare. When completed, these efforts will further reduce our carbon footprint and enhance the value of our products. This capital improvement project is in the design and permitting phase with an expected completion date in 2024. After 24 years operating as a valued and reliable supplier to the pet food industry, we intend to commercially develop primary yeast through an aerobic fermentation process at our wet mill. Extending our brand along the value chain is a natural progression to other markets that demand higher product quality and offer increased margins, including for flavors, nutraceuticals, and baking and meat substitutes. Although primary yeast production requires a different process and serves a different market, many existing as well as prospective customers have for years expressed interest in a primary yeast product. We are highly motivated to further reduce the impact of commodity exposure. Our efforts are improving our position to capture a variety of new opportunities and drive profitable growth. Looking ahead to the fourth quarter, while fuel demand typically slows in the late fall and winter periods, we are encouraged by the recent improvement in crush margins compared to the September lows, much of which is related to the late corn harvest and improving corn basis. We expect these factors to translate into much improved results in the fourth quarter. We also expect to exceed by up to 10 million gallons by year-end our contracted volume of 90 million gallons for 2022. We anticipate maintaining or growing our market share with our existing customer base for annual contracted specialty alcohols for 2023 while adding new accounts in the beverage category once system improvements to our grain neutral spirits production at our Pekin Campus are brought online in 2023. Based on our progress in upgrading equipment and operating systems, we expect to see modest improvement in profits in early 2023, with a baseline earnings before interest, taxes, depreciation and amortization, or EBITDA, of $40.0 million for 2023 at historical average crush margins and before accounting for EBITDA contributions from our pending capital improvement projects. With funding from our new term loan accelerating our investments in the further diversification of our specialty alcohol and essential ingredients products, we expect to add over $20 million in recurring annual EBITDA by the end of 2023 and an additional $30 million in recurring annual EBITDA by 2025, resulting in total additional recurring annual EBITDA of $50 million by 2025. These amounts do not yet include our anticipated results for projects in the early stages of development, including primary yeast expansion and carbon capture sequestration. 20 Use of Non-GAAP Financial Measures Management believes that certain financial measures not in accordance with generally accepted accounting principles, or GAAP, are useful measures of operations. Management provides EBITDA and Adjusted EBITDA as non-GAAP financial measures 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. We define Adjusted EBITDA as unaudited net income (loss) before interest expense, interest income, provision 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). EBITDA and Adjusted EBITDA are not measures of financial performance under GAAP and should not be considered as alternatives to net income (loss) 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. EBITDA and Adjusted EBITDA have limitations as analytical tools and you should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP. Information reconciling forward-looking EBITDA to forward-looking net income (loss) would require a forward-looking statement of net income (loss) 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) because certain items required for reconciliation are uncertain, outside of our control and/or cannot reasonably be 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) that are not presently estimable. Reconciliation of Adjusted EBITDA to Net Income (Loss) Three Months Ended September 30, Nine Months Ended September 30, (in thousands) (unaudited) 2022 2021 2022 2021 Net income (loss) $ (28,038 ) $ (3,132 ) $ (8,525 ) $ 9,936 Adjustments: Interest expense 340 429 859 3,359 Interest income (38 ) (183 ) (341 ) (553 ) Asset impairments — — — 3,100 Acquisition-related expense 875 — 2,625 — Provision for income taxes — — — — Depreciation and amortization expense 6,260 5,851 19,122 17,520 Total adjustments 7,437 6,097 22,265 23,426 Adjusted EBITDA $ (20,601 ) $ 2,965 $ 13,740 $ 33,362 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 