Alto Ingredients, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report. This report and our consolidated financial statements and notes to consolidated financial statements contain forward-looking statements, which generally include the plans and objectives of management for future operations, including plans and objectives relating to our future economic performance and our current beliefs regarding revenues we might generate and profits we might earn if we are successful in implementing our business and growth strategies. The forward-looking statements and associated risks may include, relate to or be qualified by other important factors, including: ● fluctuations in the market prices of alcohols and essential ingredients; ● fluctuations in the costs of key production input commodities such as corn and natural gas; ● the projected growth or contraction in the alcohol and essential ingredients markets in which we operate; ● our strategies for expanding, maintaining or contracting our presence in these markets; ● anticipated trends in our financial condition and results of operations; and ● our ability to distinguish ourselves from our current and future competitors. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this report, or in the case of a document incorporated by reference, as of the date of that document. We do not undertake to update, revise or correct any forward-looking statements, except as required by law. Any of the factors described immediately above or referenced from time to time in our filings with the Securities and Exchange Commission or in the “Risk Factors” section below could cause our financial results, including our net income or loss or growth in net income or loss to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially. Overview We are a leading producer and distributor of specialty alcohols and essential ingredients, and the largest producer of specialty alcohols in the United States. We operate five alcohol production facilities. Three of our production facilities are located in 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 on a dry matter basis. 14 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 markets include grain neutral spirits, or GNS, 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. We also sell yeast for human consumption. 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. 15 Our production facilities were operating for all of the first quarter except our Magic Valley production facility in Idaho, which we temporarily hot-idled on January 1, 2023 due to extreme natural gas prices, other unfavorable market conditions and to facilitate the installation of our new high protein systems. The facility was restarted in April 2023. All of our production facilities are currently operating. 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. 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 ethanol 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 2 – Segments” to our Notes to Consolidated Financial Statements included elsewhere in this report for financial information about our business segments. Current Initiatives and Outlook During the first quarter, crush margins improved sequentially each month compared to the prior month. The quarter ended with regional natural gas prices, corn basis and ethanol prices greatly improved compared to December 2022. For the month of March, we generated positive bottom-line financial results. In addition, the outlook for renewable fuel has further improved as the EPA recently approved E15 for summer blending. At current crush margin levels, we expect positive Adjusted EBITDA for the second quarter. We define Adjusted EBITDA as unaudited consolidated 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. Overall, we are pleased with the current market improvements, which continue to positively impact our business. We cannot provide guidance for the full year 2023 but we expect to benefit from approximately $10 million in additional earnings before interest expense, interest income, provision for income taxes, and depreciation and amortization, or EBITDA, generated from the capital projects we have already completed or will complete this year. 16 Despite current positive crush margins, we have no control over commodity pricing, aside from our hedging activities which can be costly and of limited effect in the case of a prolonged negative market environment. For this reason, we continue to work toward implementing a series of near- and long-term projects aimed at reducing our exposure to volatile commodity markets. We continue to transform our business by further diversifying our products and optimizing our operations to expand margins and increase profitability. With the completion of our near-term projects, we expect to increase EBITDA on an annualized basis by over $65 million by the end of 2025 and expect to increase that amount to over $125 million by the end of 2026 when our carbon capture and sequestration, cogeneration and other initiatives are fully realized. Our multi-path diversification strategy includes increased production of our most differentiated and highest quality products. Our near-term focus includes