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, or CCS, project; ● key regulatory developments relating to these projects or to our business; ● 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. 15 We also specialize in break bulk distribution of specialty alcohols, through our Eagle Alcohol subsidiary, produced by us and third-parties. We 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, renewable fuel 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. In January 2024, we temporarily hot-idled our Magic Valley facility 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 at the facility. We restarted our Magic Valley facility in July 2024. As market conditions change, we may increase, decrease or idle production at one or more operating facilities or resume operations at any idled facility. 16 Marketing and Distribution Segment We market and distribute all of the alcohols and essential ingredients we produce at our facilities. We also market and distribute 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 Over the last few years, we have used cash flow from operations and excess liquidity to fund capital upgrades and repairs and maintenance to strengthen our facilities and improve our long-term profitability. While these additional expenses can impact short-term results, our recent efforts have begun to yield operational improvements and we are confident of their long-term benefits. In the second quarter, we increased production at our Pekin Campus as a result of these initiatives, positioning us to benefit from improving ethanol margins. Our efforts further demonstrate our Pekin facilities’ advantages, including our ability to consistently operate them profitably. For example, despite over $5 million in expenses related to our biennial wet mill outage, which was completed on time and within budget, our Pekin Campus generated over $10 million of gross profit in the second quarter, up from over $4 million in the first quarter, reflecting the successful outcome of our capital upgrade and repairs and maintenance programs as well as higher crush margins starting in June. For the second quarter, the average Chicago crush margin increased to 21 cents per gallon compared to slightly above breakeven in the first quarter. In July, the average Chicago crush margin rose further to 48 cents per gallon. These improvements align with the optimism we expressed on our first quarter earnings call concerning stronger crush margins, solid corn supplies and growing export demand. Our Pekin Campus is fully operational and is taking advantage of the favorable summer driving season economics. We remain on track to achieve 90 million gallons or more of specialty alcohol sales in 2024 and we are encouraged by the demand from existing and new customers. Assuming crush margins hold at or near present levels, we expect to deliver strong third quarter financial results. Despite the strong performance from our Pekin Campus, our consolidated second quarter results and Adjusted EBITDA were negatively impacted by the cost of our biennial wet mill outage, preventative repairs and maintenance expenses at all our facilities, lower feed and carbon prices, particularly with respect to our Columbia facility, and losses on our hedging activities. We recorded $11.3 million in repairs and maintenance expense for the second quarter and remain on track for $34 million in total repairs and maintenance expense for all plants in 2024. 17 We are capitalizing on our Pekin Campus’s proximity to the Illinois River, which provides us with access to the Gulf of Mexico and an ability to export product. We are building a second loading dock at our Pekin Campus that will increase barge volume, reduce our overall transportation costs and provide critical redundancy. We expect the cost of the second dock will be less than $3 million. To generate long-term sustainable profitability, we have been actively expanding our revenue streams, such as with initiatives to produce higher quality specialty alcohols, a diversity of essential ingredients, including corn oil and high protein feed, and carbon capture and storage, or CCS. We expect that regulatory developments and carbon market fluctuations will affect our CCS initiative on an ongoing basis. Most recently, Illinois passed the SAFE CCS Act in July, establishing stringent safety, financial and insurance requirements for carbon dioxide pipelines. The Act also imposes a moratorium on the construction of new carbon pipelines until the federal Pipeline and Hazardous Materials