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. However, unless there are meaningful improvements in overall economics at our Magic Valley facility, we plan to idle the plant before the end of 2024, which we believe will have a positive impact on our financial results. 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 the intended production rate, quality and consistency from the 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 In early November, we took a significant step forward in our commitment to sustainability by finalizing a definitive CO 2 Transportation and Sequestration Agreement with Vault 44.01 for our carbon capture and storage project, or CCS. Under the terms of the agreement, Vault will handle the transportation, injection and sequestration of CO 2 from our Pekin Campus to the Mt. Simon sandstone formation in Illinois. This partnership marks a critical milestone on our journey toward a more sustainable and prosperous future. While we await EPA submission and approval, address financing and source equipment, this agreement brings us closer to achieving our goals of lowering our carbon footprint and monetizing the value of the biogenic CO 2 we produce at our Pekin Campus. In the third quarter of 2024, we improved our consolidated gross profit to $6.0 million and improved our Adjusted EBITDA to $12.2 million, including $3.6 million in realized gains on derivatives for the quarter. These results were primarily driven by an increase in our production capabilities and uptime at our Pekin Campus, increasing its profitability despite fluctuating market conditions, compared to the third quarter of 2023. These results compare to $13.6 million of Adjusted EBITDA for the same period in 2023, including $6.2 million in realized gains on derivatives and a cash grant of $2.8 million from the USDA’s Biofuel Producer Program. The third quarter began with solid ethanol crush margins supported by strong exports. Domestic demand began to weaken as weather-related events reduced miles driven. Ethanol production remained relatively high, outpacing demand and resulting in higher ethanol inventory levels and lower market prices. In addition, in the third quarter, carbon prices were approximately 80% lower in Oregon and Washington and 20% lower in California compared to the third quarter of 2023. Although carbon prices remained low in October, we have begun to see some price recovery. We increased productivity at our Pekin Campus wet mill to its highest level since 2020, reflecting in part the results of our successful biennial repairs and maintenance outage in April 2024. This translated into higher specialty alcohol production in the third quarter of 2024, reaching 42% of total sales volume at our Pekin Campus, seven percentage points higher than for the same period last year. We remain on track to sell 90 million gallons of specialty alcohols in 2024 and expect to match this volume in 2025. For the fourth quarter, we expect corn prices to remain low, reflecting a good 2024 harvest, which we anticipate will result in a strong supply carryout and attractive prices into 2025. However, with domestic corn prices lower than international prices, demand for United States corn exports will likely increase, straining logistics and driving up transportation costs. Moreover, when domestic corn prices are low, suppliers typically require that prices cover at least their costs, driving up corn basis. This dynamic is one reason we expanded our corn storage capacity at our Pekin Campus and are considering a further increase in storage capacity at the site. 17 While higher corn transportation costs impact all ethanol producers, they have a more substantial impact on our Western operations, for which we source corn supplies from the Midwest, compared to Midwest ethanol producers that have access to local corn supplies and cheaper corn basis. At our Magic Valley plant, we completed upgrades to Harvesting Technology’s system to capture high protein and corn oil products and restarted the plant in July to prove out the system and benefit from the positive crush margins at the time. In October, the Magic Valley facility consistently achieved average ethanol production rates at full capacity, the protein content yield from the plant reached 50% or greater, and we were able to expand our corn oil yields. This successful restart and operation has informed us of the technology system’s capabilities as we consider system deployment at our other dry mills. Unfortunately, recent increases in regional corn basis and declining market prices for protein and corn oil have resulted in overall margin compression, outweighing the economic benefits of our plant improvements. We will continue to explore operational opportunities and assess market trends, but unless there are meaningful improvements in overall economics at the facility, we plan to idle the