UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to _______

Commission File Number: 000-21467

ALTO INGREDIENTS, INC.

(Exact name of registrant as specified in its charter)

Delaware		41-2170618
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1300 South Second Street, Pekin, Illinois		61554
(Address of principal executive offices)		(zip code)

(916) 403-2123
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each Class		Trading Symbol		Name of Exchange on Which Registered
Common Stock, $0.001 par value		ALTO		The Nasdaq Stock Market LLC (Nasdaq Capital Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐	Smaller reporting company ☐
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 5, 2022, there were 74,180,566 shares of Alto Ingredients, Inc. common stock, $0.001 par value per share, and 896 shares of Alto Ingredients, Inc. non-voting common stock, $0.001 par value per share, outstanding.

		Page
	PART I FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS.

	Consolidated Balance Sheets as of June 30, 2022 (unaudited) and December 31, 2021	1

	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2022 and 2021 (unaudited)	3

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021 (unaudited)	4

	Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2022 and 2021 (unaudited)	5

	Notes to Consolidated Financial Statements (unaudited)	6

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	18

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	31

ITEM 4.	CONTROLS AND PROCEDURES.	33

	PART II OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS.	34

ITEM 1A.	RISK FACTORS.	34

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.	42

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES.	42

ITEM 4.	MINE SAFETY DISCLOSURES.	42

ITEM 5.	OTHER INFORMATION.	42

ITEM 6.	EXHIBITS.	43

SIGNATURES		44

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

ALTO INGREDIENTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)

	June 30,		December 31,
ASSETS	2022		2021
	(unaudited)		*
Current Assets:
Cash and cash equivalents	$	57,376	$	50,612
Restricted cash		17,361		11,513
Accounts receivable, net (net of allowance for doubtful accounts of $444 and $378, respectively)		92,744		86,888
Inventories		67,438		54,373
Derivative instruments		27,488		15,839
Notes receivable, current		—		3,125
Other current assets		11,081		7,176
Total current assets		273,488		229,526
Property and equipment, net		222,946		222,550
Other Assets:
Right of use operating lease assets, net		14,004		13,413
Notes receivable, noncurrent		—		11,641
Intangible assets, net		9,381		2,678
Goodwill		5,908		—
Other assets		5,592		5,145
Total other assets		34,885		32,877
Total Assets	$	531,319	$	484,953

Amounts derived from the audited consolidated financial statements for the year ended December 31, 2021.

See accompanying notes to consolidated financial statements.

ALTO INGREDIENTS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(in thousands, except par value)

	June 30,			December 31,
LIABILITIES AND STOCKHOLDERS’ EQUITY	2022			2021
	(unaudited)			*
Current Liabilities:
Accounts payable – trade	$	21,478		$	23,251
Accrued liabilities		21,404			21,307
Current portion – operating leases		4,132			3,909
Derivative instruments		32,770			13,582
Other current liabilities		15,340			7,553
Total current liabilities		95,124			69,602

Long-term debt, net of current portion		52,518			50,361
Operating leases, net of current portion		9,801			9,382
Other liabilities		10,288			10,394
Total Liabilities		167,731			139,739
Commitments and Contingencies (Note 7)
Stockholders’ Equity:
Alto Ingredients, Inc. Stockholders’ Equity:
Preferred stock, $0.001 par value; 10,000 shares authorized; Series A: 1,684 shares authorized; no shares issued and outstanding as of June 30, 2022 and December 31, 2021; Series B: 1,581 shares authorized; 927 shares issued and outstanding as of June 30, 2022 and December 31, 2021; liquidation preference of $18,075 as of June 30, 2022		1			1
Common stock, $0.001 par value; 300,000 shares authorized; 74,188 and 72,778 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively		74			73
Non-voting common stock, $0.001 par value; 3,553 shares authorized; 1 share issued and outstanding as of June 30, 2022 and December 31, 2021, respectively		—			—
Additional paid-in capital		1,036,692			1,037,205
Accumulated other comprehensive loss		(284	)		(284	)
Accumulated deficit		(672,895	)		(691,781	)
Total Stockholders’ Equity		363,588			345,214
Total Liabilities and Stockholders’ Equity	$	531,319		$	484,953

Amounts derived from the audited consolidated financial statements for the year ended December 31, 2021.

See accompanying notes to consolidated financial statements.

