Alto Ingredients, Inc. 10-K

Item 1. Business. Business 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 2022, we marketed and distributed approximately 420 million gallons combined of our own alcohols as well as fuel-grade ethanol produced by third parties, and over 1.6 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 sales of fuel-grade ethanol sourced from third parties, (2) Pekin production, which includes the production and sale of alcohols and essential ingredients produced at our three production facilities located in Pekin, Illinois, which we refer to as our 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 separately 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 typically garner a premium price to bulk alcohols. Eagle Alcohol delivers products to customers in the beverage, food, industrial and related-process industries via its own dedicated trucking fleet and common carrier. 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 market include grain neutral spirits used in alcoholic beverages and vinegar as well as corn germ used for corn oils. Products for Essential Ingredients market 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. We also sell yeast for human consumption. Products for the Renewable Fuels market include fuel-grade ethanol and distillers corn oil used as a feedstock for renewable diesel and biodiesel fuels. Our specialty alcohols for the Food & Beverage and Health, Home & Beauty markets represented approximately 10% and 4%, respectively, of our sales in 2022 from our two production segments. - 1 - 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. Our production facilities were operating for all of 2022. On January 1, 2023, we temporarily hot-idled our Magic Valley production facility due to extreme natural gas prices, other unfavorable market conditions and to facilitate the installation of our new high protein systems. 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. Collectively, our customers 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 ethanol producers. We arrange for transportation, storage and delivery of fuel-grade ethanol purchased by our customers through our agreements with a variety of third-party service providers in the Western United States as well as in the Midwest. 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 5 – Segments” to our Notes to Consolidated Financial Statements included elsewhere in this report for financial information about our business segments. - 2 - Company History We are a Delaware corporation formed in February 2005. Our common stock trades on The Nasdaq Capital Market under the symbol “ALTO”. Our Internet website address is http://www.altoingredients.com. Information contained on our website is not part of this Annual Report on Form 10-K. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such reports filed with or furnished to the Securities and Exchange Commission and other Securities and Exchange Commission filings are available free of charge through our website as soon as reasonably practicable after the reports are electronically filed with, or furnished to, the Securities and Exchange Commission. Business Strategy Our goal is to expand our business as a leading producer and distributor of specialty alcohols and essential ingredients. The key elements of our business and growth strategy to achieve this objective include: ● Focus on our customer relationships. Although we continue to produce more fuel-grade ethanol than specialty alcohols, we have repositioned our business to focus on expanding the production and sale of specialty alcohols and essential ingredients. As a result, our business is now more service-oriented and focused on specialty products compared to a price-oriented business focused on commodity products. We strive to make our business ever more customer-centric to enable our premium services to support premium prices and new differentiated and higher-margin products. ● Increase our break bulk capabilities. With the addition of Eagle Alcohol, we have further diversified our business to include break bulk distribution of specialty alcohols. We can now store, denature, package and resell alcohol in smaller sizes, including tank trucks, totes and drums, that typically garner a premium price to bulk specialty alcohols. We deliver these products to customers in the Health, Home & Beauty , Food & Beverage and related-process industries using our own trucking fleet and common carrier. ● Expand product offerings. We are pursuing initiatives to broaden our product offerings to appeal to a wider range of customers and uses in our key markets. For example, we have secured ISO 9001, ICH Q7 and EXCiPACT certifications at all of our Pekin Campus production facilities. These certifications appeal to customers with stringent quality demands and enable us to offer alcohol certified for use as an active pharmaceutical ingredient, or API, and as an excipient—an inactive component of a drug or medication, such as solvents, carriers or tinctures—in the pharmaceutical industry. All ingredients we produce for use in beverages, human and pet foods are third-party certified for ISO 9001 and hazard analysis and critical control points (HACCP). In addition, all of our alcohols with pharmaceutical end-uses are ICH Q7, EXCiPACT and ISO 9001 certified, and our animal feed production, including at our Oregon and Idaho facilities, has undergone third-party Food Safety Modernization Act (FSMA) auditing. We are reviewing additional certifications and product positioning within our key markets to expand the range of customers we serve and the uses our products support. ● Implement new equipment and technologies. We are evaluating and plan to implement new equipment and technologies to increase our production yields, improve our operating efficiencies and reliability, reduce our overall carbon footprint, diversify our products and revenues, and increase our profitability as financial resources and market conditions justify these investments. In February 2023, we completed Together for Sustainability, or TfS, certification at our Pekin Campus, which is an initiative to raise corporate social responsibility (CSR) standards in our industry. We are also conducting Scope 1 and 2 greenhouse gas emissions (GHG) third party verification for all of our production facilities for 2021 and 2022. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Current Initiatives and Outlook.” ● Evaluate and pursue strategic opportunities . We are examining opportunities to expand our business such as joint ventures, strategic partnerships, synergistic acquisitions and other opportunities. We intend to pursue these opportunities as financial resources and business prospects make these opportunities desirable. - 3 - Competitive Strengths We are the largest producer of specialty alcohols in the United States. We believe that our competitive strengths include: ● Our customer and supplier relationships . We have extensive and long-standing close customer and supplier relationships, both domestic and international, for our specialty alcohols and essential ingredients. We have an excellent reputation for developing specialty alcohols under stringent quality control standards, particularly at our Pekin Campus. Our quality management systems are supported by ISO 9001, ICH Q7, TfS and EXCiPACT certifications which are viewed by our customers as important attestations of our quality control standards. ● Barriers to entry . Our production facilities use specialized equipment, technologies and processes to achieve stringent quality controls, higher yields and efficient production of alcohols and essential ingredients. Our specialized equipment, technologies and processes, together with our quality management certifications, strict regulatory requirements, and close customer and supplier relationships create significant barriers to entry to new market participants. ● Our experienced management . Our senior management team has a proven track record with significant operational and financial expertise and many years of experience in the alcohol production industry. Our senior executives have successfully navigated a wide variety of business and industry-specific challenges and deeply understand the business of successfully producing and marketing specialty alcohols and essential ingredients. ● The strategic location of our Midwest production facilities . We operate three distinct but integrated production facilities at our Pekin Campus in the Midwest. We are able to participate from that location in the largest regional specialty alcohol market in the United States as well as international markets. In addition: ◾ We believe that our Midwest location enhances our overall hedging opportunities with a greater correlation to the highly-liquid physical and paper markets in Chicago. ◾ Our Midwest location provides excellent logistical access via rail, truck and barge. In particular, barge access via the Illinois River to the Mississippi River enables us to efficiently bring our products to international markets. - 4 - ◾ The relatively unique wet milling process at one of our production facilities at our Pekin Campus allows us to extract the highest use and value from each component of the corn kernel. As a result, the wet milling process generates a higher level of cost recovery from corn than that produced at a dry mill. ◾ Our Midwest location allows us deep market insight and engagement in major specialty alcohol, fuel-grade ethanol, pet food and feed markets, thereby improving pricing opportunities. We believe that these competitive strengths will help us attain our goal of expanding our business as a leading producer and distributor of specialty alcohols and essential ingredients. Overview of Our Key Markets and Market Opportunity We produce specialty alcohols, fuel-grade ethanol and essential ingredients, focusing on four key markets: Health, Home & Beauty ; Food & Beverage ; Essential Ingredients ; and Renewable Fuels . Health, Home & Beauty Our products for the health, home and beauty markets include specialty alcohols used in mouthwash, cosmetics, pharmaceuticals, hand sanitizers, disinfectants and cleaners. We offer a variety of specialty alcohols for the health, home and beauty markets, depending on usage and regulatory requirements, including API-grade, United States Pharmacopeia, or USP, -grade ethyl alcohols, and industrial-grade ethyl alcohol. In 2020, we expanded our range of available product offerings within the health, home and beauty markets through quality management systems certifications. We have ISO 9001, ICH Q7 and EXCiPACT certifications at each of our Pekin Campus production facilities, all of which are viewed as important attestations of quality control standards. In particular, our ICH Q7 certification qualifies our specialty alcohols for use as an API, and our EXCiPACT certification qualifies our specialty