Alto Ingredients, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS. ALTO INGREDIENTS, INC. CONSOLIDATED BALANCE SHEETS (in thousands) September 30, December 31, 2024 2023 (unaudited) * ASSETS Current Assets: Cash and cash equivalents $ 33,591 $ 30,014 Restricted cash 4,903 15,466 Accounts receivable, net (net of allowance for credit losses of $ 50 and $ 85 , respectively) 52,038 58,729 Inventories 48,014 52,611 Derivative instruments 36 2,412 Other current assets 6,568 9,538 Total current assets 145,150 168,770 Property and equipment, net 238,892 248,748 Other Assets: Right of use operating lease assets, net 19,283 22,597 Intangible assets, net 8,057 8,498 Other assets 6,029 5,628 Total other assets 33,369 36,723 Total Assets $ 417,411 $ 454,241 * Amounts derived from the audited consolidated financial statements for the year ended December 31, 2023. See accompanying notes to consolidated financial statements. 1 ALTO INGREDIENTS, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) (in thousands, except par value) September 30, December 31, 2024 2023 (unaudited) * LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable $ 17,205 $ 20,752 Accrued liabilities 14,255 20,205 Current portion – operating leases 4,440 4,333 Derivative instruments 3,394 13,849 Other current liabilities 5,808 6,149 Total current liabilities 45,102 65,288 Long-term debt, net 83,342 82,097 Operating leases, net of current portion 15,740 19,029 Other liabilities 9,302 8,270 Total Liabilities 153,486 174,684 Commitments and Contingencies (Note 6) Stockholders’ Equity: Preferred stock, $ 0.001 par value; 10,000 shares authorized; Series A: 1,684 shares authorized; no shares issued and outstanding as of September 30, 2024 and December 31, 2023; Series B: 1,581 shares authorized; 927 shares issued and outstanding as of September 30, 2024 and December 31, 2023; liquidation preference of $ 18,075 as of September 30, 2024 1 1 Common stock, $ 0.001 par value; 300,000 shares authorized; 76,625 and 75,703 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively 77 76 Non-voting common stock, $ 0.001 par value; 3,553 shares authorized; 1 share issued and outstanding as of September 30, 2024 and December 31, 2023, respectively — — Additional paid-in capital 1,043,501 1,040,912 Accumulated other comprehensive income 2,481 2,481 Accumulated deficit ( 782,135 ) ( 763,913 ) Total Stockholders’ Equity 263,925 279,557 Total Liabilities and Stockholders’ Equity $ 417,411 $ 454,241 * Amounts derived from the audited consolidated financial statements for the year ended December 31, 2023. See accompanying notes to consolidated financial statements. 2 ALTO INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net sales $ 251,814 $ 318,127 $ 728,911 $ 949,315 Cost of goods sold 245,854 313,966 717,798 931,137 Gross profit 5,960 4,161 11,113 18,178 Selling, general and administrative expenses ( 7,510 ) ( 8,488 ) ( 24,403 ) ( 24,281 ) Gain on sale of assets 830 — 830 — Asset impairments — — — ( 574 ) Loss from operations ( 720 ) ( 4,327 ) ( 12,460 ) ( 6,677 ) Interest expense, net ( 1,867 ) ( 2,000 ) ( 5,170 ) ( 5,299 ) Income from cash grant — 2,812 — 2,812 Other income, net 146 26 358 104 Loss before provision for income taxes ( 2,441 ) ( 3,489 ) ( 17,272 ) ( 9,060 ) Provision for income taxes — — — — Net loss $ ( 2,441 ) $ ( 3,489 ) $ ( 17,272 ) $ ( 9,060 ) Preferred stock dividends $ ( 319 ) $ ( 319 ) $ ( 950 ) $ ( 946 ) Net loss available to common stockholders $ ( 2,760 ) $ ( 3,808 ) $ ( 18,222 ) $ ( 10,006 ) Net loss per share, basic and diluted $ ( 0.04 ) $ ( 0.05 ) $ ( 0.25 ) $ ( 0.14 ) Weighted-average shares outstanding, basic and diluted 73,835 73,191 73,364 73,464 See accompanying notes to consolidated financial statements. 3 ALTO INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands) Nine Months Ended September 30, 2024 2023 Operating Activities: Net loss $ ( 17,272 ) $ ( 9,060 ) Adjustments to reconcile net loss to Net cash provided by operating activities: Depreciation and amortization 17,860 17,382 Gains on derivative instruments ( 9,002 ) ( 2,463 ) Gain on sale of assets ( 830 ) — Asset impairments — 574 Stock-based compensation 3,650 2,718 Amortization of deferred financing fees 761 793 Amortization of debt discount 602 599 Credit loss recovery ( 23 ) ( 54 ) Changes in operating assets and liabilities: Accounts receivable 6,714 2,644 Inventories 8,434 9,536 Other assets 4,702 3,253 Operating leases ( 4,424 ) ( 4,014 ) Accounts payable and accrued liabilities ( 4,903 ) ( 11,679 ) Net cash provided by operating activities 6,269 10,229 Investing Activities: Additions to property and equipment ( 9,788 ) ( 