ALTO INGREDIENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021

Net sales	$	362,189		$	298,110		$	670,307		$	516,844
Cost of goods sold		353,345			282,877			656,690			487,774
Gross profit		8,844			15,233			13,617			29,070
Selling, general and administrative expenses		8,996			7,230			16,625			14,244
Asset impairments		—			1,900			—			3,100
Income (loss) from operations		(152	)		6,103			(3,008	)		11,726
Interest expense, net		(319	)		(1,045	)		(519	)		(2,930	)
Income from cash grant		22,652			—			22,652			—
Income from loan forgiveness		—			3,887			—			3,887
Other income (expense), net		(66	)		(555	)		388			385
Income before provision for income taxes		22,115			8,390			19,513			13,068
Provision for income taxes		—			—			—			—
Net income	$	22,115		$	8,390		$	19,513		$	13,068
Preferred stock dividends	$	(315	)	$	(315	)	$	(627	)	$	(627	)
Income allocated to participating securities		(284	)		(108	)		(251	)		(167	)
Net income available to common stockholders	$	21,516		$	7,967		$	18,635		$	12,274
Net income per share, basic	$	0.29		$	0.11		$	0.26		$	0.17
Net income per share, diluted	$	0.29		$	0.11		$	0.26		$	0.17
Weighted-average shares outstanding, basic		72,936			71,260			71,690			70,808
Weighted-average shares outstanding, diluted		73,123			71,929			71,958			71,961

See accompanying notes to consolidated financial statements.

ALTO INGREDIENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

	Six Months Ended June 30,
	2022			2021
Operating Activities:
Net income	$	19,513		$	13,068
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of intangibles		12,862			11,670
Inventory valuation		3,010			—
Asset impairments		—			3,100
Income from loan forgiveness		—			(3,887	)
Non-cash compensation		1,779			1,655
Amortization of deferred financing fees		37			701
Bad debt expense		66			143
Changes in operating assets and liabilities, net of business acquisition:
Accounts receivable		(393	)		(23,694	)
Inventories		(14,729	)		(18,526	)
Other assets		3,210			12,233
Operating leases		(2,528	)		(2,069	)
Assets held-for-sale		—			(2,915	)
Liabilities held-for-sale		—			1,445
Accounts payable and accrued expenses		(2,132	)		11,096
Net cash provided by operating activities		20,695			4,020
Investing Activities:
Proceeds from Madera Sale		—			19,500
Additions to property and equipment		(9,762	)		(4,192	)
Purchase of Eagle Alcohol, net of cash acquired		(14,655	)		—
Net cash (used in) provided by investing activities		(24,417	)		15,308
Financing Activities:
Net proceeds from Kinergy’s line of credit		2,195			24,406
Proceeds from principal payments on notes receivable		14,766			—
Proceeds from stock option exercises		—			462
Principal payments on borrowings		—			(37,810	)
Preferred stock dividends paid		(627	)		—
Net cash provided by (used in) financing activities		16,334			(12,942	)
Net change in cash, cash equivalents and restricted cash		12,612			6,386
Cash, cash equivalents and restricted cash at beginning of period		62,125			48,187
Cash, cash equivalents and restricted cash at end of period	$	74,737		$	54,573


Reconciliation of total cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	57,376		$	50,796
Restricted cash		17,361			3,777
Total cash, cash equivalents and restricted cash	$	74,737		$	54,573
Supplemental Information:
Interest paid	$	456		$	2,723
Accrued preferred stock dividends	$	—		$	627

See accompanying notes to consolidated financial statements.

ALTO INGREDIENTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited, in thousands)

	Preferred Stock				Common Stock					Additional Paid-In			Accumulated			Accum. Other Comprehensive
	Shares		Amount		Shares			Amount		Capital			Deficit			Loss			Total
Balances, January 1, 2022		927	$	1		72,778		$	73	$	1,037,205		$	(691,781	)	$	(284	)	$	345,214
Restricted stock issued to employees and directors, net of cancellations and tax		—		—		684			—		(9	)		—			—			(9	)
Stock-based compensation		—		—		—			—		673			—			—			673
Shares issued for Eagle Alcohol acquisition		—		—		949			1		—			—			—			1
Preferred stock dividends		—		—		—			—		—			(312	)		—			(312	)
Net loss		—		—		—			—		—			(2,602	)		—			(2,602	)
Balances, March 31, 2022		927	$	1		74,411		$	74	$	1,037,869		$	(694,695	)	$	(284	)	$	342,965
Restricted stock issued to employees and directors, net of cancellations and tax		—		—		(223	)		—		(2,283	)		—			—			(2,283	)
Stock-based compensation		—		—		—			—		1,106			—			—			1,106
Preferred stock dividends		—		—		—			—		—			(315	)		—			(315	)
Net income		—		—		—			—		—			22,115			—			22,115
Balances, June 30, 2022		927	$	1		74,188		$	74	$	1,036,692		$	(672,895	)	$	(284	)	$	363,588