alcohols for use as an excipient in the pharmaceutical industry. These certifications enable us to offer products to a wider group of customers and generally at more profitable margins. Food & Beverage Our products for the food and beverage market include specialty alcohols used in alcoholic beverages, flavor extracts and vinegar as well as corn germ used for corn oils and carbon dioxide, or CO 2 , used for beverage carbonation and dry ice. The principal specialty alcohol we offer for beverage-grade product is our grain neutral spirits, or GNS, alcohol. In addition, we primarily sell FCC 190 and USP 190 Ultra into vinegar markets. We are also introducing new high-quality 190 proof and low-moisture 200-proof GNS products to our existing and target customers in the beverage, food, flavor, personal care and pharmaceutical industries. We believe the key drivers in the food and beverage market include consumer preferences for the social currency of brand authenticity and heritage; consumers seeking unique and personalized experiences; improved consumer access to spirits products; the growth of craft distillers; and the ability to meet wide-ranging consumer preferences through a broad diversity of spirits categories and cocktails. Essential Ingredients Our essential ingredients include dried yeast, corn gluten meal, corn gluten feed, and distillers grains and liquid feed used in commercial animal feed and pet foods. We also sell yeast for human consumption. The raw materials for our essential ingredients are generated as co-products from our production of alcohols. These co-products are further manufactured, altered and refined into our essential ingredients, including for special customer applications. - 5 - Many of our essential ingredients are used in a variety of food products to affect their nutrition, including protein and fat content, as well as other product attributes such as taste, texture, palatability and stability. Our high quality and high purity manufacturing enable our customers to use some of our essential ingredients in human foods while others are used in pet foods and animal feed. We expect the essential ingredients market to grow significantly due to global demand for higher-grade protein feed, such as feed used in fisheries and other applications. Renewable Fuels Our renewable fuels products include fuel-grade ethanol used as transportation fuel and distillers corn oil used as a biodiesel feedstock. Our renewable fuels business is supported by our own production of fuel-grade ethanol as well as fuel-grade ethanol produced by third parties. Renewable fuels, primarily fuel-grade ethanol, are used for a variety of purposes, including as octane enhancers for premium gasoline and to enable refiners to produce greater quantities of lower octane blend stock; for fuel blending to extend fuel supplies and reduce reliance on crude oil and refined products; and to comply with a variety of governmental programs, in particular, the national Renewable Fuel Standard, or RFS, which was enacted to promote alternatives to fossil fuels. Under the RFS, the mandated use of all renewable fuels rises incrementally and peaks at 36.0 billion gallons by 2022, of which 15.0 billion gallons are required from conventional, or corn-based, ethanol. The RFS allows the Environmental Protection Agency, or EPA, to adjust the annual requirement based on certain facts and circumstances. In 2022, the EPA proposed 15.0 billion gallons from conventional ethanol for 2023, increasing to 15.25 billion gallons for both 2024 and 2025. See “—Governmental Regulation”. According to the Renewable Fuels Association, the domestic fuel-grade ethanol industry produced 15.4 billion gallons of ethanol in 2022, up from 15.0 billion gallons in 2021. According to the United States Department of Energy, total annual gasoline consumption in the United States is approximately 134.8 billion gallons and total annual fuel-grade ethanol consumption represented approximately 11% of this amount in 2021. We anticipate that continued limited opportunities for gasoline refinery expansions and the growing importance of reducing CO 2 emissions through the use of renewable fuels will generate additional growth in the demand for fuel-grade ethanol. Overview of Alcohol Production Process Alcohol production from starch- or sugar-based feedstock is a highly-efficient process. Modern alcohol production requires large amounts of corn, or other high-starch grains, and water as well as chemicals, enzymes and yeast, in addition to natural gas and electricity. Dry Milling Process In the dry milling process, corn or other high-starch grain is first ground into flour, then slurried with water to form a mash. Enzymes are added to the mash to convert the starch into dextrose, a simple sugar. The mash is processed through a high temperature cooking procedure, which reduces bacteria levels prior to fermentation. The mash is then cooled and transferred to fermenters, where yeast is added and the conversion of sugar to alcohol and CO 2 begins. - 6 - After fermentation, the resulting “beer” is transferred to distillation where the alcohol is separated from the residual “stillage”. The resulting alcohol is concentrated to 190 proof using conventional distillation methods and then is dehydrated to approximately 200 proof, representing 100% alcohol levels, in either a molecular sieve system or a grits system. For fuel-grade ethanol, the resulting anhydrous alcohol is then blended