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; ● our ability to fund, and the costs, timing and effects of our plant improvement and other capital projects; ● the projected growth or contraction in the alcohols 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. 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. 15 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 markets 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 protein meal, corn protein 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 products for the Renewable Fuels markets 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 relatively 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 the first quarter except our Magic Valley plant in Idaho, which we temporarily hot-idled in January 2023 due to extreme natural gas prices, other unfavorable market conditions and to facilitate the installation of our new high protein systems at the plant. 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 — 16 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 Crush margins, particularly for fuel-grade ethanol, continued to improve during the second quarter. We also benefitted from favorable economics from our specialty alcohol and essential ingredients products, enabling us to generate net income and cash flow from operations, and to report positive Adjusted EBITDA of nearly $16 million. We increased our production capacity utilization sequentially to 81% in the second quarter as compared to 70% in the first quarter and expect to further increase utilization based on two primary factors: first, when our corn oil extraction and high protein systems at our Magic Valley plant are fully aligned, we expect to achieve optimal capacity at the facility; and second, the state of Washington recently approved a new low-carbon fuel standard that justifies shipping fuel-grade ethanol from our Columbia plant, thereby opening a new low-carbon fuel market for the facility. Given our positive crush margins for the month of July, we locked in positive spreads for a portion of our production. As a result of these favorable spreads and a positive forward crush margin curve, we expect positive Adjusted EBITDA for the third quarter. 17 We continue to make significant capital expenditures to support our business transformation, diversify our revenue streams and reduce our exposure to often volatile commodity markets. Since late 2019, we have focused on modifying our operations to pursue low-cost, high-value initiatives to expand margins and increase profitability. In 2020, when demand for pharmaceutical grade alcohol rose sharply due to the pandemic, we were prepared to serve the market as a long-standing producer of high-quality alcohols. We successfully increased our market share and improved our top- and bottom-line financial results. Since then, we have made considerable progress on our business strategy, strengthening our balance sheet and liquidity as well as accelerating investment in longer-term projects. We are successfully executing our plan to transform Alto Ingredients and to achieve our long-term EBITDA targets. For the second quarter, capital expenditures totaled $8 million, bringing our investments in capital projects to $18 million for the first half of 2023. Our near-term focus has been to increase production of high-quality products, including grain neutral spirits, or GNS, corn oil and high protein products. We have also focused on developing and executing strategies to improve plant efficiency and reliability by adding corn storage and other upgrades. We are now preparing to install a natural gas pipeline at our Pekin Campus, convert our biogas waste to renewable natural gas, produce primary yeast, expand our cogeneration capabilities and, most importantly, launch carbon capture and sequestration, or CCS. Each of our projects has a different timeline yet we remain focused on capital efficiency. For our near-term endeavors, we are using our working capital resources, cash generated from our operations and excess availability under our credit facilities. For our longer-term projects, we continue to hold productive discussions with strategic partners to fulfill our capital needs as appropriate. We now produce, at our Pekin Campus wet mill, the highest quality 192 proof and ultra-low moisture 200 proof GNS products on the market. We are working to obtain qualifications that will position us to contract for additional high value GNS sales to new and existing beverage customers during the annual contracting period for 2024. We will also continue to supply GNS, especially our unique highly differentiated ultra-low moisture 200 proof product, on a spot sale basis for the remainder