Alto Ingredients, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS. ALTO INGREDIENTS, INC. CONSOLIDATED BALANCE SHEETS (in thousands) September 30, December 31, 2023 2022 (unaudited) * ASSETS Current Assets: Cash and cash equivalents $ 26,162 $ 36,456 Restricted cash 8,699 13,069 Accounts receivable, net (net of allowance for credit losses of $ 51 and $ 105 , respectively) 66,065 68,655 Inventories 57,092 66,628 Derivative instruments 3,974 4,973 Other current assets 6,213 9,340 Total current assets 168,205 199,121 Property and equipment, net 248,882 239,069 Other Assets: Right of use operating lease assets, net 23,387 18,937 Intangible assets, net 8,645 9,087 Goodwill 5,970 5,970 Other assets 6,013 6,137 Total other assets 44,015 40,131 Total Assets $ 461,102 $ 478,321 * Amounts derived from the audited consolidated financial statements for the year ended December 31, 2022. See accompanying notes to consolidated financial statements. 1 ALTO INGREDIENTS, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) (in thousands, except par value) September 30, December 31, 2023 2022 (unaudited) * LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable $ 23,990 $ 28,115 Accrued liabilities 16,644 26,556 Current portion – operating leases 4,044 3,849 Derivative instruments 7,249 6,732 Other current liabilities 6,488 12,765 Total current liabilities 58,415 78,017 Long-term debt, net 75,878 68,356 Operating leases, net of current portion 19,942 15,062 Other liabilities 8,870 8,797 Total Liabilities 163,105 170,232 Commitments and Contingencies (Note 6) Stockholders’ Equity: Preferred stock, $ 0.001 par value; 10,000 shares authorized; Series A: 1,684 shares authorized; no shares issued and outstanding as of September 30, 2023 and December 31, 2022; Series B: 1,581 shares authorized; 927 shares issued and outstanding as of September 30, 2023 and December 31, 2022; liquidation preference of $ 18,075 as of September 30, 2023 1 1 Common stock, $ 0.001 par value; 300,000 shares authorized; 76,115 and 75,154 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively 76 75 Non-voting common stock, $ 0.001 par value; 3,553 shares authorized; 1 share issued and outstanding as of September 30, 2023 and December 31, 2022 — — Additional paid-in capital 1,040,747 1,040,834 Accumulated other comprehensive income 1,822 1,822 Accumulated deficit ( 744,649 ) ( 734,643 ) Total Stockholders’ Equity 297,997 308,089 Total Liabilities and Stockholders’ Equity $ 461,102 $ 478,321 * Amounts derived from the audited consolidated financial statements for the year ended December 31, 2022. See accompanying notes to consolidated financial statements. 2 ALTO INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net sales $ 318,127 $ 336,877 $ 949,315 $ 1,007,184 Cost of goods sold 313,966 356,716 931,137 1,013,406 Gross profit (loss) 4,161 ( 19,839 ) 18,178 ( 6,222 ) Selling, general and administrative expenses ( 8,488 ) ( 7,403 ) ( 24,281 ) ( 24,028 ) Asset impairments — — ( 574 ) — Loss from operations ( 4,327 ) ( 27,242 ) ( 6,677 ) ( 30,250 ) Interest expense, net ( 2,000 ) ( 340 ) ( 5,299 ) ( 859 ) Income from cash grant 2,812 — 2,812 22,652 Other income (expense), net 26 ( 456 ) 104 ( 68 ) Loss before provision for income taxes ( 3,489 ) ( 28,038 ) ( 9,060 ) ( 8,525 ) Provision for income taxes — — — — Net loss $ ( 3,489 ) $ ( 28,038 ) $ ( 9,060 ) $ ( 8,525 ) Preferred stock dividends $ ( 319 ) $ ( 319 ) $ ( 946 ) $ ( 946 ) Net loss available to common stockholders $ ( 3,808 ) $ ( 28,357 ) $ ( 10,006 ) $ ( 9,471 ) Net loss per share, basic and diluted $ ( 0.05 ) $ ( 0.39 ) $ ( 0.14 ) $ ( 0.13 ) Weighted-average shares outstanding, basic and diluted 73,191 73,011 73,464 71,815 See accompanying notes to consolidated financial statements. 3 ALTO INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands) Nine Months Ended September 30, 2023 2022 Operating Activities: Net loss $ ( 9,060 ) $ ( 8,525 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization of intangibles 17,382 19,122 Gains on derivative instruments ( 2,463 ) ( 20,164 ) Inventory valuation — 7,963 Asset impairments 574 — Non-cash compensation 2,718 2,546 Amortization of deferred financing fees 793 29 Amortization of debt discount 599 — Bad debt benefit ( 54 ) ( 187 ) Changes in operating assets and liabilities, net of business acquisition: Accounts receivable 2,644 16,137 Inventories 9,536 ( 13,290 ) Other assets 3,253 12,692 Operating leases ( 4,014 ) ( 3,799 ) Accounts payable and accrued expenses ( 11,679 ) ( 10,684 ) Net cash provided by operating activities 10,229 1,840 Investing Activities: Additions to property and equipment ( 24,611 ) ( 25,233 ) Proceeds from principal payments on notes receivable — 14,766 Deferred purchase price payments for Eagle Alcohol ( 3,500 ) — Purchase of Eagle Alcohol, net of cash acquired — ( 14,685 ) Net cash used in investing activities ( 28,111 ) ( 25,152 ) Financing Activities: Net proceeds from (payments on) Kinergy’s line of credit 6,847 ( 4,452 ) Stock repurchases ( 2,683 ) ( 1,002 ) Preferred stock dividends paid ( 946 ) ( 946 ) Net cash provided by (used in) financing activities 3,218 ( 6,400 ) Net change in cash, cash equivalents and restricted cash ( 14,664 ) ( 29,712 ) Cash, cash equivalents and restricted cash at beginning of period 49,525 62,125 Cash, cash equivalents and restricted cash at end of period $ 34,861 $ 32,413 Reconciliation of total cash, cash equivalents and restricted cash: Cash and cash equivalents $ 26,162 $ 28,458 Restricted cash 8,699 3,955 Total cash, cash equivalents and restricted cash $ 34,861 $ 32,413 Supplemental Information: Interest paid $ 6,063 $ 961 ROU Assets obtained in exchange for new lease obligations $ 7,167 $ — Capitalized interest $ 2,185 $ 209 See accompanying notes to consolidated financial statements. 4 ALTO INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited, in thousands) Preferred Stock Common Stock Additional Paid-In Accumulated Accum. Other Comprehensive Shares Amount Shares Amount Capital Deficit Income (Loss) Total Balances, January 1, 2023 927 $ 1 75,154 $ 75 $ 1,040,834 $ ( 734,643 ) $ 1,822 $ 308,089 Stock-based compensation — — — — 752 — — 752 Restricted stock issued to employees and directors, net of cancellations and tax — — 1,893 2 ( 8 ) — — ( 6 ) Stock repurchases — — ( 860 ) ( 1 ) ( 1,681 ) — — ( 1,682 ) Preferred stock dividends — — — — — ( 312 ) — ( 312 ) Net loss — — — — — ( 13,166 ) — ( 13,166 ) Balances, March 31, 2023 927 $ 1 76,187 $ 76 $ 1,039,897 $ ( 748,121 ) $ 1,822 $ 293,675 Stock-based compensation — — — — 959 — — 959 Restricted stock issued to employees and directors, net of cancellations and tax — — 125 — ( 120 ) — — ( 120 ) Stock repurchases — — ( 389 ) — ( 1,001 ) — — ( 1,001 ) Preferred stock dividends — — — — — ( 315 ) — ( 315 ) Net income — — — — — 7,595 — 7,595 Balances, June 30, 2023 927 $ 1 75,923 $ 76 $ 1,039,735 $ ( 740,841 ) $ 1,822 $ 300,793 Stock-based compensation — — — — 1,007 — — 1,007 Restricted stock issued to employees and directors, net of cancellations and tax — — 192 — 5 — — 5 Preferred stock dividends — — — — — ( 319 ) — ( 319 ) Net loss — — — — — ( 3,489 ) — ( 3,489 ) Balances, September 30, 2023 927 $ 1 76,115 $ 76 $ 1,040,747 $ ( 744,649 ) $ 1,822 $ 297,997 Balances, January 1, 2022 927 $ 1 72,778 $ 73 $ 1,037,205 $ ( 691,781 ) $ ( 284 ) $ 345,214 Stock-based compensation — — — — 673 — — 673 Restricted stock issued to employees and directors, net of cancellations and tax — — 684 — ( 9 ) — — ( 9 ) Shares issued for Eagle Alcohol acquisition — — 949 1 — — — 1 Preferred stock dividends — — — — — ( 312 ) — ( 312 ) Net loss — — — — — ( 2,602 ) — ( 2,602 ) Balances, March 31, 2022 927 $ 1 74,411 $ 74 $ 1,037,869 $ ( 694,695 ) $ ( 284 ) $ 342,965 Stock-based compensation — — — — 1,106 — — 1,106 Restricted stock issued to employees and directors, net of cancellations and tax — — ( 223 ) — ( 2,283 ) — — ( 2,283 ) Preferred stock dividends — — — — — ( 315 ) — ( 315 ) Net income — — — — — 22,115 — 22,115 Balances, June 30,2022 927 $ 1 74,188 $ 74 $ 1,036,692 $ ( 672,895 ) $ ( 284 ) $ 363,588 Stock-based compensation — — — — 767 — — 767 Restricted stock issued to employees and directors, net of cancellations and tax — — 27 — 2 — — 2 Stock repurchases — — ( 259 ) — ( 1,002 ) — — ( 1,002 ) Preferred stock dividends — — — — — ( 319 ) — ( 319 ) Net loss — — — — — ( 28,038 ) — ( 28,038 ) Balances, September 30, 2022 927 $ 1 73,956 $ 74 $ 1,036,459 $ ( 701,252 ) $ ( 284 ) $ 334,998 See accompanying notes to consolidated financial statements. 