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 initiatives 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 up to 350 million gallons, including both fuel-grade ethanol and specialty alcohols ranging from industrial-, pharmaceutical-, and high-quality food- and beverage-grade alcohols. Of this amount, we are able to produce up to 110 million gallons annually of specialty alcohols, depending on our product mix among high-quality beverage-grade alcohol and alcohols of other quality specifications. 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. 15 We report our financial and operating performance in three segments: (1) 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, (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 renewable fuel and essential ingredients produced at all of our other production facilities on an aggregated basis, none of which are individually so significant as to be considered a separately reportable segment. Our mission is to expand our business as a leading producer and distributor of specialty alcohols and essential ingredients. We intend to accomplish this goal in part by investing in our specialized and higher value specialty alcohol production and distribution infrastructure, expanding production in high-demand essential ingredients, expanding and extending the sale of our products into new regional and international markets, building efficiencies and economies of scale and by capturing a greater portion of the value stream. Our wholly-owned subsidiary, Eagle Alcohol Company LLC, or Eagle Alcohol, specializes in break bulk distribution of specialty alcohols. Eagle Alcohol purchases bulk alcohol from suppliers and then stores, denatures, packages, and resells alcohol products in smaller sizes, including tank trucks, totes, and drums, that typically garner a premium price to bulk alcohols. Eagle Alcohol delivers products to customers in the beverage, food, industrial and related-process industries via its own dedicated trucking fleet and common carrier. Production Segments We produce specialty alcohols, fuel-grade ethanol and essential ingredients, focusing on four key markets: Health, Home & Beauty ; Food & Beverage ; Essential Ingredients ; and Renewable Fuels . Products for the Health, Home & Beauty markets 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. 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. 16 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. 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 Our third quarter results reflect a positive contribution from improved ethanol crush margins, particularly in September as corn basis declined as the corn harvest commenced, mitigating an unexpected sharp increase in corn basis levels earlier in the quarter. Our profit for the quarter did not, however, meet our expectations due to the sharp increase in corn basis levels and unusually high unscheduled production downtime that reduced sales volumes, shifted our overall product mix toward lower margin products, and resulted in significant increases in repair and maintenance costs. In addition, lower sales volumes from this unscheduled downtime adversely impacted our hedging strategy to lock in favorable crush spreads, resulting in unanticipated derivative losses. We nevertheless generated positive Adjusted EBITDA for the third quarter and greatly improved our results compared to the third quarter of 2022. Lower consumer demand has impacted our specialty alcohol sales thus far in 2023, but we are working with our customers to roll a portion of their current-year volume commitments into 2024. Our 2024 contracting season is underway and we are on pace to exceed 2023 delivered gallons at premiums to fuel-grade ethanol. Our goal is to move up the value chain and capture a larger share of the beverage-grade market where our high-quality, low-moisture specialty alcohols and location differentiations create competitive advantages. 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 initiatives to expand margins and increase profitability. In early 2023, we outlined our revenue-enhancing and cost-reducing capital initiatives. These projects have different timelines, returns on investment and risk profiles. As a result, we have evaluated and prioritized our funding needs and options for each project separately with an overall goal of fiscal responsibility. For the third quarter, capital expenditures totaled $7 million, bringing our investments in our plants to $25 million for the first nine months of 2023. We expect the extensive repair and maintenance work completed during the quarter to benefit future production uptime and reliability. 