Safety Administration finalizes its new safety rules, or July 1, 2026, whichever occurs sooner. This timing aligns with our current proposed CCS project permitting and construction schedules. We believe the Act will add clarity for the industry on CCS projects, although we do anticipate increased compliance and other requirements. The CCS market remains dynamic. For example, on the economic front, current prices in Low Carbon Fuel Standard markets are at historic lows and voluntary carbon markets are nascent. As a result, we cannot project with certainty, beyond the value of 45Q tax credits that begin at $85 per metric ton, what the dollar values of the associated environmental attributes will be over the life of our proposed CCS project. Given our plans to take a capital-light approach to this project, we must align with our various partners so that each party bears appropriate risks while retaining appropriate financial benefits. Given these evolving dynamics, it is important that we pursue our CCS project with the right partners. We believe we are doing so effectively as we continue to work collaboratively with Vault and other parties. We continue to invest in our Western plants, which were built at a time when destination plants delivered a solid and differentiated value proposition. As competition and corn basis increased and carbon values declined, we began further investing in these plants to broaden our revenue streams and improve profitability. Our ultimate goal is to optimize their value, which could include operating them long-term as part of our portfolio of production assets or evaluating the sale of one or both plants. At our Magic Valley plant, we continue to work with our high-protein system vendor, Harvesting Technology, to produce increased levels of corn oil and higher protein feed products that garner higher prices. In January, we hot-idled our Magic Valley plant due to negative regional crush margins and to address the excess water and mass balance challenges that inhibited our ability to operate the plant at capacity and to achieve the target results from our corn oil and high protein system. We have implemented significant modifications that include installing additional equipment and adjusting designed process flows. In the second quarter, to optimize plant efficiency upon restart, we accelerated routine maintenance activities, including tuning other major plant equipment and operating systems, performing routine cleanings and flushing prior process residuals. We resumed operations at our Magic Valley facility in early July and we are encouraged by the initial results. We are currently running the plant at approximately 70% of capacity and expect to increase production rates in the coming weeks as we complete system upgrades. We intend to do so carefully to ensure the process remains balanced and our products meet quality expectations. We anticipate having a clearer picture in late summer, and in time for our third quarter earnings call, of the effectiveness of these system modifications and the general performance of the plant. The system’s effectiveness will be measured against project goals and system production targets to determine the advisability of rolling the system out to other plants. In the second quarter, we significantly improved production rates at our Columbia plant by addressing centrifuge limitations we experienced in the first quarter. As a result, we increased capacity utilization rates in the second quarter and anticipate further improvements as the summer driving season continues. We are currently working on other ways to improve the facility’s profitability and expect to share additional information in due course. At our Pekin Campus, we are seeing improvements of up to 10% of total ethanol production capacity utilization and up to 15% of total essential ingredients production. Total capital expenditures through the second quarter were $9.3 million and we continue to expect $25 million in total capital expenditures for the full year. We continue to make progress on the sustainability front and our customers have indicated their support of our efforts to continue to improve sustainability and lower our carbon footprint. In furtherance of those efforts, in July, our ICP and Pekin plants received the 2024 Bronze Medal Sustainability rating from EcoVadis, which honors the top 35% of companies assessed. EcoVadis is a globally recognized business sustainability rating service that sets corporate sustainability standards. 