Alto Ingredients, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report. This report and our consolidated financial statements and notes to consolidated financial statements contain forward-looking statements, which generally include the plans and objectives of management for future operations, including plans and objectives relating to our future economic performance and our current beliefs regarding revenues we might generate and profits we might earn if we are successful in implementing our business and growth strategies. The forward-looking statements and associated risks may include, relate to or be qualified by other important factors, including: ● fluctuations in the market prices of alcohols and essential ingredients; ● fluctuations in the costs of key production input commodities such as corn and natural gas; ● our ability to fund, and the costs, timing and effects of, our plant improvement initiatives and other capital projects, including our carbon capture and storage project; ● the projected growth or contraction in the alcohol and essential ingredients markets in which we operate; ● our strategies for expanding, maintaining or contracting our presence in these markets; ● anticipated trends in our financial condition and results of operations; and ● our ability to distinguish ourselves from our current and future competitors. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this report, or in the case of a document incorporated by reference, as of the date of that document. We do not undertake to update, revise or correct any forward-looking statements, except as required by law. Any of the factors described immediately above or referenced from time to time in our filings with the Securities and Exchange Commission or in the “Risk Factors” section below could cause our financial results, including our net income or loss or growth in net income or loss to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially. Overview We produce and distribute renewable fuel and essential ingredients. We are also the largest producer of specialty alcohols in the United States. We operate five alcohol production facilities. Three of our production facilities are located in Illinois, one is located in Oregon and another is located in Idaho. We have an annual alcohol production capacity of up to 350 million gallons, including both renewable fuel and specialty alcohols ranging from industrial-, pharmaceutical-, and high-quality food- and beverage-grade alcohols. Of this amount, we are able to produce up to 110 million gallons annually of specialty alcohols, depending on our product mix among the highest quality beverage-grade alcohol and alcohols of other quality specifications. We market and distribute all of the alcohols produced at our facilities as well as alcohols produced by third parties. In 2023, we marketed and distributed approximately 383 million gallons combined of our own alcohols as well as fuel-grade ethanol produced by third parties, and over 1.5 million tons of essential ingredients on a dry matter basis. - 14 - We also specialize in break bulk distribution of specialty alcohols through our Eagle Alcohol subsidiary. We purchase bulk alcohol from suppliers and then store, denature, package, and resell alcohol products in smaller sizes, including tank trucks, totes and drums that typically garner a premium price to bulk alcohols. We deliver products to customers in the beverage, food, industrial and related-process industries via our own dedicated trucking fleet and common carrier. We report our financial and operating performance in three segments: (1) Pekin campus production, which includes the production and sale of alcohols and essential ingredients produced at our three production facilities located in Pekin, Illinois, which we refer to as our Pekin Campus, (2) marketing and distribution, which includes marketing and merchant trading for company-produced alcohols and essential ingredients on an aggregated basis, and sales of fuel-grade ethanol sourced from third parties, and (3) Western production, which includes the production and sale of renewable fuel and essential ingredients produced at our two western production facilities on an aggregated basis, none of which are individually so significant as to be considered a separately reportable segment. Our mission is to produce the highest quality, sustainable ingredients from renewable resources that make everyday products better. We intend to accomplish this goal in part by investing in our specialized and higher value specialty alcohol production and distribution infrastructure, expanding production in high-demand essential ingredients, expanding and extending the sale of our products into new regional and international markets, building efficiencies and economies of scale and by capturing a greater portion of the value stream. Production Segments We produce specialty alcohols, fuel-grade ethanol and essential ingredients, focusing on five key markets: Health, Home & Beauty ; Food & Beverage ; Industry & Agriculture; Essential Ingredients ; and Renewable Fuels . Products for the Health, Home & Beauty markets include specialty alcohols used in mouthwash, cosmetics, pharmaceuticals, hand sanitizers, disinfectants and