plant before the end of 2024, which we believe will have a positive impact on our financial results. To address these challenges, we continue to pursue opportunities to maximize the Western plants’ strengths and advantages. We have engaged Guggenheim Securities to actively explore our alternatives to monetize or optimize these assets, including through potential partnerships. Notably, while our Columbia facility is also experiencing margin compression, the combination of lower transportation costs, premiums earned on low-carbon ethanol and revenues generated from the sale of CO 2 make the plant more economically resilient than our Magic Valley facility. We continue to modernize our equipment and facilities to improve reliability, lower our operating costs and reduce our carbon footprint. For example, we are currently building a second alcohol loading dock at our Pekin Campus. Our goal for the project is to improve our river logistics by expediting the shipping process, adding redundancy and expanding our capabilities to accommodate a wider array of barges. We expect this project will yield a synergistic effect with our existing facilities and increase overall loading efficiencies. Our anticipated project cost is $3.0 million. The project is scheduled for completion in 2025. Sustainability We recently completed our sustainability report for 2023 and increased our disclosures on topics such as environmental, health, safety, quality and social metrics. Our core values of responsibility, integrity and quality drive our mission to produce the highest quality, sustainable ingredients that make everyday products better. We proudly offer 100% bio-based renewable products from our specialty alcohols and essential ingredients to renewable fuels and plant-based proteins. At our highly efficient dry grind facilities, we are striving for carbon intensity scores below 50 by optimizing efficiency, upgrading energy infrastructure and selecting sustainable feedstocks. Our dedication to sustainability and social responsibility extends to our customers, employees, investors, partners, suppliers and consumers, as well as our focus on product quality and safety. We conducted materiality assessments with internal and external stakeholders and identified multiple long-term market opportunities to viably expand our bio-based renewable offerings. The third-party certifications we earned include such areas as oversight on risk management; chemical storage, handling, transportation and disposal; multiple food safety initiatives; quality management; good manufacturing practices and requirements for all active pharmaceutical ingredients and excipient products; and supply chains for waste streams. Derivatives We employ a variety of risk management strategies to mitigate the price volatility of different commodities throughout the year as a normal course of business. These strategies may include managing the spread between corn and ethanol prices, otherwise known as the crush margin. We may also take positions on corn and natural gas. Currently, our core strategy is to hedge the premium over fuel grade ethanol of our specialty alcohol contracts that have fixed sales prices of up to one year or longer. Using derivatives, we lock-in certain premiums for the duration of the specialty alcohol contract over production that otherwise would be sold as ethanol. For positions that settle, we record the cumulative unrealized gains or losses on those positions since inception to realized. On the remaining unsettled positions, the change in market values measured at the end of the reporting period is reflected as unrealized. Unrealized amounts are not determinate of amounts that will be realized in future periods. However, we believe that the most accurate method to assess the value or obligation to be realized in the future, measured as of a specific date, is to note the amounts on our balance sheet. The net derivative asset or liability amount on the balance sheet denotes the amount that we would realize if we liquidated all of our positions as of that specific period-end date. 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 Loss Three Months Ended September 30, Nine Months Ended September 30, (in thousands) (unaudited) 2024 2023 2024 2023 Consolidated net loss $ (2,441 ) $ (3,489 ) $ (17,272 ) $ (9,060 ) Adjustments: Interest expense, net 1,867 2,000 5,170 5,299 Interest income (194 ) (179 ) (519 ) (590 ) Unrealized derivative (gains) losses 6,199 8,917 (8,079 ) 1,517 Acquisition-related expense 675 700 2,025 2,100 Asset impairments — — — 574 Provision for income taxes — — — — Depreciation and amortization expense 6,058 5,647 17,860 17,382 Total adjustments 14,605 17,085 16,457 26,282 Adjusted EBITDA $ 12,164 $ 13,596 $ (815 ) $ 17,222 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 September 30, Percentage Nine Months Ended September 30, Percentage 2024 