18 Use of Non-GAAP Financial Measures Management believes that certain financial measures not in accordance with generally accepted accounting principles, or GAAP, are useful measures of operations. Management provides EBITDA and Adjusted EBITDA as non-GAAP financial measures so that investors will have the same financial information that management uses, which may assist investors in properly assessing our performance on a period-over-period basis. We define EBITDA as unaudited consolidated net income (loss) before interest expense, interest income, provision for income taxes and depreciation and amortization expense. We define Adjusted EBITDA as unaudited consolidated net income (loss) before interest expense, interest income, 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 Income (Loss) Three Months Ended June 30, Six Months Ended June 30, (in thousands) (unaudited) 2024 2023 2024 2023 Consolidated net income (loss) $ (3,106 ) $ 7,595 $ (14,831 ) $ (5,571 ) Adjustments: Interest expense, net 1,669 1,734 3,303 3,299 Interest income (150 ) (190 ) (325 ) (411 ) Unrealized derivative (gains) losses (11,089 ) (1,474 ) (14,279 ) (7,400 ) Acquisition-related expense 675 700 1,350 1,400 Asset impairments — — — 574 Provision for income taxes — — — — Depreciation and amortization expense 6,074 5,680 11,802 11,735 Total adjustments (2,821 ) 6,450 1,851 9,197 Adjusted EBITDA $ (5,927 ) $ 14,045 $ (12,980 ) $ 3,626 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. 19 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 the following: Three Months Ended June 30, Percentage Six Months Ended June 30, Percentage 2024 2023 Variance 2024 2023 Variance Alcohol Sales (gallons in millions) Pekin Campus renewable fuel gallons sold 30.7 34.7 (11.5 )% 62.5 70.0 (10.7 )% Western production renewable fuel gallons sold 9.0 16.5 (45.5 )% 20.2 24.4 (17.2 )% Third-party renewable fuel gallons sold 34.4 26.6 29.3 % 64.1 60.5 6.0 % Total renewable fuel gallons sold 74.1 77.8 (4.8 )% 146.8 154.9 (5.2 )% Specialty alcohol gallons sold 21.0 16.6 26.5 % 47.3 38.0 24.5 % Total gallons sold 95.1 94.4 0.7 % 194.1 192.9 0.6 % Sales Price per Gallon Pekin Campus $ 1.98 $ 2.54 (22.0 )% $ 1.94 $ 2.46 (21.1 )% Western production $ 1.94 $ 2.69 (27.9 )% $ 1.86 $ 2.67 (30.3 )% Marketing and distribution $ 2.04 $ 2.73 (25.3 )% $ 1.94 $ 2.60 (25.4 )% Total $ 2.00 $ 2.63 (24.0 )% $ 1.93 $ 2.52 (23.4 )% Alcohol Production (gallons in millions) Pekin Campus 50.0 53.0 (5.7 )% 103.6 106.3 (2.5 )% Western production 8.6 17.5 (50.9 )% 18.3 24.8 (26.2 )% Total 58.6 70.5 (16.9 )% 121.9 131.1 (7.0 )% Corn Cost per Bushel Pekin Campus $ 4.50 $ 7.06 (36.3 )% $ 4.62 $ 6.83 (32.4 )% Western production $ 5.78 $ 8.14 (29.0 )% $ 5.84 $ 8.42 (30.6 )% Total $ 4.68 $ 7.32 (36.1 )% $ 4.81 $ 7.19 (33.1 )% Average Market Metrics PLATTS Ethanol price per gallon $ 1.79 $ 2.45 (26.9 )% $ 1.67 $ 2.33 (28.3 )% CME Corn cost per bushel $ 4.43 $ 6.25 (29.1 )% $ 4.39 $ 6.42 (31.6 )% Board corn crush per gallon (1) $ 0.21 $ 0.22 (4.5 )% $ 0.10 $ 0.03 233.3 % Essential Ingredients Sold (in thousands of tons) Pekin Campus Distillers grains 79.7 76.4 4.3 % 167.4 167.2 0.1 % CO 2 43.3 47.8 (9.4 )% 82.4 90.1 (8.5 )% Corn wet feed 24.8 15.0 65.3 % 50.4 41.7 20.9 % Corn dry feed 19.8 23.7 (16.5 )% 38.7 45.2 (14.4 )% Corn oil and germ 17.5 18.5 (5.4 )% 35.3 37.8 (6.6 )% Syrup and other 11.1 8.8 26.1 % 20.6 19.3 6.7 % Corn meal 8.0 10.2 (21.6 )% 16.3 19.6 (16.8 )% Yeast 5.8 6.9 (15.9 )% 11.5 13.3 (13.5 )% Total Pekin Campus 210.0 207.3 1.3 % 422.6 434.2 (2.7 )% Western production Distillers grains 61.8 109.1 (43.4 )% 133.6 163.1 (18.1 )% CO 2 15.1 13.2 14.4 % 28.4 26.8 6.0 % Syrup and other 2.0 32.9 (93.9 )% 16.2 36.4 (55.5 )% Corn oil 0.9 1.6 (43.8 )% 2.4 2.9 (17.2 )% Total Western Production 79.8 156.8 (49.1 )% 180.6 229.2 (21.2 )% Total Essential Ingredients Sold 289.8 364.1 (20.4 )% 603.2 663.4 (9.1 )% Essential Ingredients return % (2) Pekin Campus Return 48.8 % 41.3 % 18.2 % 50.0 % 43.8 % 14.2 % Western Production Return 35.1 % 30.3 % 15.8 % 37.4 % 33.2 % 12.7 % Consolidated Total Return 45.6 % 38.3 % 19.1 % 47.8 % 41.7 % 14.6 % (1) Assumes corn conversion of 2.80 gallons of alcohol per bushel of corn. (2) Essential ingredients revenues as a percentage of total corn costs consumed. 