Alto Ingredients, Inc. 10-K

Item 9A. Controls and Procedures. We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15I and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of December 31, 2023 that our disclosure controls and procedures were effective at a reasonable assurance level. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. - 50 - Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A material weakness is defined by the Public Company Accounting Oversight Board’s Audit Standards AS 2201 as being a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework set forth in Internal Control — Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2023. RSM US LLP , an independent registered public accounting firm, has issued an attestation report on our internal control over financial reporting as of December 31, 2023. That report is included in Part IV of this report. Inherent Limitations on the Effectiveness of Controls Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Changes in Internal Control over Financial Reporting There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information. During the three months ended December 31, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934, as amended) informed us of the adoption or termination of a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K of the Securities Act of 1933, as amended). Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable. - 51 - PART III Item 10. Directors, Executive Officers and Corporate Governance. The information under the captions “Information about our Board of Directors, Board Committees and Related Matters” appearing in the Proxy Statement, is hereby incorporated by reference. Item 11. Executive Compensation. The information under the caption “Executive Compensation and Related Information,” appearing in the Proxy Statement, is hereby incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information,” appearing in the Proxy Statement, is hereby incorporated by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information under the captions “Certain Relationships and Related Transactions” and “Information about our Board of Directors, Board Committees and Related Matters—Director Independence” appearing in the Proxy Statement, is hereby incorporated by reference. Item 14. Principal Accountant Fees and Services. The information under the caption “Audit Matters—Principal Accountant Fees and Services,” appearing in the Proxy Statement, is hereby incorporated by reference. - 52 - PART IV Item 15. Exhibits and Financial Statement Schedules. (a)(1) Financial Statements Reference is made to the financial statements listed on and attached following the Index to Consolidated Financial Statements contained on page F-1 of this report. (a)(2) Financial Statement Schedules None. (a)(3) Exhibits Reference is made to the exhibits listed on the Index to Exhibits. Item 16. Form 10-K Summary. None. - 53 - I ndex to Consolidated Financial Statements Reports of Independent Registered Public Accounting Firm (PCAOB ID: 49 ) F-2 Consolidated Balance Sheets as of December 31, 2023 and 2022 F-5 Consolidated Statements of Operations for the Years Ended December 31, 2023, 2022 and 2021 F-7 Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2023, 2022 and 2021 F-8 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2023, 2022 and 2021 F-9 Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022 and 2021 F-10 Notes to Consolidated Financial Statements F-11 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Alto Ingredients, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Alto Ingredients, Inc. and its subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 13, 2024, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. F- 2 Evaluation of indicators of long-lived asset impairment As described in Note 1 to the financial statements, the Company assesses the impairment of long-lived assets, including property and equipment, when events or changes in circumstances indicate that the fair value of assets could be less than their net book value. The Company’s assessment did not result in an impairment for the year ended December 31, 2023. We identified the evaluation of impairment indicators for long-lived assets as a critical audit matter because of the significant assumptions management makes when determining whether events or changes in circumstances have occurred indicating that the carrying amounts of property and equipment may not be recoverable. This required a high degree of auditor judgment when performing audit procedures to evaluate whether management appropriately identified and evaluated impairment indicators. Our audit procedures related to the assessment of long-lived assets for possible indications of impairment included the following, among others: ● We obtained an understanding of management’s process and internal controls over management’s evaluation of potential indicators of impairment and tested the operating effectiveness of the controls ● We obtained management’s analysis of potential indicators of impairment and evaluated management’s analysis by: - Agreeing current period operating profits or losses for all identifiable asset groups to respective trial balances - For asset groups in a current period loss, compared the current period operating loss to historical operating profits or losses - Prepared an independent expectation of the underlying fair value for one identified asset group that had both current period and historical operating losses by: ● Evaluating publicly available information related to sales of comparable production facilities ● Comparing the sales price per nameplate production gallons to the carrying value of the asset group - Reading board of directors meeting minutes, press releases, and publicly available information for indications of significant changes in the manner of or the use of the asset group /s/ RSM US LLP We have served as the Company’s auditor since 2015. Rochester, Minnesota March 13, 2024 F- 3 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Alto Ingredients, Inc. Opinion on the Internal Control Over Financial Reporting We have audited Alto Ingredients, Inc.’s (the Company) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes to the consolidated financial statements of the Company and our report dated March 13, 2024 expressed an unqualified opinion. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ RSM US LLP Rochester, Minnesota March 13, 2024 F- 4 ALTO INGREDIENTS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except shares and par value) December 31, 2023 2022 ASSETS Current Assets: Cash and cash equivalents $ 30,014 $ 36,456 Restricted cash 15,466 13,069 Accounts receivable, net of allowance for credit losses of $ 85 and $ 105 , respectively 58,729 68,655 Inventories 52,611 66,628 Derivative instruments 2,412 4,973 Other current assets 9,538 9,340 Total current assets 168,770 199,121 Property and equipment, net 248,748 239,069 Other Assets: Right of use operating lease assets, net 22,597 18,937 Intangible assets, net 8,498 9,087 Goodwill — 5,970 Other assets 5,628 6,137 Total other assets 36,723 40,131 Total Assets $ 454,241 $ 478,321 The accompanying notes are an integral part of these consolidated financial statements. F- 5 ALTO INGREDIENTS, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) (in thousands, except shares and par value) December 31, LIABILITIES AND STOCKHOLDERS’ EQUITY 2023 2022 Current Liabilities: Accounts payable $ 20,752 $ 28,115 Accrued liabilities 20,205 26,556 Current portion – operating leases 4,333 3,849 Derivative instruments 13,849 6,732 Other current liabilities 6,149 12,765 Total current liabilities 65,288 78,017 Long-term debt, net 82,097 68,356 Operating leases, net of current portion 19,029 15,062 Other liabilities 8,270 8,797 Total Liabilities 174,684 170,232 Commitments and contingencies (Notes 1, 9, 10, 11 and 15) Stockholders’ Equity: Preferred stock, $ 0.001 par value; 10,000,000 shares authorized: Series A: 1,684,375 shares authorized; no shares issued and outstanding as of December 31, 2023 and 2022 — — Series B: 1,580,790 shares authorized; 926,942 shares issued and outstanding as of December 31, 2023 and 2022; liquidation preference of $ 18,075 as of December 31, 2023 1 1 Common stock, $ 0.001 par value; 300,000,000 shares authorized; 75,703,100 and 75,154,495 shares issued and outstanding as of December 31, 2023 and 2022, respectively 76 75 Non-voting common stock, $ 0.001 par value; 3,553,000 shares authorized; 896 shares issued and outstanding as of December 31, 2023 and 2022 — — Additional paid-in capital 1,040,912 1,040,834 Accumulated other comprehensive income 2,481 1,822 Accumulated deficit ( 763,913 ) ( 734,643 ) Total stockholders’ equity 279,557 308,089 Total Liabilities and Stockholders’ Equity $ 454,241 $ 478,321 The accompanying notes are an integral part of these consolidated financial statements. F- 6 ALTO INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Years Ended December 31, 2023 2022 2021 Net sales $ 1,222,940 $ 1,335,621 $ 1,207,892 Cost of goods sold 1,207,287 1,363,171 1,140,108 Gross profit (loss) 15,653 ( 27,550 ) 67,784 Selling, general and administrative expenses ( 32,664 ) ( 31,579 ) ( 29,185 ) Gain (loss) on sale (disposal) of assets ( 293 ) ( 2,230 ) 4,571 Asset impairments ( 6,544 ) — ( 3,100 ) Income (loss) from operations ( 23,848 ) ( 61,359 ) 40,070 Income from cash grant 2,812 22,652 — Income from loan forgiveness — — 9,860 Interest expense, net ( 7,425 ) ( 1,827 ) ( 3,587 ) Other income, net 553 862 1,208 Income (loss) before provision for income taxes ( 27,908 ) ( 39,672 ) 47,551 Provision for income taxes 97 1,925 1,469 Consolidated net income (loss) $ ( 28,005 ) $ ( 41,597 ) $ 46,082 Preferred stock dividends $ ( 1,265 ) $ ( 1,265 ) $ ( 1,265 ) Income allocated to participating securities $ — $ — $ ( 600 ) Income (loss) available to common stockholders $ ( 29,270 ) $ ( 42,862 ) $ 44,217 Income (loss) per share, basic $ ( 0.40 ) $ ( 0.60 ) $ 0.62 Income (loss) per share, diluted $ ( 0.40 ) $ ( 0.60 ) $ 0.61 Weighted-average shares outstanding, basic 73,339 71,944 71,098 Weighted-average shares outstanding, diluted 73,339 71,944 72,219 The accompanying notes are an integral part of these consolidated financial statements. F- 7 ALTO INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) Years Ended December 31, 2023 2022 2021 Consolidated net income (loss) $ ( 28,005 ) $ ( 41,597 ) $ 46,082 Other comprehensive income – net gain arising during the period on defined benefit pension plans 659 2,106 3,594 Total comprehensive income (loss) $ ( 27,346 ) $ ( 39,491 ) $ 49,676 The accompanying notes are an integral part of these consolidated financial statements. F- 8 ALTO INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands) Preferred Stock Common Stock and Non-Voting Common Additional Paid-In Accumulated Accum. Other Comprehensive Shares Amount Shares Amount Capital Deficit Income (Loss) Total Balances, December 31, 2020 927 $ 1 72,487 $ 72 $ 1,036,638 $ ( 736,598 ) $ ( 3,878 ) $ 296,235 Stock-based compensation — — — — 2,883 — — 2,883 Restricted stock issued to employees and directors, net of cancellations and tax — — 167 1 ( 2,778 ) — — ( 2,777 ) Common stock issuances — — 124 — 462 — — 462 Pension plan adjustment — — — — — — 3,594 3,594 Preferred stock dividends — — — — — ( 1,265 ) — ( 1,265 ) Net income — — — — — 46,082 — 46,082 Balances, December 31, 2021 927 $ 1 72,778 $ 73 $ 1,037,205 $ ( 691,781 ) $ ( 284 ) $ 345,214 Stock-based compensation — — — — 3,333 — — 3,333 Restricted stock issued to employees and directors, net of cancellations and tax — — 496 — ( 2,291 ) — — ( 2,291 ) Shares issued for Eagle — — 949 1 — — — 1 Shares issued to Orion — — 1,282 1 3,912 — — 3,913 Stock repurchases — — ( 351 ) — ( 1,325 ) — — ( 1,325 ) Pension plan adjustment — — — — — — 2,106 2,106 Preferred stock dividends — — — — — ( 1,265 ) — ( 1,265 ) Net loss — — — — — ( 41,597 ) — ( 41,597 ) Balances, December 31, 2022 927 $ 1 75,154 $ 75 $ 1,040,834 $ ( 734,643 ) $ 1,822 $ 308,089 Stock-based compensation — — — — 3,896 — — 3,896 Restricted stock issued to employees and directors, net of cancellations and tax — — 2,234 2 ( 145 ) — — ( 143 ) Stock repurchases — — ( 1,685 ) ( 1 ) ( 3,673 ) — — ( 3,674 ) Pension plan adjustment — — — — — — 659 659 Preferred stock dividends — — — — — ( 1,265 ) — ( 1,265 ) Net loss — — — — — ( 28,005 ) — ( 28,005 ) Balances, December 31, 2023 927 $ 1 75,703 $ 76 $ 1,040,912 $ ( 763,913 ) $ 2,481 $ 279,557 The accompanying notes are an integral part of these consolidated financial statements. F- 9 ALTO INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Years Ended December 31, 2023 2022 2021 Operating Activities: Consolidated net income (loss) $ ( 28,005 ) $ ( 41,597 ) $ 46,082 Adjustments to reconcile consolidated net income (loss) to cash provided by operating activities: Depreciation and amortization of intangibles 23,080 25,095 23,292 Asset impairments 6,544 — 3,100 Income from loan forgiveness — — ( 9,860 ) (Gain) loss on (sale) disposal of assets 293 2,230 ( 4,571 ) Inventory valuation 2,201 4,612 — Losses (gains) on derivative instruments 8,031 ( 19,263 ) ( 21,619 ) Amortization of