2023 Variance 2024 2023 Variance Alcohol Sales (gallons in millions) Pekin Campus renewable fuel gallons sold 31.1 34.4 (9.6 )% 93.6 104.4 (10.3 )% Western production renewable fuel gallons sold 18.0 22.2 (18.9 )% 38.2 46.6 (18.0 )% Third-party renewable fuel gallons sold 25.2 21.9 15.1 % 89.3 82.4 8.4 % Total renewable fuel gallons sold 74.3 78.5 (5.4 )% 221.1 233.4 (5.3 )% Specialty alcohol gallons sold 22.5 18.6 21.0 % 69.8 56.6 23.3 % Total gallons sold 96.8 97.1 (0.3 )% 290.9 290.0 0.3 % Sales Price per Gallon Pekin Campus $ 2.02 $ 2.48 (18.5 )% $ 1.96 $ 2.46 (20.3 )% Western production $ 2.02 $ 2.57 (21.4 )% $ 1.94 $ 2.63 (26.2 )% Marketing and distribution $ 2.17 $ 2.69 (19.3 )% $ 2.01 $ 2.62 (23.3 )% Total $ 2.06 $ 2.56 (19.5 )% $ 1.97 $ 2.53 (22.1 )% Alcohol Production (gallons in millions) Pekin Campus 53.4 51.8 3.1 % 157.0 158.1 (0.7 )% Western production 19.2 22.5 (14.7 )% 37.5 47.3 (20.7 )% Total 72.6 74.3 (2.3 )% 194.5 205.4 (5.3 )% Corn Cost per Bushel Pekin Campus $ 4.40 $ 6.29 (30.0 )% $ 4.55 $ 6.72 (32.3 )% Western production $ 5.52 $ 7.37 (25.1 )% $ 5.69 $ 7.91 (28.1 )% Total $ 4.68 $ 6.60 (29.1 )% $ 4.76 $ 6.98 (31.8 )% Average Market Metrics PLATTS Ethanol price per gallon $ 1.81 $ 2.29 (21.0 )% $ 1.72 $ 2.31 (25.5 )% CME Corn cost per bushel $ 3.92 $ 4.98 (21.3 )% $ 4.23 $ 5.94 (28.8 )% Board corn crush per gallon (1) $ 0.41 $ 0.51 (19.6 )% $ 0.21 $ 0.19 10.5 % Essential Ingredients Sold (in thousands of tons) Pekin Campus Distillers grains 83.7 85.3 (1.9 )% 251.1 252.5 (0.6 )% CO 2 53.5 48.9 9.4 % 135.9 139.0 (2.2 )% Corn wet feed 30.0 28.3 6.0 % 80.4 70.0 14.9 % Corn dry feed 26.5 22.1 19.9 % 65.2 67.3 (3.1 )% Corn oil and germ 18.8 17.8 5.6 % 54.1 55.6 (2.7 )% Syrup and other 8.0 9.2 (13.0 )% 28.6 28.5 0.4 % Corn meal 9.8 8.2 19.5 % 26.1 27.8 (6.1 )% Yeast 6.3 6.4 (1.6 )% 17.8 19.7 (9.6 )% Total Pekin Campus 236.6 226.2 4.6 % 659.2 660.4 (0.2 )% Western production Distillers grains 116.6 144.6 (19.4 )% 250.2 307.7 (18.7 )% CO 2 14.7 14.9 (1.3 )% 43.1 41.7 3.4 % Syrup and other 21.4 35.2 (39.2 )% 37.6 71.6 (47.5 )% Corn oil 2.1 2.3 (8.7 )% 4.5 5.2 (13.5 )% Total Western Production 154.8 197.0 (21.4 )% 335.4 426.2 (21.3 )% Total Essential Ingredients Sold 391.4 423.2 (7.5 )% 994.6 1,086.6 (8.5 )% Essential Ingredients return % (2) Pekin Campus Return 49.0 % 44.8 % 9.4 % 49.7 % 44.1 % 12.7 % Western Production Return 28.6 % 31.3 % (8.6 )% 33.0 % 32.3 % 2.2 % Consolidated Total Return 42.8 % 40.4 % 5.9 % 46.0 % 41.2 % 11.7 % (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 September 30, Variance in Nine Months Ended September 30, Variance in 2024 2023 Dollars Percent 2024 2023 Dollars Percent Net sales $ 251,814 $ 318,127 $ (66,313 ) (20.8 )% $ 728,911 $ 949,315 $ (220,404 ) (23.2 )% Cost of goods sold 245,854 313,966 (68,112 ) (21.7 )% 717,798 931,137 (213,339 ) (22.9 )% Gross profit $ 5,960 $ 4,161 $ 1,799 43.2 % $ 11,113 $ 18,178 $ (7,065 ) (38.9 )% Percentage of net sales 2.4 % 1.3 % 1.5 % 1.9 % * Not meaningful Three Months ended September 30, 2024 as compared to the Three Months ended September 30, 2023 Net Sales The decline in our consolidated net sales for the three months ended September 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, which we restarted in July 2024, but which did not reach average full capacity until October 2024. Pekin Campus Production Segment Net sales of alcohol from our Pekin Campus production segment declined by $22.1 million, or 17%, to $106.5 million for the three months ended September 30, 2024 as compared to $128.6 million for the same period in 2023. Our total volume of production gallons sold increased by 0.8 million gallons, or 2%, to 52.8 million gallons for the three months ended September 30, 2024 as compared to 52.0 million gallons for the same period in 2023. The decrease of $0.46, or 19%, in the segment’s average sales price per gallon for the three months ended September 30, 2024 as compared to the same period in 2023 reduced our net sales from the segment by $23.7 million. With the segment’s average sales price per gallon of $2.02 for the three months ended September 30, 2024, we generated $1.6 million more in net sales from the 0.8 million additional gallons of alcohol sold in the three months ended September 30, 2024 as compared to the same period in 2023. Net sales of essential ingredients from our Pekin Campus production segment declined by $10.4 million, or 20%, to $41.2 million for the three months ended September 30, 2024 as compared to $51.6 million for the same period in 2023. Our total volume of essential ingredients sold increased by 10,400 tons, or 5%, to 236,600 tons for the three months ended September 30, 2024 from 226,200 tons for the same period in 2023. The decrease of $54.06, or 24%, in the segment’s average sales price per ton for the three months ended September 30, 2024 as compared to the same period in 2023 reduced our net sales from the segment by $12.2 million. With the segment’s average sales price per ton of $174.21 for the three months ended September 30, 2024, we generated $1.8 million in additional net sales from the 10,400 additional tons of essential ingredients sold in the three months ended September 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 $4.3 million, or 7%, to $54.6 million for the three months ended September 30, 2024 as compared to $58.9 million for the same period in 2023. 