GNS, corn oil and high protein products, while our longer-term plan includes primary yeast as well as carbon capture and sequestration. We also remain focused on reducing production costs. Our near-term initiatives in this regard include improvements to plant efficiency, reliability and redundancy by adding corn storage and installing our own natural gas pipeline. Our longer-term vision includes upgrading equipment, converting our biogas to renewable natural gas and building energy cogeneration capabilities at our Pekin Campus. We are confident in our ability to fund our near-term capital projects through our term loan facility, current working capital resources and cash we expect to generate from our operations. For our longer-term projects, we continue to hold productive discussions with potential strategic partners and we will continue to assess our capital needs as the projects come further into focus. We have completed the upgrade of our GNS distillation system at our Pekin Campus wet mill to produce the highest quality 190 proof and low-moisture 200 proof GNS products on the market. Recently, we have added new beverage customers and we are working to place our GNS products on a spot purchase basis for the remainder of 2023. This coming fall, we expect to contract for additional volumes with both new and existing customers during our annual contracting period for 2024 sales. Our product and process certifications will be invaluable as we work toward customer qualifications for these high-quality products. Beginning in 2024, we expect these products will contribute approximately $5 million in EBITDA annually and continue to grow as part of our business over time. In December, we moderated production at our Columbia plant and temporarily idled our Magic Valley plant to minimize the impact of sustained high natural gas prices in the Pacific Northwest. This created an opportunity for us to focus our attention on completing the installation of our corn oil and high protein technologies at our Magic Valley facility. We have now completed all material installations of the CoProMax TM corn oil and high protein system and have resumed production at our Magic Valley plant. We are aligning the new and existing operating systems at the plant to ensure optimal efficiency. We expect to achieve full production of both higher corn oil volumes and high-quality dry protein at the facility by the end of the second quarter, with additional sales from these products to commence in the third quarter. We expect corn oil and high-quality protein from our Magic Valley facility to contribute in aggregate approximately $9 million in EBITDA annually. We plan to begin a staged rollout in late 2023 of corn oil technology installations at our three other dry mills. Although each dry mill is slightly different in size, on average we expect to produce similar financial results to those anticipated from our Magic Valley plant. When fully installed, we expect the corn oil installations at our three other plants in aggregate will contribute over $14 million in EBITDA annually. After our high protein system is fully and successfully operational at our Magic Valley facility, we will evaluate the system for rollout at our three other dry mills and anticipate similar economics. We expect the high protein installations at our three other plants in aggregate will contribute over $13 million in EBITDA annually. 17 In total, we expect our corn oil expansion and high protein systems, when fully operational at our Magic Valley plant and our three other dry mills, will together contribute over $36 million in EBITDA annually. As to our longer-term initiatives for high-margin offerings, we plan to expand into primary yeast production. We have finished successful product trials and selected a highly qualified third-party engineering group to complete our front-end engineering and design, or FEED, study, with the conclusion of this work expected in the third quarter. Our primary yeast project would expand on our past upgrades made to our yeast operations. We expect our primary yeast product to contribute approximately $19 million in EBITDA in the first twelve months of production with a potential increase to over $25 million annually thereafter. Our target is to begin construction of the project in early 2024 and we anticipate project completion in the summer of 2025. We have a significant opportunity for carbon capture and sequestration at our Pekin Campus, which produces approximately 700,000 metric tons of carbon annually. We are proceeding in earnest through advanced negotiations for this important project. We have selected a third-party FEED firm to determine capture, compression and engineering design. We expect this study will be completed in the third quarter. We are finalizing the selection of a development partner to provide turnkey transportation, sequestration and monitoring services. Our longer-term goal is to have our carbon capture and sequestration project operational in 2026. Based solely on our annual carbon production volume at $85 per metric ton, reflecting the 45Q tax incentive benefits established under the Inflation Reduction Act of 2022, we believe we can generate