24,611 ) Proceeds from sale of assets 400 — Deferred purchase price payments for Eagle Alcohol ( 2,800 ) ( 3,500 ) Net cash used in investing activities ( 12,188 ) ( 28,111 ) Financing Activities: Net (payments on) proceeds from Kinergy’s line of credit ( 117 ) 6,847 Stock repurchases — ( 2,683 ) Preferred stock dividends paid ( 950 ) ( 946 ) Net cash (used in) provided by financing activities ( 1,067 ) 3,218 Net change in cash, cash equivalents and restricted cash ( 6,986 ) ( 14,664 ) Cash, cash equivalents and restricted cash at beginning of period 45,480 49,525 Cash, cash equivalents and restricted cash at end of period $ 38,494 $ 34,861 Reconciliation of total cash, cash equivalents and restricted cash: Cash and cash equivalents $ 33,591 $ 26,162 Restricted cash 4,903 8,699 Total cash, cash equivalents and restricted cash $ 38,494 $ 34,861 Supplemental Information: Interest paid $ 6,211 $ 6,063 Proceeds from sale of assets – note receivable $ 1,012 $ — ROU Assets obtained in exchange for new lease obligations $ — $ 7,167 Capitalized interest $ 2,411 $ 2,185 See accompanying notes to consolidated financial statements. 4 ALTO INGREDIENTS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited, in thousands) Preferred Stock Common Stock Additional Paid-In Accumulated Accum. Other Comprehensive Shares Amount Shares Amount Capital Deficit Income Total Balances, January 1, 2024 927 $ 1 75,703 $ 76 $ 1,040,912 $ ( 763,913 ) $ 2,481 $ 279,557 Stock-based compensation — — — — 1,142 — — 1,142 Restricted stock issued to employees and directors, net of cancellations and tax — — 1,315 1 ( 1 ) — — — Preferred stock dividends — — — — — ( 315 ) — ( 315 ) Net loss — — — — — ( 11,725 ) — ( 11,725 ) Balances, March 31, 2024 927 $ 1 77,018 $ 77 $ 1,042,053 $ ( 775,953 ) $ 2,481 $ 268,659 Stock-based compensation — — — — 1,646 — — 1,646 Restricted stock cancellations and tax, net of issuances to employees and directors — — ( 373 ) — ( 1,060 ) — — ( 1,060 ) Preferred stock dividends — — — — — ( 316 ) — ( 316 ) Net loss — — — — — ( 3,106 ) — ( 3,106 ) Balances, June 30, 2024 927 $ 1 76,645 $ 77 $ 1,042,639 $ ( 779,375 ) $ 2,481 $ 265,823 Stock-based compensation — — — — 862 — — 862 Restricted stock cancellations and tax, net of issuances to employees and directors — — ( 20 ) — — — — — Preferred stock dividends — — — — — ( 319 ) — ( 319 ) Net loss — — — — — ( 2,441 ) — ( 2,441 ) Balances, September 30, 2024 927 $ 1 76,625 $ 77 $ 1,043,501 $ ( 782,135 ) $ 2,481 $ 263,925 Balances, January 1, 2023 927 $ 1 75,154 $ 75 $ 1,040,834 $ ( 734,643 ) $ 1,822 $ 308,089 Stock-based compensation — — — — 752 — — 752 Restricted stock issued to employees and directors, net of cancellations and tax — — 1,893 2 ( 8 ) — — ( 6 ) Stock repurchases — — ( 860 ) ( 1 ) ( 1,681 ) — — ( 1,682 ) Preferred stock dividends — — — — — ( 312 ) — ( 312 ) Net loss — — — — — ( 13,166 ) — ( 13,166 ) Balances, March 31, 2023 927 $ 1 76,187 $ 76 $ 1,039,897 $ ( 748,121 ) $ 1,822 $ 293,675 Stock-based compensation — — — — 959 — — 959 Restricted stock issued to employees and directors, net of cancellations and tax — — 125 — ( 120 ) — — ( 120 ) Stock repurchases — — ( 389 ) — ( 1,001 ) — — ( 1,001 ) Preferred stock dividends — — — — — ( 315 ) — ( 315 ) Net income — — — — — 7,595 — 7,595 Balances, June 30, 2023 927 $ 1 75,923 $ 76 $ 1,039,735 $ ( 740,841 ) $ 1,822 $ 300,793 Stock-based compensation — — — — 1,007 — — 1,007 Restricted stock issued to employees and directors, net of cancellations and tax — — 192 — 5 — — 5 Preferred stock dividends — — — — — ( 319 ) — ( 319 ) Net income — — — — — ( 3,489 ) — ( 3,489 ) Balances, September 30, 2023 927 $ 1 76,115 $ 76 $ 1,040,747 $ ( 744,649 ) $ 1,822 $ 297,997 See accompanying notes to consolidated financial statements. 5 ALTO INGREDIENTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND BASIS OF PRESENTATION. Organization and Business – The consolidated financial statements include, for all periods presented, the accounts of Alto Ingredients, Inc., a Delaware corporation, and its direct and indirect wholly-owned subsidiaries (collectively, the “Company”), including Kinergy Marketing LLC, an Oregon limited liability company (“Kinergy”), Alto Nutrients, LLC, a California limited liability company, Eagle Alcohol Company, LLC, a Delaware limited liability company (“Eagle Alcohol”), Alto Op Co., a Delaware corporation, Alto Pekin, LLC, a Delaware limited liability company, and Alto ICP, LLC, a Delaware limited liability company, and the Company’s production facilities in Oregon and Idaho. The Company produces and distributes renewable fuel, essential ingredients and specialty alcohols. The Company also