cleaners. Products for the Food & Beverage markets include grain neutral spirits used in alcoholic beverages and vinegar as well as corn germ used for corn oils. Products for Industry & Agriculture markets include alcohols and other products for paint applications and fertilizer s. Products for Essential Ingredients markets include dried yeast, corn protein meal, corn protein feed, corn germ, and distillers grains and liquid feed used in commercial animal feed and pet foods. We also sell yeast for human consumption. Our products for the Renewable Fuels markets include fuel-grade ethanol and distillers corn oil used as a feedstock for renewable diesel and biodiesel fuels. We produce our alcohols and essential ingredients at our production facilities. Our production facilities located in Illinois are in the heart of the Corn Belt, benefit from relatively low-cost and abundant feedstock and enjoy logistical advantages that enable us to provide our products to both domestic and international markets via truck, rail or barge. Our production facilities located in Oregon and Idaho are near their respective fuel and feed customers, offering significant timing, transportation cost and logistical advantages. All of our production facilities are currently operating except our Magic Valley plant, which we temporarily hot-idled in January 2024 to minimize losses from negative regional crush margins and to expedite the installation of additional equipment needed to achieve our intended production rate, quality and consistency from our corn oil and high protein system. We intend to restart Magic Valley production in late June or early July once the modifications are complete. As market conditions change, we may increase, decrease or idle production at one or more operating facilities or resume operations at any idled facility. - 15 - Marketing and Distribution Segment We market and distribute all of the alcohols and essential ingredients we produce at our facilities. We also market and distribute alcohols produced by third parties. We have extensive and long-standing customer relationships, both domestic and international, for our specialty alcohols and essential ingredients. These customers include producers and distributors of ingredients for cosmetics, sanitizers and related products, distilled spirits producers, food products manufacturers, producers of personal health/consumer health and personal care hygiene products, and global trading firms. Our renewable fuel customers are located throughout the Western and Midwestern United States and consist of integrated oil companies and gasoline marketers who blend fuel-grade ethanol into gasoline. Our customers depend on us to provide a reliable supply of fuel-grade ethanol and manage the logistics and timing of delivery. Our customers collectively require fuel-grade ethanol volumes in excess of the supplies we produce at our facilities. We secure additional fuel-grade ethanol supplies from third-party ethanol producers. We arrange for transportation, storage and delivery of fuel-grade ethanol purchased by our customers through our agreements with third-party service providers in the Western United States as well as in the Midwest from a variety of sources. We market food-grade essential ingredients to human and pet food markets, our feed products such as distillers grains primarily to export markets from our Pekin Campus, and other feed products to dairies and feedlots, in many cases located near our production facilities. These customers use our feed products for livestock as a substitute for corn and other sources of starch and protein. We sell our corn oil to poultry, renewable diesel and biodiesel customers. We do not market essential ingredients from other producers. See “Note 2 – Segments” to our Notes to Consolidated Financial Statements included elsewhere in this report for financial information about our business segments. Current Initiatives and Outlook We began the year with a refined vision to produce a variety of essential ingredients and the highest-grade beverage alcohol in the industry while prioritizing our carbon capture and storage, or CCS, initiative. Although encouraged by our strategic and operational progress thus far in 2024, relatively low but now improving crush margins and various weather factors impacted our first quarter financial results. Despite these challenges, specialty alcohol sales from our Pekin Campus increased year-over-year contributing toward an overall improved gross profit and higher Adjusted EBITDA. Our results also reflect our ability to leverage the unique capabilities of our Pekin Campus and our other production assets to moderate the impact of crush margin fluctuations. During the first quarter, we also completed our annual Scope I and II greenhouse gas verifications as part of our sustainability efforts. Our outlook for the remainder of 2024 is positive. Crush margins have continued to improve in the second quarter compared to the first quarter, and we expect further improvement, particularly during the summer driving season. While we forecast lower feed prices for the balance of the year, we have solid corn inventories and see improved export demand for ethanol. In addition, the EPA’s summer waiver for 