over $30 million in EBITDA annually, after accounting for operating and sequestration costs, and excluding any of the substantial additional economic benefits of the environmental attributes associated with low carbon ethanol. We continue to advance our initiatives to improve plant efficiency, reliability, redundancy and capacity. Our new 850,000 bushel corn storage silo at our Pekin Campus is now fully operational and contributing to improved corn procurement costs, plant reliability and plant operating costs across the production facility. Our conservative estimate has the silo contributing over $2 million in EBITDA annually. Our third-party FEED study for our new natural gas pipeline is complete. We are working on the initial routing steps, which will enable the project to advance to definitive land agreements and the construction permit application process. We have also initiated community interaction and initial feedback has been positive. We plan for the pipeline to bypass the current utility with the goal of optimizing energy procurement, usage and expense, which will contribute to our sustainability efforts. When fully operational, which we expect in 2024, we anticipate the pipeline will reduce our energy costs by approximately $3 million annually. The pipeline will also create the opportunity for us to convert and monetize our current biogas waste stream into renewable natural gas. Based on our current output, we estimate that production and sale of renewable natural gas would contribute more than $3 million in EBITDA annually. Our third-party FEED study for cogeneration at our Pekin Campus is complete. The cogeneration design is intended to address our current needs, support increased energy requirements for both our primary yeast and carbon capture and sequestration projects, and offset grid electrical power consumption. Based on current energy prices, we expect cogeneration to contribute approximately $15 million in EBITDA annually. 18 Renewable products are part of our primary mission and producing them safely is one of our core tenets. Each of our capital projects advances sustainability. While these projects and our continual process improvements can be viewed as environmental, social and governance, or ESG, initiatives, our decisions to ensure safety, quality and sustainability are good for our overall business. Our other ESG initiatives include: ● Efforts with Nasdaq as a third-party consultant to review our ESG strategy which included a materiality survey to determine areas of focus. We have completed all initial “roadmap” action items, and we have: o Strengthened and communicated our environmental, health, safety and security policy and objectives; o Added consistent standards and details to our Code of Ethics and Supplier Code of Conduct; o Implemented a supplier transparency program with components such as supplier scorecards and on-site auditing in some cases; and o Partnered with SEDEX, a leading data platform with over 74,000 members, to improve our sustainability performance and to ensure that we are ethically sourcing our goods and services. ● Looking ahead, we have launched a three-year employee engagement program with Gallup to identify areas of opportunity and facilitate communication at all levels. We completed our first engagement survey in December 2022. Our employee engagement is more than a survey – it is a comprehensive program with tools and training to achieve our goals for supporting our employees, one of our most important resources. In addition, diversity has been a focus for employee recruiting and at the board level. We will publish further metrics in our mid-2023 sustainability reporting. ● Lowering our carbon footprint and delivering bio-based renewable products has been at the core of our business since inception. We have completed our Scope 1 & 2 greenhouse gas emissions inventory and have third party verification for both 2021 and 2022 at all production facilities. This information combined with our key projects such as carbon capture and sequestration, improving energy efficiencies with cogeneration and equipment upgrades, and maximizing biogas utilization will lead us to set and achieve carbon reduction targets and help us do our part to meet sustainable development goals. We look forward to sharing our ESG progress mid-year. 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 consolidated 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, consolidated net income (loss). EBITDA and Adjusted EBITDA are not measures of financial performance under GAAP and should not be considered as alternatives to consolidated 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. 19 Information reconciling forward-looking EBITDA to forward-looking consolidated net income (loss) would require a forward-looking statement of consolidated 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 consolidated 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 consolidated net income (loss) that are not presently estimable. Reconciliation of Adjusted EBITDA to Consolidated Net Income (Loss) Three Months Ended March 31, (in thousands) (unaudited) 2023 2022 Net loss $ (13,166 ) $ (2,602 ) Adjustments: Interest expense 1,565 200 Interest income (221 ) (158 ) Asset impairments 574 — Acquisition-related expense 700 875 Depreciation and amortization expense 6,055 6,134 Total adjustments 8,673 7,051 Adjusted EBITDA $ (4,493 ) $ 4,449 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: accounting for business combinations; revenue recognition; 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, 2022. 