5 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND BASIS OF PRESENTATION. Organization and Business – The consolidated financial statements include, for all periods presented, the accounts of Alto Ingredients, Inc., a Delaware corporation, and its direct and indirect wholly-owned subsidiaries (collectively, the “Company”), including Kinergy Marketing LLC, an Oregon limited liability company (“Kinergy”), Alto Nutrients, LLC, a California limited liability company, Eagle Alcohol Company, LLC, a Delaware limited liability company, Alto Op Co., a Delaware corporation, Alto Pekin, LLC, a Delaware limited liability company, and Alto ICP, LLC, a Delaware limited liability company, and the Company’s production facilities in Oregon and Idaho. The Company is a leading producer and distributor of specialty alcohols and essential ingredients. The Company also produces and markets fuel-grade ethanol. The Company’s production facilities in Pekin, Illinois are located in the heart of the Corn Belt. The Company’s two production facilities in Oregon and Idaho are located in close proximity to both feed and fuel-grade ethanol customers. The Company has a combined alcohol production capacity of 350 million gallons per year and produced in 2022 over 1.6 million tons of essential ingredients, such as dried yeast, corn protein meal, corn protein feed, corn germ, and distillers grains and liquid feed used in commercial animal feed and pet foods. In addition, the Company markets and distributes fuel-grade ethanol produced by third parties. The Company focuses on four key markets: Health, Home & Beauty ; Food & Beverage ; Essential Ingredients ; and Renewable Fuels . Products for the Health, Home & Beauty market include specialty alcohols used in mouthwash, cosmetics, pharmaceuticals, hand sanitizers, disinfectants and cleaners. Products for the Food & Beverage markets include grain neutral spirits used in alcoholic beverages and vinegar as well as corn germ used for corn oils. Products for Essential Ingredients markets include dried yeast, corn protein meal, corn protein feed, corn germ, and distillers grains and liquid feed used in commercial animal feed and pet foods. Products for the Renewable Fuels markets include fuel-grade ethanol and distillers corn oil used as a feedstock for renewable diesel and biodiesel fuels. As of September 30, 2023, all of the Company’s production facilities were operating, however, from January 2023 to April 2023, its Magic Valley plant in Idaho was temporarily hot-idled due to extreme natural gas prices, other unfavorable market conditions and to facilitate the installation of its new high protein systems at the plant. The Company restarted the facility in April 2023. As market conditions change, the Company may increase, decrease or idle production at one or more operating facilities or resume operations at any idled facility. Basis of Presentation – Interim Financial Statements – The accompanying unaudited consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Results for interim periods should not be considered indicative of results for a full year. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. The accounting policies used in preparing these consolidated financial statements are the same as those described in Note 1 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included. All significant intercompany accounts and transactions have been eliminated in consolidation. 6 Accounts Receivable and Allowance for Credit Losses – Trade accounts receivable are presented at original invoice amount, net of the allowance for credit losses. The Company sells specialty alcohols to large consumer product companies, sells fuel-grade ethanol to gasoline refining and distribution companies, sells essential ingredients to animal feed customers, including distillers grains and other feed products to dairy operators and animal feedlots and corn oil to poultry and biodiesel customers, in each case generally without requiring collateral. The carrying amount of accounts receivable is reduced by a valuation allowance that reflects the Company’s best estimate of the amounts that will not be collected. The Company regularly reviews accounts receivable and based on assessments of current customer creditworthiness, estimates the portion, if any, of the customer balance that will not be collected. Of the accounts receivable balance, approximately $ 60,173,000 and $ 55,667,000 at September 30, 2023 and December 31, 2022, respectively, were used as collateral under Kinergy’s operating line of credit. The allowance for credit losses was $ 51,000 and $ 105,000 as of September 30, 2023 and December 31, 2022, respectively. The Company recorded a bad debt recovery of $ 8,000 and $ 253,000 for the three months ended September 30, 2023 and 2022, respectively. The Company recorded a bad debt recovery of $ 54,000 and $ 187,000 for the nine months ended September 30, 2023 and 2022, respectively. The Company does not have any off-balance sheet credit exposure related