15% blends will facilitate sustained use of higher-blend renewable transportation fuel and support ethanol prices in the coming months. We expect our recent repair and maintenance work will result in more consistent and higher production rates, enhancing reliability and profitability. We continue to evaluate our path to increase margins, improve profitability and deliver the highest return to our shareholders by evaluating our current portfolio of assets. Our goal for our CCS project is to create value for us, our customers and the communities surrounding our Pekin Campus by substantially reducing our carbon footprint. Our Pekin Campus facilities, given their CO 2 production and their location, provide us with a unique CCS opportunity. We continue to negotiate the terms of our proposed CCS agreements with potential financial partners and with Vault 44.01, a leading CCS company focused on the development, capitalization and operation of carbon storage assets. Our plan is to work with Vault to safely transport CO 2 to a geological reservoir nearby and permanently and securely store the CO 2 deep underground. As noted in our March update, together with Vault, we are driving forward with our respective activities for system design, community outreach, vendor negotiations and schedule alignment requirements to procure equipment for compression and to support the installation of additional power. Vault has completed a 2-dimensional seismic geological survey and has begun data analysis. Vault has also advanced the work required to submit the EPA Class VI permit application. Our goal is for Vault to submit its application by the end of the third quarter, which will impact the timing of when we order CCS equipment and when our energy needs for the project must be resolved. We expect the most significant outlays of capital for our CCS project will begin in the first half of 2025. Our CCS project provides compelling economics that we believe we can enhance with more efficient, lower-cost energy production. To this end, we are evaluating multiple capital-light options. We are in discussions with a highly regarded, independent energy company. We engaged this potential partner to complete a front-end engineering and design (FEED) study for an energy cogeneration facility that the partner would build, own, operate and maintain onsite at our Pekin Campus. The cogeneration facility would lower our capital expenditures, improve operating efficiencies and reduce our forecasted long-term energy costs. We also continue to explore an opportunity with our current utility provider to expand energy supply capabilities as an alternative to cogeneration. Longer term, the updated guidelines around tax credits for including ethanol in the production of sustainable aviation fuel further validates our CCS efforts. Overall, we are pleased with the progress we have made with our CCS initiative and the value we expect to deliver to stakeholders. In the first quarter, we sold 26 million gallons of specialty alcohol, up from 21 million gallons in the same period for 2023. As discussed in our March update, we have contracted to sell approximately 93 million gallons of fixed-price specialty alcohol for 2024 at an average premium to renewable fuel of 31 cents per gallon. Our specialty alcohols include highly differentiated 192 proof and low-moisture 200 proof grain neutral spirits that create customer opportunities higher up the value chain. - 16 - We completed our biennial wet mill outage at our Pekin Campus in April. The wet mill was offline for ten days while we executed a scope of work with over 450 discrete tasks focused on corrective and preventative maintenance as well as upgrades to plant infrastructure. The plant has returned safely to operation and is ramping up to target production rates. Although these efforts will negatively impact sales and margins for the second quarter, they will result in more consistent and higher production rates, improving reliability as we approach the summer driving season. At our Magic Valley facility, we are diligently working on our corn oil and high protein system to return the plant to more sustainable profitability by reducing the impact of periodic low crush margins and higher destination corn basis costs. As outlined in our March update, we are working with the system vendor, Harvesting Technology, to achieve the intended production rate, quality and consistency of corn oil and high protein output at the facility. We will evaluate a roll-out of the system to our other plants based on the system’s performance at our Magic Valley facility. The equipment for the system modifications has been ordered and based on current delivery and installation schedules, we expect to resume production in late June or early July. Harvesting Technology continues to pay for the direct costs of equipment and design changes associated with the system. During this downtime we are accelerating routine maintenance activities to optimize plant efficiency upon restart. Use of Non-GAAP Financial Measures Management believes that certain financial measures not in accordance with generally accepted accounting principles, or GAAP, are useful measures of operations. Management provides EBITDA and Adjusted EBITDA