20 Results of Operations The following selected financial information should be read in conjunction with our consolidated financial statements and notes to our consolidated financial statements included elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report. Certain performance metrics that we believe are important indicators of our results of operations include: Three Months Ended March 31, Percentage 2023 2022 Change Renewable fuel production gallons sold (in millions) 37.1 49.2 (24.6 )% Specialty alcohol production gallons sold (in millions) 21.4 23.3 (8.2 )% Third party renewable fuel gallons sold (in millions) 33.9 30.7 10.4 % Total gallons sold (in millions) 92.4 103.2 (10.5 )% Total gallons produced (in millions) 60.6 74.3 (18.4 )% Production capacity utilization 70 % 86 % (18.6 )% Average sales price per gallon $ 2.43 $ 2.46 (1.2 )% Corn cost per bushel—CBOT equivalent $ 6.61 $ 6.22 6.3 % Average basis (1) 0.46 0.64 (28.1 )% Delivered cost of corn $ 7.07 $ 6.86 3.1 % Total essential ingredients tons sold (in thousands) 299.3 398.8 (24.9 )% Essential ingredients revenues as % of delivered cost of corn (2) 44.5 % 36.4 % 22.3 % Average CBOT ethanol price per gallon $ 2.21 $ 2.16 2.3 % Average CBOT corn price per bushel $ 6.54 $ 6.73 (2.8 )% (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. 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 (loss) as a percentage of net sales (in thousands, except percentages): Three Months Ended March 31, Change in 2023 2022 Dollars Percent Net sales $ 313,891 $ 308,118 $ 5,773 1.9 % Cost of goods sold 317,055 303,345 13,710 4.5 % Gross profit (loss) $ (3,164 ) $ 4,773 $ (7,937 ) NM* Percentage of net sales (1.0 )% 1.5 % * Not meaningful. Net Sales The increase in our consolidated net sales for the three months ended March 31, 2023 as compared to the same period in 2022 was primarily due to an increase in total gallons sold on a gross basis, partially offset by a lower average sales price per gallon and lower volumes of essential ingredients sold. We marketed no third-party gallons on a net basis during the quarter as we ended our contractual relationship with the two fuel-grade ethanol plants for which we previously sold their production to focus on sales of our own fuel-grade ethanol production. 21 Pekin Campus Production Segment Net sales of alcohol from our Pekin Campus production segment increased by $16.3 million, or 14%, to $132.4 million for the three months ended March 31, 2023 as compared to $116.1 million for the same period in 2022. Our total volume of production gallons sold increased by 0.3 million gallons, or 1%, to 49.6 million gallons for the three months ended March 31, 2023 as compared to 49.3 million gallons for the same period in 2022. At the segment’s average sales price per gallon of $2.67 for the three months ended March 31, 2023, we generated $1.0 million in additional net sales from the 0.3 million additional gallons of alcohol sold in the three months ended March 31, 2023 as compared to the same period in 2022. The increase of $0.32, or 14%, in the segment’s average sales price per gallon in the three months ended March 31, 2023 as compared to the same period in 2022 improved our net sales from the segment by $15.3 million. Net sales of essential ingredients from our Pekin Campus production segment increased $8.3 million, or 15%, to $63.6 million for the three months ended March 31, 2023 as compared to $55.3 million for the same period in 2022. Our total volume of essential ingredients sold declined by 15,000 tons, or 6%, to 227,000 tons for the three months ended March 31, 2023 from 242,000 tons for the same period in 2022. At the segment’s average sales price per ton of $280.44 for the three months ended March 31, 2023, we generated $4.3 million less in net sales from the 15,000 fewer tons of essential ingredients sold in the three months ended March 31, 2023 as compared to the same period in 2022. The increase of $52.10, or 23%, in the segment’s average sales price per ton for the three months ended March 31, 2023 as compared to the same period in 2022 increased our net sales from the segment by $12.6 million. Marketing and Distribution Segment Net sales of alcohol from our marketing and distribution segment, excluding intersegment sales, increased by $30.3 million, or 56%, to $84.5 million for the three months ended March 31, 2023 as compared to $54.2 million for the same period in 2022. Our volume of third party alcohol sold reported gross by the segment increased by 14.0 million gallons, or 70%, to 33.9 million gallons for the three months ended March 31, 2023 as compared to 19.9 million gallons for the same period in 2022. At the segment’s average sales price per gallon of $2.49 for the three months ended March 31, 2023, we generated $34.9 million in additional net sales from the 14.0 million additional gallons of third-party alcohol sold gross in the three months ended March 31, 2023 as compared to the same period in 2022. Our volume of alcohol sold reported net by the segment decreased by 10.8 million gallons, or 100%, to no gallons sold net for the three months ended March 31, 2023 as compared to 10.8 million gallons for the same period in 2022. This decline reduced net sales by $0.2 million. The $0.22 per gallon, or 8%, decrease in the segment’s average sales price per gallon for the three months ended March 31, 2023 as compared to the same period in 2022 resulted in a $4.4 million decline in our net sales from third-party fuel-grade ethanol sold by the segment. 