September 30, Percentage Nine Months Ended September 30, Percentage 2022 2021 Variance 2022 2021 Variance Renewable fuel production gallons sold (in millions) 53.0 38.3 38.4 % 153.4 118.6 29.3 % Specialty alcohol production gallons sold (in millions) 23.3 19.7 18.3 % 72.4 63.1 14.7 % Third party renewable fuel gallons sold (in millions) 27.6 67.2 (58.9 )% 88.4 180.5 (51.0 )% Total gallons sold (in millions) 103.9 125.2 (17.0 )% 314.2 362.2 (13.3 )% Total gallons produced (in millions) 74.7 60.6 23.3 % 226.0 182.2 24.0 % Production capacity utilization 85 % 59 % 44.1 % 86 % 57 % 50.9 % Average sales price per gallon $ 2.70 $ 2.47 9.3 % $ 2.66 $ 2.27 17.2 % Corn cost per bushel – CBOT equivalent $ 7.27 $ 6.09 19.4 % $ 6.98 $ 5.71 22.2 % Average basis (1) $ 1.08 $ 0.89 21.3 % $ 0.80 $ 0.53 50.9 % Delivered cost of corn $ 8.35 $ 6.98 19.6 % $ 7.78 $ 6.24 24.7 % Total essential ingredients tons sold (in thousands) 422.0 305.6 38.1 % 1,234.9 886.5 39.3 % Essential ingredients revenues as % of delivered cost of corn (2) 30.4 % 29.5 % 3.1 % 33.2 % 33.8 % (1.8 )% Average CBOT ethanol price per gallon $ 2.16 $ 2.25 (4.0 )% $ 2.16 $ 2.08 3.8 % Average CBOT corn price per bushel $ 6.58 $ 5.59 17.7 % $ 7.03 $ 5.87 19.8 % (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 (Loss) The following table presents our net sales, cost of goods sold and gross profit (loss) in dollars and gross profit as a percentage of net sales (in thousands, except percentages): Three Months Ended September 30, Variance in Nine Months Ended September 30, Variance in 2022 2021 Dollars Percent 2022 2021 Dollars Percent Net sales $ 336,877 $ 305,556 $ 31,321 10.3 % $ 1,007,184 $ 822,400 $ 184,784 22.5 % Cost of goods sold 356,716 308,955 47,761 15.5 % 1,013,406 796,729 216,677 27.2 % Gross profit (loss) $ (19,839 ) $ (3,399 ) $ (16,440 ) 483.7 % $ (6,222 ) $ 25,671 $ (31,893 ) NM Percentage of net sales (5.9 )% (1.1 )% (0.6 )% 3.1 % The increase in our consolidated net sales for the three and nine months ended September 30, 2022 as compared to the same period in 2021 was primarily due to an increase in our average sales price per gallon and substantial increases in sales prices and volume of essential ingredients, partially offset by a decrease in our third-party gallons sold. Our production gallons sold and our volume of essential ingredients sold increased for both the three and nine months ended September 30, 2022 as compared to the same periods in 2021 primarily due to production from our Magic Valley facility operating in all of 2022, whereas the facility was idled during the same period of 2021. Specialty alcohols contributed 23.3 million gallons and 72.4 million gallons for the three and nine months ended September 30, 2022, respectively, on pace with our contracted volume of 90 million gallons for all of 2022. 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 September 30, 2022 and 2021 On a consolidated basis, our average sales price per gallon increased by 9% to $2.70 for the three months ended September 30, 2022 as compared to $2.47 for the same period in 2021. The average Chicago Board of Trade, or CBOT, fuel-grade ethanol price per gallon, however, decreased 4% to $2.16 for the three months ended September 30, 2022 as compared to $2.25 for the same period in 2021. Pekin Campus Production Segment Net sales of alcohol from our Pekin Campus production segment increased by $19.1 million, or 17%, to $133.7 million for the three months ended September 30, 2022 as compared to $114.6 million for the same period in 2021. Our total volume of production gallons sold increased by 3.6 million gallons, or 7%, to 52.8 million gallons for the three months ended September 30, 2022 as compared to 49.2 million gallons for the same period in 2021. The increase of $0.20, or 9%, in our Pekin Campus production segment’s average sales price per gallon in the three months ended September 30, 2022 as compared to the same period in 2021 improved our net sales from our Pekin Campus production segment by $10.0 million. At our Pekin Campus production segment’s average sales price per gallon of $2.53 for the three months ended September 30, 2022, we generated $9.1 million in additional net sales from our Pekin Campus production segment from the 3.6 million additional gallons of alcohol sold in the three months ended September 30, 2022 as compared to the same period in 2021. Net sales of essential ingredients increased by $8.5 million, or 18%, to $54.5 million for the three months ended September 30, 2022 as compared to $46.0 million for the same period in 2021. Our