as non-GAAP financial measures so that investors will have the same financial information that management uses, which may assist investors in properly assessing our performance on a period-over-period basis. We define EBITDA as unaudited consolidated net income (loss) before interest expense, interest income, provision for income taxes and depreciation and amortization expense. We define Adjusted EBITDA as unaudited consolidated net income (loss) before interest expense, interest income, unrealized derivative gains and losses, acquisition-related expense, asset impairments, provision for income taxes and depreciation and amortization expense. A table is provided below to reconcile Adjusted EBITDA to its most directly comparable GAAP measure, consolidated net income (loss). EBITDA and Adjusted EBITDA are not measures of financial performance under GAAP and should not be considered as alternatives to consolidated net income (loss) or any other measure of performance under GAAP, or to cash flows from operating, investing or financing activities as an indicator of cash flows or as a measure of liquidity. EBITDA and Adjusted EBITDA have limitations as analytical tools and you should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP. Information reconciling forward-looking EBITDA or Adjusted EBITDA to forward-looking consolidated net income (loss) would require a forward-looking statement of consolidated net income (loss) prepared in accordance with GAAP, which is unavailable to us without unreasonable effort. We are not able to provide a quantitative reconciliation of forward-looking EBITDA or Adjusted EBITDA to forward-looking consolidated net income (loss) because certain items required for reconciliation are uncertain, outside of our control and/or cannot reasonably be predicted, such as net sales, cost of goods sold, unrealized derivative gains and losses, asset impairments and provision (benefit) for income taxes, which we view as the most material components of consolidated net income (loss) that are not presently estimable. Reconciliation of Adjusted EBITDA to Consolidated Net Loss Three Months Ended March 31, (in thousands) (unaudited) 2024 2023 Consolidated net loss $ (11,725 ) $ (13,166 ) Adjustments: Interest expense, net 1,634 1,565 Interest income (175 ) (221 ) Unrealized derivative gains (3,190 ) (5,926 ) Acquisition-related expense 675 700 Asset impairments — 574 Provision for income taxes — — Depreciation and amortization expense 5,728 6,055 Total adjustments 4,672 2,747 Adjusted EBITDA $ (7,053 ) $ (10,419 ) Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses for each period. We believe that of our significant accounting policies, the following critical accounting policies and estimates are those policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain: accounting for business combinations; revenue recognition; impairment of long-lived assets and held-for-sale classification; valuation allowance for deferred taxes and derivative instruments. Except as noted below, these significant accounting principles are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2023. - 17 - Results of Operations Selected Financial Information The following selected financial information should be read in conjunction with our consolidated financial statements and notes to our consolidated financial statements included elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report. Certain performance metrics that we believe are important indicators of our results of operations include: Three Months Ended March 31, Percentage 2024 2023 Change Alcohol Sales (gallons in millions) Pekin Campus renewable fuel gallons sold 31.8 35.3 (10 )% Western production renewable fuel gallons sold 11.2 7.9 42 % Third party renewable fuel gallons sold 29.7 33.9 (12 )% Total renewable fuel gallons sold 72.7 77.1 (6 )% Specialty alcohol gallons sold 26.3 21.4 23 % Total gallons sold 99.0 98.5 1 % Sales Price per Gallon Pekin Campus $ 1.90 $ 2.38 (20 )% Western production $ 1.80 $ 2.64 (32 )% Marketing and distribution $ 1.83 $ 2.49 (27 )% Total $ 1.86 $ 2.43 (23 )% Alcohol Production (gallons in millions) Pekin Campus 53.6 53.3 1 % Western production 9.7 7.3 33 % Total 63.3 60.6 4 % Corn Cost per Bushel Pekin Campus $ 4.73 $ 6.83 ( 31 )% Western production $ 5.89 $ 9.34 ( 37 )% Total $ 4.92 $ 7.07 ( 30 )% Average Market Metrics PLATTS Ethanol price per gallon $ 1.56 $ 2.19 ( 29 )% CME Corn cost per bushel $ 4.35 $ 6.58 ( 34 )% Board corn crush per gallon (1) $ 0.01 $ -0.16 * - 18 - Three Months Ended March 31, Percentage 2024 2023 Change Essential Ingredients Sold (thousand tons) Pekin Campus: Distillers grains 87.7 90.8 (3 )% CO2 39.1 42.3 (8 )% Corn wet feed 25.6 26.7 (4 )% Corn dry feed 18.9 21.5 (12 )% Corn oil and germ 17.8 19.3 (8 )% Syrup and other 9.5 10.5 (10 )% Corn meal 8.3 9.4 (12 )% Yeast 5.7 6.4 (11 )% Total Pekin Campus essential ingredients sold 212.6 226.9 (6 )% Western production: Distillers grains 71.8 54.0 33 % Syrup and other 14.2 3.5 306 % CO2 13.3 13.6 (2 )% Corn oil 1.5 1.3 15 % Total Western production essential ingredients sold 100.8 72.4 39 % Total Essential Ingredients Sold 313.4 299.3 5 % Essential Ingredients Return % (2) Pekin Campus return 52.1 % 46.2 % 13 % Western production