deferred financing costs 1,048 177 778 Amortization of debt discounts (premiums) 801 126 ( 230 ) Noncash compensation 3,896 3,333 2,883 Bad debt expense (recovery) 427 ( 217 ) 158 Changes in operating assets and liabilities: Accounts receivable 9,499 23,967 ( 43,554 ) Inventories 11,816 ( 15,479 ) ( 16,448 ) Other current assets 310 7,690 38,989 Operating leases ( 5,362 ) ( 5,128 ) ( 4,216 ) Assets held-for-sale — — ( 3,483 ) Liabilities held-for-sale — — 2,305 Accounts payable and accrued expenses ( 12,554 ) 20,503 13,215 Net cash provided by operating activities $ 22,025 $ 6,049 $ 26,821 Investing Activities: Additions to property and equipment $ ( 29,531 ) $ ( 37,744 ) $ ( 16,384 ) Deferred purchase price payments for Eagle Alcohol ( 3,500 ) — — Purchase of Eagle Alcohol, net of cash acquired — ( 14,685 ) — Proceeds from principal payments on notes receivable — 14,766 — Proceeds from sale of Stockton — — 24,000 Proceeds from sale of Madera — — 19,500 Net cash (used in) provided by investing activities $ ( 33,031 ) $ ( 37,663 ) $ 27,116 Financing Activities: Net proceeds from (payments on) Kinergy’s line of credit $ 12,614 $ ( 32,325 ) $ 17,889 Net proceeds from term loan — 59,100 — Stock repurchases ( 3,674 ) ( 1,325 ) — Preferred stock dividend payments ( 1,265 ) ( 1,265 ) ( 2,853 ) Debt issuance costs ( 714 ) ( 5,171 ) — Proceeds from issuances of common stock and warrants — — 462 Payments on plant borrowings — — ( 29,964 ) Payments on senior notes — — ( 25,533 ) Net cash provided by (used in) financing activities $ 6,961 $ 19,014 $ ( 39,999 ) Net increase (decrease) in cash, cash equivalents and restricted cash ( 4,045 ) ( 12,600 ) 13,938 Cash, cash equivalents and restricted cash at beginning of period 49,525 62,125 48,187 Cash, cash equivalents and restricted cash at end of period $ 45,480 $ 49,525 $ 62,125 Reconciliation of total cash, cash equivalents and restricted cash: Cash and cash equivalents $ 30,014 $ 36,456 $ 50,612 Restricted cash 15,466 13,069 11,513 Total cash, cash equivalents and restricted cash $ 45,480 $ 49,525 $ 62,125 Supplemental Information: Interest paid (net of capitalized interest) $ 7,923 $ 2,208 $ 3,489 Capitalized interest $ 2,454 $ 720 $ 628 Income tax payments $ 324 $ 2,262 $ 448 The accompanying notes are an integral part of these consolidated financial statements. F- 10 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES. Organization and Business – The consolidated financial statements include, for all periods presented, the accounts of Alto Ingredients, Inc., a Delaware corporation (“Alto Ingredients”), 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 (“Alto Nutrients”), Alto Op Co., a Delaware corporation, Alto Pekin, LLC, a Delaware limited liability company (“Alto Pekin”) and Alto ICP, LLC, a Delaware limited liability company (“ICP”), and the Company’s production facilities in Oregon and Idaho. As discussed in Note 3, on May 14, 2021 and November 4, 2021, the Company completed the sale of its production facilities located in Madera and Stockton, California, respectively. As discussed in Note 2, on January 14, 2022, the Company acquired Eagle Alcohol Company LLC, a Missouri limited liability company (“Eagle Alcohol”). On that date, Eagle Alcohol became a wholly-owned subsidiary of the Company. Eagle Alcohol specializes in break bulk distribution of specialty alcohols. Eagle Alcohol purchases bulk alcohol from suppliers, including the Company. Then it 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. The acquisition has provided the Company further vertical integration and access to new markets in the specialty alcohol industry. The Company produces and distributes renewable fuel, essential ingredients and specialty alcohols. 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 produces, on an annualized basis, over 1.6 million tons of essential ingredients, such as dried yeast, corn gluten meal, corn gluten 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 five key markets: Health, Home & Beauty ; Food & Beverage ; Industry & Agriculture; 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 Industry & Agriculture markets include alcohols and other products for paint applications and fertilizers. Products for Essential Ingredients markets include dried yeast, corn gluten meal, corn gluten feed, corn germ, and distillers grains and liquid feed used in commercial animal feed and pet foods. Products for Renewable Fuels markets include fuel-grade ethanol and distillers corn oil used as a feedstock for renewable diesel and biodiesel fuels. The Company’s production facilities were operating for all of 2022, subject to scheduled and unscheduled downtimes to address facility repair and maintenance. On January 1, 2023, the Company temporarily hot-idled its Magic Valley production facility due to extreme natural gas prices, other unfavorable market conditions and to facilitate the installation of its new corn oil and high protein system, bringing the facility back online in April 2023. In January 2024, the Company again temporarily hot-idled the facility to minimize losses from negative regional crush margins and to expedite the installation of additional equipment needed to achieve the Company’s intended production rate, quality and consistency from the corn oil and high protein system. 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. F- 11 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Basis of Presentation – The consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation. Segments – A segment is a component of an enterprise whose operating results are regularly reviewed by the enterprise’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. The Company determines and discloses its segments in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Section 280, Segment Reporting , which defines how to determine segments. The Company reports financial and operating performance in three reportable segments (1) Pekin production, which includes the entire campus in Pekin, Illinois (“Pekin Campus”), (2) marketing and distribution, which includes marketing and merchant trading for Company-produced specialty alcohols, fuel-grade ethanol and essential ingredients, and sales of fuel-grade ethanol sourced from third parties, and (3) Western production, which includes the Company’s two western production facilities on an aggregated basis (“Western production”). Cash and Cash Equivalents – The Company considers all highly-liquid investments with an original maturity of three months or less to be cash equivalents. The Company maintains its accounts at several financial institutions. These cash balances regularly exceed amounts insured by the Federal Deposit Insurance Corporation; however, the Company does not believe it is exposed to any significant credit risk on these balances. Restricted Cash – The Company’s restricted cash comprises cash collateral balances held in derivative brokerage accounts. 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 co-products to dairy operators and animal feedlots and corn oil to poultry and biodiesel customers, in each case generally without requiring collateral. Due to a limited number of customers, the Company had significant concentrations of credit risk from sales as of December 31, 2023 and 2022, as described below. 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 $ 51,315,000 and $ 55,667,000 at December 31, 2023 and 2022, respectively, were used as collateral under Kinergy’s operating line of credit. The allowance for credit losses was $ 85,000 and $ 105,000 as of December 31, 2023 and 2022, respectively. The Company recorded a bad debt expense of $ 427 ,000, a bad debt recovery of $ 217 ,000 and a bad debt expense of $ 158,000 for the years ended December 31, 2023, 2022 and 2021, respectively. The Company does not have any off-balance sheet credit exposure related to its customers. F- 12 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Concentration Risks – Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk, whether on- or off-balance sheet, that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions described below. Financial instruments that subject the Company to credit risk consist of cash balances maintained in excess of federal depository insurance limits and accounts receivable which have no collateral or security. The Company has not experienced any significant losses in such accounts. The Company sells specialty alcohols to consumer product companies and fuel-grade ethanol to gasoline refining and distribution companies. The Company sold to customers representing 10% or more of the Company’s total net sales, as follows. Years Ended December 31, 2023 2022 2021 Customer A 9 % 10 % 13 % Customer B 7 % 10 % 9 % The Company had accounts receivable due from these customers totaling $ 4,302,000 and $ 10,469,000 , representing 7 % and 15 % of total accounts receivable, as of December 31, 2023 and 2022, respectively. The Company purchases corn, its largest cost component in producing alcohols, from its suppliers. The Company purchased corn from suppliers representing 10% or more of the Company’s total corn purchases, as follows: Years Ended December 31, 2023 2022 2021 Supplier A 14 % 11 % 12 % Supplier B 12 % 12 % 14 % Supplier C — % 15 % 2 % As of December 31, 2023, approximately 44 % of the Company’s employees were covered by a collective bargaining agreement. F- 13 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 valuation adjustments of $ 2,201,000 and $ 4,612,000 as of December 31, 2023 and 2022, respectively. Of the inventory balance, approximately $ 41,041,000 and $ 43,484,000 at December 31, 2023 and 2022, respectively, were used as collateral under Kinergy’s operating line of credit. Inventory balances consisted of the following (in thousands): December 31, 2023 2022 Finished goods $ 35,765 $ 47,736 Work in progress 5,063 6,396 Raw materials 10,313 11,197 Other 1,470 1,299 Total $ 52,611 $ 66,628 Property and Equipment – Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the following estimated useful lives: Buildings 40 years Facilities and plant equipment 10 – 25 years Other equipment, vehicles and furniture 5 – 10 years The cost of normal maintenance and repairs is charged to operations as incurred. Significant capital expenditures that increase the life of an asset are capitalized and depreciated over the estimated remaining useful life of the asset. The cost of property and equipment sold, or otherwise disposed of, and the related accumulated depreciation or amortization are removed from the accounts, and any resulting gains or losses are reflected in current operations. Intangible Assets – The Company amortizes intangible assets with definite lives using the straight-line method over their estimated lives of 10 - 12 years. Additionally, the Company assesses indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. If the Company determines that an impairment charge is needed, the charge will be recorded as an asset impairment in the consolidated statements of operations. Leases – The Company accounts for leases under ASC Section 842, Leases (“ASC 842), whereby lessees are required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted cash flow basis; and (2) a “right of use” asset, which is an asset that represents the lessee’s right to use the specified asset for the lease term. See Note 10 for further information. Derivative Instruments and Hedging Activities – Derivative transactions, which can include exchange-traded futures contracts, options and futures positions on the New York Mercantile Exchange or the Chicago Mercantile Exchange, are recorded on the balance sheet as assets and liabilities based on the derivative’s fair value. Changes in the fair value of derivative contracts are recognized currently in income unless specific hedge accounting criteria are met. If derivatives meet those criteria, and hedge accounting is elected, effective gains and losses are deferred in accumulated other comprehensive income (loss) and later recorded together with the hedged item in consolidated income (loss). For derivatives designated as a cash flow hedge, the Company formally documents the hedge and assesses the effectiveness with associated transactions. The Company has designated and documented contracts for the physical delivery of commodity products to and from counterparties as normal purchases and normal sales. F- 14 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Revenue Recognition – The Company recognizes revenue under ASC Section 606, Revenue from Contracts with Customers (“ASC 606”). The provisions of ASC 606 include a five-step process by which an entity will determine revenue recognition, depicting the transfer of goods or services to customers in amounts reflecting the payment to which an entity expects to be entitled in exchange for those goods or services. ASC 606 requires the Company to apply the following steps: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies the performance obligation. The Company recognizes revenue primarily from sales of alcohols and essential ingredients. The Company has five production facilities from which it produces and sells alcohols to its customers through