specializes in break bulk distribution of specialty alcohols produced by the Company and third parties. The Company’s production facilities in Pekin, Illinois are located in the heart of the Corn Belt. The Company’s two production facilities in Oregon and Idaho are located in close proximity to both feed and renewable fuel customers. The Company has a combined alcohol production capacity of 350 million gallons per year and produces, on an annualized basis, over 1.6 million tons of essential ingredients, such as dried yeast, corn protein meal, corn protein feed, corn germ, and distillers grains and liquid feed used in commercial animal feed and pet foods. In addition, the Company markets and distributes renewable fuel produced by third parties. The Company focuses on five key markets: Health, Home & Beauty ; Food & Beverage ; Industry & Agriculture; Essential Ingredients ; and Renewable Fuels . Products for the Health, Home & Beauty market include specialty alcohols used in mouthwash, cosmetics, pharmaceuticals, hand sanitizers, disinfectants and cleaners. Products for the Food & Beverage markets include grain neutral spirits used in alcoholic beverages and vinegar as well as corn germ used for corn oils. Products for Industry & Agriculture markets include alcohols and other products for paint applications and fertilizers. Products for Essential Ingredients markets include dried yeast, corn protein meal, corn protein feed, corn germ, and distillers grains and liquid feed used in commercial animal feed and pet foods. Products for Renewable Fuels markets include fuel-grade ethanol and distillers corn oil used as a feedstock for renewable diesel and biodiesel fuels. As of September 30, 2024, all of the Company’s production facilities were operating. In January 2024, the Company temporarily hot-idled its Magic Valley facility to minimize losses from negative regional crush margins and to expedite the installation of additional equipment needed to achieve the intended production rate, quality and consistency from the corn oil and high protein system at the facility. The Company restarted its Magic Valley facility in July 2024. As market conditions change, the Company may increase, decrease or idle production at one or more operating facilities or resume operations at any idled facility. Basis of Presentation – Interim Financial Statements – The accompanying unaudited consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Results for interim periods should not be considered indicative of results for a full year. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. The accounting policies used in preparing these consolidated financial statements are the same as those described in Note 1 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included. All significant intercompany accounts and transactions have been eliminated in consolidation. Accounts Receivable and Allowance for Credit Losses – Trade accounts receivable are presented at original invoice amount, net of the allowance for credit losses. The Company sells specialty alcohols to large consumer product companies, sells renewable fuel to gasoline refining and distribution companies, sells essential ingredients such as dried yeast for human and pet food and to animal feed customers, including distillers grains to export markets, sells those same and other feed products to dairy operators and animal feedlots and sells corn oil to poultry and biodiesel customers, in each case generally without requiring collateral. The carrying amount of accounts receivable is reduced by a valuation allowance that reflects the Company’s best estimate of the amounts that will not be collected. The Company regularly reviews accounts receivable and based on assessments of current customer creditworthiness, estimates the portion, if any, of the customer balance that will not be collected. 6 Of the accounts receivable balance, approximately $ 46,887,000 and $ 51,315,000 at September 30, 2024 and December 31, 2023, respectively, were used as collateral under Kinergy’s operating line of credit. The allowance for credit losses was $ 50,000 and $ 85,000 as of September 30, 2024 and December 31, 2023, respectively. The Company recorded a credit reserve of $ 24,000 and credit loss recovery of $ 8,000 for the three months ended September 30, 2024 and 2023, respectively. The Company recorded a credit loss recovery of $ 23,000 and a credit loss recovery of $ 54,000 for the nine months ended September 30, 2024 and 2023, respectively. The Company does not have any off-balance sheet credit exposure related to its customers. Share Repurchase Program – On September 12, 