to its customers. Share Repurchase Program – On September 12, 2022, the Company announced a share repurchase program under which it may repurchase up to $ 50 million of its common stock with an initial purchase authorization of $ 10 million. The Company’s lender has further limited the Company’s purchase authorization to $ 5 million. Amounts in excess of the purchase authorization of $ 5 million will require additional lender consent and amounts in excess of the initial purchase authorization of $ 10 million will require additional board and preferred stockholder authorization. The share repurchase program does not have an expiration date, does not require the repurchase of any particular amount of shares, and may be implemented, modified, suspended or discontinued in whole or in part at any time and without further notice. As repurchases are made, the Company will retire the shares, resulting in a reduction of issued and outstanding shares. For the nine months ended September 30, 2023, the Company repurchased an aggregate of 1,249 ,000 shares for $ 2,683 ,000 in cash. The Company did not repurchase any shares during the three months ended September 30, 2023. As of September 30, 2023, total repurchases under the program since its inception equaled 1,600 ,000 shares for $ 4,008 ,000 in cash. Financial Instruments – The carrying values of cash and cash equivalents, restricted cash, accounts receivable, derivative assets, accounts payable, accrued liabilities and derivative liabilities are reasonable estimates of their fair values because of the short maturity of these items. The Company believes the carrying value of its long-term debt instruments are not considered materially different than fair value because they were just recently issued. Income from Cash Grant – In 2022, the Company applied for the USDA’s Biofuel Producer Program (“BPP”). The program was created as part of the CARES Act in 2020, which allocated $ 700,000,000 to support biofuel producers who experienced market losses due to the pandemic. The cash grant is not required to be repaid. Since these funds are provided to subsidize historical losses of the Company, and are not required to be repaid, the Company accounted for the proceeds by analogy to International Accounting Standards 20, Accounting for Government Grants and Disclosure of Government Assistance , and reported the amount as income from cash grant in the accompanying consolidated statements of operations. The Company received $ 2,812 ,000 in cash from the BPP during the three and nine months ended September 30, 2023 and $ 22,652 ,000 in cash from the BPP for the nine months ended September 30, 2022. Estimates and Assumptions – The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates are required as part of determining the allowance for credit losses, net realizable value of inventory, long-lived asset impairments, valuation allowances on deferred income taxes, the potential outcome of future tax consequences of events recognized in the Company’s financial statements or tax returns, and the valuation of assets acquired and liabilities assumed as a result of business combinations. Actual results and outcomes may materially differ from management’s estimates and assumptions. 2. SEGMENTS. The Company reports its financial and operating performance in three segments: (1) Pekin production, which includes the production and sale of alcohols and essential ingredients produced at the Company’s Pekin, Illinois campus (“Pekin Campus”), (2) 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, and (3) Other production, which includes the production and sale of fuel-grade ethanol and essential ingredients produced at all of the Company’s other production facilities on an aggregated basis (“Other production”), none of which are individually so significant as to be considered a separately reportable segment. 