Kinergy. Kinergy enters into back-to-back sales contracts with its customers under exclusive intercompany sales agreements with each of the Company’s five production facilities. Kinergy also acts as a principal when it purchases third party fuel-grade ethanol which it resells to its customers. Finally, for the years ended December 31, 2022 and 2021, Kinergy had exclusive sales agreements with certain third-party owned fuel-grade ethanol production facilities under which it sold the facilities’ fuel-grade ethanol for a fee plus the costs to deliver the ethanol to Kinergy’s customers. These sales were referred to as third-party agent sales. Revenue from these third-party agent sales was recorded on a net basis, with Kinergy recognizing its predetermined fees and any associated delivery costs. Kinergy has terminated these contracts, and as a result, did not have any related sales for the year ended December 31, 2023. The Company has five production facilities from which it produces and sells essential ingredients to its customers through Alto Nutrients. Alto Nutrients enters into sales contracts with essential ingredient customers under exclusive intercompany sales agreements with each of the Company’s five production facilities. The Company recognizes revenue from sales of alcohols and essential ingredients at the point in time when the customer obtains control of the products, which typically occurs upon delivery depending on the terms of the underlying contracts. In some instances, the Company enters into contracts with customers that contain multiple performance obligations to deliver volumes of alcohols or essential ingredients over a contractual period of less than 12 months. The Company allocates the transaction price to each performance obligation identified in the contract based on relative standalone selling prices and recognizes the related revenue as control of each individual product is transferred to the customer in satisfaction of the corresponding performance obligations. When the Company is the agent, the supplier controls the products before they are transferred to the customer because the supplier is primarily responsible for fulfilling the promise to provide the product, has inventory risk before the product has been transferred to a customer and has discretion in establishing the price for the product. When the Company is the principal, the Company controls the products before they are transferred to the customer because the Company is primarily responsible for fulfilling the promise to provide the products, has inventory risk before the product has been transferred to a customer and has discretion in establishing the price for the product. See the tables in Note 5 for the Company’s revenue by type of contracts. F- 15 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Shipping and Handling Costs – The Company accounts for shipping and handling costs relating to contracts with customers as costs to fulfill its promise to transfer its products. Accordingly, the costs are classified as a component of cost of goods sold in the accompanying consolidated statements of operations. Selling Costs – Selling costs associated with the Company’s product sales are classified as a component of selling, general and administrative expenses in the accompanying consolidated statements of operations. Stock-Based Compensation – The Company accounts for the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award, determined on the date of grant. The expense is recognized over the period during which an employee is required to provide services in exchange for the award. The Company accounts for forfeitures as they occur. The Company recognizes stock-based compensation expense as a component of either cost of goods sold or selling, general and administrative expenses in the consolidated statements of operations. Goodwill – Goodwill represents the excess of cost of an acquired entity over the net of the amounts assigned to net assets acquired and liabilities assumed. Annually, or more frequently, if indications of impairment arise, the Company performs a review for impairment. This review includes the determination of each reporting unit’s fair value using market multiples and discounted cash flow modeling. The estimates of future cash flows are judgments based on management’s experience and knowledge of the Company’s operations and the industries in which the Company operates. These estimates can be significantly affected by future changes in market conditions, the economic environment, including inflation, and capital spending decisions of the Company’s customers. Any assessed impairments will be permanent and expensed in the period in which the impairment is determined. If the Company determines through its assessment process that any of its goodwill requires impairment charges, the charges will be recorded in asset impairment expenses in the consolidated statements of operations. The Company performed its annual review of impairment of goodwill and recognized an asset impairment loss of $ 6.0 million for the year ended December 31, 2023. No impairment losses for goodwill were recognized for the years ended December 31, 2022 and 2021. Impairment of Long-Lived Assets – The Company assesses the impairment of long-lived assets, including property and equipment, internally developed software and purchased intangibles subject to amortization, when events or changes in circumstances indicate that the fair value of assets could be less than their net book value. In such event, the Company assesses long-lived assets for impairment by first determining the forecasted, undiscounted cash flows the asset group is expected to generate plus the net proceeds expected from the sale of the asset group. If this amount is less than the carrying value of the asset, the Company will then determine the fair value of the asset group. An impairment loss would be recognized when the fair value is less than the related asset group’s net book value, and an impairment expense would be recorded in the amount of the difference. Forecasts of future cash flows are judgments based on the Company’s experience and knowledge of its operations and the industries in which it operates. These forecasts could be significantly affected by future changes in market conditions, the economic environment, including inflation, and purchasing decisions of the Company’s customers. The Company’s assessment resulted in an asset impairment of $ 574,000 , $ 0 and $ 3,100,000 for the years ended December 31, 2023, 2022 and 2021, respectively. F- 16 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Deferred Financing Costs – Deferred financing costs are costs incurred to obtain debt financing, including all related fees, and are amortized as interest expense over the term of the related financing using the straight-line method, which approximates the effective interest rate method. Amortization of deferred financing costs, included in interest expense, net, in the accompanying consolidated statements of operations, was approximately $ 1,048,000 , $ 177,000 and $ 778,000 for the years ended December 31, 2023, 2022 and 2021, respectively. Unamortized deferred financing costs were approximately $ 4,700,000 and $ 5,034,000 as of December 31, 2023 and 2022, respectively, and are recorded as a reduction of long-term debt in the consolidated balance sheets. Provision for Income Taxes – Income taxes are accounted for under the asset and liability approach, where deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining whether it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50 % likely of being realized upon ultimate settlement. An uncertain tax position is considered effectively settled on completion of an examination by a taxing authority if certain other conditions are satisfied. Should the Company incur interest and penalties relating to tax uncertainties, such amounts would be classified as a component of interest expense, net, and other income (expense), net, respectively. Deferred tax assets and liabilities are classified as noncurrent in the Company’s consolidated balance sheets. The Company files a consolidated federal income tax return. This return includes all wholly owned subsidiaries as well as the Company’s pro-rata share of taxable income from pass-through entities in which the Company owns less than 100 %. State tax returns are filed on a consolidated, combined or separate basis depending on the applicable laws relating to the Company and its subsidiaries. The Company does not have any foreign operations. Income (Loss) Per Share – Basic income (loss) per share is computed on the basis of the weighted-average number of shares of common stock outstanding during the period. Preferred dividends are deducted from net income (loss) attributed to Alto Ingredients, Inc. and are considered in the calculation of income (loss) available to common stockholders in computing basic income (loss) per share. Common stock equivalents to preferred stock are considered participating securities and are also included in this calculation when dilutive. F- 17 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables compute basic and diluted income (loss) per share (in thousands, except per share data): Year Ended December 31, 2023 Loss Numerator Shares Denominator Per-Share Amount Consolidated net loss $ ( 28,005 ) Less: Preferred stock dividends ( 1,265 ) Basic and diluted loss per share: Loss available to common stockholders $ ( 29,270 ) 73,339 $ ( 0.40 ) Year Ended December 31, 2022 Loss Numerator Shares Denominator Per-Share Amount Consolidated net loss $ ( 41,597 ) Less: Preferred stock dividends ( 1,265 ) Basic and diluted loss per share: Loss available to common stockholders $ ( 42,862 ) 71,944 $ ( 0.60 ) Year Ended December 31, 2021 Income Numerator Shares Denominator Per-Share Amount Consolidated net income $ 46,082 Less: Preferred stock dividends ( 1,265 ) Less: Income allocated to participating securities ( 600 ) Basic income per share: Income available to common stockholders $ 44,217 71,098 $ 0.62 Add: Dilutive securities — 1,121 Diluted income per share: Income available to common stockholders $ 44,217 72,219 $ 0.61 F- 18 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS There were an aggregate of 981,000 , 964,000 and 964,000 potentially dilutive shares from convertible securities outstanding for the years ended December 31, 2023, 2022 and 2021, respectively. These convertible securities were not considered in calculating diluted loss per common share for the years ended December 31, 2023, 2022 and 2021 as their effect would be anti-dilutive. In addition, there were an aggregate of 3,188,000 and 8,900,500 weighted-average anti-dilutive shares from outstanding out-of-the-money warrants for the years ended December 31, 2022 and 2021, respectively. Financial Instruments – The carrying values of cash and cash equivalents, restricted cash, accounts receivable, derivative instruments, accounts payable and accrued 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 recently issued. Business Combinations – Business acquisitions are accounted for in accordance with ASC Section 805, Business Combinations . ASC 805 requires the reporting entity to identify the acquirer, determine the acquisition date, recognize and measure the identifiable tangible and intangible assets acquired and liabilities assumed and recognize and measure goodwill or a gain from the purchase. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts assigned is recorded as goodwill. Adjustments to fair value assessments are recorded to goodwill over the measurement period (not longer than twelve months). Income from Cash Grant – For the years ended December 31, 2023 and 2022, the Company received $ 2,812,000 and $ 22,652,000 , respectively, in cash from the USDA’s Biofuel Producer Program. The program was created as part of the CARES Act of 2020, which allocated $ 700,000,000 to support biofuel producers who experienced market losses due to the pandemic. The Company is not required to repay the grants. 