22 Other Production Segment Net sales of alcohol from our other production segment decreased by $38.9 million, or 65%, to $20.9 million for the three months ended March 31, 2023 as compared to $59.8 million for the same period in 2022. Our total volume of alcohol sold declined by 15.3 million gallons, or 66%, to 7.9 million gallons for the three months ended March 31, 2023 as compared to 23.2 million gallons for the same period in 2022. At the segment’s average sales price per gallon of $2.64 for the three months ended March 31, 2023, we generated $40.2 million less in net sales from the 15.3 million fewer gallons of alcohol sold in the three months ended March 31, 2023 as compared to the same period in 2022. The increase of $0.06, or 2%, in the segment’s average sales price per gallon for the three months ended March 31, 2023 as compared to the same period in 2022 improved our net sales from the segment by $1.3 million. Net sales of essential ingredients from our other production segment decreased by $10.5 million, or 56%, to $8.4 million for the three months ended March 31, 2023 as compared to $18.9 million for the same period in 2022. Our total volume of essential ingredients sold declined by 85,000 tons, or 54%, to 72,000 tons for the three months ended March 31, 2023 from 157,000 tons for the same period in 2022. At the segment’s average sales price per ton of $115.37 for the three months ended March 31, 2023, we generated $9.7 million less in net sales from the 85,000 fewer tons of essential ingredients sold in the three months ended March 31, 2023 as compared to the same period in 2022. The decrease of $5.48, or 5%, in our average sales price per ton for the three months ended March 31, 2023 as compared to the same period in 2022 decreased our net sales of essential ingredients from the segment by $0.8 million. Corporate and other Net sales of alcohol from corporate and other increased by $0.3 million, or 8%, to $4.1 million for the three months ended March 31, 2023 as compared to $3.8 million for the same period in 2022. These sales are from Eagle Alcohol’s business. Cost of Goods Sold and Gross Profit (Loss) Our consolidated gross profit (loss) declined to a gross loss of $3.2 million for the three months ended March 31, 2023 from gross profit of $4.8 million for the same period in 2022, representing a gross margin of negative 1.0% for the three months ended March 31, 2023 compared to a gross margin of 1.5% for the same period in 2022. Our consolidated gross profit (loss) declined due to lower commodity margins as a result of higher production input costs. In addition, our cost of goods sold includes $1.8 million in net losses recorded on our forward derivative positions. Pekin Campus Production Segment Our Pekin Campus production segment’s gross profit, net of intercompany activity, declined by $5.2 million to a loss of $1.6 million for the three months ended March 31, 2023 as compared to gross profit of $3.6 million for the same period in 2022. This decline in gross profit is primarily attributable to lower fuel-grade ethanol margins. In addition, although the segment achieved higher sales prices for our essential ingredients, the higher sales prices did not outweigh our higher production input costs, particularly corn prices, we experienced to produce the essential ingredients. 23 Marketing and Distribution Segment Our marketing and distribution segment’s gross profit (loss), net of intercompany activity, improved by $1.8 million to a gross profit of $1.4 million for the three months ended March 31, 2023 as compared to a gross loss of $0.4 million for the same period in 2022. Of this improvement, $1.2 million is attributable to higher margins from sales of third-party fuel-grade ethanol and $0.6 million is attributable to higher sales volumes for the three months ended March 31, 2023 as compared to the same period in 2022 as we met our customers’ needs through sales of third-party fuel grade ethanol while our Magic Valley facility was temporarily idled. Other Production Segment Our other production segment’s gross profit, net of intercompany activity, declined by $5.3 million to a gross loss of $4.6 million for the three months ended March 31, 2023 as compared to a gross profit of $0.7 million for the same period in 2022. Of this decline, $14.2 million is attributable to lower fuel-grade ethanol margins, partially offset by $8.9 million in reduced gross losses from fewer volumes sold at negative margins as a