with approximately 2.5% denaturant, which is usually gasoline, and is then ready for shipment to renewable fuels markets. For specialty alcohols, the products can be sold pure or as one of the Tobacco Tax & Trade Bureau (TTB) approved specially denatured alcohol (SDA) formulations to meet customer specifications. The residual stillage is separated into a coarse grain portion and a liquid portion through a screw press or centrifugation process. The soluble liquid portion is concentrated to about 40% dissolved solids by an evaporation process. This intermediate state is called condensed distillers solubles, or syrup. The coarse grain and syrup portions are then mixed to produce wet distillers grains, or WDG, or can be mixed and dried to produce dried distillers grains with solubles, or DDGS. Both WDG and DDGS are high-protein animal feed products. Wet Milling Process In the wet milling process, corn or other high-starch grain is first soaked or “steeped” in sulfurous acid for approximately 24 hours to soften the whole corn kernel ahead of milling. After steeping, the grain goes through coarse milling to gently open the kernels to separate the corn germ from which the corn oil can be further extracted in a separate process. The remaining fiber, gluten and starch components are further separated and sold. The stillage from the fermentation process is concentrated in an evaporator and is co-dried with the fiber component to be sold as corn gluten feed. The gluten component is filtered and dried to produce a high protein corn gluten meal. The starch is then processed into alcohol through fermentation. The fermentation process for alcohol at this stage is similar to the dry milling process. In addition, we separate and dry yeast to produce distillers yeast. Overview of Distillers Grains Market Distillers grains are produced as a co-product of alcohol production and are valuable components of feed rations primarily to dairies and beef cattle markets, both nationally and internationally. Our plants produce both WDG and DDGS. WDG is sold to customers proximate to the plants and DDGS is delivered by truck, rail and barge to customers in domestic and international markets. Producing WDG also allows us to use up to one-third less process energy, thus reducing production costs and lowering the carbon footprint of our production facilities. Historically, the market price for distillers grains has generally tracked the price of corn. We believe that the market price of WDG and DDGS is determined by a number of factors, including the market prices of corn, soybean meal and other competitive ingredients, the performance or value of WDG and DDGS in a particular feed formulation and general market forces of supply and demand, including export markets for these co-products. The market price of distillers grains is also often influenced by nutritional models that calculate the feed value of distillers grains by nutritional content, as well as reliability of consistent supply. - 7 - Customers We market and sell through our wholly-owned subsidiary, Kinergy Marketing LLC, or Kinergy, all of the alcohols we produce. Kinergy also markets fuel-grade ethanol produced by third parties. We market and sell through our wholly-owned subsidiary, Alto Nutrients, LLC, all of the essential ingredients we produce. We also sell break bulk quantities through Eagle Alcohol to customers in the beverage, food, industrial and related-process industries. We have extensive and long-standing customer relationships, both domestic and international, for our specialty alcohols and essential ingredients, including yeast for pet food and human foods. 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. We secure additional fuel-grade ethanol supplies from third-party fuel-grade ethanol plants. 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, renewable diesel and biodiesel customers. We do not market essential ingredients from other producers. Our Pekin Campus production segment generated $521.3 million, $498.2 million and $330.4 million in net sales for the years ended December 31, 2022, 2021 and 2020, respectively, from the sale of alcohols. Our Pekin Campus production segment generated $225.8 million, $189.5 million and $130.3 million in net sales for the years ended December 31, 2022, 2021 and 2020, respectively, from the sale of essential ingredients. During 2022, 2021 and 2020, our Pekin Campus production segment sold an aggregate of approximately 201.1 million, 213.0 million and 193.9 million gallons of alcohols and 851,500, 875,100 and 829,000 tons of essential ingredients, respectively, on a dry matter basis. Our Other production segment generated $253.6 million, $107.9 million and $137.7 million in net sales for the years ended December 31, 2022, 2021 and 2020, respectively, from the sale of alcohols. Our Other production segment generated $90.2 million, $31.1 million and $40.9 million in net sales for the years ended December 31, 2022, 2021 and 2020, respectively, from the sale of essential ingredients. During 2022, 2021 and 2020, our Other production segment sold an aggregate of approximately 92.3 million, 37.6 million and 78.0 million gallons of alcohols and 785,900, 361,000 and 619,000 tons of essential ingredients, respectively, on a dry matter basis. Our marketing and distribution segment generated $228.9 million, $381.2 million and $257.7 million in net sales for the years ended December 31, 2022, 2021 and 2020, respectively, from