Alto Ingredients(ALTO) - 2022 Q3 - Quarterly Report

FORM 10-Q General Information This section details the Form 10-Q filing, including its period, filer type, and outstanding shares - The document is a Quarterly Report (Form 10-Q) for the period ended September 30, 2022, filed by Alto Ingredients, Inc[2] - Alto Ingredients, Inc. is classified as an accelerated filer[3] Outstanding Shares (as of November 4, 2022): | Class of Stock | Shares Outstanding | | :--------------- | :----------------- | | Common Stock | 73,956,108 | | Non-voting Common Stock | 896 | Table of Contents This section provides an organized list of all chapters and sub-sections within the report for easy navigation PART I - FINANCIAL INFORMATION This part presents the company's unaudited consolidated financial statements and management's discussion and analysis of financial condition and results of operations ITEM 1. FINANCIAL STATEMENTS. This section presents the unaudited consolidated financial statements of Alto Ingredients, Inc. for the quarter ended September 30, 2022, including balance sheets, statements of operations, cash flows, and stockholders' equity, along with detailed explanatory notes Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and equity as of September 30, 2022, and December 31, 2021 Consolidated Balance Sheet Highlights (in thousands): | Metric | Sep 30, 2022 | Dec 31, 2021 | Change (in thousands) | | :------------------------- | :----------- | :----------- | :----- | | Total Current Assets | $186,306 | $229,526 | $(43,220) | | Total Assets | $454,668 | $484,953 | $(30,285) | | Total Current Liabilities | $54,513 | $69,602 | $(15,089) | | Total Liabilities | $119,670 | $139,739 | $(20,069) | | Total Stockholders' Equity | $334,998 | $345,214 | $(10,216) | Consolidated Statements of Operations This section details the company's revenues, expenses, and net income or loss for the three and nine months ended September 30, 2022 and 2021 Consolidated Statements of Operations (in thousands, except per share data): | Metric | 3 Months Ended Sep 30, 2022 (in thousands) | 3 Months Ended Sep 30, 2021 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Sales | $336,877 | $305,556 | $1,007,184 | $822,400 | | Cost of Goods Sold | $356,716 | $308,955 | $1,013,406 | $796,729 | | Gross Profit (Loss) | $(19,839) | $(3,399) | $(6,222) | $25,671 | | Income (Loss) from Operations | $(27,242) | $(8,932) | $(30,250) | $2,794 | | Net Income (Loss) | $(28,038) | $(3,132) | $(8,525) | $9,936 | | Net Income (Loss) Available to Common Stockholders | $(28,357) | $(3,451) | $(9,471) | $8,870 | | Net Income (Loss) per Share, Basic | $(0.39) | $(0.05) | $(0.13) | $0.12 | | Net Income (Loss) per Share, Diluted | $(0.39) | $(0.05) | $(0.13) | $0.12 | Consolidated Statements of Cash Flows This section reports the cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2022 and 2021 Consolidated Statements of Cash Flows (in thousands): | Metric | 9 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2021 (in thousands) | | :------------------------------------------------ | :-------------------------- | :-------------------------- | | Net Cash Provided by (Used in) Operating Activities | $1,840 | $(19,511) | | Net Cash Provided by (Used in) Investing Activities | $(25,152) | $7,260 | | Net Cash Provided by (Used in) Financing Activities | $(6,400) | $850 | | Net Change in Cash, Cash Equivalents and Restricted Cash | $(29,712) | $(11,401) | | Cash, Cash Equivalents and Restricted Cash at End of Period | $32,413 | $36,786 | Consolidated Statements of Stockholders' Equity This section outlines changes in the company's equity, including net income, stock repurchases, and stock-based compensation, for the period ended September 30, 2022 - Total Stockholders' Equity decreased from $345,214 thousand at January 1, 2022, to $334,998 thousand at September 30, 2022[17] - Key activities impacting equity in 2022 include a net loss of $(28,038) thousand, stock repurchases of $(1,002) thousand, and stock-based compensation of $767 thousand for the three months ended September 30, 2022[17] Notes to Consolidated Financial Statements (UNAUDITED) This section provides detailed explanatory notes to the unaudited consolidated financial statements, offering additional context and disclosures for various accounts and transactions 1. ORGANIZATION AND BASIS OF PRESENTATION. This note describes Alto Ingredients, Inc. as a leading producer and distributor of specialty alcohols and essential ingredients, operating five production facilities. It outlines the company's focus on four key markets and details the share repurchase program initiated in September 2022 - The Company is a leading producer and distributor of specialty alcohols and essential ingredients, and renewable fuel, operating facilities in Illinois, Oregon, and Idaho[20] - The Company focuses on four key markets: Health, Home & Beauty; Food & Beverage; Essential Ingredients; and Renewable Fuels[22] - On September 12, 