17 We have already completed several of our short-term projects, including the expansion of our high-quality alcohol product offerings, installation of additional corn storage capacity, replacement of boiler equipment and various other upgrades to our facilities and systems. For our longer-term, more capital-intensive projects, we have engaged experts – third party front-end engineering and design, or FEED, firms – to conduct deeper analyses on the scope, timing and costs of the projects. These projects include implementing systems to produce primary yeast, carbon capture and sequestration, or CCS, installing a natural gas pipeline, developing a cogeneration system, and biogas conversion. At our Magic Valley plant, we continue to align the CoProMax TM corn oil extraction and high protein system to achieve the system’s performance guarantees. This process has taken longer than anticipated but we are determined to improve output consistency and optimize production. We continue to evaluate the rollout of corn oil extraction and high protein systems at our other plants, but we have already achieved comparable improvements in corn oil yields at our Pekin Campus dry mill through process optimization unique to the mill’s design. As part of our longer-term initiatives for high-margin offerings, we plan to expand into primary yeast production and recently received the preliminary results of our FEED study for this project. While the overall findings are promising, inflationary pressures and supply chain constraints have materially impacted installation costs from our original estimates. In addition, the construction period for the project has expanded from eighteen to twenty-seven months. Partially offsetting these adverse developments are an expected decline in operating costs and an improvement in the market price for primary yeast. We continue to evaluate this project and explore funding alternatives to transform this unique opportunity into a completed project. To better ensure that the construction costs of our other projects reflect current market conditions, we are critically reviewing all of our projects and prioritizing those with sustainable profitability while remaining fiscally vigilant given the challenging capital market environment. 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. We expect this added capacity to further benefit our operations this coming winter. We are presently negotiating engineering, procurement and construction contracts for our natural gas pipeline and cogeneration projects. We also continue to make progress on our CCS project. Together with our development partner, we are designing a dedicated pipeline and sequestration system located within a relatively short distance of our Pekin Campus, materially reducing installation costs and external risks to the system. Based on the current economic environment, our estimates and projections, preliminary FEED study findings and changing capital requirements, we have extended our EBITDA expansion goals by six to twelve months. We are now targeting an incremental increase in annualized Adjusted EBITDA by over $65 million by mid-2026, following the completion of our near-term projects, and by approximately $125 million by year-end 2027, when our primary yeast, CCS and other long-term initiatives are fully realized. We continue to work on our sustainability goals and in this regard our Pekin Campus earned the Safe Feed/Safe Food third-party product safety certification for our corn meal and corn germ products, further differentiating these essential ingredients from various competing products. In addition, we plan to publish our sustainability report by year-end with the goal of providing key disclosures annually in the same format. 18 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 Adjusted 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 Adjusted 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 Loss Three Months Ended September 30, Nine Months Ended September 30, (in thousands) (unaudited) 2023 2022 2023 2022 Net loss $ (3,489 ) $ (28,038 ) $ (9,060 ) $ (8,525 ) Adjustments: Interest expense 2,000 340 5,299 859 Interest income (179 ) (38 ) (590 ) (341 ) Asset impairments — — 574 — Acquisition-related expense 700 875 2,100 2,625 Provision for income taxes — — — — Depreciation and amortization expense 5,647 6,260 17,382 19,122 Total adjustments 8,168 7,437 24,765 22,265 Adjusted EBITDA $ 4,679 $ (20,601 ) $ 15,705 $ 13,740 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. 19 Results of Operations The following selected financial information should be read in conjunction with our consolidated financial statements and notes to our consolidated financial statements included elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report. Certain performance metrics that we believe are important indicators of our results of operations include: Three Months Ended September 30, Percentage Nine Months Ended September 30, Percentage 2023 2022 Variance 2023 2022 Variance Renewable fuel production gallons sold (in millions) 56.6 53.0 6.8 % 151.1 153.4 (1.5 )% Specialty alcohol production gallons sold (in millions) 18.6 23.3 (20.2 )% 56.6 72.4 (21.8 )% Third party renewable fuel gallons sold (in millions) 21.9 27.6 (20.7 )% 82.3 88.4 (6.9 )% Total gallons sold (in millions) 97.1 103.9 (6.5 )% 290.0 314.2 (7.7 )% Total gallons produced (in millions) 74.3 74.7 (0.5 )% 205.4 226.0 (9.1 )% Production capacity utilization 84 % 85 % (1.2 )% 78 % 86 % (9.3 )% Average sales price per gallon $ 2.56 $ 2.70 (5.2 )% $ 2.54 $ 2.66 (4.5 )% Corn cost per bushel – CBOT equivalent $ 5.49 $ 7.27 (24.5 )% $ 6.21 $ 6.98 (11.0 )% Average basis (1) $ 1.11 $ 1.08 2.8 % $ 0.79 $ 0.80 (1.3 )% Delivered cost of corn $ 6.60 $ 8.35 (21.0 )% $ 7.00 $ 7.78 (10.0 )% Total essential ingredients tons sold (in thousands) 423.2 422.0 0.3 % 1,086.6 1,234.9 (12.0 )% Essential ingredients revenues as % of delivered cost of corn (2) 35.9 % 30.4 % 18.1 % 37.7 % 33.2 % 13.6 % Average CBOT ethanol price per gallon $ 2.32 $ 2.51 (7.6 )% $ 2.33 $ 2.50 (6.8 )% Average CBOT corn price per bushel $ 4.98 $ 6.58 (24.3 )% $ 5.94 $ 7.03 (15.5 )% (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. 