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. Employment-related Benefits – Employment-related benefits associated with pensions and postretirement health care are expensed based on actuarial analysis. The recognition of expense is affected by estimates made by management, such as discount rates used to value certain liabilities, investment rates of return on plan assets, increases in future wage amounts and future health care costs. Discount rates are determined based on a spot yield curve that includes bonds with maturities that match the expected timing of benefit payments under the plan. Share Repurchase Program – On September 12, 2022, the Company announced a share repurchase program under which it may repurchase up to $ 50,000,000 of its common stock with an initial purchase authorization of $ 10,000,000 . The Company’s lender has further limited the Company’s purchase authorization to $ 5,000,000 . Amounts in excess of the purchase authorization of $ 5,000,000 will require additional lender consent and amounts in excess of the initial purchase authorization of $ 10,000,000 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 years ended December 31, 2023 and 2022, the Company repurchased an aggregate of 1,685,000 shares and 351,000 shares for $ 3,674,000 and $ 1,325,000 in cash, respectively. F- 19 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Nonvoting Common Stock – In 2015, the Company issued nonvoting common stock convertible at a holder’s election into voting common stock. As of December 31, 2023, an aggregate of 3,539,236 shares of nonvoting common stock had been converted into an equal number of shares of the Company’s voting common stock. As of December 31, 2023, there were 896 shares of nonvoting common stock outstanding. Estimates and Assumptions – The preparation of the consolidated financial statements in conformity with GAAP 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, goodwill impairment, valuation allowances on deferred income taxes and 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. Subsequent Events – Management evaluates, as of each reporting period, events or transactions that occur after the balance sheet date through the date that the financial statements are issued for either disclosure or adjustment to the consolidated financial results. 2. ACQUISITION OF EAGLE ALCOHOL. On January 14, 2022, the Company purchased 100 % of the membership interests of Eagle Alcohol. The purchase price was $ 14.0 million in cash plus an estimated net working capital adjustment of $ 1.3 million in cash. The selling members of Eagle Alcohol were eligible to receive up to an additional $ 14.0 million of contingent consideration, payable through a combination of $ 9.0 million in cash over the succeeding three years and an aggregate of $ 5.0 million in the Company’s common stock on the fourth- and fifth-year anniversaries of the closing date, subject to the satisfaction of certain conditions, including continued employment with the Company. With respect to these payments, the Company accrued $ 2.8 million and $ 3.5 million in other current liabilities in the accompanying consolidated balance sheets as of December 31, 2023 and 2022, respectively, with the expense included in selling, general and administrative expenses in the accompanying consolidated statements of operations for the years then ended. 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. The acquisition has provided the Company further vertical integration and access to new markets in the specialty alcohol industry. F- 20 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As part of the Company’s allocation of purchase price for its acquisition of Eagle Alcohol, the Company recorded a customer relationships intangible asset of $ 6.5 million, a trade name intangible asset of $ 0.4 million and goodwill of $ 6.0 million. See Note 7. 3. ASSET SALES. Stockton and Madera In October 2020, the Company’s Board of Directors approved a plan to sell the Company’s fuel-grade ethanol production facilities located in Madera and Stockton, California. The analysis of these potential sales resulted in an aggregate asset impairment of $ 1.2 million in the Company’s Western production segment for the year ended December 31, 2021. On May 14, 2021, the Company closed the sale of its Madera facility for total consideration of $ 28.3 million, comprised of $ 19.5 million in cash and $ 8.8 million in assumption of liabilities, resulting in a net loss on sale of less than $ 0.1 million, included in gain (loss) on sale (disposal) of assets in the Company’s consolidated statements of operations. All of the cash proceeds were used to repay a significant portion of the Company’s term debt and accrued interest. On November 5, 2021, the Company closed the sale of its Stockton facility for gross proceeds of $ 24.0 million in cash, resulting in a net gain on sale of $ 4.6 million, recorded in gain (loss) on sale (disposal) of assets in the Company’s consolidated statements of operations. With the net cash proceeds, the Company repaid in full its senior secured notes and loans made to Alto Pekin and ICP. For the year ended December 31, 2021, net sales attributed to the results of operations for Stockton and Madera were $ 2.6 million and $ 0 , respectively. For the year ended December 31, 2021, pre-tax loss attributed to the results of operations for Stockton and Madera was $ 2.8 million and $ 2.0 million, respectively. The above pre-tax results include asset impairments associated with Stockton and Madera recorded for the year ended December 31, 2021 of $ 0 and $ 1.2 million, respectively. Canton During 2021, the Company agreed to sell certain assets of the Company’s property and equipment in Canton, Illinois. The analysis of the potential sale resulted in an asset impairment of $ 1.9 million in the Company’s Western production segment for the year ended December 31, 2021. The Company sold these assets in 2022. For the years ended December 31, 2022 and 2021, there were no sales from Canton. For the years ended December 31, 2022 and 2021, pre-tax losses attributed to Canton were less than $ 1.0 million for each year. 4. INTERCOMPANY AGREEMENTS. The Company, directly or through one of its subsidiaries, has entered into the following management and marketing agreements: Affiliate Management Agreement – Alto Ingredients entered into an Affiliate Management Agreement (“AMA”) with its operating subsidiaries under which Alto Ingredients agreed to provide operational, administrative and staff support services. These services generally include, but are not limited to, administering the subsidiaries’ compliance with their credit agreements and performing billing, collection, record keeping and other administrative and ministerial tasks. Alto Ingredients agreed to supply all labor and personnel required to perform its services under the AMA, including the labor and personnel required to operate and maintain the production facilities and marketing activities. These services are billed at a predetermined amount per subsidiary each month plus out of pocket costs such as employee wages and benefits. F- 21 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The AMAs had an initial term of one year and have automatic successive one year renewal periods. Alto Ingredients may terminate the AMA, and any subsidiary may terminate the AMA, at any time by providing at least 90 days prior notice of termination. Alto Ingredients recorded revenues of approximately $ 13,200,000 $ 12,403,000 and $ 9,774,000 related to the AMAs in place for the years ended December 31, 2023, 2022 and 2021, respectively. These amounts have been eliminated upon consolidation. Ethanol Marketing Agreements – Kinergy entered into separate marketing agreements with each of the Company’s production facilities which granted Kinergy the exclusive right to purchase, market and sell the alcohols produced at those facilities. Under the terms of the marketing agreements, within ten days after delivering alcohol to Kinergy, an amount is paid to Kinergy equal to (i) the estimated purchase price payable by the third-party purchaser of the alcohol, minus (ii) the estimated amount of transportation costs to be incurred, minus (iii) the estimated incentive fee payable to Kinergy, which equals 1% of the aggregate third-party purchase price, provided that the marketing fee shall not be less than $0.015 per gallon and not more than $0.0225 per gallon. Each of the marketing agreements had an initial term of one year and has successive one year renewal periods at the option of the production facility. Kinergy recorded revenues of approximately $ 5,431,000 , $ 5,746,000 and $ 4,496,000 related to the marketing agreements for the years ended December 31, 2023, 2022 and 2021, respectively. These amounts have been eliminated upon consolidation. Corn Procurement and Handling Agreements – Alto Nutrients entered into separate corn procurement and handling agreements with each of the Company’s production facilities. Under the terms of the corn procurement and handling agreements, each facility appointed Alto Nutrients as its exclusive agent to solicit, negotiate, enter into and administer, on its behalf, corn supply arrangements to procure the corn necessary to operate the facility. Alto Nutrients also provides grain handling services including, but not limited to, receiving, unloading and conveying corn into the facility’s storage and, in the case of whole corn delivered, processing and hammering the whole corn. Under these agreements, Alto Nutrients receives a fee of $ 0.03 per bushel of corn delivered to each production facility as consideration for its procurement and handling services, payable monthly. Each corn procurement and handling agreement had an initial term of one year and successive one year renewal periods at the option of the individual facility. Alto Nutrients recorded revenues of approximately $ 3,007,000 , $ 3,207,000 and $ 2,694,000 related to the corn procurement and handling agreements for the years ended December 31, 2023, 2022 and 2021, respectively. These amounts have been eliminated upon consolidation. F- 22 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Essential Ingredients Marketing Agreements – Alto Nutrients entered into separate marketing agreements with each of the Company’s production facilities (except for the Company’s Magic Valley facility), which grant Alto Nutrients the exclusive right to market, purchase and sell the various essential ingredients produced at each facility. Under the terms of the marketing agreements, within ten days after a facility delivers essential ingredients to Alto Nutrients, the production facility is paid an amount equal to (i) the estimated purchase price payable by the third-party purchaser of the essential ingredients, minus (ii) the estimated amount of transportation costs to be incurred, minus (iii) the estimated amount of fees and taxes payable to governmental authorities in connection with the tonnage of the essential ingredients produced or marketed, minus (iv) the estimated incentive fee payable to the Company, which equals (a) 5% of the aggregate third-party purchase price for wet corn gluten feed, wet distillers grains, corn condensed distillers solubles and distillers grains with solubles, or (b) 1% of the aggregate third-party purchase price for corn gluten meal, dry corn gluten feed, dry distillers grains, corn germ and corn oil. Each marketing agreement had an initial term of one year and has successive one year renewal periods at the option of the production facility. Alto Nutrients recorded revenues of approximately $ 3,216,500 , $ 3,505,000 and $ 2,871,000 related to the marketing agreements for the years ended December 31, 2023, 2022 and 2021, respectively. These amounts have been eliminated upon consolidation. 5. SEGMENTS. The Company reports its financial and operating performance in three segments: (1) Pekin Campus production, which includes the production and sale of alcohols and essential ingredients produced at the Company’s Pekin, Illinois 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) Western production, which includes the production and sale of fuel-grade ethanol and essential ingredients produced the Company’s two western production facilities on an aggregated basis, none of which are individually so significant to be considered a separately reportable segment. Income before provision for income taxes includes management fees charged by Alto Ingredients to the segments. The Pekin Campus production segment incurred $ 5,280,000 , $ 5,046,000 and $ 4,344,000 in management fees for the years ended December 31, 2023, 2022 and 2021, respectively. The marketing and distribution segment incurred $ 3,960,000 , $ 3,840,000 and $ 3,480,000 in management fees for the years ended December 31, 2023, 2022 and 2021, respectively. The Western production segment incurred $ 2,640,000 , $ 2,400,000 and $ 1,950,000 in management fees for the years ended December 31, 2023, 2022 and 2021, respectively. Corporate and other includes the results of Eagle Alcohol and selling, general and administrative expenses, consisting primarily of corporate employee compensation, professional fees and overhead costs not directly related to a specific operating segment. During the normal course of business, the segments do business with each other. The preponderance of this activity occurs when the Company’s marketing and distribution segment markets alcohol produced by the production segments for a marketing fee, as discussed in Note 4. These intersegment activities are considered arms’-length transactions. Consequently, although these transactions impact segment performance, they do not impact the Company’s consolidated results since all revenues and corresponding costs are eliminated upon consolidation. F- 23 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2023, 2022 and 2021, capital expenditures incurred by the Pekin Campus segment were approximately $ 17.7 million, $ 25.7 million and $ 14.3 million, and capital expenditures incurred by the Western production segment were approximately $ 11.8 million, $ 12.3 million $ 2.1 million, respectively. The following tables set forth certain financial data for the Company’s operating segments (in thousands): Years Ended December 31, Net Sales : 2023 2022 2021 