2022, the Company announced a share repurchase program under which it may repurchase up to $ 50 million of its common stock with an initial purchase authorization of $ 10 million. The Company’s lender has further limited the Company’s purchase authorization to $ 5 million. Amounts in excess of the purchase authorization of $ 5 million will require additional lender consent and amounts in excess of the initial purchase authorization of $ 10 million will require additional board and preferred stockholder authorization. The share repurchase program does not have an expiration date, does not require the repurchase of any particular amount of shares, and may be implemented, modified, suspended or discontinued in whole or in part at any time and without further notice. As repurchases are made, the Company will retire the shares, resulting in a reduction of issued and outstanding shares. For the nine months ended September 30, 2023, the Company repurchased an aggregate of 1,249,000 shares for $ 2,683,000 in cash. The Company did not repurchase any shares during the three months ended September 30, 2024 and 2023 and for the nine months ended September 30, 2024. As of September 30, 2024, total repurchases under the program since its inception equaled 2,036,000 shares for approximately $ 5,000,000 in cash. Financial Instruments – The carrying values of cash and cash equivalents, restricted cash, accounts receivable, derivative assets, accounts payable, accrued liabilities and derivative liabilities are reasonable estimates of their fair values because of the short maturity of these items. The Company believes the carrying value of its long-term debt instruments are not considered materially different than fair value because they were recently issued. Income from Cash Grant – In 2022, the Company applied for the USDA’s Biofuel Producer Program (“BPP”). The program was created as part of the CARES Act in 2020, which allocated $ 700,000,000 to support biofuel producers who experienced market losses due to the pandemic. The cash grant is not required to be repaid. Since these funds are provided to subsidize historical losses of the Company, and are not required to be repaid, the Company accounted for the proceeds by analogy to International Accounting Standards 20, Accounting for Government Grants and Disclosure of Government Assistance , and reported the amount as income from cash grant in the accompanying consolidated statements of operations. The Company received $ 2,812,000 in cash from the BPP during the three and nine months ended September 30, 2023. The Company did not receive any such funds in the three and nine months ended September 30, 2024. Estimates and Assumptions – The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates are required as part of determining the allowance for credit losses, net realizable value of inventory, long-lived asset impairments, valuation allowances on deferred income taxes, the potential outcome of future tax consequences of events recognized in the Company’s financial statements or tax returns, and the valuation of assets acquired and liabilities assumed as a result of business combinations. Actual results and outcomes may materially differ from management’s estimates and assumptions. 2. SEGMENTS. The Company reports its financial and operating performance in three segments: (1) Pekin Campus production, which includes the production and sale of alcohols and essential ingredients produced at the Company’s Pekin, Illinois campus (2) marketing and distribution, which includes marketing and merchant trading for Company-produced alcohols and essential ingredients on an aggregated basis, and sales of fuel-grade ethanol sourced from third parties, and (3) Western production, which includes the production and sale of fuel-grade ethanol and essential ingredients produced at the Company’s two western production facilities on an aggregated basis, neither of which are individually so significant to be considered a separately reportable segment. 