20 Net Sales, Cost of Goods Sold and Gross Profit (Loss) The following table presents our net sales, cost of goods sold and gross profit (loss) in dollars and gross profit (loss) as a percentage of net sales (in thousands, except percentages): Three Months Ended September 30, Variance in Nine Months Ended September 30, Variance in 2023 2022 Dollars Percent 2023 2022 Dollars Percent Net sales $ 318,127 $ 336,877 $ (18,750 ) (5.6 )% $ 949,315 $ 1,007,184 $ (57,869 ) (5.7 )% Cost of goods sold 313,966 356,716 (42,750 ) (12.0 )% 931,137 1,013,406 (82,269 ) (8.1 )% Gross profit (loss) $ 4,161 $ (19,839 ) $ 24,000 NM * $ 18,178 $ (6,222 ) $ 24,400 NM * Percentage of net sales 1.3 % (5.9 )% 1.9 % (0.6 )% * Not meaningful Three months ended September 30, 2023 as compared to the three months ended September 30, 2022 Net Sales The decline in our consolidated net sales for the three months ended September 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. We produced and sold fewer gallons of specialty alcohol in part to align production and sales volumes with our customer order volumes during the quarter. In addition, we experienced unusually high unscheduled production downtime during the quarter which also reduced sales volumes. 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 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 $5.1 million, or 4%, to $128.6 million for the three months ended September 30, 2023 as compared to $133.7 million for the same period in 2022. Our total volume of production gallons sold increased by 1.7 million gallons, or 3%, to 52.0 million gallons for the three months ended September 30, 2023 as compared to 50.3 million gallons for the same period in 2022. The decrease of $0.19, or 7%, in the segment’s average sales price per gallon for the three months ended September 30, 2023 as compared to the same period in 2022 reduced our net sales from the segment by $9.3 million. At the segment’s average sales price per gallon of $2.47 for the three months ended September 30, 2023, we generated $4.2 million more in net sales from the 1.7 million additional gallons of alcohol sold in the three months ended September 30, 2023 as compared to the same period in 2022. Net sales of essential ingredients from our Pekin Campus production segment decreased by $2.9 million, or 5%, to $51.6 million for the three months ended September 30, 2023 as compared to $54.5 million for the same period in 2022. Our total volume of essential ingredients sold increased by 8,000 tons, or 4%, to 226,100 tons for the three months ended September 30, 2023 from 218,100 tons for the same period in 2022. The decrease of $21.69, or 9%, in the segment’s average sales price per ton for the three months ended September 30, 2023 as compared to the same period in 2022 reduced our net sales from the segment by $4.7 million. At the segment’s average sales price per ton of $228.37 for the three months ended September 30, 2023, we generated $1.8 million in additional net sales from the 8,000 additional tons of essential ingredients sold in the three months ended September 30, 2023 as compared to the same period in 2022. 21 Marketing and Distribution Segment Net sales of alcohol from our marketing and distribution segment, excluding intersegment sales, increased by $3.3 million, or 6%, to $58.9 million for the three months ended September 30, 2023 as compared to $55.6 million for the same period in 2022. Our volume of third-party alcohol sold reported gross by the segment increased by 2.9 million gallons, or 15%, to 21.9 million gallons for the three months ended September 30, 2023 as compared to 19.0 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 September 30, 2023, we generated $7.8 million in additional net sales from the 2.9 million additional gallons of third-party alcohol sold gross in the three months ended September 30, 2023 as compared to the same period in 2022. The $0.22 per gallon, or 8%, decrease in the segment’s average sales price per gallon for the three months ended September 30, 2023 as compared to the same period in 2022 resulted in a $4.2 million decline in our net sales from third-party fuel-grade ethanol sold by the segment. Our volume of alcohol sold reported net by the segment decreased by 8.6 million gallons, or 100%, to no gallons sold net for the three months ended September 30, 2023 as compared to 8.6 million gallons for the same period in 2022. This decline