return 39.3 % 40.0 % (2 )% Consolidated total return 49.8 % 45.4 % 10 % (1) Assumes corn conversion of 2.80 gallons of alcohol per bushel of corn. (2) Essential ingredient revenues as a percentage of total corn costs consumed. * Not meaningful Net Sales, Cost of Goods Sold and Gross Loss The following table presents our net sales, cost of goods sold and gross profit (loss) in dollars and gross profit (loss) as a percentage of net sales (in thousands, except percentages): Three Months Ended March 31, Change in 2024 2023 Dollars Percent Net sales $ 240,629 $ 313,891 $ (73,262 ) (23.3 )% Cost of goods sold 243,029 317,055 (74,026 ) (23.3 )% Gross loss $ (2,400 ) $ (3,164 ) $ 764 ( 24.1 )% Percentage of net sales (1.0 )% (1.0 )% - 19 - Net Sales The decrease in our consolidated net sales for the three months ended March 31, 2024 as compared to the same period in 2023 is attributable to lower average sales prices per gallon for both specialty alcohol and renewable fuel as well as lower average sales prices of essential ingredients due to a lower commodity price environment. Pekin Campus Production Segment Net sales of alcohol from our Pekin Campus production segment declined by $24.0 million, or 18%, to $108.4 million for the three months ended March 31, 2024 as compared to $132.4 million for the same period in 2023. Our total volume of production gallons sold increased by 1.3 million gallons, or 2%, to 57.1 million gallons for the three months ended March 31, 2024 as compared to 55.8 million gallons for the same period in 2023. The decrease of $0.48, or 20%, in the segment’s average sales price per gallon for the three months ended March 31, 2024 as compared to the same period in 2023 reduced our net sales from the segment by $26.5 million. With the segment’s average sales price per gallon of $1.90 for the three months ended March 31, 2024, we generated $2.5 million more in net sales from the 1.3 million additional gallons of alcohol sold in the three months ended March 31, 2024 as compared to the same period in 2023. Net sales of essential ingredients from our Pekin Campus production segment declined by $16.9 million, or 27%, to $46.7 million for the three months ended March 31, 2024 as compared to $63.6 million for the same period in 2023. Our total volume of essential ingredients sold declined by 14,300 tons, or 6%, to 212,600 tons for the three months ended March 31, 2024 from 226,900 tons for the same period in 2023. The decrease of $60.73, or 22%, in the segment’s average sales price per ton for the three months ended March 31, 2024 as compared to the same period in 2023 reduced our net sales from the segment by $13.8 million. With the segment’s average sales price per ton of $219.70 for the three months ended March 31, 2024, we generated $3.1 million less in net sales from the 14,300 fewer tons of essential ingredients sold in the three months ended March 31, 2024 as compared to the same period in 2023. Marketing and Distribution Segment Net sales of alcohol from our marketing and distribution segment, excluding intersegment sales, declined by $30.0 million, or 36%, to $54.5 million for the three months ended March 31, 2024 as compared to $84.5 million for the same period in 2023. Our volume of third-party alcohol sold reported gross by the segment declined by 4.2 million gallons, or 12%, to 29.7 million gallons for the three months ended March 31, 2024 as compared to 33.9 million gallons for the same period in 2023. With the segment’s average sales price per gallon of $1.83 for the three months ended March 31, 2024, we realized $7.7 million less in net sales from the 4.2 million fewer gallons of third-party alcohol sold gross in the three months ended March 31, 2024 as compared to the same period in 2023. The $0.66 per gallon, or 27%, decrease in the segment’s average sales price per gallon for the three months ended March 31, 2024 as compared to the same period in 2023 resulted in a $22.3 million decline in our net sales from third-party fuel-grade ethanol sold by the segment. - 20 - Western Production Segment Net sales of alcohol from our Western production segment declined by $0.7 million, or 3%, to $20.2 million for the three months ended March 31, 2024 as compared to $20.9 million for the same period in 2023. Our total volume of alcohol sold increased by 3.3 million gallons, or 42%, to 11.2 million gallons for the three months ended March 31, 2024 as compared to 7.9 million gallons for the same period in 2023. With the segment’s average sales price per gallon of $1.80 for the three months ended March 31, 2024, we generated $6.0 million more in net sales from the 3.3 million additional gallons of alcohol sold in the three months ended March 31, 2024 as compared to the same period in 2023. However, the decrease of $0.84, or 32%, in the segment’s average sales price per gallon for the three months ended March 31, 2024 as compared to the same period in 2023 reduced our net sales from the segment by $6.7 million. Net sales of essential ingredients from our Western production segment declined by $0.6 million, or 7%, to $7.8 million for the three months ended March 31, 2024 as compared to $8.4 million for the same period in 2023. Our total volume of essential ingredients sold increased