of 2023. At our Magic Valley plant, we continue to align the CoProMax TM corn oil extraction and high protein systems and we are working to obtain dryer permits to achieve the full production capacity integral to optimizing low-cost production of fuel-grade ethanol, corn oil, high protein and other feed products. We expect to achieve full production value for these products in the fourth quarter. As part of our longer-term initiatives for high-margin offerings, we plan to expand into primary yeast production. Our design work is on schedule and progressing well. Unfortunately, inflationary pressures have negatively impacted costs, and we expect our overall installation cost will be higher than originally anticipated. Fortunately, product prices for primary yeast have also risen. Assuming product returns remain justified, we will continue to target construction commencement in early 2024. 18 Our CCS project presents a unique and compelling opportunity at our Pekin Campus, which produces approximately 700,000 metric tons of carbon annually. The campus is located above the Mount Simon sandstone formation, one of the most significant carbon storage resources in the United States, and is proximate to the Illinois Basin, one of the largest carbon sequestration locations. 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, including 45Z benefits and use in the production of ethanol-to-jet fuel, blue ethanol, synthetic natural gas and sustainable aviation fuel. We have selected a third-party front-end engineering design, or FEED, firm to determine capture, compression and engineering design. In addition, we have selected our development partner to provide turnkey transportation, sequestration and monitoring services. Our CCS project requires upgrades to our natural gas pipeline and cogeneration projects, both of which have excellent projected returns on a standalone basis. Our longer-term goal is to have our CCS project operational by the end of 2026, which represents an aggressive but achievable schedule. 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, greater plant reliability and lower plant operating costs across the production facility. Our third-party FEED study for our new natural gas pipeline at our Pekin Campus is complete. We are finalizing easements and access while targeting construction commencement before year-end. Our goal is to improve energy procurement, pricing and stability, lowering our natural gas costs at our Pekin Campus. The pipeline will also create the opportunity for a new revenue stream by allowing us to convert and monetize our current biogas waste stream into renewable natural gas. Our third-party FEED study for cogeneration at our Pekin Campus is complete. We have also furthered our design and preparation work and initiated financing discussions. We expect that our cogeneration capabilities at our Pekin Campus will address our energy needs for both our current operations as well as our expanded operations from our in-progress capital projects. We remain focused on renewable products, underscoring our ongoing commitment to sustainability. As part of this pursuit, during the second quarter, we achieved EcoVadis Silver Medal status at our Pekin and ICP plants, indicating sustainability ratings in the 80 th percentile amongst our peers. We take pride in these awards and of our team efforts to build and strengthen procedures and implement programs focused on our sustainability, health and safety. Our team is dedicated to driving sustainable long-term value for all stakeholders, including customers, employees and investors. As part of that mission, our management, together with our board, continually pursue opportunities to maximize the value of our assets through capital investment and partnerships with strategic third-party industrial enterprises that share our vision. We believe this approach provides the best option to liberate our inherent value. Where appropriate, we have also elected to sell non-core assets, including our Aurora, Nebraska, Madera, California and Stockton, California production facilities, and invest the proceeds in more productive and profitable alternatives. Our team is experienced and committed to leveraging our assets to deliver more diversified, higher value, sustainable revenue streams from our specialty alcohol and essential ingredient products. Our strategic plan is coming to fruition, as evidenced by our new high-quality products and the benefits accruing from our production cost improvements. The aggregate sum of our parts carries far greater intrinsic value than the individual pieces and will be an even higher value when CCS is deployed. As such, we continue to be excited about our capital projects, and 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 approximately $125 million by the end of 2026 when our CCS, cogeneration and other long-term initiatives are fully realized. 