total volume of essential ingredients sold decreased by 9,200 tons, or 4%, to 218,100 tons for the three months ended September 30, 2022 from 227,300 tons for the same period in 2021. The increase of $47.61, or 24%, in our average sales price per ton for the three months ended September 30, 2022 as compared to the same period in 2021 increased our net sales from our Pekin Campus production segment by $10.8 million. At our average sales price per ton of $250.06 for the three months ended September 30, 2022, we generated $2.3 million less in net sales from the 9,200 fewer tons of essential ingredients sold in the three months ended September 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 $57.1 million, or 51%, to $55.3 million for the three months ended September 30, 2022 as compared to $112.4 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 24.0 million gallons, or 56%, to 19.0 million gallons for the three months ended September 30, 2022 as compared to 43.0 million gallons for the same period in 2021. At our marketing and distribution segment’s average sales price per gallon of $2.91 for the three months ended September 30, 2022, we generated $69.8 million less in net sales from our marketing and distribution segment from the 24.0 million fewer gallons of third-party fuel-grade ethanol sold gross in the three months ended September 30, 2022 as compared to the same period in 2021. The $0.29 per gallon, or 11%, increase in our marketing and distribution segment’s average sales price per gallon for the three months ended September 30, 2022 as compared to the same period in 2021 resulted in a $12.7 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 15.6 million gallons, or 64%, to 8.6 million gallons for the three months ended September 30, 2022 as compared to 24.2 million gallons for the same period in 2021. The decrease in third-party fuel-grade ethanol gallons sold reported net reduced our net sales by less than $0.1 million for the period. Other Production Segment Net sales of alcohol from our other production segment increased by $39.3 million, or 156%, to $64.5 million for the three months ended September 30, 2022 as compared to $25.2 million for the same period in 2021. Our total volume of gallons sold increased by 14.7 million gallons, or 167%, to 23.5 million gallons for the three months ended September 30, 2022 as compared to 8.8 million gallons for the same period in 2021. At our other production segment’s average sales price per gallon of $2.74 for the three months ended September 30, 2022, we generated an additional $40.4 million in net sales from our other production segment from the 14.7 million additional gallons of alcohol sold in the three months ended September 30, 2022 as compared to the same period in 2021. The decrease of $0.12, or 5%, in our other production segment’s average sales price per gallon for the three months ended September 30, 2022 as compared to the same period in 2021 reduced our net sales from our other production segment by $1.1 million. Net sales of essential ingredients increased by $17.6 million, or 259%, to $24.4 million for the three months ended September 30, 2022 as compared to $6.8 million for the same period in 2021. Our total volume of essential ingredients sold increased by 125,600 tons, or 160%, to 203,900 tons for the three months ended September 30, 2022 from 78,300 tons for the same period in 2021. At our average sales price per ton of $119.86 for the three months ended September 30, 2022, we generated an additional $15.0 million in net sales from the 125,600 additional tons of essential ingredients sold in the three months ended September 30, 2022 as compared to the same period in 2021. The increase of $32.16, or 37%, in our average sales price per ton for the three months ended September 30, 2022 as compared to the same period in 2021 increased our net sales from our other production segment by $2.6 million. Corporate and other Net sales of alcohol from corporate and other represented $4.2 million associated with our sales from Eagle Alcohol for the three months ended September 30, 2022. Nine Months Ended September 30, 2022 and 2021 On a consolidated basis, our average sales price per gallon increased by 17% to $2.66 for the nine months ended September 30, 2022 as compared to $2.27 for the same period in 2021. The average CBOT fuel-grade ethanol price per gallon, increased by 4% to $2.16 for the nine months ended September 30, 2022 as compared to $2.08 for the same period in 2021. 