Balances, January 1, 2021		927	$	1		72,487		$	72	$	1,036,638		$	(736,598	)	$	(3,878	)	$	296,235
Restricted stock issued to employees and directors, net of cancellations and tax		—		—		550			1		(186	)		—			—			(185	)
Stock-based compensation		—		—		—			—		804			—			—			804
Issuances of common stock		—		—		124			—		462			—			—			462
Preferred stock dividends		—		—		—			—		—			(312	)		—			(312	)
Net income		—		—		—			—		—			4,678			—			4,678
Balances, March 31, 2021		927	$	1		73,161		$	73	$	1,037,718		$	(732,232	)	$	(3,878	)	$	301,682
Restricted stock issued to employees and directors, net of cancellations and tax		—		—		(350	)		—		(2,589	)		—			—			(2,589	)
Stock-based compensation		—		—		—			—		851			—			—			851
Preferred stock dividends		—		—		—			—		—			(315	)		—			(315	)
Net income		—		—		—			—		—			8,390			—			8,390
Balances, June 30, 2021		927	$	1		72,811		$	73	$	1,035,980		$	(724,157	)	$	(3,878	)	$	308,019

See accompanying notes to consolidated financial statements.

ALTO INGREDIENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

ORGANIZATION AND BASIS OF PRESENTATION.

Organization and Business – The consolidated financial statements include, for all periods presented, the accounts of Alto Ingredients, Inc., a Delaware corporation (“Alto Ingredients”), and its direct and indirect wholly-owned subsidiaries (collectively, the “Company”), including Kinergy Marketing LLC, an Oregon limited liability company (“Kinergy”), Alto Nutrients, LLC, a California limited liability company (“Alto Nutrients”), Alto Op Co., a Delaware corporation (“Alto Op Co.”), Alto Pekin, LLC, a Delaware limited liability company (“Alto Pekin”) and Alto ICP, LLC, a Delaware limited liability company (“ICP”), and the Company’s production facilities in Oregon and Idaho.

On May 14, 2021 and November 4, 2021, the Company completed the sale of its production facilities located in Madera and Stockton, California, respectively. The results of these facilities are included in the Company’s results reported for the three and six months ended June 30, 2021. As discussed in Note 2, on January 14, 2022, the Company acquired 100% ownership of Eagle Alcohol Company LLC, a Missouri limited liability company (“Eagle Alcohol”), which is now a wholly-owned subsidiary of Alto Ingredients, Inc. The results of Eagle Alcohol since the date of the acquisition are included in the Company’s results reported for the three and six months ended June 30, 2022.

The Company is a leading producer and distributor of specialty alcohols and essential ingredients. The Company also produces, markets and distributes renewable fuel. The Company’s production facilities in Pekin, Illinois are located in the heart of the Corn Belt, benefit from low-cost and abundant feedstock and allow for access to many additional domestic markets. In addition, the Company’s ability to load barges, rail and trucks from these facilities allows for greater access to international markets. The Company’s two production facilities in Oregon and Idaho are located in close proximity to both feed and renewable fuel customers and thus enjoy unique advantages in efficiency, logistics and product pricing.

The Company has a combined alcohol production capacity of 350 million gallons per year and produces, on an annualized basis, nearly 1.2 million tons of essential ingredients, such as dried yeast, corn gluten meal, corn gluten feed, corn germ, and distillers grains and liquid feed used in commercial animal feed and pet foods. In addition, the Company sells alcohols acquired from other producers, and markets and distributes fuel-grade ethanol produced by third parties.

The Company focuses on four key markets: Health, Home & Beauty; Food & Beverage; Essential Ingredients; and Renewable Fuels. Products for the Health, Home & Beauty market include specialty alcohols used in mouthwash, cosmetics, pharmaceuticals, hand sanitizers, disinfectants and cleaners. Products for the Food & Beverage markets include grain neutral spirits used in alcoholic beverages and vinegar as well as corn germ used for corn oils. Products for Essential Ingredients markets include dried yeast, corn gluten meal, corn gluten feed, corn germ, and distillers grains and liquid feed used in commercial animal feed and pet foods. Renewable Fuels includes fuel-grade ethanol and distillers corn oil used as a feedstock for renewable diesel and biodiesel fuels.

As of June 30, 2022, all of the Company’s production facilities were operating. As market conditions change, the Company may increase, decrease or idle production at one or more operating facilities or resume operations at any then-idled facility.

Basis of Presentation–Interim Financial Statements – The accompanying unaudited consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Results for interim periods should not be considered indicative of results for a full year. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. The accounting policies used in preparing these consolidated financial statements are the same as those described in Note 1 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included. All significant intercompany accounts and transactions have been eliminated in consolidation.

Accounts Receivable and Allowance for Doubtful Accounts – Trade accounts receivable are presented at face value, net of the allowance for doubtful accounts. The Company sells specialty alcohols to large consumer products companies, sells fuel-grade ethanol to gasoline refining and distribution companies, sells essential ingredients to animal feed customers, including distillers grains and other feed co-products to dairy operators and animal feedlots and corn oil to poultry and biodiesel customers generally without requiring collateral.