reduced net sales by $0.3 million. Other Production Segment Net sales of alcohol from our Other production segment decreased by $7.3 million, or 11%, to $57.2 million for the three months ended September 30, 2023 as compared to $64.5 million for the same period in 2022. Our total volume of alcohol sold declined by 1.3 million gallons, or 6%, to 22.2 million gallons for the three months ended September 30, 2023 as compared to 23.5 million gallons for the same period in 2022. At the segment’s average sales price per gallon of $2.57 for the three months ended September 30, 2023, we generated $3.3 million less in net sales from the 1.3 million fewer gallons of alcohol sold in the three months ended September 30, 2023 as compared to the same period in 2022. The decrease of $0.17, or 6%, in the segment’s average sales price per gallon for the three months ended September 30, 2023 as compared to the same period in 2022 reduced our net sales from the segment by $4.0 million. Net sales of essential ingredients from our other production segment decreased by $6.6 million, or 27%, to $17.8 million for the three months ended September 30, 2023 as compared to $24.4 million for the same period in 2022. Our total volume of essential ingredients sold declined by 6,800 tons, or 3%, to 197,100 tons for the three months ended September 30, 2023 from 203,900 tons for the same period in 2022. The decrease of $29.34, or 24%, in our average sales price per ton for the three months ended September 30, 2023 as compared to the same period in 2022 decreased our net sales of essential ingredients from the segment by $6.0 million. At the segment’s average sales price per ton of $90.52 for the three months ended September 30, 2023, we generated $0.6 million less in net sales from the 6,800 fewer tons of essential ingredients sold in the three months ended September 30, 2023 as compared to the same period in 2022. Corporate and other Net sales of alcohol from corporate and other remained flat at $4.1 million for the three months ended September 30, 2023 as compared to the same period in 2022. These sales are from Eagle Alcohol’s business. 22 Cost of Goods Sold and Gross Profit (Loss) Our consolidated gross profit (loss) increased to $4.2 million in gross profit for the three months ended September 30, 2023 from a gross loss of $19.8 million for the same period in 2022, representing a gross margin of 1.3% for the three months ended September 30, 2023 compared to a negative gross margin of 5.9% 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. Our gross profit for the quarter did not, however, meet our expectations due to unusually high unscheduled production downtime that reduced sales volumes, shifted our overall product mix toward lower margin products, and resulted in significant increases in repair and maintenance costs. In addition, lower sales volumes from this unscheduled downtime adversely impacted our hedging strategy to lock in favorable crush spreads, resulting in unanticipated derivative losses. Our gross profit for the quarter was also negatively impacted by an unexpected sharp increase in corn basis levels earlier in the quarter despite a decline in corn basis levels in September as the corn harvest commenced. Pekin Campus Production Segment Our Pekin Campus production segment’s gross profit, net of intercompany activity, improved by $20.1 million to a gross profit of $1.1 million for the three months ended September 30, 2023 as compared to gross loss of $19.0 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 $0.5 million to a gross profit of $0.9 million for the three months ended September 30, 2023 as compared to $0.4 million for the same period in 2022. Of this improvement, $0.4 million is attributable to higher margins from sales of third-party fuel-grade ethanol and $0.1 million is attributable to higher sales volumes for the three months ended September 30, 2023 as compared to the same period in 2022. Other Production Segment Our other production segment’s gross profit, net of intercompany activity, improved by $4.2 million to a gross profit of $1.7 million for the three months ended September 30, 2023 as compared to a gross loss of $2.5 million for the same period in 2022. Of this improvement, $4.3 million is attributable to higher fuel-grade ethanol margins, partially offset by $0.1 million in lower volumes sold. Corporate and other Gross profit from corporate and other declined by $0.8 million to a gross profit of $0.5 million for the three months ended September 30, 2023 as compared to $1.3 million for the same period in 2022, all of which were from Eagle Alcohol’s business. Nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 Net Sales The decline in our consolidated net sales for the nine months ended September 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 at lower prices. We produced and sold fewer gallons of specialty alcohol in part to align production and sales volumes with our customer order volumes during the period. In addition, we experienced unusually high unscheduled production downtime during the third quarter which also reduced sales volumes for the nine-month 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. 