7 The following tables set forth certain financial data for the Company’s operating segments (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net Sales Pekin Campus, recorded as gross: Alcohol sales $ 106,459 $ 128,554 $ 315,494 $ 388,629 Essential ingredient sales 41,217 51,634 127,297 169,220 Intersegment sales 321 363 927 1,120 Total Pekin Campus sales 147,997 180,551 443,718 558,969 Marketing and distribution: Alcohol sales, gross $ 54,531 $ 58,805 $ 179,118 $ 215,741 Alcohol sales, net 71 74 169 292 Intersegment sales 2,862 3,392 8,002 8,734 Total marketing and distribution sales 57,464 62,271 187,289 224,767 Western production, recorded as gross: Alcohol sales $ 36,395 $ 57,159 $ 74,084 $ 122,477 Essential ingredient sales 10,408 17,841 24,184 40,614 Intersegment sales 8 37 ( 122 ) 99 Total Western production sales 46,811 75,037 98,146 163,190 Corporate and other 2,733 4,060 8,565 12,342 Intersegment eliminations ( 3,191 ) ( 3,792 ) ( 8,807 ) ( 9,953 ) Net sales as reported $ 251,814 $ 318,127 $ 728,911 $ 949,315 Cost of goods sold: Pekin Campus $ 141,823 $ 179,995 $ 423,135 $ 546,591 Marketing and distribution 53,553 58,051 176,676 212,923 Western production 49,079 73,584 112,762 165,401 Corporate and other 2,952 3,538 8,690 9,322 Intersegment eliminations ( 1,553 ) ( 1,202 ) ( 3,465 ) ( 3,100 ) Cost of goods sold as reported $ 245,854 $ 313,966 $ 717,798 $ 931,137 Gross profit (loss): Pekin Campus $ 6,174 $ 556 $ 20,583 $ 12,378 Marketing and distribution 3,911 4,220 10,613 11,844 Western production ( 2,268 ) 1,453 ( 14,616 ) ( 2,211 ) Corporate and other ( 219 ) 522 ( 125 ) 3,020 Intersegment eliminations ( 1,638 ) ( 2,590 ) ( 5,342 ) ( 6,853 ) Gross profit as reported $ 5,960 $ 4,161 $ 11,113 $ 18,178 Loss before provision for income taxes: Pekin Campus $ 1,997 $ ( 1,956 ) $ 8,083 $ 3,716 Marketing and distribution 1,626 2,403 3,733 6,019 Western production ( 4,119 ) ( 20 ) ( 21,075 ) ( 6,497 ) Corporate and other ( 1,945 ) ( 3,916 ) ( 8,013 ) ( 12,298 ) $ ( 2,441 ) $ ( 3,489 ) $ ( 17,272 ) $ ( 9,060 ) Depreciation and amortization: Pekin Campus $ 5,328 $ 4,961 $ 15,733 $ 14,778 Western production 502 458 1,445 1,921 Corporate and other 228 228 682 683 $ 6,058 $ 5,647 $ 17,860 $ 17,382 Interest expense, net of capitalized interest: Pekin Campus $ 496 $ 108 $ 1,083 $ ( 527 ) Marketing and distribution 98 111 291 713 Western production 619 678 1,848 173 Corporate and other 654 1,103 1,948 4,940 $ 1,867 $ 2,000 $ 5,170 $ 5,299 8 The following table sets forth the Company’s total assets by operating segment (in thousands): September 30, 2024 December 31, 2023 Total assets: Pekin Campus $ 227,491 $ 251,048 Marketing and distribution 90,215 101,196 Western production 63,920 57,533 Corporate and other 35,785 44,464 $ 417,411 $ 454,241 3. INVENTORIES. Inventories consisted primarily of bulk ethanol, specialty alcohols, corn, essential ingredients and unleaded fuel, and are valued at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Inventory is net of a valuation adjustment of $ 203,000 and $ 2,201,000 as of September 30, 2024 and December 31, 2023, respectively. Inventory balances consisted of the following (in thousands): September 30, 2024 December 31, 2023 Finished goods $ 27,766 $ 35,765 Work in progress 4,788 5,063 Raw materials 9,858 10,313 Other 5,602 1,470 Total $ 48,014 $ 52,611 4. DERIVATIVES. The business and activities of the Company expose it to a variety of market risks, including risks related to changes in commodity prices. The Company monitors and manages these financial exposures as an integral part of its risk management program. This program recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effects that market volatility could have on operating results. Commodity Risk – Cash Flow Hedges – The Company uses derivative instruments to protect cash flows from fluctuations caused by volatility in commodity prices for periods of up to eighteen months to protect gross profit margins from potentially adverse effects of market and price volatility on alcohol sales and purchase commitments where the prices are set at a future date and/or if the contracts specify a floating or index-based price. In addition, the Company hedges anticipated sales of alcohol to minimize its exposure to the potentially adverse effects of price volatility. These derivatives may be designated and documented as cash flow hedges and effectiveness is evaluated by assessing the probability of the anticipated transactions and regressing commodity futures prices against the Company’s purchase and sales prices. Ineffectiveness, which is defined as the degree to which the derivative does not offset the underlying exposure, is recognized immediately in cost of goods sold. For the three and nine months ended September 30, 2024 and 2023, the Company did not designate any of its derivatives as cash flow hedges. Commodity Risk – Non-Designated Hedges – The Company uses derivative instruments to lock in prices for certain amounts of corn and alcohols by entering into exchange-traded futures contracts or options for those commodities. These derivatives are not designated for hedge accounting treatment. The changes in fair value of these contracts are recorded on the balance sheet and recognized immediately in cost of goods sold. The Company recognized net losses of $ 2,566,000 and net losses $ 2,711,000 as the change in the fair value of these contracts for the three months ended September 30, 2024 and 2023, respectively. The Company recognized net gains of $ 9,002,000 and $ 2,463,000 as the change in the fair value of these contracts for the nine months ended September 30, 2024 and 2023, respectively. 