Pekin Campus production, recorded as gross: Alcohol sales $ 502,217 $ 521,273 $ 498,195 Essential ingredient sales 217,702 225,871 189,535 Intersegment sales 1,427 1,212 1,193 Total Pekin Campus sales 721,346 748,356 688,923 Marketing and distribution: Alcohol sales, gross $ 262,587 $ 227,626 $ 379,422 Alcohol sales, net 365 1,225 1,753 Intersegment sales 11,654 12,459 10,061 Total marketing and distribution sales 274,606 241,310 391,236 Western Production, recorded as gross: Alcohol sales $ 166,971 $ 253,605 $ 107,931 Essential ingredient sales 57,264 90,209 31,056 Intersegment sales 134 22 964 Total Western production sales 224,369 343,836 139,951 Corporate and other 15,834 15,812 — Intersegment eliminations ( 13,215 ) ( 13,693 ) ( 12,218 ) Net sales as reported $ 1,222,940 $ 1,335,621 $ 1,207,892 Cost of goods sold: Pekin Campus production $ 710,088 $ 772,755 $ 638,371 Marketing and distribution 259,234 229,288 371,371 Western production 230,445 353,775 136,401 Corporate and other 12,122 12,167 — Intersegment eliminations ( 4,602 ) ( 4,814 ) ( 6,035 ) Cost of goods sold as reported $ 1,207,287 $ 1,363,171 $ 1,140,108 Income (loss) before provision for income taxes: Pekin Campus production $ ( 1,560 ) $ ( 27,376 ) $ 41,622 Marketing and distribution 7,644 3,748 11,756 Western production ( 13,506 ) ( 7,209 ) ( 3,762 ) Corporate and other ( 20,486 ) ( 8,835 ) ( 2,065 ) $ ( 27,908 ) $ ( 39,672 ) $ 47,551 Depreciation and amortization expense: Pekin Campus production $ 19,789 $ 19,136 $ 17,352 Western production 2,381 5,085 5,890 Corporate and other 910 874 50 $ 23,080 $ 25,095 $ 23,292 Interest expense, net of capitalized interest: Pekin Campus production $ ( 207 ) $ ( 381 ) $ 756 Marketing and distribution 822 1,658 963 Western production 1,164 ( 339 ) 167 Corporate and other 5,646 889 1,701 $ 7,425 $ 1,827 $ 3,587 F- 24 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth the Company’s total assets by operating segment (in thousands): December 31, 2023 December 31, 2022 Total assets: Pekin Campus production $ 251,048 257,089 Marketing and distribution 101,196 114,755 Western production 57,533 51,886 Corporate and other 44,464 54,591 $ 454,241 $ 478,321 6. PROPERTY AND EQUIPMENT. Property and equipment consisted of the following (in thousands): December 31, 2023 2022 Facilities and plant equipment $ 405,010 $ 386,932 Land 3,687 3,687 Other equipment, vehicles and furniture 9,719 9,876 Construction in progress 50,505 37,538 468,921 438,033 Accumulated depreciation ( 220,173 ) ( 198,964 ) $ 248,748 $ 239,069 Depreciation expense was $ 22,492,000 , $ 24,528,000 and $ 23,292,000 for the years ended December 31, 2023, 2022 and 2021, respectively. The Company capitalized interest of $ 2,454,000 , $ 720,000 and $ 628,000 for the years ended December 31, 2023, 2022 and 2021, respectively, related to its capital investment activities. The Company’s property and equipment are substantially collateralized under the Company’s Term Loan. 7. INTANGIBLE ASSETS. Intangible assets, including goodwill, consisted of the following (in thousands): December 31, 2023 December 31, 2022 Useful Life (Years) Gross Accumulated Amortization/ Impairment Net Book Value Gross Accumulated Amortization Net Book Value Non-Amortizing: Goodwill $ 5,970 $ ( 5,970 ) $ — $ 5,970 $ — $ 5,970 Kinergy tradename 2,678 — 2,678 2,678 — 2,678 Amortizing: Customer relationships 12 6,556 ( 1,074 ) 5,482 6,556 ( 527 ) 6,029 Eagle Alcohol tradename 10 420 ( 82 ) 338 420 ( 40 ) 380 Total goodwill and intangible assets $ 15,624 $ ( 7,126 ) $ 8,498 $ 15,624 $ ( 567 ) $ 15,057 F- 25 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Goodwill – As discussed in Note 2, the Company’s recorded goodwill of $ 5,970,000 in its Corporate and other segment resulted from the Company’s acquisition of Eagle Alcohol. As part of the Company’s annual goodwill testing, it impaired the full amount of goodwill of $ 5,970,000 and recognized the amount in asset impairments in the consolidated statements of operations for the year ended December 31, 2023. The Company did not record any goodwill impairment for the years ended December 31, 2022 and 2021. Kinergy Tradename – The Company recorded tradename of $ 2,678,000 as part of the Company’s merger with Kinergy in 2006. The Company determined that the tradename has an indefinite life and therefore, rather than being amortized, will be tested annually for impairment. The Company did not record any impairment on its tradename for the years ended December 31, 2023, 2022 and 2021. Customer Relationships – The Company recorded customer relationships of $ 6,556,000 from the Company’s acquisition of Eagle Alcohol. See Note 2. The Company has established a useful life of twelve years for these customer relationships. Eagle Alcohol Tradename – The Company recorded tradename of $ 420,000 from the Company’s acquisition of Eagle Alcohol. See Note 2. The Company has established a useful life of ten years for the tradename. Amortization expense associated with intangible assets totaled $ 588,000 and $ 567,000 for the years ended December 31, 2023 and 2022. The weighted-average unamortized life of the customer relationships and tradename is 9.9 years. The expected amortization expense relating to amortizable intangible assets in each of the five years after December 31, 2023 are (in thousands): Years Ended December 31, Amount 2024 $ 588 2025 588 2026 588 2027 588 2028 588 Thereafter 2,880 Total $ 5,820 8. 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 in order 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 years ended December 31, 2023, 2022 and 2021, 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 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 $ 8,031,000 and net gains of $ 19,263,000 and $ 21,619,000 as the change in the fair value of these contracts for the years ended December 31, 2023, 2022 and 2021, respectively. F- 26 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 December 31, 2023 Assets Liabilities Type of Instrument Balance Sheet Location Fair Value Balance Sheet Location Fair Value Cash collateral balance Restricted cash $ 15,466 Commodity contracts Derivative instruments $ 2,412 Derivative instruments $ 13,849 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 For the Years Ended December 31, Type of Instrument Statements of Operations Location 2023 2022 2021 Commodity contracts Cost of goods sold $ 1,647 $ 23,280 $ 32,618 $ 1,647 $ 23,280 $ 32,618 Unrealized Losses For the Years Ended December 31, Type of Instrument Statements of Operations Location 2023 2022 2021 Commodity contracts Cost of goods sold $ ( 9,678 ) $ ( 4,017 ) $ ( 10,999 ) $ ( 9,678 ) $ ( 4,017 ) $ ( 10,999 ) F- 27 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. DEBT. Long-term borrowings are summarized as follows (in thousands): December 31, 2023 December 31, 2022 Kinergy line of credit $ 30,690 $ 18,076 Orion term loan 60,000 60,000 90,690 78,076 Less unamortized debt discount ( 3,893 ) ( 4,686 ) Less unamortized debt financing costs ( 4,700 ) ( 5,034 ) Less current portion — — Long-term debt $ 82,097 $ 68,356 Kinergy Line of Credit – Kinergy has an operating line of credit for an aggregate amount of up to $ 100,000,000 . The line of credit matures on November 7, 2027 . The credit facility is based on Kinergy’s eligible accounts receivable and inventory levels, subject to certain concentration reserves. The credit facility is subject to certain other sublimits, including inventory loan limits. Interest accrues under the line of credit at a rate equal to (i) the daily Secured Overnight Financing Rate, plus (ii) a specified applicable margin ranging between 1.25 % and 1.75 %. The applicable margin was 1.25 %, for a total rate of 6.74 %, at December 31, 2023. The credit facility’s monthly unused line fee is an annual rate equal to 0.25 % to 0.375 % depending on the average daily principal balance during the immediately preceding month. Payments that may be made by Kinergy to the Company as reimbursement for management and other services provided by the Company to Kinergy are limited under the terms of the credit facility to $ 1,500,000 per fiscal quarter. The credit facility also includes the accounts receivable of Alto Nutrients as additional collateral. Payments that may be made by Alto Nutrients to the Company as reimbursement for management and other services provided by the Company to Alto Nutrients are limited under the terms of the credit facility to $ 500,000 per fiscal quarter. Kinergy and Alto Nutrients may also make distributions to the Company of up to 75 % of their excess cash flow. If the monthly excess borrowing availability of Kinergy and Alto Nutrients falls below certain thresholds, they are collectively required to 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 first-priority security interests in all of their assets in favor of the lender. Alto Ingredients has guaranteed all of Kinergy’s obligations under the line of credit. As of December 31, 2023, Kinergy had $ 33.3 million in unused borrowing availability under the credit facility. Orion Term Loan – On November 7, 2022, the Company entered into a credit agreement with certain funds managed by Orion Infrastructure Capital (collectively, the “Lenders”), and OIC Investment Agent, LLC, as administrative agent and collateral agent (“OIC”), under which the Lenders agreed to extend a senior secured credit facility in the amount of up to $ 125,000,000 (the “Term Loan”). The Term Loan is secured by a first priority lien on certain assets of the Company and a second priority lien on certain assets of Kinergy and Alto Nutrients. The Lenders agreed to advance to the Company up to $ 100,000,000 , with up to an additional $ 25,000,000 upon the satisfaction of certain conditions. The Company also agreed to issue to the Lenders upon its first funding request, an aggregate of 1,282,051 shares of the Company’s common stock, and up to an additional 320,513 shares of the Company’s common stock upon additional funding or fundings. On November 23, 2022, the Company received its initial funding of $ 60,000,000 and issued 1,282,051 shares of common stock. As of December 31, 2023 and 2022, the principal amount outstanding under the Term Loan was $ 60,000,000 . The Company allocated $ 3,912,000 of the loan proceeds to additional paid-in capital for the common stock issued based on the relative fair values of the debt and equity instruments and recorded a corresponding amount as a debt issuance discount that will be amortized to interest expense over the term of the loan. 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. F- 28 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company must prepay amounts outstanding under the Term Loan on a semi-annual basis beginning with the six-month period ended December 31, 2023 in an amount equal to a percentage of the Company’s excess cash flow based on a specified leverage ratio, as follows: (i) if the leverage ratio is greater than or equal to 3.0x, then the mandatory prepayment amount will equal 100% of the Company’s excess cash flow, (ii) if the leverage ratio is less than 3.0x and greater than or equal to 1.5x, then the mandatory prepayment amount will equal 50% of the Company’s excess cash flow and (iii) if the leverage ratio is less than 1.5x, then the mandatory prepayment amount will equal 25% of the Company’s excess cash flow. The terms and conditions of the Term Loan also contain customary and other representations, warranties, covenants and obligations, including events of default, and other terms and conditions. Registration Rights Agreement - On November 7, 2022, the Company entered into a registration rights agreement with the Lenders and agreed to register for resale with the Securities and Exchange Commission the shares of common stock issued to the Lenders under the Term Loan. The related registration statement has been declared effective by the Securities and Exchange Commission. CARES Act Loans – On May 4, 2020, Alto Ingredients and Alto Pekin, received loan proceeds from Bank of America, NA under the Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES Act”), through the Paycheck Protection Program administered by the U.S. Small Business Administration (“SBA”). Alto Ingredients received $ 6.0 million and Alto Pekin received $ 3.9 million in loan proceeds. Under the terms of the loans, certain amounts may be forgiven if they are used for qualifying expenses as described in the CARES Act. In June 2021, the SBA approved Alto Pekin’s forgiveness application for the full amount of $ 3.9 million. In September 2021, the SBA approved Alto Ingredients’ forgiveness application for the full amount of $ 6.0 million. As a result, the Company recognized income from loan forgiveness of $ 9.9 million for the year ended December 31, 2021. The SBA may audit the loan forgiveness applications and further examine eligibility for forgiveness, including the facts and circumstances existing at the time the loans were made. The Company can provide no assurance that any loan forgiven will not require repayment following an audit by the SBA. Maturities of Long-term Debt – The Company’s long-term debt matures as follows (in thousands): December 31: 2027 $ 30,690 2028 