19 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 EBITDA as unaudited consolidated net income (loss) before interest expense, interest income, provision for income taxes and depreciation and amortization expense. 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. 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 June 30, Six Months Ended June 30, (in thousands) (unaudited) 2023 2022 2023 2022 Net income (loss) $ 7,595 $ 22,115 $ (5,571 ) $ 19,513 Adjustments: Interest expense 1,734 319 3,299 519 Interest income (190 ) (145 ) (411 ) (303 ) Asset impairments — — 574 — Acquisition-related expense 700 875 1,400 1,750 Depreciation and amortization expense 5,681 6,728 11,735 12,861 Total adjustments 7,925 7,777 16,597 14,827 Adjusted EBITDA $ 15,520 $ 29,892 $ 11,026 $ 34,340 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 June 30, Percentage Six Months Ended June 30, Percentage 2023 2022 Variance 2023 2022 Variance Renewable fuel production gallons sold (in millions) 51.2 51.3 (0.1 )% 94.5 100.4 (5.9 )% Specialty alcohol production gallons sold (in millions) 16.6 25.8 (35.7 )% 38.0 49.1 (22.6 )% Third-party renewable fuel gallons sold (in millions) 26.6 30.0 (11.3 )% 60.4 60.8 (0.7 )% Total gallons sold (in millions) 94.4 107.1 (11.9 )% 192.9 210.3 (8.3 )% Total gallons produced (in millions) 70.5 77.0 (8.4 )% 131.1 151.3 (13.4 )% Production capacity utilization 78 % 88 % (11.4 )% 76 % 85 % (10.6 )% Average sales price per gallon $ 2.63 $ 2.84 (7.4 )% $ 2.53 $ 2.65 (4.5 )% Corn cost per bushel – CBOT equivalent $ 6.52 $ 7.46 (12.6 )% $ 6.56 $ 6.84 (4.1 )% Average basis (1) $ 0.80 $ 0.69 15.9 % $ 0.63 $ 0.66 (4.5 )% Delivered cost of corn $ 7.32 $ 8.15 (10.2 )% $ 7.19 $ 7.50 (4.1 )% Total essential ingredients tons sold (in thousands) 364.1 414.1 (12.1 )% 663.4 812.9 (18.4 )% Essential ingredients revenues as % of delivered cost of corn (2) 37.6 % 32.7 % 15.0 % 38.6 % 34.6 % 11.6 % Average CBOT ethanol price per gallon $ 2.46 $ 2.73 (9.9 )% $ 2.33 $ 2.50 (6.8 )% Average CBOT corn price per bushel $ 6.25 $ 7.78 (19.7 )% $ 6.42 $ 7.25 (11.4 )% (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 The following table presents our net sales, cost of goods sold and gross profit in dollars and gross profit as a percentage of net sales (in thousands, except percentages): Three Months Ended June 30, Variance in Six Months Ended June 30, Variance in 2023 2022 Dollars Percent 2023 2022 Dollars Percent Net sales $ 317,297 $ 362,189 $ (44,892 ) (12.4 )% $ 631,188 $ 670,307 $ (39,119 ) (5.8 )% Cost of goods sold 300,116 353,345 (53,229 ) (15.1 )% 617,171 656,690 (39,519 ) (6.0 )% Gross profit $ 17,181 $ 8,844 $ 8,337 94.3 % $ 14,017 $ 13,617 $ 400 2.9 % Percentage of net sales 5.4 % 2.4 % 2.2 % 2.0 % 21 Three months ended June 30, 2023 as compared to the three months ended June 30, 2022 Net Sales The decline in our consolidated net sales for the three months ended June 30, 2023 as compared to the same period in 2022 was primarily due to fewer total gallons sold on a gross basis, mainly specialty alcohol, and lower average sales prices per gallon of alcohol and per ton of essential ingredients. We produced and sold fewer gallons of specialty alcohol to align production and sales volumes with our customer order volumes during the quarter. We marketed no third-party gallons on a net basis during the quarter since we had previously ended our contractual relationship with the two fuel-grade ethanol plants for which we sold their production to instead focus on sales of our own fuel-grade ethanol production. Pekin Campus Production Segment Net sales of alcohol from our Pekin Campus production segment decreased by $16.1 million, or 11%, to $127.7 million for the three months ended June 30, 2023 as compared to $143.8 million for the same period in 2022. Our total volume of production gallons sold decreased by 1.8 million gallons, or 3%, to 50.2 million gallons for the three months ended June 30, 2023 as compared to 52.0 million gallons for the same period in 2022. At the segment’s average sales price per gallon of $2.54 for the three months ended June 30, 2023, we generated $4.6 million less in net sales from the 1.8 million fewer gallons of alcohol sold in the three months ended June 30, 2023 as compared to the same period in 2022. The decrease of $0.22, or 8%, in the segment’s average sales price per gallon for the three months ended June 30, 2023 as compared to the same period in 2022 reduced our net sales from the segment by $11.5 million. Net sales of essential ingredients