7 The following tables set forth certain financial data for the Company’s operating segments (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net Sales Pekin Campus, recorded as gross: Alcohol sales $ 128,554 $ 133,680 $ 388,629 $ 393,498 Essential ingredient sales 51,634 54,537 169,220 169,670 Intersegment sales 363 332 1,120 857 Total Pekin Campus sales 180,551 188,549 558,969 564,025 Marketing and distribution: Alcohol sales, gross $ 58,805 $ 55,262 $ 215,741 $ 172,746 Alcohol sales, net 74 308 292 975 Intersegment sales 3,392 3,121 8,734 9,360 Total marketing and distribution sales 62,271 58,691 224,767 183,081 Other production, recorded as gross: Alcohol sales $ 57,159 $ 64,492 $ 122,477 $ 191,483 Essential ingredient sales 17,841 24,439 40,614 66,748 Intersegment sales 37 3 99 14 Total Other production sales 75,037 88,934 163,190 258,245 Corporate and other 4,060 4,159 12,342 12,064 Intersegment eliminations ( 3,792 ) ( 3,456 ) ( 9,953 ) ( 10,231 ) Net sales as reported $ 318,127 $ 336,877 $ 949,315 $ 1,007,184 Cost of goods sold: Pekin Campus $ 179,995 $ 207,939 $ 546,591 $ 572,512 Marketing and distribution 58,051 55,159 212,923 173,670 Other production 73,584 91,663 165,401 261,514 Corporate and other 3,538 2,925 9,322 8,995 Intersegment eliminations ( 1,202 ) ( 970 ) ( 3,100 ) ( 3,285 ) Cost of goods sold as reported $ 313,966 $ 356,716 $ 931,137 $ 1,013,406 Gross profit (loss): Pekin Campus $ 556 $ ( 19,390 ) $ 12,378 $ ( 8,487 ) Marketing and distribution 4,220 3,532 11,844 9,411 Other production 1,453 ( 2,729 ) ( 2,211 ) ( 3,269 ) Corporate and other 522 1,234 3,020 3,069 Intersegment eliminations ( 2,590 ) ( 2,486 ) ( 6,853 ) ( 6,946 ) Gross profit (loss) as reported $ 4,161 $ ( 19,839 ) $ 18,178 $ ( 6,222 ) Income (loss) before provision for income taxes: Pekin Campus $ ( 1,956 ) $ ( 22,664 ) $ 3,716 $ ( 6,252 ) Marketing and distribution 2,403 1,622 6,019 3,444 Other production ( 20 ) ( 4,958 ) ( 6,497 ) 1,404 Corporate and other ( 3,916 ) ( 2,038 ) ( 12,298 ) ( 7,121 ) $ ( 3,489 ) $ ( 28,038 ) $ ( 9,060 ) $ ( 8,525 ) Depreciation and amortization of intangibles: Pekin Campus $ 4,961 $ 4,758 $ 14,778 $ 14,381 Other production 458 1,273 1,921 4,095 Corporate and other 228 229 683 646 $ 5,647 $ 6,260 $ 17,382 $ 19,122 Interest expense, net of capitalized interest: Pekin Campus $ 108 $ ( 48 ) $ ( 527 ) $ ( 81 ) Marketing and distribution 111 487 713 1,060 Other production 678 ( 74 ) 173 ( 128 ) Corporate and other 1,103 ( 25 ) 4,940 8 $ 2,000 $ 340 $ 5,299 $ 859 8 The following table sets forth the Company’s total assets by operating segment (in thousands): September 30, 2023 December 31, 2022 Total assets: Pekin Campus $ 246,580 $ 257,089 Marketing and distribution 113,797 114,755 Other production 57,280 51,886 Corporate and other 43,445 54,591 $ 461,102 $ 478,321 3. INVENTORIES. Inventories consisted primarily of bulk ethanol, specialty alcohols, corn, essential ingredients and unleaded fuel, and are valued at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Inventory is net of a valuation adjustment of $ 0 and $ 4,612,000 as of September 30, 2023 and December 31, 2022, respectively. Inventory balances consisted of the following (in thousands): September 30, 2023 December 31, 2022 Finished goods $ 36,835 $ 47,736 Work in progress 6,363 6,396 Raw materials 12,502 11,197 Other 1,392 1,299 Total $ 57,092 $ 66,628 4. DERIVATIVES. The business and activities of the Company expose it to a variety of market risks, including risks related to changes in commodity prices. The Company monitors and manages these financial exposures as an integral part of its risk management program. This program recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effects that market volatility could have on operating results. Commodity Risk – Cash Flow Hedges – The Company uses derivative instruments to protect cash flows from fluctuations caused by volatility in commodity prices for periods of up to twelve months to protect gross profit margins from potentially adverse effects of market and price volatility on alcohol sales and purchase commitments where the prices are set at a future date and/or if the contracts specify a floating or index-based price. In addition, the Company hedges anticipated sales of alcohol to minimize its exposure to the potentially adverse effects of price volatility. These derivatives may be designated and documented as cash flow hedges and effectiveness is evaluated by assessing the probability of the anticipated transactions and regressing commodity futures prices against the Company’s purchase and sales prices. Ineffectiveness, which is defined as the degree to which the derivative does not offset the underlying exposure, is recognized immediately in cost of goods sold. For the three and nine months ended September 30, 2023 and 2022, the Company did not designate any of its derivatives as cash flow hedges. Commodity Risk – Non-Designated Hedges – The Company uses derivative instruments to lock in prices for certain amounts of corn and alcohols by entering into exchange-traded futures contracts or options for those commodities. These derivatives are not designated for hedge accounting treatment. The changes in the fair value of these contracts are recorded on the balance sheet and recognized immediately in cost of goods sold. The Company recognized net losses of $ 2,711 ,000 and net gains of $ 1,772 ,000 as the change in the fair value of these contracts for the three months ended September 30, 2023 and 2022, respectively. The Company recognized net gains of $ 2,463 ,000 and $ 20,164 ,000 as the change in the fair value of these contracts for the nine months ended September 30, 2023 and 2022, respectively. 