2022, the Company announced a share repurchase program for up to $50 million of its common stock, with an initial purchase authorization of $10 million[32] - For the three and nine months ended September 30, 2022, the Company repurchased 259,000 shares for $1,002,000 in cash[32] 2. ACQUISITION OF EAGLE ALCOHOL. On January 14, 2022, Alto Ingredients acquired Eagle Alcohol Company LLC for $14.0 million in cash plus an estimated working capital adjustment and potential contingent consideration. This acquisition provides vertical integration and access to new markets in specialty alcohol distribution - Acquisition of Eagle Alcohol Company LLC was completed on January 14, 2022[34] - The purchase price was $14.0 million in cash plus an estimated net working capital adjustment of $1.3 million in cash, with potential contingent consideration of up to an additional $14.0 million[34] - The acquisition provides further vertical integration and access to new markets in the specialty alcohol industry[35] Preliminary Purchase Price Allocation (in thousands): | Asset/Liability | Amount (in thousands) | | :------------------------- | :----- | | Net Tangible Assets Acquired | $2,444 | | Customer Relationships | $6,556 | | Tradename | $420 | | Goodwill | $5,970 | | Total Purchase Price | $15,390 | 3. SEGMENTS. The company reports financial performance across three segments: marketing and distribution, Pekin production, and Other production. For the three and nine months ended September 30, 2022, the Pekin Campus segment experienced a gross loss, marketing and distribution saw a decline in gross profit, and Other production improved its gross loss Segment Net Sales (in thousands): | Segment | 3 Months Sep 2022 (in thousands) | 3 Months Sep 2021 (in thousands) | 9 Months Sep 2022 (in thousands) | 9 Months Sep 2021 (in thousands) | | :------------------------- | :---------------- | :---------------- | :---------------- | :---------------- | | Pekin Campus | $188,549 | $160,896 | $564,025 | $483,556 | | Marketing and Distribution | $58,691 | $115,311 | $183,081 | $264,468 | | Other Production | $88,934 | $32,316 | $258,245 | $83,468 | | Corporate and Other | $4,159 | $0 | $12,064 | $0 | | Total Net Sales | $336,877 | $305,556 | $1,007,184 | $822,400 | Segment Gross Profit (Loss) (in thousands): | Segment | 3 Months Sep 2022 (in thousands) | 3 Months Sep 2021 (in thousands) | 9 Months Sep 2022 (in thousands) | 9 Months Sep 30, 2021 (in thousands) | | :------------------------- | :---------------- | :---------------- | :---------------- | :-------------------- | | Pekin Campus | $(19,390) | $(8,825) | $(8,487) | $14,584 | | Marketing and Distribution | $3,532 | $9,409 | $9,411 | $18,862 | | Other Production | $(2,729) | $(3,297) | $(3,269) | $(3,587) | | Corporate and Other | $1,234 | $0 | $3,069 | $0 | | Total Gross Profit (Loss) | $(19,839) | $(3,399) | $(6,222) | $25,671 | Total Assets by Operating Segment (in thousands): | Segment | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :------------------------- | :----------- | :----------- | | Pekin Campus | $247,449 | $266,197 | | Marketing and Distribution | $111,900 | $130,302 | | Other Production | $63,904 | $57,046 | | Corporate and Other | $31,415 | $31,408 | | Total Assets | $454,668 | $484,953 | 4. INVENTORIES. Inventories, valued at the lower of cost or net realizable value, increased to $61.1 million as of September 30, 2022, from $54.4 million at December 31, 2021, primarily due to a valuation adjustment of $7.96 million - Inventory is net of a valuation adjustment of $7,963,000 as of September 30, 2022, compared to $0 as of December 31, 2021[45] Inventory Balances (in thousands): | Category | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :--------------- | :----------- | :----------- | | Finished Goods | $40,630 | $35,509 | | Work in Progress | $8,084 | $6,909 | | Raw Materials | $11,321 | $10,837 | | Other | $1,053 | $1,118 | | Total | $61,088 | $54,373 | 5. DERIVATIVES. The company uses non-designated derivative instruments, such as exchange-traded forward contracts or options for corn and alcohols, to manage commodity price risk. Changes in the fair value of these contracts are recognized immediately in cost of goods sold - The Company uses derivative instruments to protect cash flows from fluctuations in commodity prices for alcohol sales and purchase commitments[49] - These derivatives are not designated for hedge accounting treatment, and changes in fair value are recognized immediately in cost of goods sold[50] - The Company recognized net losses of $1,772,000 for the three months ended September 30, 2022, and net gains of $20,164,000 for the nine months ended September 30, 2022, from changes in the fair value of non-designated derivative contracts[50] Non-Designated Derivative Instruments (in thousands): | Type of Instrument | Sep 30, 2022 (Fair Value, in thousands) | Dec 31, 2021 (Fair Value, in thousands) | | :----------------- | :------------------------ | :------------------------ | | Derivative Assets | $7,384 | $15,839 | | Derivative Liabilities | $1,106 | $13,582 | 6. DEBT. Long-term debt, primarily from Kinergy's line of credit, decreased to $45.9 million as of September 30, 2022, from $50.4 million at December 31, 2021. The company had $30.7 million in unused borrowing availability and was in compliance with its covenants Long-term Debt (in thousands): | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :-------------------------------- | :----------- | :----------- | | Kinergy line of credit | $45,949 | $50,401 | | Less unamortized debt financing costs | $(61) | $(40) | | Long-term debt | $45,888 | $50,361 | - As of September 30, 2022, Kinergy had $30.7 million in unused borrowing availability under its line of credit[57] - The Company believes it was in compliance with its covenants under the line of credit as of September 30, 2022[57] 7. COMMITMENTS AND CONTINGENCIES. The company has various sales and purchase commitments for alcohol, essential ingredients, corn, and natural gas extending through 2022 and 2023, along with future capital project commitments. It is also subject to ordinary course litigation, which management does not expect to have a material adverse impact - As of September 30, 2022, the Company had open fixed-price alcohol sales contracts totaling $101,427,000 and indexed-price contracts for 92,771,000 gallons[59] - Fixed-price sales contracts for essential ingredients totaled $17,274,000 as of September 30, 2022[59] - Purchase commitments included $38,769,000 for corn and $46,796,000 for capital projects as of September 30, 2022[60] - Management does not expect any pending legal proceedings to have a material impact on the Company's financial condition or results of operations[61] 8. PENSION AND RETIREMENT BENEFIT PLANS. The company sponsors a defined benefit pension plan (Retirement Plan) and a healthcare and life insurance plan (Postretirement Plan) for certain unionized employees. Both plans are underfunded or have net periodic expenses, with the Retirement Plan having an underfunded amount of $3.8 million as of December 31, 2021 - The Retirement Plan is a noncontributory defined benefit pension plan for 'grandfathered' unionized employees at the Pekin, Illinois facility[62] - As of December 31, 2021, the Retirement Plan had an underfunded amount of $3.8 million[63] - The Postretirement Plan provides postretirement medical benefits and life insurance to certain 'grandfathered' unionized employees[65] - For the nine months ended September 30, 2022, the Retirement Plan's net periodic benefit was $24,000, and the Postretirement Plan's net periodic expense was $96,000[64][66] 9. FAIR VALUE MEASUREMENTS. The company categorizes fair value measurements into a three-level hierarchy. Derivative financial instruments are primarily Level 1 (quoted prices on commodity exchanges), while defined benefit plan assets are Level 2 (net asset value as practical expedient) - Fair value measurements are categorized into Level 1 (unadjusted quoted prices), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[68] - The fair values of commodity positions (derivative financial instruments) are based on quoted prices on commodity exchanges and are designated as Level 1 inputs[70] - Defined benefit plan assets (pooled separate accounts) are valued using net asset value as a practical expedient and are classified within Level 2 of the valuation hierarchy[69] - Long-lived assets held-for-sale at December 31, 2021, were $1,000,000 and designated as Level 3 inputs[69][72] 10. EARNINGS (LOSS) PER SHARE. The company reported basic and diluted net losses per share for the three and nine months ended September 30, 2022, reflecting the overall net loss for the periods. Potentially dilutive securities were anti-dilutive and thus excluded from diluted EPS calculations Net Income (Loss) Per Share (in thousands, except per share data): | Metric | 3 Months Sep 30, 2022 (in thousands) | 3 Months Sep 30, 2021 (in thousands) | 9 Months Sep 30, 2022 (in thousands) | 9 Months Sep 30, 2021 (in thousands) | | :--------------------------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Loss Available to Common Stockholders | $(28,357) | $(3,451) | $(9,471) | $8,870 | | Basic EPS | $(0.39) | $(0.05) | $(0.13) | $0.12 | | Diluted EPS | $(0.39) | $(0.05) | $(0.13) | $0.12 | - Potentially dilutive weighted-average shares of 964,000 were anti-dilutive for the three and nine months ended September 30, 2022 and 2021, and thus not included in diluted EPS[78] 11. SUBSEQUENT EVENTS. Subsequent to the quarter end, the company secured a new senior secured term loan facility for up to $125 million and extended Kinergy's operating line of credit maturity to 2027 - On November 7, 2022, the Company closed on a senior secured term loan credit facility for up to $125 million (initial $100 million, additional $25 million upon conditions)[79] - The term loan has a six-year term, a fixed