20 Net Sales, Cost of Goods Sold and Gross Profit The following table presents our net sales, cost of goods sold and gross profit in dollars and gross profit as a percentage of net sales (in thousands, except percentages): Three Months Ended June 30, Variance in Six Months Ended June 30, Variance in 2024 2023 Dollars Percent 2024 2023 Dollars Percent Net sales $ 236,468 $ 317,297 $ (80,829 ) (25.5 )% $ 477,097 $ 631,188 $ (154,091 ) (24.4 )% Cost of goods sold 228,915 300,116 (71,201 ) (23.7 )% 471,944 617,171 (145,227 ) (23.5 )% Gross profit $ 7,553 $ 17,181 $ (9,628 ) (56.0 )% $ 5,153 $ 14,017 $ (8,864 ) (63.2 )% Percentage of net sales 3.2 % 5.4 % 1.1 % 2.2 % Three Months ended June 30, 2024 as compared to the Three Months ended June 30, 2023 Net Sales The decrease in our consolidated net sales for the three months ended June 30, 2024 as compared to the same period in 2023 is primarily 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. In addition, we had lower sales of renewable fuel and essential ingredients due to the hot-idling of our Magic Valley plant in January 2024 and the biennial wet mill outage at our Pekin Campus for repairs and maintenance in April 2024. Pekin Campus Production Segment Net sales of alcohol from our Pekin Campus production segment declined by $27.0 million, or 21%, to $100.7 million for the three months ended June 30, 2024 as compared to $127.7 million for the same period in 2023. Our total volume of production gallons sold increased by 0.6 million gallons, or 1%, to 50.8 million gallons for the three months ended June 30, 2024 as compared to 50.2 million gallons for the same period in 2023. The decrease of $0.56, or 22%, in the segment’s average sales price per gallon for the three months ended June 30, 2024 as compared to the same period in 2023 reduced our net sales from the segment by $28.1 million. With the segment’s average sales price per gallon of $1.98 for the three months ended June 30, 2024, we generated $1.1 million more in net sales from the 0.6 million additional gallons of alcohol sold in the three months ended June 30, 2024 as compared to the same period in 2023. 21 Net sales of essential ingredients from our Pekin Campus production segment declined by $14.6 million, or 27%, to $39.4 million for the three months ended June 30, 2024 as compared to $54.0 million for the same period in 2023. Our total volume of essential ingredients sold increased by 2,700 tons, or 1%, to 210,000 tons for the three months ended June 30, 2024 from 207,300 tons for the same period in 2023. The decrease of $72.80, or 28%, in the segment’s average sales price per ton for the three months ended June 30, 2024 as compared to the same period in 2023 reduced our net sales from the segment by $15.0 million. With the segment’s average sales price per ton of $187.48 for the three months ended June 30, 2024, we generated $0.4 million in additional net sales from the 2,700 additional tons of essential ingredients sold in the three months ended June 30, 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 $2.5 million, or 3%, to $70.2 million for the three months ended June 30, 2024 as compared to $72.7 million for the same period in 2023. Our volume of third-party alcohol sold reported gross by the segment increased by 7.8 million gallons, or 29%, to 34.4 million gallons for the three months ended June 30, 2024 as compared to 26.6 million gallons for the same period in 2023. With the segment’s average sales price per gallon of $2.04 for the three months ended June 30, 2024, we realized $15.9 million in additional net sales from the 7.8 million additional gallons of third-party alcohol sold gross in the three months ended June 30, 2024 as compared to the same period in 2023. The $0.69 per gallon, or 25%, decrease in the segment’s average sales price per gallon for the three months ended June 30, 2024 as compared to the same period in 2023 resulted in a $18.4 million decline in our net sales from third-party fuel-grade ethanol sold by the segment. Western Production Segment Net sales of alcohol from our Western production segment declined by $26.9 million, or 61%, to $17.5 million for the three months ended June 30, 2024 as compared to $44.4 million for the same period in 2023. Our total volume of alcohol sold decreased by 7.5 million gallons, or 46%, to 9.0 million gallons for the three months ended June 30, 2024 as compared to 16.5 million gallons for the same period in 2023. With the segment’s average sales price per gallon of $1.94 for the three months ended June 30, 2024, we generated $14.6 million less in net sales from the 7.5 million fewer gallons of alcohol sold in the three months ended June 30, 2024 as compared to the same period in 2023. The decrease of $0.75, or 28%, in the segment’s average sales price per gallon for the three months ended June 