21 The $0.52 per gallon, or 19%, decrease in the segment’s average sales price per gallon for the three months ended September 30, 2024 as compared to the same period in 2023 resulted in a $11.4 million decline in our net sales from third-party fuel-grade ethanol sold by the segment. Our volume of third-party alcohol sold reported gross by the segment increased by 3.3 million gallons, or 15%, to 25.2 million gallons for the three months ended September 30, 2024 as compared to 21.9 million gallons for the same period in 2023. With the segment’s average sales price per gallon of $2.17 for the three months ended September 30, 2024, we realized $7.1 million in additional net sales from the 3.3 million additional gallons of third-party alcohol sold gross in the three months ended September 30, 2024 as compared to the same period in 2023. Western Production Segment Net sales of alcohol from our Western production segment declined by $20.8 million, or 36%, to $36.4 million for the three months ended September 30, 2024 as compared to $57.2 million for the same period in 2023. Our total volume of alcohol sold decreased by 4.2 million gallons, or 19%, to 18.0 million gallons for the three months ended September 30, 2024 as compared to 22.2 million gallons for the same period in 2023. The decrease of $0.55, or 21%, in the segment’s average sales price per gallon for the three months ended September 30, 2024 as compared to the same period in 2023 reduced our net sales from the segment by $12.3 million. With the segment’s average sales price per gallon of $2.02 for the three months ended September 30, 2024, we generated $8.5 million less in net sales from the 4.2 million fewer gallons of alcohol sold in the three months ended September 30, 2024 as compared to the same period in 2023. Net sales of essential ingredients from our Western production segment declined by $7.4 million, or 42%, to $10.4 million for the three months ended September 30, 2024 as compared to $17.8 million for the same period in 2023. Our total volume of essential ingredients sold decreased 42,200 tons, or 21%, to 154,800 tons for the three months ended September 30, 2024 from 197,000 tons for the same period in 2023. The decrease of $23.33, or 26%, in our average sales price per ton for the three months ended September 30, 2024 as compared to the same period in 2023 reduced our net sales of essential ingredients from the segment by $4.6 million. With the segment’s average sales price per ton of $67.24 for the three months ended September 30, 2024, we generated $2.8 million less in net sales from the 42,200 fewer tons of essential ingredients sold in the three months ended September 30, 2024 as compared to the same period in 2023. Corporate and other Net sales of alcohol from corporate and other declined by $1.4 million, or 34%, to $2.7 million for the three months ended September 30, 2024 as compared to $4.1 million for the same period in 2023. These sales are from Eagle Alcohol’s business. Cost of Goods Sold and Gross Profit Our consolidated gross profit improved to $6.0 million for the three months ended September 30, 2024 from $4.2 million for the same period in 2023, representing a gross margin of 2.4% and 1.3% for the three months ended September 30, 2024 and 2023, respectively. With total alcohol sales volumes essentially flat, our consolidated gross profit increased due to lower overall corn costs, primarily from lower corn basis costs, which declined $0.63 per bushel compared to the same period in 2023. Our lower corn costs were, however, partially offset by a $0.10 decline in market crush margins to $0.41 per gallon compared to the same period in 2023. Our Pekin Campus contributed $6.2 million to gross profit, improving tenfold year-over-year, in part due to productivity and other improvements resulting from our scheduled repairs and maintenance in April 2024 as well as a positive shift in sales mix to higher margin products. In particular, we sold 4.0 million gallons more of specialty alcohols for the three months ended September 30, 2024 compared to the same period in 2023. These improvements were partially offset by a 24% decline in our average sales price for essential ingredients compared to the same period in 2023. Our Western facilities generated a gross loss of $2.3 million for the three months ended September 30, 2024 compared to a gross profit of $1.5 million for the same period in 2023. This $3.8 million year-over-year decline in gross profit is largely attributable to production downtime at our Magic Valley facility and higher costs associated with upgrading equipment at the plant and restarting the facility at the beginning of the third quarter of 2024. Production at our Magic Valley plant did not reach average full capacity until October 2024. In addition, our Columbia facility generated $1.6 million less in high margin revenue due to an 80% drop in carbon prices in the region. 