9 Non-Designated Derivative Instruments – The classification and amounts of the Company’s derivatives not designated as hedging instruments, and related cash collateral balances, are as follows (in thousands): As of September 30, 2024 Assets Liabilities Type of Instrument Balance Sheet Location Fair Value Balance Sheet Location Fair Value Cash collateral balance Restricted cash $ 4,903 Commodity contracts Derivative instruments $ 36 Derivative instruments $ 3,394 As of December 31, 2023 Assets Liabilities Type of Instrument Balance Sheet Location Fair Value Balance Sheet Location Fair Value Cash collateral balance Restricted cash $ 15,466 Commodity contracts Derivative instruments $ 2,412 Derivative instruments $ 13,849 The above amounts represent the gross balances of the contracts; however, the Company does have a right of offset with each of its derivative brokers, but the Company’s intent is to close out positions individually, therefore, the positions are reported at gross. The classification and amounts of the Company’s realized and unrealized gains and losses for its derivatives not designated as hedging instruments are as follows (in thousands): Realized Gains For the Three Months Ended September 30, Type of Instrument Statements of Operations Location 2024 2023 Commodity contracts Cost of goods sold $ 3,633 $ 6,206 $ 3,633 $ 6,206 Realized Gains For the Nine Months Ended September 30, Type of Instrument Statements of Operations Location 2024 2023 Commodity contracts Cost of goods sold $ 923 $ 3,980 $ 923 $ 3,980 Unrealized Losses For the Three Months Ended September 30, Type of Instrument Statements of Operations Location 2024 2023 Commodity contracts Cost of goods sold $ ( 6,199 ) $ ( 8,917 ) $ ( 6,199 ) $ ( 8,917 ) 10 Unrealized Gains (Losses) For the Nine Months Ended September 30, Type of Instrument Statements of Operations Location 2024 2023 Commodity contracts Cost of goods sold $ 8,079 $ ( 1,517 ) $ 8,079 $ ( 1,517 ) 5. DEBT. Long-term borrowings are summarized as follows (in thousands): September 30, 2024 December 31, 2023 Kinergy line of credit $ 30,572 $ 30,690 Orion term loan 60,000 60,000 90,572 90,690 Less unamortized debt discount ( 3,291 ) ( 3,893 ) Less unamortized debt financing costs ( 3,939 ) ( 4,700 ) Less current portion — — Long-term debt $ 83,342 $ 82,097 Excess Availability – As of September 30, 2024, Kinergy had $ 27.2 million in unused borrowing availability under its line of credit with Wells Fargo Bank and the Company had $ 65.0 million that may be available for capital improvement projects under its term loan with Orion Infrastructure Capital, subject to certain conditions. At September 30, 2024, the interest rates for the Kinergy line of credit and the Orion term loan were 6.43 % and 10.00 %, respectively. 6. COMMITMENTS AND CONTINGENCIES. Sales Commitments – At September 30, 2024, the Company had entered into sales contracts with its major customers to sell certain quantities of alcohol and essential ingredients. The Company had open alcohol indexed-price contracts for 70,128,000 gallons as of September 30, 2024 and open fixed-price alcohol sales contracts totaling $ 112,966,000 as of September 30, 2024. The Company had open fixed-price sales contracts for essential ingredients totaling $ 6,797,000 and open indexed-price sales contracts of essential ingredients for 44,000 tons as of September 30, 2024. These sales contracts are scheduled to be completed throughout 2024 and 2025. Purchase Commitments – At September 30, 2024, the Company had indexed-price purchase contracts to purchase 14,468,000 gallons of alcohol and fixed-price purchase contracts to purchase $ 1,517,000 of alcohol from its suppliers. The Company had fixed-price purchase contracts to purchase $ 23,996,000 of corn from its suppliers as of September 30, 2024. The Company had indexed-price purchase contracts for natural gas totaling 5,592,000 MMBTU as of September 30, 2024. The Company also had future commitments for certain capital projects totaling $ 8,616,000 . These purchase commitments are scheduled to be satisfied throughout 2024 and 2025. 