from our Pekin Campus production segment decreased $5.9 million, or 10%, to $54.0 million for the three months ended June 30, 2023 as compared to $59.9 million for the same period in 2022. Our total volume of essential ingredients sold increased by 73,800 tons, or 34%, to 291,700 tons for the three months ended June 30, 2023 from 217,900 tons for the same period in 2022. At the segment’s average sales price per ton of $184.96 for the three months ended June 30, 2023, we generated $13.6 million in additional net sales from the 73,800 additional tons of essential ingredients sold in the three months ended June 30, 2023 as compared to the same period in 2022. The decrease of $89.72, or 33%, in the segment’s average sales price per ton for the three months ended June 30, 2023 as compared to the same period in 2022 reduced our net sales from the segment by $19.5 million. Marketing and Distribution Segment Net sales of alcohol from our marketing and distribution segment, excluding intersegment sales, increased by $8.8 million, or 14%, to $72.7 million for the three months ended June 30, 2023 as compared to $63.9 million for the same period in 2022. Our volume of third-party alcohol sold reported gross by the segment increased by 5.8 million gallons, or 28%, to 26.6 million gallons for the three months ended June 30, 2023 as compared to 20.8 million gallons for the same period in 2022. At the segment’s average sales price per gallon of $2.73 for the three months ended June 30, 2023, we generated $15.8 million in additional net sales from the 5.8 million additional gallons of third-party alcohol sold gross in the three months ended June 30, 2023 as compared to the same period in 2022. Our volume of alcohol sold reported net by the segment decreased by 9.2 million gallons, or 100%, to no gallons sold net for the three months ended June 30, 2023 as compared to 9.2 million gallons for the same period in 2022. This decline reduced net sales by $0.2 million. The $0.33 per gallon, or 11%, decrease in the segment’s average sales price per gallon for the three months ended June 30, 2023 as compared to the same period in 2022 resulted in a $6.8 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 $22.8 million, or 34%, to $44.4 million for the three months ended June 30, 2023 as compared to $67.2 million for the same period in 2022. Our total volume of alcohol sold declined by 6.1 million gallons, or 27%, to 16.5 million gallons for the three months ended June 30, 2023 as compared to 22.6 million gallons for the same period in 2022. At the segment’s average sales price per gallon of $2.69 for the three months ended June 30, 2023, we generated $16.4 million less in net sales from the 6.1 million fewer gallons of alcohol sold in the three months ended June 30, 2023 as compared to the same period in 2022. The decrease of $0.28, or 10%, in the segment’s average sales price per gallon for the three months ended June 30, 2023 as compared to the same period in 2022 reduced our net sales from the segment by $6.4 million. The decline in gallons sold by our other production segment resulted from the idling of our Magic Valley plant due to unfavorable market conditions and to facilitate the installation of our new high protein systems at the plant. Net sales of essential ingredients from our other production segment decreased by $9.0 million, or 38%, to $14.4 million for the three months ended June 30, 2023 as compared to $23.4 million for the same period in 2022. Our total volume of essential ingredients sold declined by 123,800 tons, or 63%, to 72,400 tons for the three months ended June 30, 2023 from 196,200 tons for the same period in 2022. At the segment’s average sales price per ton of $199.19 for the three months ended June 30, 2023, we generated $24.7 million less in net sales from the 123,800 fewer tons of essential ingredients sold in the three months ended June 30, 2023 as compared to the same period in 2022. The increase of $80.06, or 68%, in our average sales price per ton for the three months ended June 30, 2023 as compared to the same period in 2022 increased our net sales of essential ingredients from the segment by $15.7 million. Corporate and other Net sales of alcohol from corporate and other remained flat at $4.1 million for the three months ended June 30, 2023 as compared to the same period in 2022. These sales are from Eagle Alcohol’s business. Cost of Goods Sold and Gross Profit Our consolidated gross profit increased to $17.2 million for the three months ended June 30, 2023 from $8.8 million for the same period in 2022, representing a gross margin of 5.4% for the three months ended June 30, 2023 compared to a gross profit margin of 2.4% for the same