by 28,400 tons, or 39%, to 100,800 tons for the three months ended March 31, 2024 from 72,400 tons for the same period in 2023. With the segment’s average sales price per ton of $77.64 for the three months ended March 31, 2024, we generated $2.2 million more in net sales from the 28,400 additional tons of essential ingredients sold in the three months ended March 31, 2024 as compared to the same period in 2023. The decrease of $37.73, or 33%, in our average sales price per ton for the three months ended March 31, 2024 as compared to the same period in 2023 reduced our net sales of essential ingredients from the segment by $2.8 million. Corporate and other Net sales of alcohol from corporate and other declined by $1.1 million, or 27%, to $3.0 million for the three months ended March 31, 2024 as compared to $4.1 million for the same period in 2023. These sales are from Eagle Alcohol’s business. Cost of Goods Sold and Gross Profit (Loss) Our consolidated gross loss declined to a gross loss of $2.4 million for the three months ended March 31, 2024 from a gross loss of $3.2 million for the same period in 2023, representing a gross margin of negative 1.0% for the three months ended March 31, 2024 and 2023. With sales volumes relatively flat, our consolidated gross loss declined due to slightly higher average commodity margins from proportionally lower production input costs despite lower sales prices, and increased sales of higher-margin specialty alcohol as well as the positive impact of our efforts to increase returns on our essential ingredients, reduce costs and expand our operating efficiencies. Three significant additional factors impacted our gross profit in the first quarter. First, we recognized $4.9 million in incremental costs, compared to $8.6 million for the same period in 2023, from our natural gas hedging activities, which benefitted us during the cold spike in January but resulted in losses for the remainder of the quarter due to unseasonably moderate weather conditions and ensuing historically low natural gas prices resulting from higher natural gas production and supply coupled with lower consumer demand. Second, extreme cold weather conditions in January at our Pekin Campus restricted barge deliveries and increased standby fees. To manage inventory levels, we transported more product by rail, a higher cost mode of transportation. Cold weather conditions also required us to shift to lower margin feed products and reduced our production rates across our Pekin Campus, hindering our ability to produce specialty alcohol at full capacity. Finally, first quarter production at our Colombia facility was hampered by equipment issues which we addressed by extending the facility’s regularly scheduled outage in mid-March to install equipment upgrades that will increase reliability and reduce ongoing maintenance costs. Our repairs and maintenance expense for the first quarter was $7.5 million, an increase of $1.0 million compared to the same period in 2023. This increase reflects accelerated repairs and maintenance costs, and we remain on track to achieve our overall estimate of $34 million in repairs and maintenance expenses for 2024. Pekin Campus Production Segment Our Pekin Campus production segment’s gross profit, net of intercompany activity, improved by $6.5 million to a gross profit of $4.9 million for the three months ended March 31, 2024 as compared to a gross loss of $1.6 million for the same period in 2023. Of this improvement, $6.4 million is attributable to higher fuel-grade ethanol margins and $0.1 million is attributable to higher sales volumes. - 21 - Marketing and Distribution Segment Our marketing and distribution segment’s gross profit, net of intercompany activity, declined by $0.6 million to a gross profit of $0.7 million for the three months ended March 31, 2024 as compared to a gross profit of $1.3 million for the same period in 2023. Of this decline, $0.5 million is attributable to lower margins from sales of third-party fuel-grade ethanol and $0.1 million is attributable to lower sales volumes for the three months ended March 31, 2024 as compared to the same period in 2023. Western Production Segment Our Western production segment’s gross profit, net of intercompany activity, declined by $3.7 million to a gross loss of $8.3 million for the three months ended March 31, 2024 as compared to a gross loss of $4.6 million for the same period in 2023. Of this decline, $1.3 million is attributable to lower renewable fuel margins and $2.4 million is attributable to higher sales volumes of both renewable fuel and essential ingredients at lower margins. Corporate and other Gross profit from corporate and other declined by $1.4 million to a gross profit of $0.3 million for the three months ended March 31, 2024 as compared to $1.7 million for the same period in 2023, all of which were from Eagle Alcohol’s business. Selling, General and Administrative Expenses The following table presents our selling, general and administrative, or SG&A, expenses in dollars and as a percentage of net sales (in thousands, except percentages): Three Months Ended March 31, Change in 2024 2023 Dollars Percent Selling, general and administrative expenses $ 7,932 $ 7,882 $ 50 0.6 % Percentage of