11 Litigation – General – The Company is subject to various claims and contingencies in the ordinary course of its business, including those related to litigation, business transactions, employee-related matters, environmental regulations, and others. When the Company is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the Company will record a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the claim if the likelihood of a potential loss is reasonably possible and the amount involved could be material. While the Company can provide no assurances, the Company does not expect that any of its pending legal proceedings will have a material impact on the Company’s financial condition or results of operations. 7. PENSION AND RETIREMENT BENEFIT PLANS. The Company sponsors a defined benefit pension plan (the “Retirement Plan”) and a healthcare and life insurance plan (the “Postretirement Plan”). The Retirement Plan is noncontributory and covers only “grandfathered” unionized employees at the Company’s Pekin, Illinois facility who fulfill minimum age and service requirements. Benefits are based on a prescribed formula based upon the employee’s years of service. The Retirement Plan, which is part of a collective bargaining agreement, covers only union employees hired prior to November 1, 2010. The Company uses a December 31 measurement date for its Retirement Plan. The Company’s funding policy is to make the minimum annual contribution required by applicable regulations. As of December 31, 2023, the Retirement Plan’s accumulated projected benefit obligation was $ 18.6 million, with a fair value of plan assets of $ 18.5 million. The underfunded amount of $ 0.1 million is recorded on the Company’s consolidated balance sheet in other liabilities. For the three months ended September 30, 2024, the Retirement Plan’s net periodic expense was $ 13,000 , comprised of $ 222,000 in interest cost and $ 67,000 in service cost, partially offset by $ 276,000 of expected return on plan assets. For the nine months ended September 30, 2024, the Retirement Plan’s net periodic expense was $ 39,000 , comprised of $ 666,000 in interest cost and $ 201,000 in service cost, partially offset by $ 828,000 of expected return on plan assets. For the three months ended September 30, 2023, the Retirement Plan’s net periodic expense was $ 39,000 , comprised of $ 225,000 in interest cost and $ 62,000 in service cost, partially offset by $ 248,000 of expected return on plan assets. For the nine months ended September 30, 2023, the Retirement Plan’s net periodic expense was $ 117,000 , comprised of $ 675,000 in interest cost and $ 186,000 in service cost, partially offset by $ 744,000 of expected return on plan assets. The Postretirement Plan provides postretirement medical benefits and life insurance to certain “grandfathered” unionized employees at the Company’s Pekin, Illinois facility. Employees hired after December 31, 2000 are not eligible to participate in the Postretirement Plan. The Postretirement Plan is contributory, with contributions required at the same rate as active employees. Benefit eligibility under the plan reduces at age 65 from a defined benefit to a defined dollar cap based upon years of service. As of December 31, 2023, the Postretirement Plan’s accumulated projected benefit obligation was $ 4.3 million and is recorded on the Company’s consolidated balance sheet in other liabilities. The Company’s funding policy is to make the minimum annual contribution required by applicable regulations. For the three months ended September 30, 2024, the Postretirement Plan’s net periodic expense was $ 54,000 , comprised of $ 49,000 in interest cost and $ 5,000 in service cost. For the nine months ended September 30, 2024, the Postretirement Plan’s net periodic expense was $ 162,000 , comprised of $ 147,000 in interest cost and $ 15,000 in service cost. For the three months ended September 30, 2023, the Postretirement Plan’s net periodic expense was $ 36,000 , comprised of $ 46,000 of interest cost and $ 3,000 of service cost, partially offset by $ 13,000 in amortization of gains. For the nine months ended September 30, 2023, the Postretirement Plan’s net periodic expense was $ 108,000 , comprised of $ 138,000 of interest cost and $ 9,000 of service cost, partially offset by $ 39,000 in amortization of gains. 