period in 2022. Our consolidated gross profit increased due to improved commodity margins as a result of lower corn costs relative to the price of fuel-grade ethanol. Pekin Campus Production Segment Our Pekin Campus production segment’s gross profit, net of intercompany activity, improved by $5.7 million to a gross profit of $14.3 million for the three months ended June 30, 2023 as compared to gross profit of $8.6 million for the same period in 2022. This improvement in gross profit is primarily attributable to higher fuel-grade ethanol margins. Marketing and Distribution Segment Our marketing and distribution segment’s gross profit, net of intercompany activity, improved by $1.0 million to a gross profit of $1.1 million for the three months ended June 30, 2023 as compared to $0.1 million for the same period in 2022. Of this improvement, $0.8 million is attributable to higher margins from sales of third-party fuel-grade ethanol and $0.2 million is attributable to higher sales volumes for the three months ended June 30, 2023 as compared to the same period in 2022. 23 Other Production Segment Our other production segment’s gross profit, net of intercompany activity, improved by $1.9 million to a gross profit of $1.1 million for the three months ended June 30, 2023 as compared to a gross loss of $0.8 million for the same period in 2022. Of this improvement, $2.3 million is attributable to higher fuel-grade ethanol margins, partially offset by $0.4 million in lower volumes sold. Corporate and other Gross profit from corporate and other declined by $0.2 million to a gross profit of $0.7 million for the three months ended June 30, 2023 as compared to $0.9 million for the same period in 2022, all of which were from Eagle Alcohol’s business. Six months ended June 30, 2023 as compared to the six months ended June 30, 2022 Net Sales The decline in our consolidated net sales for the six months ended June 30, 2023 as compared to the same period in 2022 was primarily due to fewer total gallons sold, mainly specialty alcohol, an overall lower average sales price per gallon and lower volumes of essential ingredients sold. We produced and sold fewer gallons of specialty alcohol to align production and sales volumes with our customer order volumes during the period. We marketed no third-party gallons on a net basis during the period since we had previously ended our contractual relationship with the two fuel-grade ethanol plants for which we sold their production to instead focus on sales of our own fuel-grade ethanol production. Pekin Campus Production Segment Net sales of alcohol from our Pekin Campus production segment increased by $0.3 million, or less than 1%, to $260.1 million for the six months ended June 30, 2023 as compared to $259.8 million for the same period in 2022. Our total volume of production gallons sold increased by 4.7 million gallons, or 5%, to 106.0 million gallons for the six months ended June 30, 2023 as compared to 101.3 million gallons for the same period in 2022. At the segment’s average sales price per gallon of $2.45 for the six months ended June 30, 2023, we generated $11.5 million in additional net sales from the 4.7 million additional gallons of alcohol sold in the six months ended June 30, 2023 as compared to the same period in 2022. The decrease of $0.11, or 4%, in the segment’s average sales price per gallon for the six months ended June 30, 2023 as compared to the same period in 2022 reduced our net sales from the segment by $11.2 million. Net sales of essential ingredients from our Pekin Campus production segment increased $2.5 million, or 2%, to $117.6 million for the six months ended June 30, 2023 as compared to $115.1 million for the same period in 2022. Our total volume of essential ingredients sold increased by 7,300 tons, or 2%, to 434,100 tons for the six months ended June 30, 2023 from 426,800 tons for the same period in 2022. At the segment’s average sales price per ton of $270.87 for the six months ended June 30, 2023, we generated $2.0 million in additional net sales from the 7,300 additional tons of essential ingredients sold in the six months ended June 30, 2023 as compared to the same period in 2022. The increase of $1.11, or less than 1%, in the segment’s average sales price per ton for the six months ended June 30, 2023 as compared to the same period in 2022 increased our net sales from the segment by $0.5 million. 