net sales 3.3 % 2.5 % Our SG&A expenses were essentially flat for the three months ended March 31, 2024 as compared to the same period in 2023. However, as a percentage of net sales, our SG&A expenses increased primarily due to additional legal and other costs associated with progress on our strategic capital improvement projects. Interest Expense, net The following table presents our interest expense, net, in dollars and as a percentage of net sales (in thousands, except percentages): Three Months Ended March 31, Change in 2024 2023 Dollars Percent Interest expense, net $ 1,634 $ 1,565 $ 69 4.4 % Percentage of net sales 0.7 % 0.5 % - 22 - Our interest expense, net, increased for the three months ended March 31, 2024 as compared to the same period in 2023. The less than $0.1 million period over period increase in interest expense, net, is primarily due to higher debt balances compared to the prior year period. Net Loss Available to Common Stockholders The following table presents our net loss available to common stockholders in dollars and as a percentage of net sales (in thousands, except percentages): Three Months Ended March 31, Change in 2024 2023 Dollars Percent Net loss available to Common Stockholders $ (12,040 ) $ (13,478 ) $ 1,438 (10.7 ) % Percentage of net sales (5.0 )% (4.3 )% The decrease in net loss available to common stockholders is primarily due to lower net sales at negative margins and a decline of $0.6 million in asset impairments for the three months ended March 31, 2024 as compared to the same period in 2023. Liquidity and Capital Resources During the three months ended March 31, 2024, we funded our operations primarily from proceeds from cash on hand, cash flow from our operations, and Kinergy’s operating line of credit. In addition to funding our operations, our capital resources were used to advance our capital improvement projects and make an annual payment for our acquisition of Eagle Alcohol. As of March 31, 2024, we had $42.1 million in cash, cash equivalents and restricted cash, $25.9 million available for borrowing under Kinergy’s operating line of credit and $65.0 million that may be available for capital improvement projects under our Orion term loan, subject to certain conditions. We believe we have sufficient liquidity to meet our anticipated working capital, debt service and other liquidity needs for the next twelve months from the date of this report. Quantitative Year-End Liquidity Status We believe that the following amounts provide insight into our liquidity and capital resources. The following selected financial information should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report (dollars in thousands). March 31, 2024 December 31, 2023 Change Cash, cash equivalents and restricted cash $ 42,072 $ 45,480 (7.5 )% Current assets $ 150,843 $ 168,770 (10.6 )% Property and equipment, net $ 248,901 $ 248,748 0.1 % Current liabilities $ 55,054 $ 65,288 (15.7 )% Long-term debt, noncurrent portion $ 84,069 $ 82,097 2.4 % Working capital $ 95,789 $ 103,482 (7.4 )% Working capital ratio 2.74 2.59 5.8 % - 23 - Restricted Net Assets At March 31, 2024, we had approximately $53.0 million of net assets at our subsidiaries that were not available to be transferred to Alto Ingredients, Inc. in the form of dividends, distributions, loans or advances due to restrictions contained in our subsidiaries’ credit facilities. Changes in Working Capital and Cash Flows Working capital declined to $95.8 million at March 31, 2024 from $103.5 million at December 31, 2023 as a result of a decrease of $17.9 million in current assets, partially offset by a decrease of $10.2 million in current liabilities. Current assets declined primarily due to a decrease in inventories from reduced production volumes. Our current liabilities decreased primarily due to lower accounts payable and accrued liabilities as a result of timing of payments, and a decrease in derivative liabilities from changes in commodity prices for open contracts. Our cash, cash equivalents and restricted cash declined by $3.4 million due to $6.0 million in cash used in our investing activities, partially offset by $1.4 million in cash provided by our operating activities and $1.2 million in cash provided by our financing activities. Cash provided by our Operating Activities Our cash flow provided by our operations was $1.4 million for the three months ended March 31, 2024 as compared to $23.3 million of cash used in our operating activities for the same period in 2023. Specific factors that contributed to the change in cash provided by our operating activities include: ● an increase of $22.0 million related to payments of accounts payable and accrued liabilities due to their timing; and ● an increase of $9.9 million related to lower inventories due to reduced production volumes. These amounts were partially offset by: ● a decrease of $5.1 million related to higher period-end commodity prices applicable to our derivative instruments; ● a decrease of $1.5 million related to lower accounts receivable balances due to the timing of collections; and ● a decrease of $1.4 million in net loss due to lower sales volumes at negative margins. Cash used in our Investing Activities We used $4.6 million in cash during the quarter