22 We realized consolidated derivative gains of $3.6 million for the three months ended September 30, 2024 compared to $6.2 million for the same period in 2023. During the third quarter of 2024, on a consolidated basis, we recorded $8.1 million dollars in repairs and maintenance expense, in line with the prior-year quarter, and we are on track to meet our 2024 full-year estimate of $34.0 million dollars of repairs and maintenance expense. Pekin Campus Production Segment Our Pekin Campus production segment’s gross profit, net of intercompany activity, increased by $5.9 million to $7.0 million for the three months ended September 30, 2024 as compared to $1.1 million for the same period in 2023. Of this increase, $5.8 million is attributable to higher margins and $0.1 million is attributable to higher sales volumes. Marketing and Distribution Segment Our marketing and distribution segment’s gross profit, net of intercompany activity, increased by $0.4 million to $1.3 million for the three months ended September 30, 2024 as compared to a gross profit of $0.9 million for the same period in 2023. Of this improvement, $0.3 million is attributable to higher margins from sales of third-party fuel-grade ethanol and $0.1 million attributable to higher sales volumes. Western Production Segment Our Western production segment’s gross profit, net of intercompany activity, declined by $3.8 million to a gross loss of $2.1 million for the three months ended September 30, 2024 as compared to a gross profit of $1.7 million for the same period in 2023. Of this decline, $4.2 million is attributable to lower renewable fuel margins, partially offset by $0.4 million attributable to lower sales volumes at negative margins. Corporate and other Gross profit from corporate and other declined by $0.7 million to a gross loss of $0.2 million for the three months ended September 30, 2024 as compared to a gross profit of $0.5 million for the same period in 2023, all of which were from Eagle Alcohol’s business. Nine Months ended September 30, 2024 as compared to the Nine Months ended September 30, 2023 Net Sales The decrease in our consolidated net sales for the nine months ended September 30, 2024 as compared to the same period in 2023 is primarily attributable to lower average sales prices per gallon for both specialty alcohols 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 $73.1 million, or 19%, to $315.5 million for the nine months ended September 30, 2024 as compared to $388.6 million for the same period in 2023. Our total volume of production gallons sold increased by 2.8 million gallons, or 2%, to 160.7 million gallons for the nine months ended September 30, 2024 as compared to 157.9 million gallons for the same period in 2023. The decrease of $0.50, or 20%, in the segment’s average sales price per gallon for the nine months ended September 30, 2024 as compared to the same period in 2023 reduced our net sales from the segment by $78.6 million. With the segment’s average sales price per gallon of $1.96 for the nine months ended September 30, 2024, we generated $5.5 million more in net sales from the 2.8 million additional gallons of alcohol sold in the nine months ended September 30, 2024 as compared to the same period in 2023. Net sales of essential ingredients from our Pekin Campus production segment declined by $41.9 million, or 25%, to $127.3 million for the nine months ended September 30, 2024 as compared to $169.2 million for the same period in 2023. Our total volume of essential ingredients sold decreased by 1,200 tons, or less than 1%, to 659,200 tons for the nine months ended September 30, 2024 from 660,400 tons for the same period in 2023. The decrease of $63.13, or 25%, in the segment’s average sales price per ton for the nine months ended September 30, 2024 as compared to the same period in 2023 reduced our net sales from the segment by $41.7 million. With the segment’s average sales price per ton of $193.11 for the nine months ended September 30, 2024, we generated $0.2 million less in net sales from the 1,200 fewer tons of essential ingredients sold in the nine months ended September 30, 2024 as compared to the same period in 2023. 