the sale of all alcohols. Our Corporate and other segment generated $15.8 million in net sales from Eagle Alcohol and sold 7.6 million gallons of alcohols. - 8 - During 2022, 2021 and 2020, we produced or purchased from third parties and resold an aggregate of 418.9 million, 479.6 million and 536.3 million gallons of alcohols to approximately 114, 99 and 65 customers, respectively. For 2022, 2021 and 2020, sales to our two largest customers, Shell Trading US Company and Chevron Products USA represented an aggregate of approximately 20%, 22% and 12%, of our net sales, respectively. For 2022, 2021 and 2020, sales to each of our other customers represented less than 10% of our net sales. Suppliers Pekin Campus and Other Production Segments Our production operations depend upon various raw materials suppliers, including suppliers of corn, natural gas, electricity and water. The cost of corn is the most important variable cost associated with our alcohol production. We source corn for our plants using standard contracts, including spot purchase, forward purchase and basis contracts. When resources are available, we seek to limit the exposure of our production operations to raw material price fluctuations by purchasing forward a portion of our corn requirements on a fixed price basis and by purchasing corn and other raw materials futures contracts and options. During 2022, 2021 and 2020, purchases of corn from our two largest suppliers represented an aggregate of approximately 27%, 16% and 16% of our total corn purchases, respectively, for those periods. Purchases from each of our other corn suppliers represented less than 10% of total corn purchases in each of 2022, 2021 and 2020. Marketing and Distribution Segment Our marketing and distribution operations include alcohols and essential ingredients we produce but also depend upon various third-party producers of fuel-grade ethanol. In addition, we provide transportation, storage and delivery services through third-party service providers with whom we have contracted to receive fuel-grade ethanol at agreed upon locations from our third-party suppliers and to store and/or deliver the ethanol to agreed-upon locations on behalf of our customers. These contracts generally run from year-to-year, subject to termination by either party upon advance written notice before the end of the then-current annual term. During 2022, 2021 and 2020, we purchased and resold from third parties an aggregate of approximately 220 million, 204 million and 163 million gallons, respectively, of fuel-grade ethanol. During 2022, 2021 and 2020, purchases of fuel-grade ethanol from our four largest third-party suppliers represented 69%, 76% and 62%, respectively, of our total third-party ethanol purchases for each of those periods. Purchases from each of our other third-party ethanol suppliers represented less than 10% of total third-party ethanol purchases in each of 2022, 2021 and 2020. Production Facilities We operate five production facilities. Three of our production facilities are located in Pekin, Illinois at our Pekin Campus, 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. As market conditions change, we may increase, decrease or idle production at one or more operating facilities or resume operations at any idled facility. The tables below provide an overview of our five production facilities. - 9 - Pekin Campus Production Facilities Pekin Wet Facility Pekin Dry Facility Pekin ICP Facility Location Pekin, IL Pekin, IL Pekin, IL Current operating status Operating Operating Operating Approximate maximum annual alcohol production capacity (in millions of gallons) 100 60 90 Approximate maximum annual specialty alcohol production capacity (in millions of gallons) 74 — 66 Production milling process Wet Dry Dry Primary energy source Natural Gas Natural Gas Natural Gas Western Production Facilities Magic Valley Facility Columbia Facility Location Burley, ID Boardman, OR Current operating status Idled Operating Approximate maximum annual fuel-grade ethanol production capacity (in millions of gallons) 60 40 Production milling process Dry Dry Primary energy source Natural Gas Natural Gas Commodity Risk Management We employ various risk mitigation techniques. For example, we may seek to mitigate our exposure to commodity price fluctuations by purchasing forward a portion of our corn and natural gas requirements through fixed-price or variable-price contracts with our suppliers, as well as entering into derivative contracts for fuel-grade ethanol, corn and natural gas. To mitigate fuel-grade ethanol inventory price risks, we may sell a portion of our production forward under fixed- or index-price contracts, or both. We may hedge a portion of the price risks by entering into exchange-traded futures contracts and options. Proper execution of these risk mitigation strategies can reduce the volatility of our gross profit margins. Specialty alcohols have relatively low price volatility and are usually priced at significant premiums to fuel-grade ethanol. The market price of fuel-grade ethanol is volatile, however, and subject to large fluctuations. Given the nature of our business, we cannot effectively hedge against extreme volatility or certain market conditions. For example, fuel-grade ethanol prices, as reported by the Chicago Board of Trade, or CBOT, ranged from $2.00 to $2.88 per gallon during 2022, $1.48 to $3.75 per gallon during 2021 and from $0.81 to $1.62 per gallon during 2020; and