9 Non-Designated Derivative Instruments – The classification and amounts of the Company’s derivatives not designated as hedging instruments, and related cash collateral balances, are as follows (in thousands): As of September 30, 2023 Assets Liabilities Type of Instrument Balance Sheet Location Fair Value Balance Sheet Location Fair Value Cash collateral balance Restricted cash $ 8,699 Commodity contracts Derivative instruments $ 3,974 Derivative instruments $ 7,249 As of December 31, 2022 Assets Liabilities Type of Instrument Balance Sheet Location Fair Value Balance Sheet Location Fair Value Cash collateral balance Restricted cash $ 13,069 Commodity contracts Derivative instruments $ 4,973 Derivative instruments $ 6,732 The above amounts represent the gross balances of the contracts; however, the Company does have a right of offset with each of its derivative brokers, but the Company’s intent is to close out positions individually, therefore, the positions are reported at gross. The classification and amounts of the Company’s recognized gains (losses) for its derivatives not designated as hedging instruments are as follows (in thousands): Realized Gains (Losses) For the Three Months Ended September 30, Type of Instrument Statements of Operations Location 2023 2022 Commodity contracts Cost of goods sold $ 6,206 $ ( 13,332 ) $ 6,206 $ ( 13,332 ) Realized Gains For the Nine Months Ended September 30, Type of Instrument Statements of Operations Location 2023 2022 Commodity contracts Cost of goods sold $ 3,980 $ 16,143 $ 3,980 $ 16,143 Unrealized Gains (Losses) For the Three Months Ended September 30, Type of Instrument Statements of Operations Location 2023 2022 Commodity contracts Cost of goods sold $ ( 8,917 ) $ 11,560 $ ( 8,917 ) $ 11,560 Unrealized Gains (Losses) For the Nine Months Ended September 30, Type of Instrument Statements of Operations Location 2023 2022 Commodity contracts Cost of goods sold $ ( 1,517 ) $ 4,021 $ ( 1,517 ) $ 4,021 10 5. DEBT. Long-term borrowings are summarized as follows (in thousands): September 30, 2023 December 31, 2022 Kinergy line of credit $ 24,923 $ 18,076 Orion term loan 60,000 60,000 84,923 78,076 Less unamortized debt discount ( 4,095 ) ( 4,686 ) Less unamortized debt financing costs ( 4,950 ) ( 5,034 ) Less current portion — — Long-term debt $ 75,878 $ 68,356 Excess Availability – As of September 30, 2023, the Company had $ 53.4 million in unused borrowing availability under Kinergy’s line of credit and $ 40.0 million available under the Orion term loan. The Company also has an option to expand the Orion term loan by up to $ 25.0 million upon the satisfaction of certain conditions. 6. COMMITMENTS AND CONTINGENCIES. Sales Commitments – At September 30, 2023, the Company had entered into sales contracts with its major customers to sell certain quantities of alcohol and essential ingredients. The Company had open alcohol indexed-price contracts for 92,138,000 gallons as of September 30, 2023 and open fixed-price alcohol sales contracts totaling $ 248,902,000 as of September 30, 2023. The Company had open fixed-price sales contracts for essential ingredients totaling $ 7,863,000 as of September 30, 2023. These sales contracts are scheduled to be completed throughout 2023 and 2024. Purchase Commitments – At September 30, 2023, the Company had indexed-price purchase contracts to purchase 11,516,000 gallons of alcohol and fixed-price purchase contracts to purchase $ 1,948,000 of alcohol from its suppliers. The Company had fixed-price purchase contracts to purchase $ 14,961,000 of corn from its suppliers as of September 30, 2023. The Company had fixed-price purchase contracts for natural gas totaling $ 10,020,000 . The Company also had future commitments for certain capital projects totaling $ 23,639,000 . These purchase commitments are scheduled to be satisfied throughout 2023 and 2024. Litigation – General – The Company is subject to various claims and contingencies in the ordinary course of its business, including those related to litigation, business transactions, employee-related matters, environmental regulations, and others. When the Company is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the Company will record a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the claim if the likelihood of a potential loss is reasonably possible and the amount involved could be material. While there can be no assurances, the Company does not expect that any of its pending legal proceedings will have a material impact on the Company’s financial condition or results of operations. 