24 Pekin Campus Production Segment Net sales of alcohol from our Pekin Campus production segment increased by $51.5 million, or 15%, to $393.5 million for the nine months ended September 30, 2022 as compared to $342.0 million for the same period in 2021. Our total volume of production gallons sold declined by 0.8 million gallons, or less than 1%, to 156.6 million gallons for the nine months ended September 30, 2022 as compared to 157.4 million gallons for the same period in 2021. The increase of $0.34, or 16%, in our Pekin Campus production segment’s average sales price per gallon in the nine months ended September 30, 2022 as compared to the same period in 2021 improved our net sales from our Pekin Campus production segment by $53.4 million. At our Pekin Campus production segment’s average sales price per gallon of $2.51 for the nine months ended September 30, 2022, we generated $1.9 million less in net sales from our Pekin Campus production segment from the 0.8 million fewer gallons of alcohol sold in the nine months ended September 30, 2022 as compared to the same period in 2021. Net sales of essential ingredients increased by $29.0 million, or 21%, to $169.7 million for the nine months ended September 30, 2022 as compared to $140.7 million for the same period in 2021. Our total volume of essential ingredients sold declined by 16,000 tons, or 2%, to 644,900 tons for the nine months ended September 30, 2022 from 660,900 tons for the same period in 2021. The increase of $50.25, or 24%, in our average sales price per ton for the nine months ended September 30, 2022 as compared to the same period in 2021 increased our net sales from our Pekin Campus production segment by $33.2 million. At our average sales price per ton of $263.10 for the nine months ended September 30, 2022, we generated $4.2 million less in net sales from the 16,000 fewer tons of essential ingredients sold in the nine months ended September 30, 2022 as compared to the same period in 2021. Marketing and Distribution Segment Net sales of fuel-grade ethanol from our marketing and distribution segment, excluding intersegment sales, decreased by $83.5 million, or 32%, to $173.7 million for the nine months ended September 30, 2022 as compared to $257.2 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 43.5 million gallons, or 42%, to 59.7 million gallons for the nine months ended September 30, 2022 as compared to 103.2 million gallons for the same period in 2021. At our marketing segment’s average sales price per gallon of $2.89 for the nine months ended September 30, 2022, we generated $125.9 million less in net sales from our marketing and distribution segment from the 43.5 million fewer gallons of third-party fuel-grade ethanol sold gross in the nine months ended September 30, 2022 as compared to the same period in 2021. The $0.42 per gallon, or 17%, increase in our marketing segment’s average sales price per gallon for the nine months ended September 30, 2022 as compared to the same period in 2021 resulted in a $42.9 million increase in our net sales from third-party fuel-grade ethanol sold reported gross by our marketing and distribution segment. Our volume of third party fuel-grade ethanol gallons sold reported net by our marketing and distribution segment decreased by 48.6 million gallons, or 63%, to 28.7 million gallons for the nine months ended September 30, 2022 as compared to 77.3 million gallons for the same period in 2021. The decrease in third-party fuel-grade ethanol gallons sold reported net reduced net sales by $0.5 million. Other Production Segment Net sales of alcohol from our other production segment increased $128.2 million, or 203%, to $191.5 million for the nine months ended September 30, 2022 as compared to $63.3 million for the same period in 2021. Our total volume of gallons sold increased by 44.9 million gallons, or 185%, to 69.2 million gallons for the nine months ended September 30, 2022 as compared to 24.3 million gallons for the same period in 2021. At our other production segment’s average sales price per gallon of $2.77 for the nine months ended September 30, 2022, we generated $124.2 million in additional net sales from the 44.9 million additional gallons of alcohol sold in the nine months ended September 30, 2022 as compared to the same period in 2021. The increase of $0.16, or 6%, in our other production segment’s average sales price per gallon for the nine months ended September 30, 2022 as compared to the same period in 2021 improved our net sales from our other production segment by $4.0 million. Net sales of essential ingredients increased by $47.5 million, or 247%, to $66.7 million for the