24 Marketing and Distribution Segment Net sales of alcohol from our marketing and distribution segment, excluding intersegment sales, increased by $39.0 million, or 33%, to $157.2 million for the six months ended June 30, 2023 as compared to $118.2 million for the same period in 2022. Our volume of third-party alcohol sold reported gross by the segment increased by 19.7 million gallons, or 48%, to 60.4 million gallons for the six months ended June 30, 2023 as compared to 40.7 million gallons for the same period in 2022. At the segment’s average sales price per gallon of $2.60 for the six months ended June 30, 2023, we generated $51.2 million in additional net sales from the 19.7 million additional gallons of third-party alcohol sold gross in the six months ended June 30, 2023 as compared to the same period in 2022. Our volume of alcohol sold reported net by the segment decreased by 20.1 million gallons, or 100%, to no gallons sold net for the six months ended June 30, 2023 as compared to 20.1 million gallons for the same period in 2022. This decline reduced net sales by $0.4 million. The $0.29 per gallon, or 10%, decrease in the segment’s average sales price per gallon for the six months ended June 30, 2023 as compared to the same period in 2022 resulted in a $11.7 million decline in our net sales from third-party fuel-grade ethanol sold by the segment. Other Production Segment Net sales of alcohol from our other production segment decreased by $61.7 million, or 49%, to $65.3 million for the six months ended June 30, 2023 as compared to $127.0 million for the same period in 2022. Our total volume of alcohol sold declined by 21.3 million gallons, or 47%, to 24.4 million gallons for the six months ended June 30, 2023 as compared to 45.7 million gallons for the same period in 2022. At the segment’s average sales price per gallon of $2.68 for the six months ended June 30, 2023, we generated $57.0 million less in net sales from the 21.3 million fewer gallons of alcohol sold in the six months ended June 30, 2023 as compared to the same period in 2022. The decrease of $0.10, or 4%, in the segment’s average sales price per gallon for the six months ended June 30, 2023 as compared to the same period in 2022 reduced our net sales from the segment by $4.7 million. The decline in gallons sold by our other production segment resulted from the idling of our Magic Valley plant due to unfavorable market conditions and to facilitate the installation of our new high protein systems at the plant. We restarted our Magic Valley facility in April 2023, but did not achieve higher fuel-grade ethanol production levels until later in the second quarter. Net sales of essential ingredients from our other production segment decreased by $19.5 million, or 46%, to $22.8 million for the six months ended June 30, 2023 as compared to $42.3 million for the same period in 2022. Our total volume of essential ingredients sold declined by 156,800 tons, or 41%, to 229,300 tons for the six months ended June 30, 2023 from 386,100 tons for the same period in 2022. At the segment’s average sales price per ton of $99.32 for the six months ended June 30, 2023, we generated $15.6 million less in net sales from the 156,800 fewer tons of essential ingredients sold in the six months ended June 30, 2023 as compared to the same period in 2022. The decrease of $10.27, or 9%, in our average sales price per ton for the six months ended June 30, 2023 as compared to the same period in 2022 reduced our net sales of essential ingredients from the segment by $3.9 million. Corporate and other Net sales of alcohol from corporate and other increased by $0.4 million, or 5%, to $8.3 million for the six months ended June 30, 2023, as compared to $7.9 million for the same period in 2022. These sales are from Eagle Alcohol’s business. 25 Cost of Goods Sold and Gross Profit Our consolidated gross profit increased to $14.0 million for the six months ended June 30, 2023 from $13.6 million for the same period in 2022, representing a gross margin of 2.2% for the six months ended June 30, 2023 compared to a gross profit margin of 2.0% for the same period in 2022. Our consolidated gross profit improved due to improved commodity margins as a result of lower corn costs relative to the price of ethanol. Pekin Campus Production Segment Our Pekin Campus production segment’s gross profit, net of intercompany activity, increased by $0.2 million to a gross profit of $12.5 million for the six months ended June 30, 2023 as compared to gross profit of $12.3 million for the same period in 2022. Marketing and Distribution Segment Our marketing and distribution segment’s gross profit, net of intercompany activity, improved by $2.8 million to a gross profit of $2.4 million for the six months ended June 30, 2023 as compared to a gross loss of $0.4 million for the same period in 2022. Of this improvement, $2.2 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 six months ended June 30, 2023 as compared to the same period in 2022. Other Production