The Company maintains an allowance for doubtful accounts for balances that appear to have specific collection issues. The collection process is based on the age of the invoice and requires attempted contacts with the customer at specified intervals. If, after a specified number of days, the Company has been unsuccessful in its collection efforts, a bad debt allowance is recorded for the balance in question. Delinquent accounts receivable are charged against the allowance for doubtful accounts once uncollectibility has been determined. The factors considered in reaching this determination are the apparent financial condition of the customer and the Company’s success in contacting and negotiating with the customer. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of ability to make payments, additional allowances may be required.

Of the accounts receivable balance, approximately $60,256,000 and $63,929,000 at June 30, 2022 and December 31, 2021, respectively, were used as collateral under Kinergy’s operating line of credit. The allowance for doubtful accounts was $444,000 and $378,000 as of June 30, 2022 and December 31, 2021, respectively. The Company recorded a bad debt expense of $35,000 and $52,000 for the three months ended June 30, 2022 and 2021, respectively. The Company recorded a bad debt expense of $66,000 and $143,000 for the six months ended June 30, 2022 and 2021, respectively. The Company does not have any off-balance sheet credit exposure related to its customers.

Financial Instruments – The carrying values of cash and cash equivalents, restricted cash, accounts receivable, notes receivable, derivative assets, accounts payable, accrued liabilities and derivative liabilities are reasonable estimates of their fair values because of the short maturity of these items. The Company believes the carrying value of its long-term debt instruments are not considered materially different than fair value because the interest rates on these instruments are variable.

Business Combinations – Business acquisitions are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 “Business Combinations”. FASB ASC 805 requires the reporting entity to identify the acquirer, determine the acquisition date, recognize and measure the identifiable tangible and intangible assets acquired and liabilities assumed and recognize and measure goodwill or a gain from the purchase. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts assigned is recorded as goodwill. Adjustments to fair value assessments are recorded to goodwill over the measurement period (not longer than twelve months).

Income from Cash Grant – The Company applied for and received $22,652,000 in cash from the USDA’s Biofuel Producer Program. The program was created as part of the CARES Act in 2020, which allocated $700,000,000 to support biofuel producers who experienced market losses due to the pandemic. The cash grant is not required to be repaid. Since these funds are provided to subsidize historical losses of the Company, and are not required to be repaid, the Company accounted for the proceeds by analogy to International Accounting Standards 20 Accounting for Government Grants and Disclosure of Government Assistance, and reported as income from cash grant in the accompanying consolidated statements of operations.

Estimates and Assumptions – The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates are required as part of determining the allowance for doubtful accounts, net realizable value of inventory, estimated lives of property and equipment, long-lived asset impairments, fair value of warrants, valuation allowances on deferred income taxes, the potential outcome of future tax consequences of events recognized in the Company’s financial statements or tax returns, and the valuation of assets acquired and liabilities assumed as a result of business combinations. Actual results and outcomes may materially differ from management’s estimates and assumptions.

ACQUISITION OF EAGLE ALCOHOL.

On January 14, 2022, the Company purchased 100% of the membership interests of Eagle Alcohol. The purchase price was $14.0 million in cash plus an estimated net working capital adjustment of $1.3 million in cash. The selling members of Eagle Alcohol are eligible to receive up to an additional $14.0 million of contingent consideration, payable through a combination of $9.0 million in cash over the next three years and an aggregate of $5.0 million in the Company’s common stock on the fourth and fifth year anniversaries of the closing date, subject to the satisfaction of certain conditions, including continued employment with the Company. With respect to these payments, the Company has recognized an estimated $0.9 million and $1.8 million for the three and six months ended June 30, 2022, respectively, in selling, general and administrative expenses in the accompanying consolidated statements of operations.

Eagle Alcohol specializes in break bulk distribution of specialty alcohols. Eagle Alcohol purchases bulk alcohol from suppliers. Eagle Alcohol then stores, denatures, packages, and resells alcohol products in smaller sizes, including tank trucks, totes, and drums, that garner a premium to bulk alcohols. Eagle Alcohol delivers products to customers in the beverage, food, and related-process industries via its own dedicated trucking fleet and common carrier. The acquisition will provide the Company further vertical integration and access to new markets in the specialty alcohol industry.