result of the temporary shutdown of our Magic Valley plant. Corporate and other Gross profit from corporate and other improved by $0.8 million to a gross profit of $1.7 million for the three months ended March 31, 2023 as compared to $0.9 million for the same period in 2022, all of which were from Eagle Alcohol’s business. Selling, General and Administrative Expenses The following table presents our selling, general and administrative, or SG&A, expenses in dollars and as a percentage of net sales (in thousands, except percentages): Three Months Ended March 31, Change in 2023 2022 Dollars Percent Selling, general and administrative expenses $ 7,882 $ 7,629 $ 253 3.3 % Percentage of net sales 2.5 % 2.5 % Our SG&A expenses increased for the three months ended March 31, 2023 as compared to the same period in 2022. The $0.3 million period over period increase in SG&A expenses is primarily due to increased professional fees to support our assessments of future plant improvement projects and other strategic initiatives. Interest Expense, net The following table presents our interest expense, net, in dollars and as a percentage of net sales (in thousands, except percentages): Three Months Ended March 31, Change in 2023 2022 Dollars Percent Interest expense, net $ 1,565 $ 200 $ 1,365 682.5 % Percentage of net sales 0.5 % 0.1 % Our interest expense, net, increased for the three months ended March 31, 2023 as compared to the same period in 2022. The $1.4 million period over period increase in interest expense, net, is primarily due to increased borrowings under our Orion term loan, the proceeds of which we are using to accelerate and expand our plant improvement projects and other strategic initiatives. 24 Net Loss Available to Common Stockholders The following table presents our net loss available to common stockholders in dollars and as a percentage of net sales (in thousands, except percentages): Three Months Ended March 31, Change in 2023 2022 Dollars Percent Net loss available to Common Stockholders $ (13,478 ) $ (2,914 ) $ 10,564 362.5 % Percentage of net sales (4.3 )% (0.9 )% The increase in net loss available to common stockholders is primarily due to lower margins resulting from higher commodity prices for the three months ended March 31, 2023 as compared to the same period in 2022. Interest expense was also higher for the first quarter of 2023 compared to the same period in 2022 due to higher debt balances from our term loan to support our capital improvement projects. Liquidity and Capital Resources During the three months ended March 31, 2023, we funded our operations primarily from proceeds from our line of credit and cash on hand. In addition to funding our operations, our capital resources were used to advance our capital improvement projects and make an annual payment for our acquisition of Eagle Alcohol. As of March 31, 2023, we had $26.4 million in cash, cash equivalents and restricted cash, $41.6 million available for borrowing under Kinergy’s operating line of credit and $40 million available for borrowing under our Orion term loan. We believe we have sufficient liquidity to meet our anticipated working capital, debt service and other liquidity needs for the next twelve months from the date of this report. Quantitative Year-End Liquidity Status We believe that the following amounts provide insight into our liquidity and capital resources. The following selected financial information should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report (dollars in thousands). March 31, 2023 December 31, 2022 Change Cash, cash equivalents and restricted cash $ 26,436 $ 49,525 (46.6 )% Current assets $ 171,604 $ 199,121 (13.8 )% Property and equipment, net $ 244,172 $ 239,069 2.1 % Current liabilities $ 53,846 $ 78,017 (31.0 )% Long-term debt $ 83,739 $ 68,356 22.5 % Working capital $ 117,758 $ 121,104 (2.8 )% Working capital ratio 3.19 2.55 25.1 % Changes in Working Capital and Cash Flows Working capital declined to $117.8 million at March 31, 2023 from $121.1 million at December 31, 2022 as a result of a decrease of $27.5 million in current assets, partially offset by a decrease of $24.2 million in current liabilities. 25 Current assets declined primarily due to a decrease in cash and restricted cash as we used significant cash on hand for our operating activities and also used cash on hand to advance our capital improvement projects. Our current liabilities decreased primarily due to lower accrued liabilities as a result of our payment of accrued contingent consideration for our acquisition of Eagle Alcohol, lower utility accruals in the current period and a decline in the value of derivative instruments due to the end of period change in commodity prices for open contracts. Our cash, cash equivalents and restricted cash declined by $23.0 million primarily due to $23.3 million in cash used in our operating activities and $13.1 million in cash used in our investing activities, partially offset by $13.4 million in cash provided by our financing activities. Cash used in our Operating Activities We used $23.3 million in cash for our operating activities during the three months ended March 31, 2023 as compared to $11.1 million in cash