Segment Our other production segment’s gross profit, net of intercompany activity, declined by $3.4 million to a gross loss of $3.4 million for the six months ended June 30, 2023 as compared to a gross loss of less than $0.1 million for the same period in 2022. Of this decline, $4.7 million is attributable to lower fuel-grade ethanol margins, partially offset by $1.3 million in savings from lower volumes sold at negative margins as our Magic Valley plant was idled for the entire first quarter of 2023. Corporate and other Gross profit from corporate and other improved by $0.7 million to a gross profit of $2.5 million for the six months ended June 30, 2023 as compared to $1.8 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 June 30, Variance in Six Months Ended June 30, Variance in 2023 2022 Dollars Percent 2023 2022 Dollars Percent Selling, general and administrative expenses $ 7,911 $ 8,996 $ (1,085 ) (12.1 )% $ 15,793 $ 16,625 $ (832 ) (5.0 )% Percentage of net sales 2.5 % 2.5 % 2.5 % 2.5 % Our SG&A expenses decreased for the three and six months ended June 30, 2023 as compared to the same period in 2022. The period over period decreases in SG&A expenses are primarily due to reduced professional services fees from diligence work on debt financing and lower accruals in the 2023 period related to deferred payments according to schedule for our acquisition of Eagle Alcohol. 26 Interest Expense, net The following table presents our interest expense, net in dollars and as a percentage of net sales (in thousands, except percentages): Three Months Ended June 30, Variance in Six Months Ended June 30, Variance in 2023 2022 Dollars Percent 2023 2022 Dollars Percent Interest Expense, net $ 1,734 $ 319 $ 1,415 443.6 % $ 3,299 $ 519 $ 2,780 535.6 % Percentage of net sales 0.5 % 0.1 % 0.5 % 0.1 % Our interest expense increased for the three and six months ended June 30, 2023 as compared to the same period in 2022. The increase resulted from higher debt balances due to our recent term loan to fund our capital improvement projects. Income from Cash Grant We applied for and received a $22.7 million cash grant from the USDA’s Biofuel Producer Program for the three and six months ended June 30, 2022. No such amounts were received for the three and six months ended June 30, 2023. The program was created as part of the CARES Act in 2020, which allocated $700 million to support biofuel producers who experienced market losses due to the pandemic. The grant is not required to be repaid nor will it recur in the future. Net Income (Loss) Available to Common Stockholders The following table presents our net income (loss) available to common stockholders in dollars and as a percentage of net sales (in thousands, except percentages): Three Months Ended June 30, Variance in Six Months Ended June 30, Variance in 2023 2022 Dollars Percent 2023 2022 Dollars Percent Net income (loss) available to common stockholders $ 7,184 $ 21,516 $ (14,332 ) (66.6 )% $ (6,198 ) $ 18,635 $ (24,833 ) NM* Percentage of net sales 2.3 % 5.9 % (1.0 )% 2.8 % * Not meaningful. The decrease in our net income available to common stockholders for the three and six months ended June 30, 2023 as compared to the same periods in 2022 is primarily due to non-recurring income in 2022 from a cash grant under the CARES Act in the amount of $22.7 million, as discussed above. Liquidity and Capital Resources During the six months ended June 30, 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 June 30, 2023, we had $25.1 million in cash, cash equivalents and restricted cash, $49.4 million available for borrowing under Kinergy’s operating line of credit and $40 million available for borrowing under our Orion term loan. We also have an option to expand the Orion term loan by up to $25.0 million upon the satisfaction of certain conditions. 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. 27 Quantitative Period-End Liquidity Status We believe that the following amounts provide insight into our liquidity and capital resources. The following selected financial information should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report (dollars in thousands). June 30, 2023 December 31, 2022 Change Cash, cash equivalents and restricted cash $ 25,090 $ 49,525 (49.3 )% Current assets $ 179,529 $ 199,121 (9.8 )% Property and equipment, net $ 246,693 $ 239,069 3.2 % Current liabilities $ 58,686 $ 78,017 (24.8 )% Long-term debt $ 82,082 $ 68,356 20.1 % Working capital $ 120,843 $ 121,104 (0.2 )% Working capital ratio 3.06 2.55 20.0 % Changes in Working Capital and Cash Flows Working capital declined slightly to $120.8 million at June 30, 2023 from $121.1 million at December 31, 2022 due to a decrease of $19.6 million in current assets and a decrease of $19.3 million in current liabilities. Current assets declined primarily due to a decrease in cash, cash equivalents and restricted cash of $24.4 million and a decrease in accounts receivable, partially offset by an increase in inventories and derivative assets due to higher average commodity prices for the six months ended June 30, 2023 as compared to the same period in 2022. 