Eagle Alcohol’s unaudited results for the three months ended June 30, 2022 and 2021 generated $4.1 million and $8.9 million in net sales and $0.0 million and $1.1 million in net income, respectively. Eagle Alcohol’s unaudited results for the six months ended June 30, 2022 and 2021 generated $7.9 million and $17.5 million in net sales and $0.2 million and $2.0 million in net income, respectively. The following table presents unaudited pro forma combined financial information assuming the acquisition occurred on January 1, 2021 (dollars in thousands except per share amounts):

	Three Months Ended June 30,
	2022		2021

Revenues – pro forma	$	362,189	$	303,640
Net income available to common stockholders – pro forma	$	21,516	$	7,322
Diluted net income per share – pro forma	$	0.29	$	0.10
Diluted shares		74,072		72,878

	Six Months Ended June 30,
	2022		2021

Revenues – pro forma	$	670,834	$	529,126
Net income available to common stockholders – pro forma	$	18,568	$	11,791
Diluted net income per share – pro forma	$	0.25	$	0.16
Diluted shares		72,907		72,910

The following preliminary allocation of the estimated purchase price assumes, with the exception of property and equipment and intangibles, carrying values approximate fair value. Estimates of uncollectible accounts receivable are not considered material due to the short-term nature and customer collection history. The preliminary estimate of working capital is under review by management and is subject to change. Based upon these assumptions, the preliminary purchase price allocation is as follows (in thousands):

Cash and cash equivalents	$	705
Accounts receivable		5,529
Inventories		1,345
Total current assets		7,579

Property and equipment		1,066
Right of use assets		2,749
Total tangible assets	$	11,394

Current liabilities	$	6,169
Right of use liabilities		2,749
Total liabiltiies	$	8,918


Net tangible assets acquired	$	2,476
Customer relationships		6,556
Tradename		420
Goodwill		5,908
Total Purchase Price	$	15,360

Goodwill represents the value of the downstream integration that the operations of Eagle Alcohol will add to the Company. The Company expects the amortization of goodwill to be deductible for tax purposes. For the identifiable intangible assets, the Company has estimated 12 years for useful lives for customer relationships and 10 years for tradename. For the three months ended June 30, 2022, the Company recorded amortization expense of $137,000 and $10,000 for customer relationships and tradename, respectively. For the six months ended June 30, 2022, the Company recorded amortization expense of $245,000 and $19,000 for customer relationships and tradename, respectively. Any changes to the initial estimates of the fair value of the acquired assets and assumed liabilities will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill if net assets acquired are less than the purchase price. The Company did not incur any material acquisition costs.

SEGMENTS.

The Company reports its financial and operating performance in three segments: (1) marketing and distribution, which includes marketing and merchant trading for Company-produced alcohols and essential ingredients on an aggregated basis and third-party fuel-grade ethanol sales (2) Pekin production, which includes the production and sale of alcohols and essential ingredients produced at the Company’s Pekin, Illinois campus (“Pekin Campus”), and (3) Other production, which includes the production and sale of renewable fuel and essential ingredients produced at all of the Company’s other production facilities on an aggregated basis (“Other production”), none of which are individually so significant as to be considered a reportable segment.

The following tables set forth certain financial data for the Company’s operating segments (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Net Sales
Pekin Campus, recorded as gross:
Alcohol sales	$	143,768		$	132,296		$	259,818		$	227,380
Essential ingredient sales		59,853			49,578			115,133			94,655
Intersegment sales		269			316			525			628
Total Pekin Campus sales		203,890			182,190			375,476			322,663

Marketing and distribution:
Alcohol sales, gross	$	63,558		$	86,299		$	117,484		$	143,309
Alcohol sales, net		317			532			668			984
Intersegment sales		3,242			2,618			6,239			4,862
Total marketing and distribution sales		67,117			89,449			124,391			149,155

Other production, recorded as gross:
Alcohol sales	$	67,184		$	22,153		$	126,991		$	38,121
Essential ingredient sales		23,372			7,252			42,309			12,395
Intersegment sales		—			332			12			637
Total Other production sales		90,556			29,737			169,312			51,153

Corporate and other		4,137			—			7,904			—
Intersegment eliminations		(3,511	)		(3,266	)		(6,776	)		(6,127	)
Net sales as reported	$	362,189		$	298,110		$	670,307		$	516,844

Cost of goods sold:
Pekin Campus	$	195,691		$	171,547		$	364,573		$	299,250
Marketing and distribution		63,796			85,746			118,510			139,705
Other production		91,606			27,325			169,851			51,442
Corporate and other		3,197			—			6,070			—
Intersegment eliminations		(945	)		(1,741	)		(2,314	)		(2,623	)
Cost of goods sold as reported	$	353,345		$	282,877		$	656,690		$	487,774

Gross profit:
Pekin Campus	$	8,199		$	10,643		$	10,903		$	23,413
Marketing and distribution		3,321			3,703			5,881			9,450
Other production		(1,050	)		2,412			(539	)		(289	)
Corporate and other		940			—			1,834			—
Intersegment eliminations		(2,566	)		(1,525	)		(4,462	)		(3,504	)
Gross profit as reported	$	8,844		$	15,233		$	13,617		$	29,070

Income before provision for income taxes:
Pekin Campus	$	16,331		$	10,726		$	16,413		$	20,737
Marketing and distribution		1,036			1,678			1,824			5,411
Other production		7,570			(1,666	)		6,361			(7,612	)
Corporate and other		(2,822	)		(2,348	)		(5,085	)		(5,468	)
	$	22,115		$	8,390		$	19,513		$	13,068