60,000 $ 90,690 1 0. LEASES. The Company leases equipment and land for certain of its facilities. Operating lease right of use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses its estimated incremental borrowing rate, unless an implicit rate is readily determinable, as the discount rate for each lease in determining the present value of lease payments. For the years ended December 31, 2023 and 2022, the Company’s weighted-average discount rate was 7.50 %. Operating lease expense is recognized on a straight-line basis over the lease term. Upon the adoption of ASC 842, the Company elected the following practical expedients allowable under the guidance: not to reassess whether any expired or existing contracts are or contain leases; not to reassess the lease classification for any expired or existing leases; not to reassess initial direct costs for any existing leases; not to separately identify lease and non-lease components; and not to evaluate historical land easements. Additionally, the Company elected the short-term lease exemption policy, applying the requirements of ASC 842 to only long-term (greater than 1 year) leases. The Company determines if an arrangement is a lease or contains a lease at inception. The Company’s leases have remaining lease terms of approximately 1 year to 52 years, which includes options to extend the lease when it is reasonably certain the Company will exercise those options. For the year ended December 31, 2023, the weighted-average remaining lease terms of equipment and land-related leases were 4.73 years and 15.41 years, respectively. The Company does not have lease arrangements with residual value guarantees, sale-leaseback terms or material restrictive covenants. The Company does not have any material finance lease obligations nor sublease agreements. Leases consist of the following (in thousands): December 31, Classification 2023 2022 Assets: Operating Right of use operating lease assets, net $ 22,597 $ 18,937 Liabilites: Operating - Current Current portion, operating leases $ 4,333 $ 3,849 Operating - Noncurrent Operating leases, net of current portion $ 19,029 $ 15,062 F- 29 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Components of lease costs were as follows (in thousands) : Years Ended December 31, 2023 2022 2021 Fixed lease cost $ 5,722 $ 5,224 $ 4,500 Variable lease cost 871 124 238 Net lease cost $ 6,593 $ 5,348 $ 4,738 The following table summarizes the remaining maturities of the Company’s operating lease liabilities, assuming all land lease extensions are taken, as of December 31, 2023 (in thousands) : Year Ended: Equipment Land Related 2024 $ 4,959 $ 991 2025 4,506 1,178 2026 3,860 1,156 2027 3,350 1,129 2028 2,655 1,142 2029-76 1,278 4,666 Less interest ( 3,720 ) ( 3,788 ) $ 16,888 $ 6,474 11. PENSION PLANS. Retirement Plan - The Company sponsors a defined benefit pension plan (the “Retirement Plan”) that is noncontributory, and covers only “grandfathered” unionized employees at its Alto Pekin production facilities. Benefits are based on a prescribed formula based upon the employee’s years of service. Employees hired after November 1, 2010, are not eligible to participate in the Retirement Plan. The Company uses a December 31st measurement date for its Retirement Plan. The Company’s funding policy is to make the minimum annual contribution required by applicable regulations. Information related to the Retirement Plan as of and for the years ended December 31, 2023 and 2022 is presented below (dollars in thousands): 2023 2022 Changes in plan assets: Fair value of plan assets, beginning $ 16,688 $ 19,987 Actual gains (losses) 2,376 ( 3,315 ) Benefits paid ( 834 ) ( 784 ) Company contributions 255 800 Participant contributions — — Fair value of plan assets, ending $ 18,485 $ 16,688 Less: projected accumulated benefit obligation $ 18,590 $ 17,956 Funded status, (underfunded)/overfunded $ ( 105 ) $ ( 1,268 ) Amounts recognized in the consolidated balance sheets: Other liabilities $ ( 105 ) $ ( 1,268 ) Accumulated other comprehensive loss $ ( 2,231 ) $ ( 1,166 ) Assumptions used in computation of benefit obligations: Discount rate 4.90 % 5.15 % Expected long-term return on plan assets 6.50 % 6.50 % Rate of compensation increase — — F- 30 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2023 2022 2021 Components of net periodic benefit costs are as follows: Service cost $ 249 $ 404 $ 436 Interest cost 900 655 605 Amortization of net loss — — 98 Expected return on plan assets ( 993 ) ( 1,090 ) ( 952 ) Net periodic cost (benefit) $ 156 $ ( 31 ) $ 187 The Company does not expect to make any contributions in the year ending December 31, 2024. Net periodic benefit cost for 2024 is estimated at less than $ 0.1 million. The following table summarizes the expected benefit payments for the Company’s Retirement Plan for each of the next five fiscal years and in the aggregate for the five fiscal years thereafter (in thousands): December 31: 2024 $ 960 2025 1,030 2026 1,070 2027 1,100 2028 1,140 2029-33 6,280 $ 11,580 See Note 16 for discussion of the Retirement Plan’s fair value disclosures. Historical and future expected returns of multiple asset classes were analyzed to develop a risk-free real rate of return and risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation component, the risk-free real rate of return, and the associated risk premium. A weighted-average rate was developed based on those overall rates and the target asset allocation of the Retirement Plan. The Company’s pension committee is responsible for overseeing the investment of pension plan assets. The pension committee is responsible for determining and monitoring the appropriate asset allocations and for selecting or replacing investment managers, trustees, and custodians. The Retirement Plan’s current investment target allocations are 50 % equities and 50 % debt. The pension committee periodically reviews the actual asset allocation in light of these targets and rebalances investments as necessary. The pension committee also evaluates the performance of investment managers as compared to the performance of specified benchmarks and peers and monitors the investment managers to ensure adherence to their stated investment style and to the Retirement Plan’s investment guidelines. Postretirement Plan - The Company also sponsors a health care plan and life insurance plan (the “Postretirement Plan”) that provides postretirement medical benefits and life insurance to certain “grandfathered” unionized employees at its Alto Pekin production facilities. Employees hired after December 31, 2000, are not eligible to participate in the Postretirement Plan. The plan is contributory, with contributions required at the same rate as active employees. Benefit eligibility under the plan reduces at age 65 from a defined benefit to a defined dollar cap based upon years of service. Information related to the Postretirement Plan as of December 31, 2023 and 2022 is presented below (dollars in thousands): 2023 2022 Amounts at the end of the year: Accumulated/projected benefit obligation $ 4,294 $ 3,907 Fair value of plan assets — — Funded status, (underfunded)/overfunded $ ( 4,294 ) $ ( 3,907 ) Amounts recognized in the consolidated balance sheets: Accrued liabilities $ ( 320 ) $ ( 310 ) Other liabilities $ ( 3,974 ) $ ( 3,597 ) Accumulated other comprehensive loss $ ( 250 ) $ ( 656 ) Discount rate used in computation of benefit obligations 4.75 % 4.95 % F- 31 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2023 2022 2021 Components of net periodic benefit costs are as follows: Service cost $ 14 $ 26 $ 42 Interest cost 186 105 105 Amortization of prior service cost ( 53 ) — 25 Net periodic benefit cost $ 147 $ 131 $ 172 Amounts recognized in the plan for the year: Participant contributions $ 36 $ 43 $ 32 Benefits paid $ 201 $ 215 $ 217 The Company does not expect to recognize any amortization of net actuarial loss during the year ended December 31, 2024. The following table summarizes the expected benefit payments for the Company’s Postretirement Plan for each of the next five fiscal years and in the aggregate for the five fiscal years thereafter (in thousands): December 31: 2024 $ 320 2025 350 2026 430 2027 440 2028 450 2029-2033 1,940 $ 3,930 For purposes of determining the cost and obligation for pre-Medicare postretirement medical benefits, a 7.50 % annual rate of increase in the per capita cost of covered benefits (i.e., health care trend rate) was assumed for the Postretirement Plan in 2025, adjusted to a rate of 4.50 % in 2034. Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. 12. INCOME TAXES. The Company recorded a provision for income taxes as follows (in thousands): Years Ended December 31, 2023 2022 2021 Current provision $ 97 $ 1,925 $ 1,469 Deferred provision — — — Total $ 97 $ 1,925 $ 1,469 A reconciliation of the differences between the United States statutory federal income tax rate and the effective tax rate as provided in the consolidated statements of operations is as follows: Years Ended December 31, 2023 2022 2021 Statutory rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal benefit 4.6 5.8 6.0 Change in valuation allowance ( 23.4 ) ( 33.9 ) ( 18.8 ) Stock-based compensation ( 2.3 ) 3.1 — Non-deductible items 0.8 ( 1.6 ) 0.4 Income from loan forgiveness — — ( 5.5 ) Other ( 1.0 ) 0.6 ( 0.1 ) Effective rate ( 0.3 )% ( 5.0 )% 3.0 % F- 32 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Deferred income taxes are provided using the asset and liability method to reflect temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities using presently enacted tax rates and laws. The components of deferred income taxes included in the consolidated balance sheets were as follows (in thousands): December 31, 2023 2022 Deferred tax assets: Net operating loss carryforwards $ 57,870 $ 58,131 Capital loss 26,518 26,043 Disallowed interest 3,457 2,395 R&D, Energy and AMT credits 3,742 3,742 Derivatives 3,051 460 Intangibles 1,201 89 Pension liability 1,173 1,354 Railcar contracts 818 786 Stock-based compensation 696 634 Allowance for credit losses and other assets 296 311 Other 3,340 3,208 Total gross deferred tax assets 102,162 97,153 Less: valuation allowance ( 93,506 ) ( 87,949 ) Total deferred tax assets, net of valuation allowance 8,656 9,204 Deferred tax liabilities: Property and equipment ( 7,720 ) ( 9,125 ) Other ( 1,172 ) ( 315 ) Total deferred tax liabilities ( 8,892 ) ( 9,440 ) Net deferred tax liabilities, included in other liabilities $ ( 236 ) $ ( 236 ) F- 33 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A portion of the Company’s net operating loss carryforwards are subject to provisions of the tax law that limit the use of losses incurred by a corporation prior to the date certain ownership changes occur. These limitations also apply to certain depreciation deductions associated with assets on hand at the time of the ownership change and otherwise allowable during the five-year period following the ownership change. As the five-year limitation period lapsed in 2019, these disallowed deductions are reflected in property and equipment in the schedule above but continue to be subject to the annual limitation that applies to the pre-change net operating losses. Due to the limitation on the use of net operating losses and depreciation deductions, a significant portion of these carryforwards will expire regardless of whether the Company generates future taxable income. After reducing these net operating loss carryforwards for the amount which will expire due to this limitation, the Company had remaining federal net operating loss carryforwards of approximately $ 207,481,000 and state net operating loss carryforwards of approximately $ 227,772,000 at December 31, 2023. These net operating loss carryforwards expire as follows (in thousands): Tax Years Federal State 2024–2028 $ — $ 94,913 2029–2033 15,245 5,637 2034–2038 83,771 93,390 2039 and after* 108,465 33,832 Total NOLs $ 207,481 $ 227,772 * Includes indefinite life federal net operating losses of $ 108.5 million generated after 2017. Approximately $ 135,260,000 is available to utilize against federal taxable income for 2024. To the extent amounts are not utilized in any year, they may be carried forward to the next year until expiration. These amounts may change if there are future additional limitations on their utilization. Federal capital loss of $100,487,000 may be carried forward for 5 years and will expire in 2025. State capital loss of $95,469,000 may be carried forward for 5 years for most of the states in which the Company files returns and will expire in 2025. In assessing whether the deferred tax assets are realizable, a more likely than not standard is applied. If it is determined that it is more likely than not that deferred tax assets will not be realized, a valuation allowance must be established against the deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the associated temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. A valuation allowance was established in the amount of $ 93,506,000 and $ 87,949,000 as of December 31, 2023 and 2022, respectively, based on the Company’s assessment of the future realizability of certain deferred