annual interest rate of 10%, and will be issued at an original issue discount of 1.5%[79] - In connection with the term loan, the Company will issue up to 1,602,564 shares of common stock to the lenders[80] - On November 7, 2022, Kinergy's operating line of credit was amended to extend its maturity to 2027[81] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This section provides management's perspective on the company's financial condition, results of operations, and future outlook, highlighting key factors influencing performance, strategic initiatives, and liquidity Overview This section provides a high-level summary of Alto Ingredients' business, its position as a leading producer and distributor of specialty alcohols, and its strategic mission for growth - Alto Ingredients is a leading producer and distributor of specialty alcohols and essential ingredients, and the largest producer of specialty alcohols in the United States[85] - The Company has an annual alcohol production capacity of 350 million gallons, comprised of 210 million gallons of fuel-grade ethanol and up to 140 million gallons of specialty alcohols[85] - The Company's mission is to expand its business as a leading producer and distributor of specialty alcohols and essential ingredients by investing in infrastructure, expanding production, and entering new markets[87] Production Segments This section details the company's production capabilities across its facilities, focusing on specialty alcohols, fuel-grade ethanol, and essential ingredients for various markets - The Company produces specialty alcohols, fuel-grade ethanol, and essential ingredients for Health, Home & Beauty; Food & Beverage; Essential Ingredients; and Renewable Fuels markets[90] Annual Alcohol Production Capacity (estimated, in gallons): | Production Facility | Location | Fuel-Grade Ethanol (gallons) | Specialty Alcohol (gallons) | | :------------------ | :----------- | :----------------- | :---------------- | | Pekin Campus | Pekin, IL | 110,000,000 | 140,000,000 | | Magic Valley | Burley, ID | 60,000,000 | — | | Columbia | Boardman, OR | 40,000,000 | — | Marketing and Distribution Segment This section describes the company's marketing and distribution activities for its own and third-party alcohols and essential ingredients, highlighting its extensive customer relationships - The segment markets and distributes all alcohols and essential ingredients produced at the Company's facilities, as well as fuel-grade ethanol produced by third parties[93] - The Company maintains extensive and long-standing customer relationships, both domestic and international, for its specialty alcohols and essential ingredients[93] - Renewable fuel customers include integrated oil companies and gasoline marketers in the Western and Midwestern United States[94] Current Initiatives and Outlook This section outlines the company's strategic growth initiatives, including debt financing for diversification, infrastructure improvements, and expansion of protein and yeast products, with expected EBITDA contributions - The Company secured debt financing for up to $125 million to accelerate and fund diversification growth strategies, including carbon capture sequestration, additional corn oil production, and protein and yeast product expansion[97] - Expected to add over $20 million in recurring annual EBITDA by the end of 2023 and an additional $30 million by 2025, totaling $50 million in additional recurring annual EBITDA by 2025[107] - Infrastructure improvements capitalized over $25 million and incurred an additional $3 million in related costs during the third quarter, negatively affecting cost of goods sold and net income[98] - Phase one of the enhanced protein project (corn oil extraction) at Magic Valley, Idaho, is complete and yields have grown significantly, with phase two (separating and producing enhanced protein) on schedule for Q1 2023 completion[99] - The Company is doubling corn storage capacity at its Pekin Campus, expected to be completed before year-end, to increase corn-buying flexibility and reduce input cost volatility[100] - New renewable natural gas and natural gas pipelines are planned for the Pekin Campus, with an expected completion date in 2024, to increase access to competitively priced natural gas and monetize produced RNG[104] Use of Non-GAAP Financial Measures This section explains management's use of non-GAAP financial measures, specifically EBITDA and Adjusted EBITDA, to provide additional insights into the company's operational performance - Management uses EBITDA and Adjusted EBITDA as non-GAAP financial measures to provide investors with additional insights into operations[109] - Adjusted EBITDA is defined as unaudited net income (loss) before interest expense, interest income, provision for income taxes, asset impairments, loss on extinguishment of debt, acquisition-related expense, fair value adjustments, and depreciation and amortization expense[109] Reconciliation