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 and lower utility accruals in the current period, partially offset by an increase 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 $24.4 million primarily due to $12.9 million in cash used in our operating activities and $21.5 million in cash used in our investing activities, partially offset by $9.9 million in cash provided by our financing activities, as further detailed below. Cash used in our Operating Activities We used $12.9 million in cash for our operating activities during the six months ended June 30, 2023 as compared to $20.7 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: ● a decrease of $25.1 million in our net income primarily due to a cash grant under the CARES Act in the prior year of $22.6 million that did not recur in 2023; and ● a decrease of $38.7 million related to accounts payable and accrued liabilities due to timing of payments. These amounts were partially offset by: ● a decrease of $16.8 million related to derivative instruments due to changes in commodity prices; 28 ● an increase of $10.2 million related to changes in inventories due to changes in commodity prices; and ● an increase of $5.7 million related to changes in accounts receivable balances due to the timing of our collections. Cash used in our Investing Activities We used $21.5 million in cash during the period to fund $18.0 million of additions to property and equipment, including for our capital improvement projects, and to fund $3.5 million of contingent purchase price payments for our acquisition of Eagle Alcohol. We used $8.2 million more in cash for additions to property and equipment during the current period as compared to the same period in 2022 as we accelerated our capital improvement projects in 2023. We generated $14.8 million less in cash from principal payments on notes receivable in the current period as compared to the same period in 2022 as the notes receivable from the sale of our Aurora, Nebraska facility fully matured and were repaid in 2022. Cash provided by our Financing Activities Cash provided by our financing activities was $9.9 million for the six months ended June 30, 2023, which reflects net proceeds of $13.2 million from Kinergy’s operating line of credit, partially offset by $2.7 million of stock repurchases and $0.6 million paid in preferred stock dividends, as compared to $1.6 million of cash provided by our financing activities for the same period in 2022. Our use of Kinergy’s line of credit generated an additional $11.1 million in cash in the current period as compared to the same period in 2022 due to higher commodity prices and the timing of payments and collections. 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 (i) 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. 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. 29 We believe Kinergy and Alto Nutrients are in compliance with the fixed-charge coverage ratio covenant as of the filing of this report. The following table sets forth the fixed-charge coverage ratio financial covenant and the actual results for the periods presented: Three Months Ended June 30, Years Ended December 31, 2023 2022 2022 2021 Fixed-Charge Coverage Ratio Requirement 1.10 2.00 1.10 2.00 Actual 3.89 8.72 3.54 13.32 Excess 2.79 6.72 2.44 11.32 Alto Ingredients, Inc. has guaranteed all of Kinergy’s obligations under the credit facility. As of June 30, 2023, Kinergy had an outstanding balance of $31.3 million and $49.4 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. 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 June 30, 2023, the amount outstanding under the Term Loan was $60,000,000. Share Repurchase Program For the three and six months ended June 30, 2023, we repurchased 389,000 and 1,249,000 shares of our common stock as part of our publicly announced share repurchase program at an average price per share of $2.57 and $2.15 for an aggregate expenditure of $1,001,000 and $2,683,000, respectively. See “Unregistered Sales of Equity Securities and Use of Proceeds – Purchases of Equity Securities by the Issuer and Affiliated Purchasers.” 30 Other Cash Obligations As of June 30, 2023, we had future commitments for certain capital projects totaling $17.4 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.