corn prices, as reported by the CBOT, ranged from $5.64 to $8.18 per bushel during 2022, $4.84 to $7.73 per bushel during 2021 and from $3.03 to $4.84 per bushel during 2020. Climate-Related and Other Risks Short- to medium-term climate-related and other risks include high sensitivity to certain commodity prices such as corn and natural gas; regulatory changes and political volatility, both domestic and international; ethanol supply and demand imbalances; logistics and storage constraints from river access during inclement or volatile weather conditions; lack of automation of process optimization; high repair, maintenance and production costs resulting from older facilities; poor cooling capacity of our older facilities as water temperatures increase; and international market competition. Long-term climate-related risks include water resource limitations; lower or volatile grain availability in local markets; market transition away from combustion fuels that include renewables; and the energy cost impact of technology such as wet milling and multiple distillation processes for high-quality alcohol. We also may be impacted by costs and regulatory burdens associated with carbon emissions from our production and distribution as well as truck transport and packaging associated with Eagle Alcohol’s use of drums and totes. See “Risk Factors.” - 10 - Marketing Arrangements We market all the alcohols and essential ingredients produced at our facilities. In addition, we market and sell the entire fuel-grade ethanol production volume of a third-party producer. Competition We are the largest producer of specialty alcohols in the United States. Other significant producers of specialty alcohols in the United States are Archer-Daniels-Midland Company, MGP Ingredients, Inc., Grain Processing Corporation, CIE and Greenfield Global Inc., which collectively make up a significant majority of the total installed specialty alcohol production capacity in the United States along with many smaller producers. The largest producers of fuel-grade ethanol in the United States are POET, LLC, Valero Renewable Fuels Company, LLC, Archer-Daniels-Midland Company and Green Plains Inc., collectively with approximately 41% of the total installed fuel-grade ethanol production capacity in the United States. In addition, there are many mid-sized fuel-grade ethanol producers with several plants under ownership, smaller producers each with one or two plants, and several fuel-grade ethanol marketers that create significant competition. Overall, we believe there are over 200 fuel-grade ethanol production facilities in the United States with a total installed production capacity of approximately 17.5 billion gallons and many brokers and marketers with whom we compete for sales of fuel-grade ethanol and its co-products. Our fuel-grade ethanol also competes on a global market against production from other countries, such as Brazil, which may have lower production costs than United States producers. Lower feedstock input costs such as sugarcane used in Brazil as compared to corn used in the Unites States may give foreign producers a competitive advantage. In addition, fuel-grade ethanol from sugarcane feedstock qualifies as an advanced biofuel, unlike corn ethanol, allowing certain producers to economically satisfy an advanced biofuel standard. Moreover, new products and production technologies are under continuous development, many of which, if adopted by competitors, could harm our ability to compete. We believe that our competitive strengths include our customer and supplier relationships, the barriers to entry to our most profitable lines of business—including our modern technologies and certifications at our production facilities—our experienced management, and the strategic location of our Midwest production facilities. We believe that these advantages will help us to attain our goal to expand our business as a leading producer and distributor of specialty alcohols and essential ingredients. See “—Competitive Strengths”. - 11 - Governmental Regulation Our business is subject to a wide range of federal, state and local laws and regulations directed at protecting public health and the environment, including those promulgated by the Occupational Safety and Health Administration, or OSHA, the U.S. Food and Drug Administration, or FDA, the EPA, and numerous state, local and international authorities. These laws, their underlying regulatory requirements and their potential enforcement, some of which are described below, impact, or may impact, nearly every aspect of our operations, including our production of alcohols (including distillation), our production of essential ingredients, our storage facilities, and our water usage, wastewater discharge, disposal of hazardous wastes and emissions, and other matters pertaining to our existing and proposed business by imposing: ● restrictions on our existing and proposed operations and/or the need to install enhanced or additional controls; ● special requirements applicable to food and drug additives; ● the need to obtain and comply with permits and authorizations; ● liability for exceeding applicable permit limits or legal requirements, in some cases for the remediation of contaminated soil and groundwater at our production facilities, contiguous and adjacent properties and other properties owned and/or operated by third parties; and ● other specifications for the specialty alcohols and essential