12 8. FAIR VALUE MEASUREMENTS. The fair value hierarchy prioritizes the inputs used in valuation techniques into three levels, as follows: ● Level 1 – Observable inputs – unadjusted quoted prices in active markets for identical assets and liabilities; ● Level 2 – Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data; and ● Level 3 – Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable. For fair value measurements using significant unobservable inputs, a description of the inputs and the information used to develop the inputs is required along with a reconciliation of Level 3 values from the prior reporting period. Pooled separate accounts – Pooled separate accounts invest primarily in domestic and international stocks, commercial paper or single mutual funds. The net asset value is used as a practical expedient to determine fair value for these accounts. Each pooled separate account provides for redemptions by the Retirement Plan at reported net asset values per share, with little to no advance notice requirement, therefore these funds are classified within Level 2 of the valuation hierarchy. Other Derivative Instruments – The Company’s other derivative instruments consist of commodity positions. The fair values of the commodity positions are based on quoted prices on the commodity exchanges and are designated as Level 1 inputs. The following table summarizes recurring and nonrecurring fair value measurements by level at September 30, 2024 (in thousands): Fair Value Level 1 Level 2 Level 3 Assets: Derivative instruments $ 36 $ 36 $ — $ — Liabilities: Derivative instruments $ ( 3,394 ) $ ( 3,394 ) $ — $ — The following table summarizes recurring and nonrecurring fair value measurements by level at December 31, 2023 (in thousands): Benefit Plan Fair Percentage Value Level 1 Level 2 Level 3 Allocation Assets: Derivative instruments $ 2,412 $ 2,412 $ — $ — Defined benefit plan assets(1) (pooled separate accounts): Large U.S. Equity(2) 5,608 — 5,608 — 30 % Small/Mid U.S. Equity(3) 3,350 — 3,350 — 18 % International Equity(4) 2,682 — 2,682 — 15 % Fixed Income(5) 6,845 — 6,845 — 37 % $ 20,897 $ 2,412 $ 18,485 $ — Liabilities: Derivative instruments $ 13,849 $ 13,849 $ — $ — (1) Included in other assets in the consolidated balance sheets. (2) This category includes investments in funds comprised of equity securities of large U.S. companies. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. (3) This category includes investments in funds comprised of equity securities of small- and medium-sized U.S. companies. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. (4) This category includes investments in funds comprised of equity securities of foreign companies including emerging markets. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. (5) This category includes investments in funds comprised of U.S. and foreign investment-grade fixed income securities, high-yield fixed income securities that are rated below investment-grade, U.S. treasury securities, mortgage-backed securities, and other asset-backed securities. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. 13 9. EARNINGS PER SHARE. The following tables compute basic and diluted earnings per share (in thousands, except per share data): Three Months Ended September 30, 2024 Loss Numerator Shares Denominator Per-Share Amount Net loss $ ( 2,441 ) Less: Preferred stock dividends ( 319 ) Basic and diluted loss per share: Loss available to common stockholders $ ( 2,760 ) 73,835 $ ( 0.04 ) Three Months Ended September 30, 2023 Loss Numerator Shares Denominator Per-Share Amount Net loss $ ( 3,489 ) Less: Preferred stock dividends ( 319 ) Basic and diluted loss per share: Loss available to common stockholders $ ( 3,808 ) 73,191 $ ( 0.05 ) Nine Months Ended September 30, 2024 Loss Numerator Shares Denominator Per-Share Amount Net loss $ ( 17,272 ) Less: Preferred stock dividends ( 950 ) Basic and diluted loss per share: Loss available to common stockholders $ ( 18,222 ) 73,364 $ ( 0.25 ) Nine Months Ended September 30, 2023 Loss Numerator Shares Denominator Per-Share Amount Net loss $ ( 9,060 ) Less: Preferred stock dividends ( 946 ) Basic and diluted loss per share: Loss available to common stockholders $ ( 10,006 ) 73,464 $ ( 0.14 ) There were an additional aggregate potentially dilutive weighted-average shares of 981,000 from convertible securities outstanding for the three and nine months ended September 30, 2024 and September 30, 2023. These securities were not considered in calculating diluted net income (loss) per share for the three and nine months ended September 30, 2024 and the three and nine months ended September 30, 2023, as their effect would have been anti-dilutive. 10. SUBSEQUENT EVENT. On November 5, 2024, the Company entered into a CO 2 Transportation and Sequestration Agreement (“TSA”) with Vault 44.01 to provide transportation, injection and sequestration into the Mt. Simon sandstone formation in Illinois of CO 2 produced at the Company’s Pekin Campus. Under the TSA, Vault 44.01 will also manage the EPA permit approval process from submission to ultimate approval. 14