of Adjusted EBITDA to Net Income (Loss) (in thousands): | Metric | 3 Months Sep 30, 2022 (in thousands) | 3 Months Sep 30, 2021 (in thousands) | 9 Months Sep 30, 2022 (in thousands) | 9 Months Sep 30, 2021 (in thousands) | | :---------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Net Income (Loss) | $(28,038) | $(3,132) | $(8,525) | $9,936 | | Total Adjustments | $7,437 | $6,097 | $22,265 | $23,426 | | Adjusted EBITDA | $(20,601) | $2,965 | $13,740 | $33,362 | Critical Accounting Policies and Estimates This section discusses the significant management estimates and judgments required for preparing consolidated financial statements, particularly concerning revenue recognition, business combinations, and asset impairment - The preparation of consolidated financial statements requires significant management estimates and judgments, particularly for revenue recognition, business combinations, impairment of long-lived assets, valuation allowances for deferred taxes, and derivative instruments[33][113] - Determining the fair value of assets acquired and liabilities assumed in a business combination is considered a critical accounting estimate due to significant management judgment and subjective measurements[114] Results of Operations This section details the company's operational performance, including net sales, cost of goods sold, gross profit, SG&A expenses, and net income (loss) for the three and nine months ended September 30, 2022 and 2021, highlighting the impact of commodity prices and strategic shifts Net Sales, Cost of Goods Sold and Gross Profit (Loss) Consolidated net sales increased for both periods, driven by higher average sales prices and essential ingredient volumes, despite a decrease in third-party gallons sold. However, gross profit turned into a significant loss due to higher commodity prices, extreme volatility, increased corn basis costs, and infrastructure upgrade charges Consolidated Net Sales, Cost of Goods Sold, Gross Profit (Loss) (in thousands): | Metric | 3 Months Sep 2022 (in thousands) | 3 Months Sep 2021 (in thousands) | % Change | 9 Months Sep 2022 (in thousands) | 9 Months Sep 2021 (in thousands) | % Change | | :---------------- | :---------------- | :---------------- | :------- | :---------------- | :---------------- | :------- | | Net Sales | $336,877 | $305,556 | 10.3% | $1,007,184 | $822,400 | 22.5% | | Cost of Goods Sold | $356,716 | $308,955 | 15.5% | $1,013,406 | $796,729 | 27.2% | | Gross Profit (Loss) | $(19,839) | $(3,399) | 483.7% | $(6,222) | $25,671 | NM | - The decline in consolidated gross profit (loss) was due to higher overall commodity prices, extreme commodity price volatility, increased corn basis costs (approximately $11.0 million in Q3 2022), logistical disruptions, and $3.0 million in uncapitalized infrastructure upgrade charges[140][141] - Pekin Campus production segment's gross profit declined by $11.9 million to a gross loss of $19.0 million for the three months ended September 30, 2022, primarily due to lower specialty alcohol margins[141] - Marketing and distribution segment's gross profit declined by $6.8 million to $0.5 million for the three months ended September 30, 2022, due to lower marketing volumes and margins from third-party fuel-grade ethanol[142] Selling, General and Administrative Expenses SG&A expenses increased for both the three and nine months ended September 30, 2022, primarily due to higher stock compensation expenses and an acquisition-related accrual for Eagle Alcohol Selling, General and Administrative Expenses (in thousands): | Metric | 3 Months Sep 2022 (in thousands) | 3 Months Sep 2021 (in thousands) | % Change | 9 Months Sep 2022 (in thousands) | 9 Months Sep 2021 (in thousands) | % Change | | :------------------------- | :---------------- | :---------------- | :------- | :---------------- | :---------------- | :------- | | SG&A Expenses | $7,403 | $5,533 | 33.8% | $24,028 | $19,777 | 21.5% | | Percentage of Net Sales | 2.2% | 1.8% | | 2.4% | 2.4% | | - The increases were primarily due to increased stock compensation expenses and an acquisition-related accrual for future cash payments attributable to the acquisition of Eagle Alcohol ($0.9 million for three months, $2.6 million for nine months)[148] Income from Cash Grant The company received a non-recurring cash grant of $22.7 million from the USDA's Biofuel Producer Program, established under the CARES Act to support biofuel producers affected by the pandemic - The Company received $22.7 million in cash from the USDA's Biofuel Producer Program, which was created as part of the CARES Act[149] - The cash grant is not required to be repaid and is non-recurring[149] Net Income (Loss) Available to Common Stockholders Net income available to common stockholders significantly declined to a loss for both the three and nine months ended September 30, 2022, primarily due to substantially higher production input costs leading to negative gross margins and increased SG&A expenses Net