23 Pekin Campus Production Segment Net sales of alcohol from our Pekin Campus production segment decreased by $4.9 million, or 1%, to $388.6 million for the nine months ended September 30, 2023 as compared to $393.5 million for the same period in 2022. Our total volume of production gallons sold increased by 9.6 million gallons, or 6%, to 158.0 million gallons for the nine months ended September 30, 2023 as compared to 148.4 million gallons for the same period in 2022. The decrease of $0.19, or 7%, in the segment’s average sales price per gallon for the nine months ended September 30, 2023 as compared to the same period in 2022 reduced our net sales from the segment by $28.5 million. At the segment’s average sales price per gallon of $2.46 for the nine months ended September 30, 2023, we generated $23.6 million in additional net sales from the 9.6 million additional gallons of alcohol sold in the nine months ended September 30, 2023 as compared to the same period in 2022. Net sales of essential ingredients from our Pekin Campus production segment decreased by $0.5 million, or less than 1%, to $169.2 million for the nine months ended September 30, 2023 as compared to $169.7 million for the same period in 2022. Our total volume of essential ingredients sold increased by 15,300 tons, or 2%, to 660,200 tons for the nine months ended September 30, 2023 from 644,900 tons for the same period in 2022. The decrease of $6.78, or 3%, in the segment’s average sales price per ton for the nine months ended September 30, 2023 as compared to the same period in 2022 decreased our net sales from the segment by $4.4 million. At the segment’s average sales price per ton of $256.32 for the nine months ended September 30, 2023, we generated $3.9 million in additional net sales from the 15,300 additional tons of essential ingredients sold in the nine months ended September 30, 2023 as compared to the same period in 2022. Marketing and Distribution Segment Net sales of alcohol from our marketing and distribution segment, excluding intersegment sales, increased by $42.3 million, or 24%, to $216.0 million for the nine months ended September 30, 2023 as compared to $173.7 million for the same period in 2022. Our volume of third-party alcohol sold reported gross by the segment increased by 22.6 million gallons, or 38%, to 82.3 million gallons for the nine months ended September 30, 2023 as compared to 59.7 million gallons for the same period in 2022. At the segment’s average sales price per gallon of $2.62 for the nine months ended September 30, 2023, we generated $59.2 million in additional net sales from the 22.6 million additional gallons of third-party alcohol sold gross in the nine months ended September 30, 2023 as compared to the same period in 2022. The $0.27 per gallon, or 9%, decrease in the segment’s average sales price per gallon for the nine months ended September 30, 2023 as compared to the same period in 2022 resulted in a $16.2 million decline in our net sales from third-party fuel-grade ethanol sold by the segment. Our volume of alcohol sold reported net by the segment decreased by 28.7 million gallons, or 100%, to no gallons sold net for the nine months ended September 30, 2023 as compared to 28.7 million gallons for the same period in 2022. This decline reduced net sales by $0.7 million. 24 Other Production Segment Net sales of alcohol from our other production segment decreased by $69.0 million, or 36%, to $122.5 million for the nine months ended September 30, 2023 as compared to $191.5 million for the same period in 2022. Our total volume of alcohol sold declined by 25.8 million gallons, or 36%, to 46.6 million gallons for the nine months ended September 30, 2023 as compared to 72.4 million gallons for the same period in 2022. At the segment’s average sales price per gallon of $2.63 for the nine months ended September 30, 2023, we generated $67.8 million less in net sales from the 25.8 million fewer gallons of alcohol sold in the nine months ended September 30, 2023 as compared to the same period in 2022. The decrease of $0.02, or less than 1%, in the segment’s average sales price per gallon for the nine months ended September 30, 2023 as compared to the same period in 2022 reduced our net sales from the segment by $1.2 million. The decline in gallons sold by our other production segment resulted from the idling of our Magic Valley plant during the first quarter of 2023 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 $26.1 million, or 39%, to $40.6 million for the nine months ended September 30, 2023 as compared to $66.7 million for the same period in 2022. Our total volume of essential ingredients sold declined by 163,600 tons, or 28%, to 426,400 tons for the nine months ended September 30, 2023 from 590,000 tons for the same period in 2022. At the segment’s average sales price per ton of $95.25 for the nine months ended September 30, 2023, we generated $15.6 million less in net sales from the 163,600 fewer tons of essential