23 Marketing and Distribution Segment Net sales of alcohol from our marketing and distribution segment, excluding intersegment sales, declined by $36.7 million, or 17%, to $179.3 million for the nine months ended September 30, 2024 as compared to $216.0 million for the same period in 2023. Our volume of third-party alcohol sold reported gross by the segment increased by 6.9 million gallons, or 8%, to 89.3 million gallons for the nine months ended September 30, 2024 as compared to 82.4 million gallons for the same period in 2023. The $0.61 per gallon, or 23%, decrease in the segment’s average sales price per gallon for the nine months ended September 30, 2024 as compared to the same period in 2023 resulted in a $50.6 million decline in our net sales from third-party fuel-grade ethanol sold by the segment. With the segment’s average sales price per gallon of $2.01 for the nine months ended September 30, 2024, we realized $13.9 million in additional net sales from the 6.9 million additional gallons of third-party alcohol sold gross in the nine months ended September 30, 2024 as compared to the same period in 2023. Western Production Segment Net sales of alcohol from our Western production segment declined by $48.4 million, or 40%, to $74.1 million for the nine months ended September 30, 2024 as compared to $122.5 million for the same period in 2023. Our total volume of alcohol sold decreased by 8.4 million gallons, or 18%, to 38.2 million gallons for the nine months ended September 30, 2024 as compared to 46.6 million gallons for the same period in 2023. The decrease of $0.69, or 26%, in the segment’s average sales price per gallon for the nine months ended September 30, 2024 as compared to the same period in 2023 reduced our net sales from the segment by $32.1 million. With the segment’s average sales price per gallon of $1.94 for the nine months ended September 30, 2024, we generated $16.3 million less in net sales from the 8.4 million fewer gallons of alcohol sold in the nine months ended September 30, 2024 as compared to the same period in 2023. Net sales of essential ingredients from our Western production segment declined by $16.4 million, or 40%, to $24.2 million for the nine months ended September 30, 2024 as compared to $40.6 million for the same period in 2023. Our total volume of essential ingredients sold decreased 90,800 tons, or 21%, to 335,400 tons for the nine months ended September 30, 2024 from 426,200 tons for the same period in 2023. The decrease of $23.19, or 24%, in our average sales price per ton for the nine months ended September 30, 2024 as compared to the same period in 2023 reduced our net sales of essential ingredients from the segment by $9.9 million. With the segment’s average sales price per ton of $72.10 for the nine months ended September 30, 2024, we generated $6.5 million less in net sales from the 90,800 fewer tons of essential ingredients sold in the nine months ended September 30, 2024 as compared to the same period in 2023. Corporate and other Net sales of alcohol from corporate and other declined by $3.7 million, or 30%, to $8.6 million for the nine months ended September 30, 2024 as compared to $12.3 million for the same period in 2023. These sales are from Eagle Alcohol’s business. Cost of Goods Sold and Gross Profit Our consolidated gross profit declined to $11.1 million for the nine months ended September 30, 2024 from $18.2 million for the same period in 2023, representing a gross margin of 1.5% and 1.9% for the nine months ended September 30, 2024 and 2023, respectively. Our consolidated gross profit declined primarily due to higher repairs and maintenance expense and lower average sales prices for our essential ingredients due, in particular, to a compression on protein prices from an increase in soybean meal supply, a consequence of production growth in soy crush driven by the demand for renewable diesel. Another contributing factor to the year-over-year decline in gross profit is production downtime at our Magic Valley facility and higher operating costs associated with upgrading equipment at the plant. We restarted our Magic Valley facility in July 2024, but production did not reach average full capacity until October 2024. 24 Pekin Campus Production Segment Our Pekin Campus production segment’s gross profit, net of intercompany activity, increased by $8.6 million to a gross profit of $22.4 million for the nine months ended September 30, 2024 as compared to $13.8 million for the same period in 2023. Of this improvement, $8.3 million is attributable to higher alcohol sales margins and $0.3 million is attributable to higher sales volumes. Marketing and Distribution Segment Our marketing and distribution segment’s gross profit, net of intercompany activity, declined by $0.3 million to a gross profit of $2.9 million for the nine months ended September 30, 2024 as compared to a gross profit of $3.2 million for the same period in 2023. Of this decline, $0.5 million is attributable to lower margins from sales of third-party fuel-grade ethanol, partially offset by $0.2 