Depreciation and amortization of intangibles:
Pekin Campus	$	5,084		$	4,326		$	9,621		$	8,671
Other production		1,458			1,468			2,822			2,966
Corporate and other		186			17			419			33
	$	6,728		$	5,811		$	12,862		$	11,670

Interest expense, net of capitalized interest:
Pekin Campus	$	(3	)	$	73		$	(33	)	$	591
Marketing and distribution		336			222			573			426
Other production		(39	)		46			(54	)		182
Corporate and other		25			704			33			1,731
	$	319		$	1,045		$	519		$	2,930

The following table sets forth the Company’s total assets by operating segment (in thousands):

	June 30, 2022		December 31, 2021
Total assets:
Pekin Campus	$	273,688	$	266,197
Marketing and distribution		149,564		130,302
Other production		64,467		57,046
Corporate and other		43,600		31,408
	$	531,319	$	484,953

4.	INVENTORIES.

Inventories consisted primarily of bulk ethanol, specialty alcohols, corn, essential ingredients and unleaded fuel, and are valued at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. Inventory is net of a valuation adjustment of $3,010,000 and $0 as of June 30, 2022 and December 31, 2021, respectively. Inventory balances consisted of the following (in thousands):

	June 30, 2022		December 31, 2021
Finished goods	$	44,610	$	35,509
Work in progress		8,586		6,909
Raw materials		13,171		10,837
Other		1,071		1,118
Total	$	67,438	$	54,373

5.	DERIVATIVES.

The business and activities of the Company expose it to a variety of market risks, including risks related to changes in commodity prices. The Company monitors and manages these financial exposures as an integral part of its risk management program. This program recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effects that market volatility could have on operating results.

Commodity Risk – Cash Flow Hedges – The Company uses derivative instruments to protect cash flows from fluctuations caused by volatility in commodity prices for periods of up to twelve months in order to protect gross profit margins from potentially adverse effects of market and price volatility on alcohol sales and purchase commitments where the prices are set at a future date and/or if the contracts specify a floating or index-based price. In addition, the Company hedges anticipated sales of alcohol to minimize its exposure to the potentially adverse effects of price volatility. These derivatives may be designated and documented as cash flow hedges and effectiveness is evaluated by assessing the probability of the anticipated transactions and regressing commodity futures prices against the Company’s purchase and sales prices. Ineffectiveness, which is defined as the degree to which the derivative does not offset the underlying exposure, is recognized immediately in cost of goods sold. For the three and six months ended June 30, 2022 and 2021, the Company did not designate any of its derivatives as cash flow hedges.

Commodity Risk – Non-Designated Hedges – The Company uses derivative instruments to lock in prices for certain amounts of corn and alcohols by entering into exchange-traded forward contracts or options for those commodities. These derivatives are not designated for hedge accounting treatment. The changes in fair value of these contracts are recorded on the balance sheet and recognized immediately in cost of goods sold. The Company recognized net gains of $16,619,000 and $8,868,000 as the change in the fair value of these contracts for the three months ended June 30, 2022 and 2021, respectively. The Company recognized net gains of $21,936,000 and $19,411,000 as the change in the fair value of these contracts for the six months ended June 30, 2022 and 2021, respectively.

Non Designated Derivative Instruments – The classification and amounts of the Company’s derivatives not designated as hedging instruments, and related cash collateral balances, are as follows (in thousands):

As of June 30, 2022

Assets

Liabilities

Type of Instrument

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Cash collateral balance

Restricted cash

17,361

Commodity contracts

Derivative assets

27,488

Derivative liabilities

32,770

As of December 31, 2021

Assets

Liabilities

Type of Instrument

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Cash collateral balance

Restricted cash

11,513

Commodity contracts

Derivative assets

15,839

Derivative liabilities

13,582

The above amounts represent the gross balances of the contracts; however, the Company does have a right of offset with each of its derivative brokers, but its intent is to close out positions individually, therefore, they are reported at gross.

The classification and amounts of the Company’s recognized gains for its derivatives not designated as hedging instruments are as follows (in thousands):

		Realized Gains
		For the Three Months Ended June 30,
Type of Instrument	Statements of Operations Location	2022		2021

Commodity contracts	Cost of goods sold	$	13,913	$	18,158
		$	13,913	$	18,158

		Realized Gains
		For the Six Months Ended June 30,
Type of Instrument	Statements of Operations Location	2022		2021

Commodity contracts	Cost of goods sold	$	29,476	$	24,343
		$	29,476	$	24,343

		Unrealized Gains (Losses)
		For the Three Months Ended June 30,
Type of Instrument	Statements of Operations Location	2022		2021

Commodity contracts	Cost of goods sold	$	2,706	$	(9,290	)
		$	2,706	$	(9,290	)

		Unrealized (Losses)
		For the Six Months Ended June 30,
Type of Instrument	Statements of Operations Location	2022			2021

Commodity contracts	Cost of goods sold	$	(7,540	)	$	(4,932	)
		$	(7,540	)	$	(4,932	)

DEBT.