for capital expenditures to fund additions to property and equipment and $1.4 million in cash to make contingent purchase price payments for our acquisition of Eagle Alcohol. Our capital expenditures for the first quarter are in line with our overall $25 million capital expenditure budget for 2024. Cash provided by our Financing Activities Cash provided by our financing activities was $1.2 million for the three months ended March 31, 2024, which reflects net proceeds of $1.5 million from Kinergy’s operating line of credit, partially offset by $0.3 million paid in preferred dividends. - 24 - Kinergy’s Operating Line of Credit Kinergy maintains an operating line of credit for an aggregate amount of up to $100.0 million. The credit facility matures on November 7, 2027. Interest accrues under the credit facility at a rate equal to (i) the daily Secured Overnight Financing Rate, plus (ii) a specified applicable margin ranging from 1.25% to 1.75%. The credit facility’s monthly unused line fee is 0.25% to 0.375% of the amount by which the maximum credit under the facility exceeds the average daily principal balance during the immediately preceding month. Payments that may be made by Kinergy to Alto Ingredients, Inc. as reimbursement for management and other services provided by Alto Ingredients, Inc. to Kinergy are limited under the terms of the credit facility to $1.5 million per fiscal quarter. The credit facility also includes the accounts receivable of our indirect wholly-owned subsidiary, Alto Nutrients, LLC, or Alto Nutrients, as additional collateral. Payments that may be made by Alto Nutrients to Alto Ingredients, Inc. as reimbursement for management and other services provided by Alto Ingredients, Inc. to Alto Nutrients are limited under the terms of the credit facility to $0.5 million per fiscal quarter. Alto Nutrients markets our essential ingredients and also provides raw material procurement services to our subsidiaries. In addition, the amount of cash distributions that Kinergy or Alto Nutrients may make to us is also limited to up to 75% of excess cash flow. For all monthly periods in which excess borrowing availability falls below a specified level, Kinergy and Alto Nutrients must collectively maintain a fixed-charge coverage ratio (calculated as a twelve-month rolling earnings before interest, taxes, depreciation and amortization divided by the sum of interest expense, capital expenditures, principal payments of indebtedness, indebtedness from capital leases and taxes paid during such twelve-month rolling period) of at least 1.1 and are prohibited from incurring certain additional indebtedness (other than specific intercompany indebtedness). The obligations of Kinergy and Alto Nutrients under the credit facility are secured by all of our tangible and intangible assets. We believe Kinergy and Alto Nutrients are in compliance with the fixed-charge coverage ratio covenant as of the filing of this report. The following table sets forth the fixed-charge coverage ratio financial covenant and the actual results for the periods presented: Three Months Ended March 31, Years Ended December 31, 2024 2023 2023 2022 Fixed-Charge Coverage Ratio Requirement 1.10 1.10 1.10 1.10 Actual 4.66 3.89 5.22 3.54 Excess 3.56 2.79 4.12 2.44 Alto Ingredients, Inc. has guaranteed all of Kinergy’s obligations under the credit facility. As of March 31, 2024, Kinergy had an outstanding balance of $32.2 million and $25.9 million of unused borrowing availability under the credit facility. Orion Term Loan On November 7, 2022, we entered into a credit agreement with certain funds managed by Orion Infrastructure Capital, or Lenders, under which the Lenders extended a senior secured credit facility in the amount of up to $125.0 million, or Term Loan. The Term Loan is secured by a first priority lien on certain of our assets and a second priority lien on certain assets of Kinergy and Alto Nutrients. - 25 - The Lenders agreed to advance to us up to $125.0 million upon the satisfaction of certain conditions. Interest accrues on the unpaid principal amount of the Term Loan at a fixed rate of 10% per annum. The Term Loan matures on November 7, 2028, or earlier upon acceleration. We must prepay amounts outstanding under the Term Loan on a semi-annual basis in an amount equal to a percentage of our excess cash flow based on a specified leverage ratio, as follows: (i) if our leverage ratio is greater than or equal to 3.0x, then the mandatory prepayment amount will equal 100% of our excess cash flow, (ii) if our leverage ratio is less than 3.0x and greater than or equal to 1.5x, then the mandatory prepayment amount will equal 50% of our excess cash flow, and (iii) if our leverage ratio is less than 1.5x, then the mandatory prepayment amount will equal 25% of our excess cash flow. As of March 31, 2024, the principal amount outstanding under the Term Loan was $60,000,000. Other Cash Obligations As of March 31, 2024, we had future commitments for certain capital projects totaling $10.8 million. These commitments are scheduled to be satisfied through 2024. In connection with our acquisition of Eagle Alcohol, we committed to contingent payments of up to $4.1 million in cash over the next two years if certain targets are met.