30, 2024 as compared to the same period in 2023 reduced our net sales from the segment by $12.3 million. Net sales of essential ingredients from our Western production segment declined by $8.5 million, or 59%, to $5.9 million for the three months ended June 30, 2024 as compared to $14.4 million for the same period in 2023. Our total volume of essential ingredients sold decreased 77,000 tons, or 49%, to 79,800 tons for the three months ended June 30, 2024 from 156,800 tons for the same period in 2023. With the segment’s average sales price per ton of $74.56 for the three months ended June 30, 2024, we generated $5.7 million less in net sales from the 77,000 fewer tons of essential ingredients sold in the three months ended June 30, 2024 as compared to the same period in 2023. The decrease of $17.41, or 19%, in our average sales price per ton for the three months ended June 30, 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 $1.4 million, or 33%, to $2.8 million for the three months ended June 30, 2024 as compared to $4.2 million for the same period in 2023. These sales are from Eagle Alcohol’s business. 22 Cost of Goods Sold and Gross Profit (Loss) Our consolidated gross profit declined to $7.6 million for the three months ended June 30, 2024 from $17.2 million for the same period in 2023, representing a gross margin of 3.2% and 5.4% for the three months ended June 30, 2024 and 2023, respectively. With sales volumes of alcohols being relatively flat, our consolidated gross profit declined due to higher repairs and maintenance expense, totaling $11.3 million across all plants, and lower average sales prices for our essential ingredients, in particular, a compression on protein prices due to an increase in soybean meal supply, a consequence of production growth in soy crush driven by the demand for renewable diesel. Gross profit was also negatively impacted by historic low carbon market pricing at our Columbia plant and significantly higher realized derivative losses of $2.9 million compared to $5.5 million in derivative gains for the prior year period. Pekin Campus Production Segment Our Pekin Campus production segment’s gross profit, net of intercompany activity, declined by $3.7 million to a gross profit of $10.6 million for the three months ended June 30, 2024 as compared to $14.3 million for the same period in 2023. Of this decline, $3.8 million is attributable to lower alcohol sales margins, partially offset by $0.1 million attributable to higher sales volumes. Marketing and Distribution Segment Our marketing and distribution segment’s gross profit, net of intercompany activity, declined by $0.2 million to a gross profit of $0.8 million for the three months ended June 30, 2024 as compared to a gross profit of $1.0 million for the same period in 2023. Of this decline, $0.3 million is attributable to lower margins from sales of third-party fuel-grade ethanol, partially offset by $0.1 million attributable to higher sales volumes. Western Production Segment Our Western production segment’s gross profit, net of intercompany activity, declined by $4.8 million to a gross loss of $3.7 million for the three months ended June 30, 2024 as compared to a gross profit of $1.1 million for the same period in 2023. Of this decline, $7.8 million is attributable to lower renewable fuel margins, partially offset by $3.0 million attributable to lower sales volumes at negative margins. Corporate and other Gross profit from corporate and other declined by $0.9 million to a gross loss of $0.1 million for the three months ended June 30, 2024 as compared to a gross profit of $0.8 million for the same period in 2023, all of which were from Eagle Alcohol’s business. Six Months ended June 30, 2024 as compared to the Six Months ended June 30, 2023 Net Sales The decrease in our consolidated net sales for the six months ended June 30, 2024 as compared to the same period in 2023 is primarily 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 lower corn prices. In addition, we had lower sales of renewable fuel and essential ingredients due to the hot-idling of our Magic Valley plant in January 2024 and the biennial wet mill outage at our Pekin Campus for repairs and maintenance in April 2024. Pekin Campus Production Segment Net sales of alcohol from our Pekin Campus production segment declined by $51.1 million, or 20%, to $209.0 million for the six months ended June 30, 2024 as compared to $260.1 million for the same period in 2023. Our total volume of production gallons sold increased by 2.0 million gallons, or 2%, to 107.9 million gallons for the six months ended June 30, 2024 as compared to 105.9 million gallons for the same period in 2023. The decrease of $0.52, or 21%, in the segment’s average sales price per gallon for the six months ended June 30, 2024 as compared to the same period in 2023 reduced our net sales from the segment by $55.0 million. With the segment’s average sales price per gallon of $1.94 for the six months ended June 30, 2024, we generated $3.9 million more in net sales from the 2.0 million additional gallons of alcohol sold in the six months ended June 30, 2024 as compared to the same period in 2023. 