ingredients sold in the nine months ended September 30, 2023 as compared to the same period in 2022. The decrease of $17.88, or 16%, in our average sales price per ton for the nine months ended September 30, 2023 as compared to the same period in 2022 reduced our net sales of essential ingredients from the segment by $10.5 million. Corporate and other Net sales of alcohol from corporate and other increased by $0.3 million, or 3%, to $12.3 million for the nine months ended September 30, 2023, as compared to $12.0 million for the same period in 2022. These sales are from Eagle Alcohol’s business. Cost of Goods Sold and Gross Profit (Loss) Our consolidated gross profit increased to $18.2 million for the nine months ended September 30, 2023 from a gross loss of $6.2 million for the same period in 2022, representing a gross margin of 1.9% for the nine months ended September 30, 2023 compared to a negative gross margin of 0.6% 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 fuel-grade ethanol. Our gross profit for the period did not, however, meet our expectations in part due to unusually high unscheduled production downtime in the third quarter that reduced sales volumes, shifted our overall product mix toward lower margin products, and resulted in significant increases in repair and maintenance costs. Pekin Campus Production Segment Our Pekin Campus production segment’s gross profit, net of intercompany activity, increased by $20.3 million to a gross profit of $13.7 million for the nine months ended September 30, 2023 as compared to gross loss of $6.6 million for the same period in 2022. 25 Marketing and Distribution Segment Our marketing and distribution segment’s gross profit, net of intercompany activity, improved by $3.4 million to a gross profit of $3.3 million for the nine months ended September 30, 2023 as compared to a gross loss of $0.1 million for the same period in 2022. Of this improvement, $3.0 million is attributable to higher margins from sales of third-party fuel-grade ethanol and $0.4 million is attributable to higher sales volumes for the nine months ended September 30, 2023 as compared to the same period in 2022. Other Production Segment Our other production segment’s gross profit, net of intercompany activity, improved by $0.8 million to a gross loss of $1.8 million for the nine months ended September 30, 2023 as compared to a gross loss of $2.6 million for the same period in 2022. Of this improvement, $0.7 million is attributable to higher fuel-grade ethanol margins and $0.1 million is attributable to higher sales volumes. Corporate and other Gross profit from corporate and other remained flat at $3.0 million for the nine months ended September 30, 2023, 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 September 30, Variance in Nine Months Ended September 30, Variance in 2023 2022 Dollars Percent 2023 2022 Dollars Percent Selling, general and administrative expenses $ 8,488 $ 7,403 $ 1,085 14.7 % $ 24,281 $ 24,028 $ 253 1.1 % Percentage of net sales 2.7 % 2.2 % 2.6 % 2.4 % Our SG&A expenses increased for the three and nine months ended September 30, 2023 as compared to the same period in 2022. The period over period increases in SG&A expenses are primarily due to increased stock compensation expenses, compensation-related expenses and litigation accruals, partially offset by a reduction in accruals for deferred cash payments attributable to our acquisition of Eagle Alcohol. 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 September 30, Variance in Nine Months Ended September 30, Variance in 2023 2022 Dollars Percent 2023 2022 Dollars Percent Interest Expense, net $ 2,000 $ 340 $ 1,660 488.2 % $ 5,299 $ 859 $ 4,440 516.9 % Percentage of net sales 0.6 % 0.1 % 0.6 % 0.1 % Our interest expense increased for the three and nine months ended September 30, 2023 as compared to the same periods in 2022. The increase resulted from higher debt balances due to our recent term loan to fund our capital improvement projects as well as higher interest rates under Kinergy’s line of credit resulting from the general rise in interest rates. 26 Income from Cash Grant We applied for the USDA’s Biofuel Producer Program in 2022. As a result, we received $2.8 million for the three and nine months ended September 30, 2023 after receiving an initial payment of $22.7 million for the nine months ended September 30, 2022. These cash grants are not required to be repaid nor will they recur in the future. Net Loss Available to Common Stockholders The following table presents our net loss available to common stockholders in dollars and as a percentage of net sales (in thousands, except percentages): Three Months Ended September 30, Variance in Nine Months Ended September 30, Variance in 2023 2022 Dollars Percent 2023 2022 Dollars Percent Net loss available to common stockholders $ (3,808 ) $ (28,357 ) $ (24,549 ) (86.6 )% $ (10,006 ) $ (9,471 ) $ 535 5.6 % Percentage of net sales (1.2 )% (8.4 )% (1.1 )% (0.9 )% The decline in our net loss available to common stockholders for the three months ended September 30, 2023 as compared to the same