million attributable to higher sales volumes. Western Production Segment Our Western production segment’s gross profit, net of intercompany activity, declined by $12.3 million to a gross loss of $14.1 million for the nine months ended September 30, 2024 as compared to a gross loss of $1.8 million for the same period in 2023. Of this decline, $15.4 million is attributable to lower renewable fuel margins and hot-idling costs at our Magic Valley facility, partially offset by $3.1 million attributable to lower sales volumes at negative margins. Corporate and other Gross profit from corporate and other declined by $3.1 million to a gross loss of $0.1 million for the nine months ended September 30, 2024 as compared to a gross profit of $3.0 million for the same period in 2023, all of which were from Eagle Alcohol’s business. Selling, General and Administrative Expenses The following table presents our selling, general and administrative, or SG&A, expenses in dollars and as a percentage of net sales (in thousands, except percentages): Three Months Ended September 30, Variance in Nine Months Ended September 30, Variance in 2024 2023 Dollars Percent 2024 2023 Dollars Percent Selling, general and administrative expenses $ 7,510 $ 8,488 $ (978 ) (11.5 )% $ 24,403 $ 24,281 $ 122 0.5 % Percentage of net sales 3.0 % 2.7 % 3.3 % 2.6 % Our SG&A expenses decreased for the three months ended September 30, 2024 as compared to the same period in 2023. The period over period decrease in SG&A expenses is primarily due to lower 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. SG&A expenses remained essentially flat for the nine months ended September 30, 2024 and 2023. 25 Net Loss Available to Common Stockholders The following table presents our net loss available to common stockholders in dollars and as a percentage of net sales (in thousands, except percentages): Three Months Ended September 30, Variance in Nine Months Ended September 30, Variance in 2024 2023 Dollars Percent 2024 2023 Dollars Percent Net loss available to common stockholders $ (2,760 ) $ (3,808 ) $ (1,048 ) 27.5 % $ (18,222 ) $ (10,006 ) $ 8,216 82.1 % Percentage of net sales (1.1 )% (1.2 )% (2.5 )% (1.1 )% Our net loss available to common stockholders for the three and nine months ended September 30, 2024 and 2023 is primarily due to lower margins resulting from increased repairs and maintenance expense, higher up-front project costs as we worked to advance our CCS project, and other factors affecting gross profit as discussed above, partially offset by $0.8 million in gains for the three months ended September 30, 2024 from the sale of noncore assets from a past business acquisition. In addition, for the three months ended September 30, 2023, we received a USDA cash grant of $2.8 million related to the Biofuel Producer Program. This grant did not recur in 2024. Liquidity and Capital Resources During the nine months ended September 30, 2024, we funded our operations primarily from cash on hand, cash provided by our operations and Kinergy’s operating line of credit. In addition to funding our operations, we used our capital resources to advance our capital improvement projects and make an annual payment relating to our acquisition of Eagle Alcohol. As of September 30, 2024, we had $38.5 million in cash, cash equivalents and restricted cash, $27.2 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. Quantitative Period-End Liquidity Status We believe that the following amounts provide insight into our liquidity and capital resources. The following selected financial information should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report (dollars in thousands). September 30, 2024 December 31, 2023 Change Cash, cash equivalents and restricted cash $ 38,494 $ 45,480 (15.4 )% Current assets $ 145,150 $ 168,770 (14.0 )% Property and equipment, net $ 238,892 $ 248,748 (4.0 )% Current liabilities $ 45,102 $ 65,288 (30.9 )% Long-term debt, noncurrent portion $ 83,342 $ 82,097 1.5 % Working capital $ 100,048 $ 103,482 (3.3 )% Working capital ratio 3.22 2.59 24.3 % 26 Restricted Net Assets At September 30, 2024, we had approximately $56.3 million of net assets at our subsidiaries that were not available to be transferred to Alto Ingredients, Inc. in the form of dividends, distributions, loans or advances due to restrictions contained in our subsidiaries’ credit facilities. Changes in Working Capital and Cash Flows Working capital declined by $3.5 million to $100.0 million at September 30, 2024 compared to $103.5 million at December 31, 2023 due to a decrease of $23.7 million in current assets, partially offset by a decrease of $20.2 million in current liabilities. Current assets declined due to decreases in cash, cash equivalents and restricted cash, accounts receivable, inventories, derivative assets and other assets for the nine months ended September 