23 Net sales of essential ingredients from our Pekin Campus production segment declined by $31.5 million, or 27%, to $86.1 million for the six months ended June 30, 2024 as compared to $117.6 million for the same period in 2023. Our total volume of essential ingredients sold declined by 11,600 tons, or 3%, to 422,600 tons for the six months ended June 30, 2024 from 434,200 tons for the same period in 2023. The decrease of $67.12, or 25%, in the segment’s average sales price per ton for the six months ended June 30, 2024 as compared to the same period in 2023 reduced our net sales from the segment by $29.1 million. With the segment’s average sales price per ton of $203.69 for the six months ended June 30, 2024, we generated $2.4 million less in net sales from the 11,600 fewer tons of essential ingredients sold in the six months ended June 30, 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 $32.4 million, or 21%, to $124.7 million for the six months ended June 30, 2024 as compared to $157.1 million for the same period in 2023. Our volume of third-party alcohol sold reported gross by the segment increased by 3.6 million gallons, or 6%, to 64.1 million gallons for the six months ended June 30, 2024 as compared to 60.5 million gallons for the same period in 2023. With the segment’s average sales price per gallon of $1.94 for the six months ended June 30, 2024, we realized $7.0 million in additional net sales from the 3.6 million additional gallons of third-party alcohol sold gross in the six months ended June 30, 2024 as compared to the same period in 2023. The $0.66 per gallon, or 25%, decrease in the segment’s average sales price per gallon for the six months ended June 30, 2024 as compared to the same period in 2023 resulted in a $39.4 million decline in our net sales from third-party fuel-grade ethanol sold by the segment. Western Production Segment Net sales of alcohol from our Western production segment declined by $27.6 million, or 42%, to $37.7 million for the six months ended June 30, 2024 as compared to $65.3 million for the same period in 2023. Our total volume of alcohol sold decreased by 4.2 million gallons, or 17%, to 20.2 million gallons for the six months ended June 30, 2024 as compared to 24.4 million gallons for the same period in 2023. With the segment’s average sales price per gallon of $1.86 for the six months ended June 30, 2024, we generated $7.8 million less in net sales from the 4.2 million fewer gallons of alcohol sold in the six months ended June 30, 2024 as compared to the same period in 2023. The decrease of $0.81, or 30%, in the segment’s average sales price per gallon for the six months ended June 30, 2024 as compared to the same period in 2023 reduced our net sales from the segment by $19.8 million. Net sales of essential ingredients from our Western production segment declined by $9.0 million, or 39%, to $13.8 million for the six months ended June 30, 2024 as compared to $22.8 million for the same period in 2023. Our total volume of essential ingredients sold decreased 48,600 tons, or 21%, to 180,600 tons for the six months ended June 30, 2024 from 229,200 tons for the same period in 2023. With the segment’s average sales price per ton of $76.28 for the six months ended June 30, 2024, we generated $3.7 million less in net sales from the 48,600 fewer tons of essential ingredients sold in the six months ended June 30, 2024 as compared to the same period in 2023. The decrease of $23.08, or 23%, in our average sales price per ton for the six months ended June 30, 2024 as compared to the same period in 2023 reduced our net sales of essential ingredients from the segment by $5.3 million. 