Income (Loss) Available to Common Stockholders (in thousands): | Metric | 3 Months Sep 2022 (in thousands) | 3 Months Sep 2021 (in thousands) | % Change | 9 Months Sep 2022 (in thousands) | 9 Months Sep 2021 (in thousands) | % Change | | :--------------------------------------- | :---------------- | :---------------- | :------- | :---------------- | :---------------- | :------- | | Net Income (Loss) Available to Common Stockholders | $(28,357) | $(3,451) | (721.7)% | $(9,471) | $8,870 | NM | | Percentage of Net Sales | (8.4)% | (1.1)% | | (0.9)% | 1.1% | | - The decline was primarily due to substantially higher production input costs resulting in negative gross margins, as well as higher SG&A expenses[151] Liquidity and Capital Resources As of September 30, 2022, the company had $32.4 million in cash and equivalents and $30.7 million in available borrowing capacity. It believes it has sufficient liquidity for the next twelve months, supported by a new $125 million term loan facility secured in November 2022 Quantitative Period-End Liquidity Status The company's working capital declined to $131.8 million at September 30, 2022, from $159.9 million at December 31, 2021, primarily due to a decrease in current assets, partially offset by a decrease in current liabilities Liquidity Metrics (in thousands): | Metric | Sep 30, 2022 (in thousands) | Dec 31, 2021 (in thousands) | Change % | | :--------------------------------------- | :----------- | :----------- | :----- | | Cash, cash equivalents and restricted cash | $32,413 | $62,125 | (47.8)% | | Current assets | $186,306 | $229,526 | (18.8)% | | Current liabilities | $54,513 | $69,602 | (21.7)% | | Long-term debt | $45,888 | $50,361 | (8.9)% | | Working capital | $131,793 | $159,924 | (17.6)% | | Working capital ratio | 3.42 | 3.30 | 3.6% | Changes in Working Capital and Cash Flows Working capital decreased due to lower current assets (cash, receivables, derivative assets) partially offset by lower current liabilities (derivative instruments, accounts payable). Operating activities generated cash, while investing activities used cash for capital expenditures and the Eagle Alcohol acquisition, and financing activities used cash for debt payments and share repurchases - Working capital declined to $131.8 million at September 30, 2022, from $159.9 million at December 31, 2021[155] - Cash provided by operating activities was $1.8 million for the nine months ended September 30, 2022, a significant improvement from $19.5 million cash used in the prior year[158] - Cash used in investing activities was $25.2 million for additions to property and equipment and $14.7 million for the Eagle Alcohol acquisition during the nine months ended September 30, 2022[159] - Cash used in financing activities was $6.4 million for the nine months ended September 30, 2022, reflecting net payments on Kinergy's line of credit, share repurchases, and preferred stock dividends[160] Term Loan On November 7, 2022, the company closed a $125 million senior secured term loan facility with a 10% fixed annual interest rate, maturing in six years. The loan is secured by all company assets and includes an issuance of common stock to lenders - A senior secured term loan facility for up to $125 million was closed on November 7, 2022, with a fixed annual interest rate of 10% and a six-year term[161] - The loan is secured by all of the Company's tangible and intangible assets[161] - In connection with the term loan, the Company will issue up to 1,602,564 shares of common stock to the lenders[161] Kinergy's Operating Line of Credit Kinergy maintains a $100.0 million operating line of credit, extended to mature in 2027, with variable interest rates and an unused line fee. The facility is secured by company assets and includes financial covenants, such as a fixed-charge coverage ratio of at least 2.0, which the company believes it is in compliance with - Kinergy maintains an operating line of credit for up to $100.0 million, with its maturity extended to 2027[162] - Interest accrues at a rate equal to the daily Secured Overnight Financing Rate (SOFR) plus an applicable margin ranging from 1.75% to 2.25%[162] - The credit facility includes a fixed-charge coverage ratio covenant of at least 2.0, which the Company believes it is in compliance with (actual ratio of 3.13 as of September 30, 2022)[164][165] - As of September 30, 2022, Kinergy had an outstanding balance of $45.9 million and $30.7 million of unused borrowing availability[165] Share Repurchase Program The company repurchased 259,000 shares of common stock for $1.0 million during the three months ended September 30, 2022, as part of its $50 million share repurchase program, which has an initial authorization of $10 million - For the three months ended September 30, 2022, the Company repurchased 259,000 shares of common stock for an aggregate expenditure of $1,002,000, at an average price of $3.86 per share[166] - The repurchases are part of a publicly