nine months ended September 30, 2022 as compared to $19.2 million for the same period in 2021. Our total volume of essential ingredients sold increased by 364,400 tons, or 162%, to 590,000 tons for the nine months ended September 30, 2022 from 225,600 tons for the same period in 2021. At our average sales price per ton of $113.13 for the nine months ended September 30, 2022, we generated an additional $41.2 million in net sales from the 364,400 additional tons of essential ingredients sold in the nine months ended September 30, 2022 as compared to the same period in 2021. The increase of $27.76, or 32.5%, in our average sales price per ton for the nine months ended September 30, 2022 as compared to the same period in 2021 increased our net sales from our other production segment by $6.3 million. 25 Corporate and other Net sales of alcohol from corporate and other represented $12.1 million associated with our sales from Eagle Alcohol for the nine months ended September 30, 2022. Cost of Goods Sold and Gross Profit (Loss) Our consolidated gross profit (loss) declined to a loss of $19.8 million, representing a gross profit margin of negative 5.9%, for the three months ended September 30, 2022 compared to a loss of $3.4 million, representing a gross profit margin of negative 1.1%, for the same period in 2021. Our consolidated gross profit (loss) declined to a loss of $6.2 million, representing a gross profit margin of negative 0.6%, for the nine months ended September 30, 2022 compared to gross profit of $25.7 million, representing a gross profit margin of 3.1%, for the same period in 2021. Our consolidated gross profit (loss) for both the three and nine month periods declined due to higher overall commodity prices and extreme commodity price volatility due to inflationary pressures, including drawn-out supply chains and higher delivery costs, and logistical and service disruptions, some of which caused plant outages for over six days in the third quarter of 2022 contributing to negative margins at our Western plants. Corn basis costs increased significantly in the third quarter of 2022 by approximately $11.0 million. We also accelerated much of our fall repair and maintenance activities to August to reduce our use of corn and minimize the impact of short-term higher commodity prices, resulting in higher costs and lower production than we otherwise would have achieved. For all of 2022, our corn basis costs increased significantly year-over-year. Our cost of goods sold and gross loss for the current periods also include $3.0 million in charges associated with the uncapitalized portion of our infrastructure upgrades. We also recorded an additional $3.0 million of losses on our forward derivative positions in the third quarter. Three Months Ended September 30, 2022 and 2021 Pekin Campus Production Segment Our Pekin Campus production segment’s gross profit declined by $11.9 million to a gross loss of $19.0 million for the three months ended September 30, 2022 as compared to a gross loss of $7.1 million for the same period in 2021. Of this decline, $10.6 million is attributable to lower margins from our specialty alcohols and $1.3 million is attributable to decreased sales volumes of essential ingredients in the three months ended September 30, 2022 as compared to the same period in 2021. Marketing and Distribution Segment Our marketing and distribution segment’s gross profit declined by $6.8 million to $0.5 million for the three months ended September 30, 2022 as compared to $7.3 million for the same period in 2021. Of this reduction, $0.6 million is attributable to lower marketing volumes of third-party fuel-grade ethanol and nearly $6.2 million is attributable to lower margins from sales of third-party fuel-grade ethanol due to high volatility in fuel prices for the three months ended September 30, 2022 as compared to the same period in 2021. Other Production Segment Our other production segment’s gross profit (loss) improved by $1.0 million to a gross loss of $2.5 million for the three months ended September 30, 2022 as compared to a gross loss of $3.5 million for the same period in 2021. Of this improvement, $2.5 million is attributable to better, but still negative, margins for fuel-grade ethanol, partially offset by $1.5 million attributable to increased volumes at negative margins of fuel-grade ethanol for the three months ended September 30, 2022 as compared to the same period in 2021. Corporate and other Gross profit from corporate and other represented $1.2 million associated with our sales from Eagle Alcohol for the three