tax assets. The valuation allowance on deferred tax assets is related to future deductible temporary differences and net operating loss carryforwards for which the Company has concluded it is more likely than not that these items will not be realized in the ordinary course of operations. For the year ended December 31, 2023, the Company recorded an increase in valuation allowance of $ 5,557,000 . This was primarily related to additional net operating losses accumulated for the year. For the year ended December 31, 2022, the Company recorded an increase in valuation allowance of $ 12,365,000 . This was primarily related to additional net operating losses accumulated for the year. For the year ended December 31, 2021, the Company recorded a decrease in valuation allowance of $ 10,104,000 . This was primarily related to utilization of net operating losses as the Company generated taxable income for the year. F- 34 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unrecognized Tax Benefits A reconciliation of the beginning balance and the ending balance of gross unrecognized tax benefits, before interest and penalties, for the period presented is as follows (in thousands): December 31, 2023 2022 Unrecognized tax benefits at beginning of year $ 739 $ — Increases related to current year tax positions — — Decreases related to current year tax positions — — Increases related to prior year tax positions — 739 Decreases related to prior year tax positions — — Decreases related to expiration of prior year tax positions — — Decreases related to settlements of prior year tax positions — — Unrecognized tax benefits at end of year $ 739 $ 739 The Company recorded unrecognized tax benefits for uncertain tax positions of approximately $ 739,000 as of December 31, 2023, of which $ 739,000 would impact the effective tax rate, if recognized. The Company recognizes interest and penalties related to income tax matters as a component of interest expense and other income, net, respectively. As of December 31, 2023, the Company accrued penalties of $ 74,000 and interest of $ 75,000 related to uncertain tax positions. The Company does not expect the unrecognized tax benefits to change significantly over the next 12 months. The Company is subject to income tax in the United States federal jurisdiction and various state jurisdictions and has identified its federal tax return and tax returns in state jurisdictions below as “major” tax filings. These jurisdictions, along with the years still open to audit under the applicable statutes of limitation, are as follows: Jurisdiction Tax Years Federal 2020 – 2022 Alabama 2020 – 2022 Arizona 2019 – 2022 Arkansas 2020 – 2022 California 2019 – 2022 Colorado 2019 – 2022 Connecticut 2020 – 2022 Georgia 2020 – 2022 Idaho 2020 – 2022 Illinois 2020 – 2022 Indiana 2020 – 2022 Iowa 2020 – 2022 Kansas 2020 – 2022 Louisiana 2020 – 2022 Michigan 2020 – 2022 Minnesota 2020 – 2022 Mississippi 2020 – 2022 Missouri 2020 – 2022 Nebraska 2020 – 2022 New Mexico 2020 – 2022 Oklahoma 2020 – 2022 Oregon 2020 – 2022 Pennsylvania 2020 – 2022 Rhode Island 2020 – 2022 South Carolina 2020 – 2022 Tennessee 2020 – 2022 Texas 2019 – 2022 F- 35 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS However, because the Company had net operating losses and credits carried forward in several of the jurisdictions, including the United States federal and California jurisdictions, certain items attributable to closed tax years are still subject to adjustment by applicable taxing authorities through an adjustment to tax attributes carried forward to open years. 13. PREFERRED STOCK. The Company has 6,734,835 undesignated shares of authorized and unissued preferred stock, which may be designated and issued in the future on the authority of the Company’s Board of Directors. As of December 31, 2023, the Company had the following designated classes of preferred stock: Series A Preferred Stock – The Company has authorized 1,684,375 shares of Series A Cumulative Redeemable Convertible Preferred Stock (“Series A Preferred Stock”), with none outstanding at December 31, 2023 and 2022. Shares of Series A Preferred Stock that are converted into shares of the Company’s common stock revert to undesignated shares of authorized and unissued preferred stock. Upon any issuance, the Series A Preferred Stock would rank senior in liquidation and dividend preferences to the Company’s common stock. Holders of Series A Preferred Stock would be entitled to quarterly cumulative dividends payable in arrears in cash in an amount equal to 5 % per annum of the purchase price per share of the Series A Preferred Stock. The holders of the Series A Preferred Stock would have conversion rights initially equivalent to two shares of common stock for each share of Series A Preferred Stock, subject to customary antidilution adjustments. Certain specified issuances will not result in antidilution adjustments. The shares of Series A Preferred Stock would also be subject to forced conversion upon the occurrence of a transaction that would result in an internal rate of return to the holders of the Series A Preferred Stock of 25 % or more. Accrued but unpaid dividends on the Series A Preferred Stock are to be paid in cash upon any conversion of the Series A Preferred Stock. The holders of Series A Preferred Stock would have a liquidation preference over the holders of the Company’s common stock equivalent to the purchase price per share of the Series A Preferred Stock plus any accrued and unpaid dividends on the Series A Preferred Stock. A liquidation would be deemed to occur upon the happening of customary events, including transfer of all or substantially all of the Company’s capital stock or assets or a merger, consolidation, share exchange, reorganization or other transaction or series of related transactions, unless holders of 66 2/3% of the Series A Preferred Stock vote affirmatively in favor of or otherwise consent to such transaction. Series B Preferred Stock – The Company has authorized 1,580,790 shares of Series B Cumulative Convertible Preferred Stock (“Series B Preferred Stock”), with 926,942 shares outstanding at December 31, 2023 and 2022. Shares of Series B Preferred Stock that are converted into shares of the Company’s common stock revert to undesignated shares of authorized and unissued preferred stock. The Series B Preferred Stock ranks senior in liquidation and dividend preferences to the Company’s common stock. Holders of Series B Preferred Stock are entitled to quarterly cumulative dividends payable in arrears in cash in an amount equal to 7.00 % per annum of the purchase price per share of the Series B Preferred Stock; however, subject to the provisions of the Letter Agreement described below, such dividends may, at the option of the Company, be paid in additional shares of Series B Preferred Stock based initially on the liquidation value of the Series B Preferred Stock. In addition to the quarterly cumulative dividends, holders of the Series B Preferred Stock are entitled to participate in any common stock dividends declared by the Company to its common stockholders. The holders of Series B Preferred Stock have a liquidation preference over the holders of the Company’s common stock initially equivalent to $ 19.50 per share of the Series B Preferred Stock plus any accrued and unpaid dividends on the Series B Preferred Stock. A liquidation will be deemed to occur upon the happening of customary events, including the transfer of all or substantially all of the capital stock or assets of the Company or a merger, consolidation, share exchange, reorganization or other transaction or series of related transaction, unless holders of 66 2/3% of the Series B Preferred Stock vote affirmatively in favor of or otherwise consent that such transaction shall not be treated as a liquidation. The Company believes that such liquidation events are within its control and therefore has classified the Series B Preferred Stock in stockholders’ equity . F- 36 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2023, the Series B Preferred Stock was convertible into 980,712 shares of the Company’s common stock. The conversion ratio is subject to customary antidilution adjustments. In addition, antidilution adjustments are to occur in the event that the Company issues equity securities, including derivative securities convertible into equity securities (on an as-converted or as-exercised basis), at a price less than the conversion price then in effect. The shares of Series B Preferred Stock are also subject to forced conversion upon the occurrence of a transaction that would result in an internal rate of return to the holders of the Series B Preferred Stock of 25 % or more. The forced conversion is to be based upon the conversion ratio as last adjusted. Accrued but unpaid dividends on the Series B Preferred Stock are to be paid in cash upon any conversion of the Series B Preferred Stock. The holders of Series B Preferred Stock vote together as a single class with the holders of the Company’s common stock on all actions to be taken by the Company’s stockholders. Each share of Series B Preferred Stock entitles the holder to approximately 0.03 votes per share on all matters to be voted on by the stockholders of the Company. Notwithstanding the foregoing, the holders of Series B Preferred Stock are afforded numerous customary protective provisions with respect to certain actions that may only be approved by holders of a majority of the shares of Series B Preferred Stock. In 2008, the Company entered into Letter Agreements with Lyles United LLC (“Lyles United”) and other purchasers under which the Company expressly waived its rights under the Certificate of Designations relating to the Series B Preferred Stock to make dividend payments in additional shares of Series B Preferred Stock in lieu of cash dividend payments without the prior written consent of Lyles United and the other purchasers. Registration Rights Agreement – In connection with the sale of its Series B Preferred Stock, the Company entered into a registration rights agreement with Lyles United. The registration rights agreement is effective until the holders of the Series B Preferred Stock, and their affiliates, as a group, own less than 10 % for each of the series issued, including common stock into which such Series B Preferred Stock has been converted. The registration rights agreement provides that holders of a majority of the Series B Preferred Stock, including common stock into which such Series B Preferred Stock has been converted, may demand and cause the Company to register on their behalf the shares of common stock issued, issuable or that may be issuable upon conversion of the Preferred Stock and as payment of dividends thereon, and upon exercise of the related warrants (collectively, the “Registrable Securities”). The Company is required to keep such registration statement effective until such time as all of the Registrable Securities are sold or until such holders may avail themselves of Rule 144 for sales of Registrable Securities without registration under the Securities Act of 1933, as amended. The holders are entitled to two demand registrations on Form S-1 and unlimited demand registrations on Form S-3; provided, however, that the Company is not obligated to effect more than one demand registration on Form S-3 in any calendar year. In addition to the demand registration rights afforded the holders under the registration rights agreement, the holders are entitled to unlimited “piggyback” registration rights. These rights entitle the holders who so elect to be included in registration statements to be filed by the Company with respect to other registrations of equity securities. The Company is responsible for all costs of registration, plus reasonable fees of one legal counsel for the holders, which fees are not to exceed $ 25,000 per registration. The registration rights agreement includes customary representations and warranties on the part of both the Company and the holders and other customary terms and conditions. 