announced share repurchase program for up to $50 million, with an initial purchase authorization of $10 million[237] Dividends The company paid $0.3 million and $0.9 million in preferred stock dividends for the three and nine months ended September 30, 2022, respectively. It does not intend to pay cash dividends on common stock in the foreseeable future, prioritizing earnings retention for business development - The Company accrued and paid $0.3 million and $0.9 million in preferred stock dividends for the three and nine months ended September 30, 2022, respectively[240] - The Company does not intend to pay cash dividends on its common stock in the foreseeable future, anticipating retention of earnings for business development[240] - Holders of Series B Preferred Stock are entitled to dividends of 7% per annum, payable quarterly[241] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The company is exposed to market risks, primarily from commodity price fluctuations for ethanol and corn. It uses derivative instruments (not designated for hedge accounting) to manage these risks, recognizing changes in fair value in cost of goods sold. A sensitivity analysis indicates significant potential impact from hypothetical price changes - The Company's business is sensitive to changes in the prices of ethanol and corn, which are subject to volatility and uncertainty[169] - Derivative financial instruments (futures and options) are used to manage and reduce the impact of changes in ethanol and corn prices, but are not designated for hedge accounting treatment[172][173] - Net gains of $21.2 million related to changes in the fair values of these contracts were recognized for the nine months ended September 30, 2022[173] Sensitivity Analysis (9 months ended Sep 30, 2022, hypothetical 10% adverse change in prices): | Commodity | Adverse Change to Pre-Tax Income (in millions) | | :-------- | :--------------------------------------------- | | Ethanol | $(48.9) | | Corn | $(56.7) | ITEM 4. CONTROLS AND PROCEDURES. Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2022. No material changes in internal control over financial reporting occurred during the quarter, though inherent limitations of control systems are acknowledged - Management concluded that the Company's disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2022[176] - There has been no change in internal control over financial reporting during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting[177] - Management acknowledges the inherent limitations of control systems, which can provide only reasonable, not absolute, assurance and can be circumvented[177][178] PART II - OTHER INFORMATION This part covers additional disclosures not included in the financial statements, such as legal proceedings, risk factors, equity sales, and exhibits ITEM 1. LEGAL PROCEEDINGS. The company is involved in various legal proceedings in the ordinary course of business. While potential liabilities may be substantial, management believes these matters will not materially affect the company's financial position, results of operations, or cash flows - The Company is subject to various claims and contingencies in the ordinary course of its business, including litigation[180] - Management believes that pending legal proceedings will not adversely affect in any material respect the Company's financial position, results of operations, or cash flows[180] ITEM 1A. RISK FACTORS. This section outlines various risks that could materially and adversely affect Alto Ingredients' business, financial condition, results of operations, and liquidity, categorized into business, financial, legal/regulatory, and common stock ownership risks Risks Related to our Business This section details business-specific risks, including commodity price volatility, inflation, supply chain disruptions, operational hazards, and potential losses from hedging transactions - The Company's results are highly impacted by the volatility of commodity prices for corn, natural gas, alcohols, and essential ingredients, which are subject to market forces beyond its control[182][186] - Inflation, including commodity price inflation and supply chain constraints due to the war in Ukraine, may adversely impact results of operations by increasing production inputs, wages, and other costs[187][188][189] - Disruptions in production or distribution, caused by operational hazards, equipment failures, natural disasters, or human error, could prevent timely deliveries and harm business, results of operations, and financial condition[193][196] - Hedging transactions, while intended to mitigate risk, expose the Company to potential financial losses if counterparties default or if expected price differentials change, and may negatively impact liquidity through margin calls[200] Risks Related to our Finances This section addresses financial risks, including historical losses, substantial indebtedness impacting strategic flexibility, and potential