months ended September 30, 2022. Nine Months Ended September 30, 2022 and 2021 Pekin Campus Production Segment Our Pekin Campus production segment’s gross profit (loss) declined by $24.2 million to a gross loss of $6.8 million for the nine months ended September 30, 2022 as compared to a gross profit of $17.4 million for the same period in 2021. Of this decline, $0.4 million is attributable to lower sales volumes and $23.8 million is attributable to lower margins from our specialty alcohols in the nine months ended September 30, 2022 as compared to the same period in 2021. Marketing and Distribution Segment Our marketing segment’s gross profit declined by $12.4 million to a gross profit of $0.1 million for the nine months ended September 30, 2022 as compared to a gross profit of $12.5 million for the same period in 2021. Of this decline, $12.2 million is attributable to lower margins from sales of third-party fuel-grade ethanol and $0.2 million is attributable to lower marketing volumes of third-party fuel-grade ethanol for the nine months ended September 30, 2022 as compared to the same period in 2021. 26 Other Production Segment Our other production segment’s gross loss improved by $1.6 million to a gross loss of $2.6 million for the nine months ended September 30, 2022 as compared to a gross loss of $4.2 million for the same period in 2021. Of this improvement, $3.2 million is attributable to better margins, although negative, partially offset by $1.6 million attributable to lower sales volumes at negative margins for the nine months ended September 30, 2022 as compared to the same period in 2021. Corporate and other Gross profit from corporate and other represented $3.0 million associated with our sales from Eagle Alcohol for the nine months ended September 30, 2022. 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 September 30, Variance in Nine Months Ended September 30, Variance in 2022 2021 Dollars Percent 2022 2021 Dollars Percent Selling, general and administrative expenses $ 7,403 $ 5,533 $ 1,870 33.8 % $ 24,028 $ 19,777 $ 4,251 21.5 % Percentage of net sales 2.2 % 1.8 % 2.4 % 2.4 % Our SG&A expenses increased for the three and nine months ended September 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 $0.9 million and $2.6 million for the three and nine months ended September 30, 2022, respectively. 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. Net Income (Loss) Available to Common Stockholders The following table presents our net income (loss) available to common stockholders in dollars and as a percentage of net sales (in thousands, except percentages): Three Months Ended September 30, Variance in Nine Months Ended September 30, Variance in 2022 2021 Dollars Percent 2022 2021 Dollars Percent Net income (loss) available to common stockholders $ (28,357 ) $ (3,451 ) $ (24,906 ) (721.7 )% $ (9,471 ) $ 8,870 $ (18,341 ) NM Percentage of net sales (8.4 )% (1.1 )% (0.9 )% 1.1 % The decline in our net income available to common stockholders for the three and nine months ended September 30, 2022 as compared to the same periods in 2021 is primarily due to substantially higher production input costs resulting in negative gross margins as well as higher SG&A expenses. 27 Liquidity and Capital Resources During the nine months ended September 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 our line of credit, asset sales and cash on hand. A portion of these funds were also used to acquire Eagle Alcohol and for capital expenditures. As of September 30, 2022, we had $32.4 million in cash, cash equivalents and restricted cash and $30.7 million available for borrowing under Kinergy’s operating line of credit. In addition to Kinergy’s operating line of credit, we have a senior secured term loan facility to fund large capital-intensive projects. We believe we have sufficient liquidity to meet our anticipated working capital, debt service, capital expenditure and other liquidity needs for the next twelve months from the filing of this report. 