period in 2022 is primarily due to improved margins from a lower cost of corn. Liquidity and Capital Resources During the nine months ended September 30, 2023, we funded our operations primarily from cash generated by our operations, 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 September 30, 2023, we had $26.2 million in cash and cash equivalents, $53.4 million available for borrowing under Kinergy’s operating line of credit and $40.0 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. Quantitative Period-End Liquidity Status We believe that the following amounts provide insight into our liquidity and capital resources. The following selected financial information should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report (dollars in thousands). September 30, 2023 December 31, 2022 Change Cash, cash equivalents and restricted cash $ 34,861 $ 49,525 (29.6 )% Current assets $ 168,205 $ 199,121 (15.5 )% Property and equipment, net $ 248,882 $ 239,069 4.1 % Current liabilities $ 58,415 $ 78,017 (25.1 )% Long-term debt $ 75,878 $ 68,356 11.0 % Working capital $ 109,790 $ 121,104 (9.3 )% Working capital ratio 2.88 2.55 12.9 % 27 Changes in Working Capital and Cash Flows Working capital declined slightly to $109.8 million at September 30, 2023 from $121.1 million at December 31, 2022 due to a decrease of $30.9 million in current assets and a decrease of $19.6 million in current liabilities. Current assets declined primarily due to a decrease in cash, cash equivalents and restricted cash of $14.7 million and a decrease in accounts receivable, inventories and derivative assets due to changes in average commodity prices for the nine months ended September 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 $14.7 million primarily due to $28.1 million in cash used in our investing activities, partially offset by $10.2 million in cash provided by our operating activities and $3.2 million in cash provided by our financing activities, as further detailed below. Cash provided by our Operating Activities We generated $10.2 million in cash from our operating activities for the nine months ended September 30, 2023 as compared to $1.8 million for the same period in 2022. Specific factors that contributed to the change in cash generated by our operating activi ties include: ● a decrease of $17.7 million in gains from our derivative instruments due to changes in the number of positions and commodity prices; and ● an increase of $22.8 million related to changes in inventories due to changes in the quantity of finished goods and commodity prices. These amounts were partially offset by: ● a decrease of $13.5 million related to changes in accounts receivable balances due to the timing of our collections; ● a decrease of $9.4 million related to other assets, primarily driven by changes in the value of derivative instruments due to changes in commodity prices; and ● a decrease of $8.0 million related to higher inventory valuations, as various commodity prices increased for the period. Cash used in our Investing Activities We used $28.1 million in cash during the period to fund $24.6 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. 28 Cash provided by our Financing Activities Cash provided by our financing activities was $3.2 million for the nine months ended September 30, 2023, which reflects net proceeds of $6.8 million from Kinergy’s operating line of credit, partially offset by $2.7 million of stock repurchases and $0.9 million paid in preferred stock dividends, as compared to $6.4 million of cash used in our financing activities for the same period in 2022. 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. We believe Kinergy and Alto Nutrients are in compliance with the fixed-charge coverage ratio covenant as of the filing of this report. The following table sets forth the fixed-charge coverage ratio financial covenant and the actual results for the periods presented: Three Months Ended September 30, Years Ended December 31, 2023 2022 2022 2021 Fixed-Charge Coverage Ratio Requirement 1.10 2.00 1.10 2.00 Actual 4.09 3.13 3.54 13.32 Excess 2.99 1.13 2.44 11.32 Alto Ingredients, Inc. has guaranteed all of Kinergy’s obligations under the credit facility. As of September 30, 2023, Kinergy had an outstanding balance of $24.9 million and $53.4 million of unused borrowing availability under the credit facility. 29 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 September 30, 2023, the outstanding principal balance under the Term Loan was $60,000,000. Share Repurchase Program For the nine months ended September 30, 2023, we repurchased 1,249,000 shares of our common stock as part of our publicly announced share repurchase program at an average price per share of $2.15 for an aggregate expenditure of $2,683,000. We did not repurchase any shares in the three months ended September 30, 2023. Other Cash Obligations As of September 30, 2023, we had future commitments for certain capital projects totaling $23.6 million. These commitments are scheduled to be satisfied throughout 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. 30