Long-term borrowings are summarized as follows (in thousands):

	June 30, 2022			December 31, 2021
Kinergy line of credit	$	52,596		$	50,401
Less unamortized debt financing costs		(78	)		(40	)
Less short-term portion		—			—
Long-term debt	$	52,518		$	50,361

As of June 30, 2022, Kinergy had $28.6 million in unused borrowing availability under its line of credit. In addition, the Company believes it is currently in compliance with its covenants under the line of credit.

7.	COMMITMENTS AND CONTINGENCIES.

Sales Commitments – At June 30, 2022, the Company had entered into sales contracts with its major customers to sell certain quantities of alcohol and essential ingredients. The Company had open alcohol indexed-price contracts for 103,094,000 gallons as of June 30, 2022 and open fixed-price alcohol sales contracts totaling $102,157,000 as of June 30, 2022. The Company had open fixed-price sales contracts for essential ingredients totaling $18,847,000 as of June 30, 2022. These sales contracts are scheduled to be completed throughout 2022.

Purchase Commitments – At June 30, 2022, the Company had indexed-price purchase contracts to purchase 12,746,000 gallons of alcohol and fixed-price purchase contracts to purchase $68,886,000 of alcohol from its suppliers. The Company had fixed-price purchase contracts to purchase $104,062,000 of corn from its suppliers as of June 30, 2022. The Company had fixed-price purchase contracts for natural gas totaling $7,724,000 and indexed-price purchase contracts for natural gas totaling 2,140,000 MMBTU. The Company also had future commitments for certain capital projects totaling $34,800,000. These purchase commitments are scheduled to be satisfied throughout 2022 and 2023.

Litigation – General – The Company is subject to various claims and contingencies in the ordinary course of its business, including those related to litigation, business transactions, employee-related matters, environmental regulations, and others. When the Company is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the Company will record a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the claim if the likelihood of a potential loss is reasonably possible and the amount involved could be material. While there can be no assurances, the Company does not expect that any of its pending legal proceedings will have a material impact on the Company’s financial condition or results of operations.

PENSION AND RETIREMENT BENEFIT PLANS.

The Company sponsors a defined benefit pension plan (the “Retirement Plan”) and a healthcare and life insurance plan (the “Postretirement Plan”).

The Retirement Plan is noncontributory, and covers only “grandfathered” unionized employees at the Company’s Pekin, Illinois facility who fulfill minimum age and service requirements. Benefits are based on a prescribed formula based upon the employee’s years of service. The Retirement Plan, which is part of a collective bargaining agreement, covers only union employees hired prior to November 1, 2010.

The Company uses a December 31 measurement date for its Retirement Plan. The Company’s funding policy is to make the minimum annual contribution required by applicable regulations. As of December 31, 2021, the Retirement Plan’s accumulated projected benefit obligation was $23.8 million, with a fair value of plan assets of $20.0 million. The underfunded amount of $3.8 million is recorded on the Company’s consolidated balance sheet in other liabilities.

For the three months ended June 30, 2022, the Retirement Plan’s net periodic benefit was $8,000, comprised of $273,000 of expected return on plan assets, partially offset by $164,000 in interest cost and $101,000 in service cost. For the three months ended June 30, 2021, the Retirement Plan’s net periodic expense was $22,000, comprised of $151,000 in interest cost and $109,000 in service cost, partially offset by $238,000 of expected return on plan assets. For the six months ended June 30, 2022, the Retirement Plan’s net periodic benefit was $16,000, comprised of $546,000 of expected return on plan assets, partially offset by $328,000 in interest cost and $202,000 in service cost. For the six months ended June 30, 2021, the Retirement Plan’s net periodic expense was $44,000, comprised of $302,000 in interest cost and $218,000 in service cost, partially offset by $476,000 of expected return on plan assets.

The Postretirement Plan provides postretirement medical benefits and life insurance to certain “grandfathered” unionized employees. Employees hired after December 31, 2000 are not eligible to participate in the Postretirement Plan. The Postretirement Plan is contributory, with contributions required at the same rate as active employees. Benefit eligibility under the plan declines at age 65 from a defined benefit to a defined dollar cap based upon years of service. As of December 31, 2021, the Postretirement Plan’s accumulated projected benefit obligation was $4.3 million and is recorded on the Company’s consolidated balance sheet in other liabilities. The Company’s funding policy is to make the minimum annual contribution required by applicable regulations.