limitations on utilizing net operating loss carryforwards - The Company has incurred significant losses and negative operating cash flow in the past and may continue to do so, which could hamper operations and impede business expansion[201] - Substantial indebtedness, particularly for capital improvement projects, could make debt repayment difficult, limit strategic flexibility, consume cash flows, and restrict additional financing if project returns do not meet projections[203][204] - The ability to utilize net operating loss carryforwards and other tax attributes may be limited by 'ownership change' rules under Section 382 of the Internal Revenue Code, potentially increasing future tax obligations[205] Risks Related to Legal and Regulatory Matters This section covers legal and regulatory risks, including compliance with environmental laws, potential liability for contamination, and uncertainties regarding future demand for fuel-grade ethanol due to policy changes - The Company is subject to various federal, state, and local environmental laws and regulations, which may require significant expenditures for compliance and could result in substantial fines, sanctions, or production facility shutdowns for violations[207] - The Company may be liable for the investigation and cleanup of environmental contamination at its facilities or off-site locations, potentially incurring significant costs[209] - Future demand for fuel-grade ethanol is uncertain and may be adversely affected by changes to federal mandates (e.g., RFS program, small refinery waivers), negative public perception, and overall consumer demand for transportation fuel[212][213][214][217] Risks Related to Ownership of our Common Stock This section addresses risks for common stockholders, including stock price volatility, the company's policy of not paying cash dividends, and the exclusive forum provision in its bylaws - The Company's stock price is highly volatile and may fluctuate significantly due to factors such as product prices, input costs, market valuations, regulatory developments, and financing activities, potentially leading to substantial losses for investors and litigation[220][222][223] - The Company does not intend to pay any cash dividends on its common stock in the near future, as it plans to retain earnings for business development, meaning stockholders will rely solely on stock appreciation for returns[224] - The Company's bylaws contain an exclusive forum provision designating the Delaware Court of Chancery as the sole forum for certain disputes, which could limit stockholders' ability to choose a favorable judicial forum[225][227] General Risk Factors This section covers general risks, including potential business disruption from cyberattacks and significant fines or reputational harm from data privacy breaches or security failures - Cyberattacks through security vulnerabilities could lead to business disruption, reduced revenue, increased costs, liability claims, or harm to the Company's reputation or competitive position[229][230] - Failure to comply with applicable data privacy or similar laws, or data security breaches, could result in significant fines, onerous corrective action, loss of trade secrets, public disclosure of sensitive data, and exposure of personally identifiable information[232][233] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. This item reports on the company's share repurchase program, under which 259,000 shares of common stock were repurchased for $1.0 million during the three months ended September 30, 2022 - For the three months ended September 30, 2022, the Company repurchased 259,000 shares of its common stock for an aggregate expenditure of $1,002,000[236] - The average price paid per share was $3.86[236] - The repurchases were part of a publicly announced share repurchase program for up to $50 million, with an initial purchase authorization of $10 million[237] ITEM 3. DEFAULTS UPON SENIOR SECURITIES. This item is not applicable to the Company for the reporting period ITEM 4. MINE SAFETY DISCLOSURES. This item is not applicable to the Company for the reporting period ITEM 5. OTHER INFORMATION. This item is not applicable to the Company for the reporting period ITEM 6. EXHIBITS. This section lists the exhibits filed with the Form 10-Q, including certifications required by the Securities Exchange Act and Sarbanes-Oxley Act, as well as Inline XBRL documents - Exhibits include Certifications Required by Rule 13a-14(a) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350[243] - Inline XBRL Instance Document and Taxonomy Extension Schema, Calculation, Definition, Label, and Presentation Linkbase Documents are filed[243] SIGNATURES This section contains the official signatures, confirming the accuracy and completeness of the Form 10-Q filing by the company's authorized officers - The report was signed on November 8, 2022, by Bryon T. McGregor, Chief Financial Officer of Alto Ingredients, Inc[246]