11 7. PENSION AND RETIREMENT BENEFIT PLANS. The Company sponsors a defined benefit pension plan (the “Retirement Plan”) and a healthcare and life insurance plan (the “Postretirement Plan”). The Retirement Plan is noncontributory and covers only “grandfathered” unionized employees at the Company’s Pekin, Illinois facility who fulfill minimum age and service requirements. Benefits are based on a prescribed formula based upon the employee’s years of service. The Retirement Plan, which is part of a collective bargaining agreement, covers only union employees hired prior to November 1, 2010. The Company uses a December 31 measurement date for its Retirement Plan. The Company’s funding policy is to make the minimum annual contribution required by applicable regulations. As of December 31, 2022, the Retirement Plan’s accumulated projected benefit obligation was $ 18.0 million, with a fair value of plan assets of $ 16.7 million. The underfunded amount of $ 1.3 million is recorded on the Company’s consolidated balance sheet in other liabilities. For the three months ended September 30, 2023, the Retirement Plan’s net periodic expense was $ 39,000 , comprised of $ 225,000 in interest cost and $ 62,000 in service cost, partially offset by $ 248,000 of expected return on plan assets. For the three months ended September 30, 2022, the Retirement Plan’s net periodic benefit was $ 8,000 , comprised of $ 273,000 of expected return on plan assets, partially offset by $ 164,000 in interest cost and $ 101,000 in service cost. For the nine months ended September 30, 2023, the Retirement Plan’s net periodic expense was $ 117,000 , comprised of $ 675,000 in interest cost and $ 186,000 in service cost, partially offset by $ 744,000 of expected return on plan assets. For the nine months ended September 30, 2022, the Retirement Plan’s net periodic benefit was $ 24,000 , comprised of $ 819,000 of expected return on plan assets, partially offset by $ 492,000 in interest cost and $ 303,000 in service cost. The Postretirement Plan provides postretirement medical benefits and life insurance to certain “grandfathered” unionized employees. Employees hired after December 31, 2000 are not eligible to participate in the Postretirement Plan. The Postretirement Plan is contributory, with contributions required at the same rate as active employees. Benefit eligibility under the plan declines at age 65 from a defined benefit to a defined dollar cap based upon years of service. As of December 31, 2022, the Postretirement Plan’s accumulated projected benefit obligation was $ 3.9 million and is recorded on the Company’s consolidated balance sheet in other liabilities. The Company’s funding policy is to make the minimum annual contribution required by applicable regulations. For the three months ended September 30, 2023, the Postretirement Plan’s net periodic expense was $ 36,000 , comprised of $ 46,000 of interest cost and $ 3,000 of service cost, partially offset by $ 13,000 in amortization of gains. For the three months ended September 30, 2022, the Postretirement Plan’s net periodic expense was $ 32,000 , comprised of $ 6,000 of interest cost and $ 26,000 of service cost. For the nine months ended September 30, 2023, the Postretirement Plan’s net periodic expense was $ 108,000 , comprised of $ 138,000 of interest cost and $ 9,000 of service cost, partially offset by $ 39,000 in amortization of gains. For the nine months ended September 30, 2022, the Postretirement Plan’s net periodic expense was $ 96,000 , comprised of $ 18,000 of interest cost and $ 78,000 of service cost. 12 8. FAIR VALUE MEASUREMENTS. The fair value hierarchy prioritizes the inputs used in valuation techniques into three levels, as follows: ● Level 1 – Observable inputs – unadjusted quoted prices in active markets for identical assets and liabilities; ● Level 2 – Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data; and ● Level 