For the three months ended June 30, 2022, the Postretirement Plan’s net periodic expense was $32,000, comprised of $6,000 of interest cost and $26,000 of service cost. For the three months ended June 30, 2021, the Postretirement Plan’s net periodic expense was $42,000, comprised of $10,000 of interest cost, $26,000 of service cost and $6,000 of amortization expense.

For the six months ended June 30, 2022, the Postretirement Plan’s net periodic expense was $64,000, comprised of $12,000 of interest cost and $52,000 of service cost. For the six months ended June 30, 2021, the Postretirement Plan’s net periodic expense was $84,000, comprised of $20,000 of interest cost, $52,000 of service cost and $12,000 of amortization expense.

9.	FAIR VALUE MEASUREMENTS.

The fair value hierarchy prioritizes the inputs used in valuation techniques into three levels, as follows:

●

Level 1 – Observable inputs – unadjusted quoted prices in active markets for identical assets and liabilities;

●

Level 2 – Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data; and

●

Level 3 – Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable. For fair value measurements using significant unobservable inputs, a description of the inputs and the information used to develop the inputs is required along with a reconciliation of Level 3 values from the prior reporting period.

Pooled separate accounts – Pooled separate accounts invest primarily in domestic and international stocks, commercial paper or single mutual funds. The net asset value is used as a practical expedient to determine fair value for these accounts. Each pooled separate account provides for redemptions by the Retirement Plan at reported net asset values per share, with little to no advance notice requirement, therefore these funds are classified within Level 2 of the valuation hierarchy.

Long-Lived Assets Held-for-Sale – The Company recorded its long-lived assets associated with its property and equipment held-for-sale at fair value at June 30, 2022 and December 31, 2021 of $1,000,000. The fair values of these assets are based on observable values for the assets through corroboration with market data and are designated as Level 3 inputs.

Other Derivative Instruments – The Company’s other derivative instruments consist of commodity positions. The fair values of the commodity positions are based on quoted prices on the commodity exchanges and are designated as Level 1 inputs.

The following table summarizes recurring and nonrecurring fair value measurements by level at June 30, 2022 (in thousands):

	Fair
	Value			Level 1			Level 2		Level 3
Assets:
Derivative financial instruments	$	27,488		$	27,488		$	—	$	—
Long-lived assets held-for-sale		1,000			—			—		1,000
	$	28,488		$	27,488		$	—	$	1,000

Liabilities:
Derivative financial instruments	$	(32,770	)	$	(32,770	)	$	—	$	—

The following table summarizes recurring and nonrecurring fair value measurements by level at December 31, 2021 (in thousands):

											Benefit Plan
	Fair										Percentage
	Value			Level 1			Level 2		Level 3		Allocation
Assets:
Derivative financial instruments	$	15,839		$	15,839		$	—	$	—
Long-lived assets held-for-sale		1,000			—			—		1,000
Defined benefit plan assets(1)
(pooled separate accounts):
Large U.S. Equity(2)		5,612			—			5,612		—		28	%
Small/Mid U.S. Equity(3)		3,684			—			3,684		—		18	%
International Equity(4)		2,909			—			2,909		—		15	%
Fixed Income(5)		7,782			—			7,782		—		39	%
	$	36,826		$	15,839		$	19,987	$	1,000

Liabilities:
Derivative financial instruments	$	(13,582	)	$	(13,582	)	$	—	$	—

(1)	Included in other assets in the consolidated balance sheets.

(2)	This category includes investments in funds comprised of equity securities of large U.S. companies. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund.

(3)	This category includes investments in funds comprised of equity securities of small- and medium-sized U.S. companies. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund.

(4)	This category includes investments in funds comprised of equity securities of foreign companies including emerging markets. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund.

(5)

This category includes investments in funds comprised of U.S. and foreign investment-grade fixed income securities, high-yield fixed income securities that are rated below investment-grade, U.S. treasury securities, mortgage-backed securities, and other asset-backed securities. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund.

10.

EARNINGS PER SHARE.

The following tables compute basic and diluted earnings per share (in thousands, except per share data):

	Three Months Ended June 30, 2022
	Income Numerator			Shares Denominator		Per-Share Amount
Net income attributed to Alto Ingredients, Inc.	$	22,115
Less: Preferred stock dividends		(315	)
Less: Income allocated to participating securities		(284	)
Basic income per share:
Income available to common stockholders	$	21,516			72,936	$	0.29
Add: Dilutive instruments		—			187
Diluted income per share:
Income available to common stockholders	$	21,516			73,123	$	0.29

	Three Months Ended June 30, 2021
	Income Numerator			Shares Denominator	Per-Share Amount
Net income attributed to Alto Ingredients, Inc.	$	8,390
Less: Preferred stock dividends		(315	)
Less: Income allocated to participating securities		(

SEC Form 10-Q filed by Alto Ingredients Inc.