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). September 30, 2022 December 31, 2021 Change Cash, cash equivalents and restricted cash $ 32,413 $ 62,125 (47.8 )% Current assets $ 186,306 $ 229,526 (18.8 )% Property and equipment, net $ 233,475 $ 222,550 4.9 % Current liabilities $ 54,513 $ 69,602 (21.7 )% Long-term debt $ 45,888 $ 50,361 (8.9 )% Working capital $ 131,793 $ 159,924 (17.6 )% Working capital ratio 3.42 3.30 3.6 % Changes in Working Capital and Cash Flows Working capital declined to $131.8 million at September 30, 2022 from $159.9 million at December 31, 2021 as a result of a decrease of $43.2 million in current assets, partially offset by a decrease of $15.1 million in current liabilities. Current assets decreased primarily due to a decrease in cash, restricted cash, accounts receivable and derivative assets due to the timing of sales and increased capital expenditures for the nine months ended September 30, 2022. Our current liabilities decreased primarily due to a decrease in derivative instruments due to the end of period change in commodity prices for open contracts and a decrease in accounts payable due to the timing of payments. Our cash, cash equivalents and restricted cash decreased by $29.7 million primarily due to $25.2 million in cash used in our investing activities and $6.4 million in cash used in our financing activities, partially offset by $1.8 million in cash provided by our operating activities. 28 Cash provided by our Operating Activities We generated $1.8 million in cash from our operating activities during the nine months ended September 30, 2022, as compared to cash used in our operating activities of $19.5 million for the same period in 2021. Specific factors that contributed to the change in cash from our operating activities include: ● An increase of $51.2 million related to higher accounts receivable balances due to the timing of payments and higher commodity prices and sales volumes; ● an increase of $6.9 million related to higher inventories due to increased commodity prices; ● a decrease in income from loan forgiveness of $9.9 million due to a CARES Act loan forgiven in the prior period; and ● an increase in inventory valuation of $8.0 million due to increased commodity prices. These amounts were partially offset by: ● A decrease of $19.2 million related to accounts payable due to the timing of payments; ● a decrease of $18.5 million in our consolidated net income (loss) due to lower margins driven by higher corn costs; ● a decrease in other assets of $15.4 million due to changes in derivative assets related to commodity price changes; and ● a reduction of asset impairments of $3.1 million due to plants recorded as held-for-sale in the prior period. Cash used in our Investing Activities We used $25.2 million of cash for additions to property and equipment and $14.7 million of cash to acquire Eagle Alcohol, net of cash acquired, partially offset by collections of $14.8 million from notes receivable held in connection with the sale in 2020 of our ethanol production facilities in Aurora, Nebraska for the nine months ended September 30, 2022. Our additions to property and equipment increased by $13.0 million for the nine months ended September 30, 2022 as compared to the same period in 2021 due to higher capital expenditures associated with our plant improvement initiatives in 2022. Cash used in our Financing Activities Cash used in our financing activities was $6.4 million for the nine months ended September 30, 2022, which reflects net payments of $4.5 million on Kinergy’s operating line of credit, $1.0 million of share repurchases and $0.9 million paid in cash dividends on our preferred stock. Term Loan On November 7, 2022, we entered into a senior secured term loan 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. Our obligations under the term loan are secured by all of our tangible and intangible assets. In connection with the term loan facility, we will issue to the lenders an aggregate of up to 1.6 million shares of our common 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 in 2027. 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. 29 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 all of our tangible and intangible assets. 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 September 30, Years Ended December 31, 2022 2021 2021 2020 Fixed-Charge Coverage Ratio Requirement 2.00 2.00 2.00 2.00 Actual 3.13 16.11 13.32 5.35 Excess 1.13 14.11 11.32 3.35 Alto Ingredients, Inc. has guaranteed all of Kinergy’s obligations under the credit facility. As of September 30, 2022, Kinergy had an outstanding balance of $45.9 million and $30.7 million of unused borrowing availability under the credit facility. Share Repurchase Program For the three months ended September 30, 2022, we repurchased 259,000 shares of our common stock as part of our publicly announced share repurchase program at an average price per share of $3.86 for an aggregate expenditure of $1,002,000 during the period. See “Unregistered Sales of Equity Securities and Use of Proceeds – Purchases of Equity Securities by the Issuer and Affiliated Purchasers.” 30