3 – Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable. For fair value measurements using significant unobservable inputs, a description of the inputs and the information used to develop the inputs is required along with a reconciliation of Level 3 values from the prior reporting period. Pooled separate accounts – Pooled separate accounts invest primarily in domestic and international stocks, commercial paper or single mutual funds. The net asset value i s used as a practical expedient to determine fair value for these accounts. Each pooled separate account provides for redemptions by the Retirement Plan at reported net asset values per share, with little to no advance notice requirement, therefore these funds are classified within Level 2 of the valuation hierarchy. Other Derivative Instruments – The Company’s other derivative instruments consist of commodity positions. The fair values of the commodity positions are based on quoted prices on the commodity exchanges and are designated as Level 1 inputs. The following table summarizes recurring and nonrecurring fair value measurements by level at September 30, 2023 (in thousands): Fair Value Level 1 Level 2 Level 3 Assets: Derivative financial instruments $ 3,974 $ 3,974 $ — $ — Liabilities: Derivative financial instruments $ ( 7,249 ) $ ( 7,249 ) $ — $ — The following table summarizes recurring and nonrecurring fair value measurements by level at December 31, 2022 (in thousands): Benefit Plan Fair Percentage Value Level 1 Level 2 Level 3 Allocation Assets: Derivative financial instruments $ 4,973 $ 4,973 $ — $ — Defined benefit plan assets(1) (pooled separate accounts): Large U.S. Equity(2) 4,586 — 4,586 — 28 % Small/Mid U.S. Equity(3) 2,986 — 2,986 — 18 % International Equity(4) 2,406 — 2,406 — 14 % Fixed Income(5) 6,710 — 6,710 — 40 % $ 21,661 $ 4,973 $ 16,688 $ — Liabilities: Derivative financial instruments $ 6,732 $ 6,732 $ — $ — (1) Included in other assets in the consolidated balance sheets. (2) This category includes investments in funds comprised of equity securities of large U.S. companies. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. (3) This category includes investments in funds comprised of equity securities of small- and medium-sized U.S. companies. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. (4) This category includes investments in funds comprised of equity securities of foreign companies including emerging markets. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. (5) This category includes investments in funds comprised of U.S. and foreign investment-grade fixed income securities, high-yield fixed income securities that are rated below investment-grade, U.S. treasury securities, mortgage-backed securities, and other asset-backed securities. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. 13 9. LOSS PER SHARE. The following tables compute basic and diluted loss per share (in thousands, except per share data): Three Months Ended September 30, 2023 Loss Numerator Shares Denominator Per-Share Amount Net loss $ ( 3,489 ) Less: Preferred stock dividends ( 319 ) Basic and Diluted loss per share: Loss available to common stockholders $ ( 3,808 ) 73,191 $ ( 0.05 ) Three Months Ended September 30, 2022 Loss Numerator Shares Denominator Per-Share Amount Net loss $ ( 28,038 ) Less: Preferred stock dividends ( 319 ) Basic and Diluted loss per share: Loss available to common stockholders $ ( 28,357 ) 73,011 $ ( 0.39 ) Nine Months Ended September 30, 2023 Loss Numerator Shares Denominator Per-Share Amount Net loss $ ( 9,060 ) Less: Preferred stock dividends ( 946 ) Basic and Diluted loss per share: Loss available to common stockholders $ ( 10,006 ) 73,464 $ ( 0.14 ) Nine Months Ended September 30, 2022 Loss Numerator Shares Denominator Per-Share Amount Net loss $ ( 8,525 ) Less: Preferred stock dividends ( 946 ) Basic and Diluted loss per share: Loss available to common stockholders $ ( 9,471 ) 71,815 $ ( 0.13 ) There were an additional aggregate potentially dilutive weighted-average shares of 981,000 from convertible securities outstanding for the three and nine months ended September 30, 2023. There were an additional aggregate potentially dilutive weighted-average shares of 964,000 from convertible securities outstanding for the three and nine months ended September 30, 2022. These securities were not considered in calculating diluted net loss per share for the three and nine months ended September 30, 2023 and 2022, as their effect would have been anti-dilutive. 14