14. STOCK-BASED COMPENSATION. On June 16, 2016, the Company’s shareholders approved the 2016 Stock Incentive Plan, which authorizes the issuance of incentive stock options and non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights, direct stock issuances and other stock-based awards to the Company’s officers, directors or key employees or to consultants that do business with the Company initially for up to an aggregate of 1,150,000 shares of common stock. On June 14, 2018, the Company’s shareholders approved an increase to the aggregate number of shares authorized under the 2016 Stock Incentive Plan to 3,650,000 shares. On November 7, 2019, the Company’s shareholders approved an increase to the aggregate number of shares authorized under the 2016 Stock Incentive Plan to 5,650,000 shares. On November 18, 2020, the Company’s shareholders approved an increase to the aggregate number of shares authorized under the 2016 Stock Incentive Plan to 7,400,000 shares. On June 23, 2022, the Company’s shareholders approved an increase to the aggregate number of shares authorized under the 2016 Stock Incentive Plan to 8,900,000 shares. On June 22, 2023, the Company’s shareholders approved an increase to the aggregate number of shares authorized under the 2016 Stock Incentive Plan to 11,400,000 shares. F- 37 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Restricted Stock – A summary of unvested restricted stock activity is as follows (shares in thousands): Number of Shares Weighted- Average Grant Date Fair Value Per Share Unvested at December 31, 2021 1,387 $ 3.30 Issued 872 $ 6.21 Vested ( 1,051 ) $ 2.66 Canceled ( 39 ) $ 6.23 Unvested at December 31, 2022 1,169 $ 5.95 Issued 2,375 $ 1.87 Vested ( 547 ) $ 5.61 Canceled ( 56 ) $ 3.14 Unvested at December 31, 2023 2,941 $ 2.77 The fair value of the common stock at vesting aggregated $ 929,000 , $ 6,900,000 and $ 8,810,000 for the years ended December 31, 2023, 2022 and 2021, respectively. Stock-based compensation expense related to employee and non-employee restricted stock and option grants recognized in the accompanying consolidated statements of operations, was as follows (in thousands): Years Ended December 31, 2023 2022 2021 Employees $ 3,345 $ 2,689 $ 1,758 Non-employees 551 644 1,125 Total stock-based compensation expense $ 3,896 $ 3,333 $ 2,883 Employee grants typically have a two or three-year vesting schedule, while non-employee grants have a one-year vesting schedule. At December 31, 2023, the total compensation expense related to unvested awards which had not been recognized was $ 8,281,000 and the associated weighted-average period over which the compensation expense attributable to those unvested awards will be recognized was approximately 0.67 years. F- 38 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. COMMITMENTS AND CONTINGENCIES. Commitments – The following is a description of significant commitments at December 31, 2023: Sales Commitments – At December 31, 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 102,874,000 gallons as of December 31, 2023 and open fixed-price alcohol sales contracts totaling $ 285,802,000 as of December 31, 2023. The Company had open fixed-price sales contracts for essential ingredients totaling $ 6,374,000 and open indexed-price sales contracts of essential ingredients for 85,000 tons as of December 31, 2023. These sales contracts are scheduled for completion over the next twelve months. Purchase Commitments – At December 31, 2023, the Company had indexed-price purchase contracts to purchase 26,332,000 gallons of alcohol and fixed-price purchase contracts to purchase $ 1,705,000 of alcohol from its suppliers. The Company had fixed-price purchase contracts to purchase $ 30,100,000 of corn from its suppliers as of December 31, 2023. The Company had fixed-price purchase contracts for natural gas totaling $ 4,663,000 . The Company also had future commitments for certain capital projects totaling $ 15,629,000 . These purchase commitments are scheduled to be satisfied through 2024. Contingencies – The following is a description of significant contingencies at December 31, 2023: Litigation – 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, 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 the Company can provide no assurances, the Company does not expect that any of its pending legal proceedings will have a material financial impact on the Company’s operating results. 16. 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. F- 39 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pooled Separate Accounts – Pooled separate accounts invest primarily in domestic and international stocks, commercial paper or single mutual funds. The net asset value is 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 December 31, 2023 (in thousands): Fair Value Level 1 Level 2 Level 3 Benefit Plan Percentage Allocation Assets: Derivative financial instruments $ 2,412 $ 2,412 $ — $ — Defined benefit plan assets(1) (pooled separate accounts): Large U.S. Equity(2) 5,608 — 5,608 — 30 % Small/Mid U.S. Equity(3) 3,350 — 3,350 — 18 % International Equity(4) 2,682 — 2,682 — 15 % Fixed Income(5) 6,845 — 6,845 — 37 % $ 20,897 $ 2,412 $ 18,485 $ — Liabilities: Derivative financial instruments $ 13,849 $ 13,849 $ — $ — 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) See Note 11 for accounting discussion. (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. F- 40 INDEX TO EXHIBITS Where Located Exhibit Number Description* Form File Number Exhibit Number Filing Date Filed Herewith 2.1 Asset Purchase Agreement dated April 23, 2021 by and among the Registrant, Pacific Ethanol Madera LLC and Seaboard Energy California, LLC 10-Q 000-21467 10.1 08/10/2021 2.2 First Amendment to Asset Purchase Agreement dated July 30, 2021 by and among the Registrant, Pacific Ethanol Madera LLC and Seaboard Energy California, LLC 10-Q 000-21467 10.2 08/10/2021 2.3 Asset Purchase Agreement dated November 5, 2021 by and among the Registrant, Pacific Ethanol Stockton LLC and Pelican Acquisition LLC 10-K 000-21467 2.3 03/15/2022 3.1 Certificate of Incorporation 10-Q 000-21467 3.1 11/06/2015 3.2 Certificate of Designations, Powers, Preferences and Rights of the Series A Cumulative Redeemable Convertible Preferred Stock 10-Q 000-21467 3.2 11/06/2015 3.3 Certificate of Designations, Powers, Preferences and Rights of the Series B Cumulative Convertible Preferred Stock 10-Q 000-21467 3.3 11/06/2015 3.4 Certificate of Amendment to Certificate of Incorporation dated June 3, 2010 10-Q 000-21467 3.4 11/06/2015 3.5 Certificate of Amendment to Certificate of Incorporation effective June 8, 2011 10-Q 000-21467 3.5 11/06/2015 3.6 Certificate of Amendment to Certificate of Incorporation effective May 14, 2013 10-Q 000-21467 3.6 11/06/2015 3.7 Certificate of Amendment to Certificate of Incorporation effective July 1, 2015 10-Q 000-21467 3.7 11/06/2015 3.8 Certificate of Amendment to Certificate of Incorporation effective January 12, 2021 8-K 000-21467 3.1 01/13/2021 3.9 Amended and Restated Bylaws 8-K 000-21467 3.1 03/06/2024 4.1 Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 10-K 000-21467 4.1 03/30/2020 10.1 2016 Stock Incentive Plan, as amended# S-8 333-272836 4.11 06/22/2023 10.2 Form of Employee Restricted Stock Agreement under 2016 Stock Incentive Plan# 10-K 000-21467 10.5 03/15/2018 - 54 - INDEX TO EXHIBITS Where Located Exhibit Number Description* Form File Number Exhibit Number Filing Date Filed Herewith 10.3 Form of Non-Employee Director Restricted Stock Agreement under 2016 Stock Incentive Plan# 10-K 000-21467 10.6 03/15/2017 10.4 Second Amended and Restated Executive Employment Agreement dated September 17, 2023 between the Registrant and Bryon T. McGregor# 8-K 000-21467 10.1 09/20/2023 10.5 Amended and Restated Executive Employment Agreement dated November 7, 2016 between the Registrant and James R. Sneed# 10-K 000-21467 10.12 03/15/2017 10.6 Third Amended and Restated Employment Agreement dated September 18, 2023 between the Registrant and Michael D. Kandris# 8-K 000-21467 10.2 09/20/2023 10.7 Employment Agreement dated February 1, 2022 between the Registrant and Auste M. Graham# 10-K 000-21467 10.9 03/15/2022 10.8 Second Amended and Restated Employment Agreement dated September 17, 2023 between the Registrant and Robert R. Olander# 8-K 000-21467 10.3 09/20/2023 10.9 Form of Indemnity Agreement between the Registrant and each of its Executive Officers and Directors# 10-K 000-21467 10.46 03/31/2010 10.10 Policy for Recoupment of Incentive Compensation dated March 29, 2018# 10-K 000-21467 10.17 03/18/2019 10.11 Form of Clawback Policy Acknowledgement and Agreement# 10-K 000-21467 10.18 03/18/2019 10.12 Registration Rights Agreement dated March 27, 2008 between the Registrant and Lyles United, LLC 8-K 000-21467 10.4 03/27/2008 10.13 Letter Agreement dated March 27, 2008 between the Registrant and Lyles United, LLC 8-K 000-21467 10.5 03/27/2008 10.14 Letter Agreement dated May 22, 2008 among the Registrant, Neil M. Koehler, Bill Jones, Paul P. Koehler and Thomas D. Koehler# 8-K 000-21467 10.3 05/23/2008 - 55 - INDEX TO EXHIBITS Where Located Exhibit Number Description* Form File Number Exhibit Number Filing Date Filed Herewith 10.15 Second Amended and Restated Credit Agreement dated August 2, 2017 among Kinergy Marketing LLC, Pacific Ag. Products, LLC, Wells Fargo Bank, National Association, and the parties thereto from time to time as lenders 8-K 000-21467 10.1 08/08/2017 10.16 Amendment No. 1 to Second Amended and Restated Credit Agreement dated March 27, 2019 by and among Kinergy Marketing LLC, Pacific Ag. Products, LLC and Wells Fargo Bank, National Association 10-Q 000-21467 10.7 05/03/2019 10.17 Amendment No. 2 to Second Amended and Restated Credit Agreement dated July 31, 2019 by and among Kinergy Marketing LLC, Pacific Ag. Products, LLC, the parties thereto from time to time as lenders and Wells Fargo Bank, National Association 8-K 000-21467 10.1 08/06/2019 10.18 Amendment No. 3 to Second Amended and Restated Credit Agreement dated November 19, 2019 by and among Kinergy Marketing LLC, Pacific Ag. Products, LLC, the parties thereto from time to time as lenders and Wells Fargo Bank, National Association 10-K 000-21467 10.61 03/30/2020 10.19 Waiver, Consent and Amendment No. 4 to Second Amended and Restated Credit Agreement dated March 8, 2021 by and among Kinergy Marketing LLC, Alto Nutrients, LLC and Wells Fargo Bank, National Association 10-K 000-21467 10.20 03/15/2022 10.20 Waiver, Consent, and Amendment No. 5 to Second Amended and Restated Credit Agreement dated June 10, 2021 by and among Kinergy Marketing LLC, Alto Nutrients, LLC and Wells Fargo Bank, National Association 10-K 000-21467 10.21 03/15/2022 10.21 Amendment No. 6 to Second Amended and Restated Credit Agreement dated November 7, 2022 by and among Kinergy Marketing LLC, Alto Nutrients, LLC and Wells Fargo Bank, National Association 8-K 000-21467 10.2 11/14/2022 - 56 - INDEX TO EXHIBITS Where Located Exhibit Number Description* Form File Number Exhibit Number Filing Date Filed Herewith 10.22 Second Amended and Restated Guarantee dated August 2, 2017 by the Registrant in favor of Wells Fargo Bank, National Association, for and on behalf of the lenders 8-K 000-21467 10.2 08/08/2017 10.23 Credit Agreement dated November 7, 2022 by and among the Registrant, the subsidiary guarantors signatory thereto, Orion Energy Credit Opportunities Fund III, L.P., Orion Energy Credit Opportunities Fund III GPFA PV, L.P., Orion Energy Credit Opportunities Fund III GPFA, L.P., Orion Energy Credit Opportunities Fund III PV, L.P., and OIC Investment Agent, LLC 8-K 000-21467 10.1 11/14/2022 10.24 First Amendment to Credit Agreement dated November 6, 2023 between the Registrant and OIC Investment Agent, LLC X 10.25 Registration Rights Agreement dated November 7, 2022 by and among Alto Ingredients, Inc., Orion Energy Credit Opportunities Fund III, L.P., Orion Energy Credit Opportunities Fund III GPFA PV, L.P., Orion Energy Credit Opportunities Fund III GPFA, L.P. and Orion Energy Credit Opportunities Fund III PV, L.P. 8-K 000-21467 10.3 11/14/2022 21.1 Subsidiaries of the Registrant 10-K 000-21467 21.1 03/14/2023 23.1 Consent of Independent Registered Public Accounting Firm X 31.1 Certification Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X 31.2 Certification Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X 32.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 X 97.1 Alto Ingredients, Inc. Dodd-Frank Clawback Policy X 101.INS Inline XBRL Instance Document X 101.SCH Inline XBRL Taxonomy Extension Schema X 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase X 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase X 101.LAB Inline XBRL Taxonomy Extension Label Linkbase X 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase X 104 Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101) X (#) A contract, compensatory plan or arrangement to which a director or executive officer is a party or in which one or more directors or executive officers are eligible to participate. (*) Certain of the agreements filed as exhibits contain representations and warranties made by the parties thereto. The assertions embodied in such representations and warranties are not necessarily assertions of fact, but a mechanism for the parties to allocate risk. Accordingly, investors should not rely on the representations and warranties as characterizations of the actual state of facts or for any other purpose at the time they were made or otherwise. - 57 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 13th day of March, 2024. ALTO INGREDIENTS, INC. /s/ BRYON T. MCGREGOR Bryon T. McGregor President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ DOUGLAS L. KIETA Chairman of the Board and Director March 13, 2024 Douglas L. Kieta /s/ BRYON T. MCGREGOR President and Chief Executive Officer March 13, 2024 Bryon T. McGregor (Principal Executive Officer) /s/ ROBERT R. OLANDER Chief Financial Officer March 13, 2024 Robert R. Olander (Principal Financial and Accounting Officer) /s/ MICHAEL D. KANDRIS Acting Chief Operating Officer and March 13, 2024 Michael D. Kandris Director /s/ GILBERT E. NATHAN Director March 13, 2024 Gilbert E. Nathan /s/ DIANNE S. NURY Director March 13, 2024 Dianne S. Nury /s/ MARIA G. GRAY Director March 13, 2024 Maria G. Gray -58-