provided by our operations for the same period in 2022. Specific factors that contributed to the change in cash from our operating activities include: ● an increase of $10.6 million in our net loss due to lower margins primarily caused by higher commodity prices; ● an increase of $14.4 million related to payments of accounts payable and accrued liabilities due to their timing; ● a decrease of $10.1 million related to other assets primarily related to lower hedging activities during the quarter; and ● an increase of $9.6 million related to higher accounts receivable balances due to the timing of collections. These amounts were partially offset by: ● an increase of $7.1 million related to volatility from our derivative instruments; and ● a decrease of $2.3 million related to higher inventories due to increased commodity prices. Cash used in our Investing Activities We used $9.6 million of cash during the quarter to fund additions to property and equipment and $3.5 million of cash to make contingent purchase price payments for our acquisition of Eagle Alcohol. Cash provided by our Financing Activities Cash provided by our financing activities was $13.4 million for the three months ended March 31, 2023, which reflects net proceeds of $15.4 million from Kinergy’s operating line of credit, partially offset by $1.7 million of stock repurchases and $0.3 million paid in preferred dividends. Kinergy’s Operating Line of Credit Kinergy maintains an operating line of credit for an aggregate amount of up to $100.0 million. The credit facility matures on November 7, 2027. Interest accrues under the credit facility at a rate equal to (a) the daily Secured Overnight Financing Rate, plus (ii) a specified applicable margin ranging from 1.25% to 1.75%. 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. In addition, the amount of cash distributions that Kinergy or Alto Nutrients may make to us is also limited to up to 75% of excess cash flow. 26 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 1.1 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 March 31, Years Ended December 31, 2023 2022 2022 2021 Fixed-Charge Coverage Ratio Requirement 1.10 2.00 1.10 2.00 Actual 3.89 10.18 3.54 13.32 Excess 2.79 8.18 2.44 11.32 Alto Ingredients, Inc. has guaranteed all of Kinergy’s obligations under the credit facility. As of March 31, 2023, Kinergy had an outstanding balance of $33.4 million and $41.6 million of unused borrowing availability under the credit facility. Orion Term Loan On November 7, 2022, we entered into a credit agreement with certain funds managed by Orion Infrastructure Capital, or Lenders, under which the Lenders extended a senior secured credit facility in the amount of up to $125,000,000, or Term Loan. The Term Loan is secured by a first priority lien on certain of our assets and a second priority lien on certain assets of Kinergy and Alto Nutrients. The Lenders agreed to advance up to $100,000,000, with up to an additional $25,000,000 upon the satisfaction of certain conditions. We committed to issue to the Lenders pro rata an aggregate of 1,282,051 shares of our common stock at the initial funding and up to an additional 320,513 shares of our common stock based upon certain further fundings under the credit facility. On November 23, 2022, we received our initial funding of $60,000,000 under the credit facility and issued an aggregate of 1,282,051 shares of our common stock to the Lenders. We received no separate consideration for the shares of common stock issued. 27 Interest accrues on the unpaid principal amount of the Term Loan at a fixed rate of 10% per annum. The Term Loan matures on November 7, 2028, or earlier upon acceleration. We must prepay amounts outstanding under the Term Loan on a semi-annual basis beginning with the six-month period ending December 31, 2023 in an amount equal to a percentage of our excess cash flow based on a specified leverage ratio, as follows: (a) if our leverage ratio is greater than or equal to 3.0x, then the mandatory prepayment amount will equal 100% of our excess cash flow, (b) if our leverage ratio is less than 3.0x and greater than or equal to 1.5x, then the mandatory prepayment amount will equal 50% of our excess cash flow, and (c) if our leverage ratio is less than 1.5x, then the mandatory prepayment amount will equal 25% of our excess cash flow. As of March 31, 2023, the amount outstanding under the Term Loan was $60,000,000. Share Repurchase Program For the three months ended March 31, 2023, we repurchased 860,000 shares of our common stock as part of our publicly announced share repurchase program at an average price per share of $1.96 for an aggregate expenditure of $1.7 million during the period. See “Unregistered Sales of Equity Securities and Use of Proceeds – Purchases of Equity Securities by the Issuer and Affiliated Purchasers.” Other Cash Obligations As of March 31, 2023, we had future commitments for certain capital projects totaling $21.7 million. These commitments are scheduled to be satisfied through 2024. In connection with our acquisition of Eagle Alcohol, we committed to contingent payments of up to $5.5 million in cash over the next two years if certain targets are met.