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 $7.0 million primarily due to $12.0 million in cash used in our investing activities and $1.0 million in cash used in our financing activities, partially offset by $6.0 million of cash provided by our operating activities. Cash provided by our Operating Activities We generated $6.3 million in cash from our operating activities during the nine months ended September 30, 2024 as compared to $10.2 million for the same period in 2023. Specific factors that contributed to the change in cash from our operating activities include: ● an increase of $8.2 million in our net loss primarily due to lower commodity margins; and ● a decrease of $6.5 million related to derivative instruments due to changes in commodity prices. These amounts were partially offset by: ● an increase of $6.8 million related to accounts payable and accrued liabilities due to the timing of payments; and ● an increase of $4.1 million related to changes in accounts receivable balances due to the timing of our collections. Cash used in our Investing Activities We used $12.2 million in cash during the nine months ended September 30, 2024 to fund $9.8 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, partially offset by $0.4 million in proceeds from the sale of assets. Our capital expenditures for the third quarter of 2024 totaled $0.5 million, net of various energy rebates. 27 Cash used in our Financing Activities We used $1.0 million in cash during the nine months ended September 30, 2024 to fund $0.9 million in preferred stock dividends and $0.1 million in net payments on Kinergy’s operating line of credit. Kinergy’s Operating Line of Credit Kinergy maintains an operating line of credit with Wells Fargo Bank for an aggregate amount of up to $100.0 million. The credit facility matures on November 7, 2027. Interest accrues under the credit facility at a rate equal to (i) the daily Secured Overnight Financing Rate, plus (ii) a specified applicable margin ranging from 1.25% to 1.75%. The credit facility’s monthly unused line fee is 0.25% to 0.375% of the amount by which the maximum credit under the facility exceeds the average daily principal balance during the immediately preceding month. Payments that may be made by Kinergy to Alto Ingredients, Inc. as reimbursement for management and other services provided by Alto Ingredients, Inc. to Kinergy are limited under the terms of the credit facility to $1.5 million per fiscal quarter. The credit facility also includes the accounts receivable of our indirect wholly-owned subsidiary, Alto Nutrients, LLC, or Alto Nutrients, as additional collateral. Payments that may be made by Alto Nutrients to Alto Ingredients, Inc. as reimbursement for management and other services provided by Alto Ingredients, Inc. to Alto Nutrients are limited under the terms of the credit facility to $0.5 million per fiscal quarter. Alto Nutrients markets our essential ingredients and also provides raw material procurement services to our subsidiaries. In addition, the amount of cash distributions that Kinergy or Alto Nutrients may make to us is also limited to up to 75% of excess cash flow. For all monthly periods in which excess borrowing availability falls below a specified level, Kinergy and Alto Nutrients must collectively maintain a fixed-charge coverage ratio (calculated as a twelve-month rolling earnings before interest, taxes, depreciation and amortization divided by the sum of interest expense, capital expenditures, principal payments of indebtedness, indebtedness from capital leases and taxes paid during such twelve-month rolling period) of at least 1.1 and are prohibited from incurring certain additional indebtedness (other than specific intercompany indebtedness). The obligations of Kinergy and Alto Nutrients under the credit facility are secured by all of our tangible and intangible assets. We believe Kinergy and Alto Nutrients are in compliance with the fixed-charge coverage ratio covenant as of the filing of this report. The following table sets forth the fixed-charge coverage ratio financial covenant and the actual results for the periods presented: Three Months Ended September 30, Years Ended December 31, 2024 2023 2023 2022 Fixed-Charge Coverage Ratio Requirement 1.10 1.10 1.10 1.10 Actual 3.80 4.09 5.22 3.54 Excess 2.70 2.99 4.12 2.44 Alto Ingredients, Inc. has guaranteed all of Kinergy’s obligations under the credit facility. As of September 30, 2024, Kinergy had an outstanding balance of $30.6 million and $27.2 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 September 30, 2024, the principal amount outstanding under the Term Loan was $60,000,000. Other Cash Obligations As of September 30, 2024, we had future commitments for certain capital projects totaling $8.6 million. These commitments are scheduled to be satisfied through 2024 and 2025. 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.