24 Corporate and other Net sales of alcohol from corporate and other declined by $2.5 million, or 30%, to $5.8 million for the six months ended June 30, 2024 as compared to $8.3 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 profit declined to $5.2 million for the six months ended June 30, 2024 from $14.0 million for the same period in 2023, representing a gross margin of 1.1% and 2.2% for the six months ended June 30, 2024 and 2023, respectively. Our consolidated gross profit declined due to higher repairs and maintenance expense and lower average sales prices for our essential ingredients, in particular, a compression on protein prices due to an increase in soybean meal supply, a consequence of production growth in soy crush driven by the demand for renewable diesel. Gross profit was also negatively impacted by historic low carbon market pricing at our Columbia plant and significantly higher realized derivative losses compared to the prior year period. Pekin Campus Production Segment Our Pekin Campus production segment’s gross profit, net of intercompany activity, increased by $2.9 million to a gross profit of $15.5 million for the six months ended June 30, 2024 as compared to $12.6 million for the same period in 2023. Of this improvement, $2.6 million is attributable to higher alcohol sales margins and $0.3 million attributable to higher sales volumes. Marketing and Distribution Segment Our marketing and distribution segment’s gross profit, net of intercompany activity, declined by $0.8 million to a gross profit of $1.6 million for the six months ended June 30, 2024 as compared to a gross profit of $2.4 million for the same period in 2023. This decline is attributable primarily to lower margins from sales of third-party fuel-grade ethanol for the six months ended June 30, 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 $8.5 million to a gross loss of $12.0 million for the six months ended June 30, 2024 as compared to a gross loss of $3.5 million for the same period in 2023. Of this decline, $11.1 million is attributable to lower renewable fuel margins and hot-idling costs attributable to our Magic Valley facility, partially offset by $2.6 million attributable to lower sales volumes at negative margins. Corporate and other Gross profit from corporate and other declined by $2.4 million to a gross profit of $0.1 million for the six months ended June 30, 2024 as compared to $2.5 million for the same period in 2023, all of which were from Eagle Alcohol’s business. 25 Selling, General and Administrative Expenses The following table presents our selling, general and administrative, or SG&A, expenses in dollars and as a percentage of net sales (in thousands, except percentages): Three Months Ended June 30, Variance in Six Months Ended June 30, Variance in 2024 2023 Dollars Percent 2024 2023 Dollars Percent Selling, general and administrative expenses $ 8,961 $ 7,911 $ 1,050 13.3 % $ 16,893 $ 15,793 $ 1,100 7.0 % Percentage of net sales 3.8 % 2.5 % 3.5 % 2.5 % Our SG&A expenses increased for the three and six months ended June 30, 2024 as compared to the same periods in 2023. The period over period increases in SG&A expenses are primarily due to increased non-cash compensation and higher professional services fees from diligence work on strategic capital projects and other related up-front project costs, such as with respect to our CCS project, which are expensed until the project is at a stage where costs are capitalized. Net Income (Loss) Available to Common Stockholders The following table presents our net income (loss) available to common stockholders in dollars and as a percentage of net sales (in thousands, except percentages): Three Months Ended June 30, Variance in Six Months Ended June 30, Variance in 2024 2023 Dollars Percent 2024 2023 Dollars Percent Net income (loss) available to common stockholders $ (3,422 ) $ 7,184 $ (10,606 ) NM* $ (15,462 ) $ (6,198 ) $ (9,264 ) (149.5 )% Percentage of net sales (1.4 )% 2.3 % (3.2 )% (1.0 )% * Not meaningful. The decrease in our net income available to common stockholders for the three and six months ended June 30, 2024 as compared to the same periods in 2023 is primarily due to lower margins caused by increased repairs and maintenance expense, realized derivative losses from hedging activities, higher up-front project costs, and other factors affecting gross profit (loss) as discussed above. Liquidity and Capital Resources During the six months ended June 30, 2024, we funded our operations primarily from cash on hand 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 relating to our acquisition of Eagle Alcohol. As of June 30, 2024, we had $28.4 million in cash, cash equivalents and restricted cash, $30.3 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 term loan with Orion Infrastructure Capital, subject to certain conditions. We believe we have sufficient liquidity to meet our anticipated working capital, debt service and other liquidity needs to fund our operations for at least the next twelve months from the date of this report. We must, however, raise significant additional capital to advance and complete some of our capital improvement projects, including our CCS project. 