ingredients we produce and market. In addition, some governmental regulations are helpful to our production and marketing business. The fuel-grade ethanol industry in particular is supported by federal and state mandates and environmental regulations that favor the use of fuel-grade ethanol in motor fuel blends in North America. Some of the governmental regulations applicable to our production and marketing business are briefly described below. Food and Drug Regulation Our products for the Health, Home & Beauty , Food & Beverage and Essential Ingredients markets are subject to regulation by the FDA as well as similar state agencies. Under the Federal Food, Drug, and Cosmetic Act, or FDCA, the FDA regulates the processing, formulation, safety, manufacture, packaging, labeling and distribution of food ingredients, vitamins, cosmetics and pharmaceuticals for active and inactive ingredients. Many of the FDA’s and FDCA’s rules and regulations apply directly to us as well as indirectly through their application in our customers’ products. To be properly marketed and sold in the United States, a relevant product must be generally recognized as safe, approved and not adulterated or misbranded under the FDCA and relevant regulations issued under the FDCA. The FDA has broad authority to enforce the provisions of the FDCA. Failure to comply with the laws and regulations of the FDA or similar state agencies could prevent us from selling certain of our products or subject us to liability. Renewable Fuels Energy Legislation Under the RFS, the mandated use of all renewable fuels, including fuel-grade ethanol, rose incrementally and peaked at 36.0 billion gallons in 2022, of which 15.0 billion gallons are required from conventional, or corn-based, ethanol. Under the provisions of the Energy Independence and Security Act of 2007, the EPA has the authority to waive the mandated RFS requirements in whole or in part. To grant a waiver, the EPA administrator must determine, in consultation with the Secretaries of Agriculture and Energy, that there is inadequate domestic renewable fuel supply or implementation of the requirement would severely harm the economy or environment of a state, region or the United States as a whole. Various bills in Congress introduced from time to time are also directed at altering existing renewable fuels energy legislation, but none have passed in recent years. Some legislative bills are directed at halting or reversing expansion of, or even eliminating, the renewable fuel program, while other bills are directed at bolstering the program or enacting further mandates or grants that would support the renewable fuels industry. - 12 - The EPA has allowed fuel and fuel-additive manufacturers to introduce into commercial gasoline up to 15% fuel-grade ethanol by volume, or E15, for vehicles from model year 2001 and beyond. Commercial sale of E15 has begun in a majority of states, and the EPA has enacted a rule allowing for year-round use of E15. Various states including California, Oregon and Washington, and other regions such as the Canadian province of British Columbia, have implemented low-carbon fuel standards focused on reducing the carbon intensity of transportation fuels. Blending fuel-grade ethanol into gasoline is one of the primary means of attaining these goals. Additional Environmental Regulations In addition to the governmental regulations applicable to the alcohol production and marketing industry described above, our business is subject to additional federal, state and local environmental regulations, including regulations established by the EPA and state regulatory agencies related to water quality and air pollution control. We cannot predict the manner by which, or extent to which, these regulations will harm or help our business or the alcohol production and marketing industry in general. Human Capital Resources As of March 13, 2023, we had approximately 439 employees, including 439 full-time employees. Our human capital resources objectives include attracting and retaining well-qualified and highly skilled and motivated employees and executives. As of that same date, approximately 44% of our employees were represented by a labor union and covered by a collective bargaining agreement. We have never had a work stoppage or strike and we consider our relations with our employees to be good. Our compensation program is designed to attract, retain and motivate our personnel. We use a mix of competitive salaries and other benefits to attract and retain employees and executives. Some of these benefits include matching 401K contributions of up to 6% of salary, health and wellness programs and a paid service day for employees to give back to their communities. At the direction and with the involvement of an environmental, social and governance, or ESG, committee established by our board of directors, we have established an ESG working committee that draws from our many administrative and operational departments to review key policies and procedures, conduct employee engagement surveys and training, champion volunteering and charitable drives, develop and implement recruiting efforts which promote diversity and inclusion and prioritize collecting and improving on key metrics from industry frameworks such as the Global Reporting Initiative and Sustainability Accounting Standards Board standards which are maintained by the International Sustainability Standards Board of the IFRS Foundation. - 13 -