26 Quantitative Period-End Liquidity Status We believe that the following amounts provide insight into our liquidity and capital resources. The following selected financial information should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report (dollars in thousands). June 30, 2024 December 31, 2023 Change Cash, cash equivalents and restricted cash $ 28,411 $ 45,480 (37.5 )% Current assets $ 153,658 $ 168,770 (9.0 )% Property and equipment, net $ 244,893 $ 248,748 (1.5 )% Current liabilities $ 49,767 $ 65,288 (23.8 )% Long-term debt, noncurrent portion $ 90,960 $ 82,097 10.8 % Working capital $ 103,891 $ 103,482 0.4 % Working capital ratio 3.09 2.59 19.3 % Restricted Net Assets At June 30, 2024, we had approximately $57.4 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 remained relatively flat at $103.9 million at June 30, 2024 compared to $103.5 million at December 31, 2023 due to a decrease of $15.5 million in current liabilities and a decrease of $15.1 million in current assets. Current assets declined primarily due to a decrease in cash, cash equivalents and restricted cash and a decrease in inventories, partially offset by an increase in accounts receivable and derivative assets for the six months ended June 30, 2024 as compared to the same period in 2023. Our current liabilities decreased primarily due to a decrease in accrued liabilities, derivative instruments and other current liabilities. Our cash, cash equivalents and restricted cash declined by $17.1 million primarily due to $12.3 million in cash used in our operating activities and $12.1 million in cash used in our investing activities, partially offset by $7.3 million in cash provided by our financing activities, as further detailed below. Cash used in our Operating Activities We used $12.3 million in cash for our operating activities during the six months ended June 30, 2024 as compared to $12.9 million in cash used in our operations for the same period in 2023. Specific factors that contributed to the change in cash from our operating activities include: ● an increase of $11.5 million related to changes in inventories due to changes in commodity prices; and ● a decrease of $15.0 million related to accounts payable and accrued liabilities due to the timing of payments. These amounts were partially offset by: ● an increase of $10.6 million related to changes in accounts receivable balances due to the timing of our collections; ● an increase of $9.3 million in our net loss primarily due to lower commodity margins; and ● a decrease of $6.4 million related to derivative instruments due to changes in commodity prices. 27 Cash used in our Investing Activities We used $12.1 million in cash during the six months ended June 30, 2024 to fund $9.3 million of additions to property and equipment, including for our capital improvement projects, and to fund $2.8 million of contingent purchase price payments for our acquisition of Eagle Alcohol. Cash provided by our Financing Activities Cash provided by our financing activities was $7.3 million for the six months ended June 30, 2024, which reflects net proceeds of $8.0 million from Kinergy’s operating line of credit, partially offset by $0.6 million paid in preferred stock dividends. 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 June 30, Years Ended December 31, 2024 2023 2023 2022 Fixed-Charge Coverage Ratio Requirement 1.10 1.10 1.10 1.10 Actual 4.29 3.89 5.22 3.54 Excess 3.19 2.79 4.12 2.44 Alto Ingredients, Inc. has guaranteed all of Kinergy’s obligations under the credit facility. As of June 30, 2024, Kinergy had an outstanding balance of $38.6 million and $30.3 million of unused borrowing availability under the credit facility. 28 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. 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 June 30, 2024, the principal amount outstanding under the Term Loan was $60,000,000. Other Cash Obligations As of June 30, 2024, we had future commitments for certain capital projects totaling $7.8 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 $2.7 million in cash in early 2025 if certain targets are met.