MGP Ingredients, Inc. (formerly named MGPI Holdings Inc.) (herein the "Company" or, when referenced prior to the Reorganization, referred to herein as "Holdings") is a Kansas corporation headquartered in Atchison, Kansas. It was incorporated in 2011 and is a holding company with no operations of its own. Its principal, directly-owned, operating subsidiaries are MGPI of Indiana, LLC (formerly named Firebird Acquisitions, LLC)("MGPI-I") and MGPI Processing, Inc. (formerly named MGP Ingredients, Inc.) ("Processing"), which was incorporated in Kansas in 1957 and is the successor to a business founded in 1941 by Cloud L. Cray, Sr.

On January 3, 2012, Processing reorganized into a holding company structure (the "Reorganization") through a merger (the "Merger") with MGPI Merger Sub, Inc., a Kansas corporation, which was an indirect, wholly-owned subsidiary of Processing and a direct, wholly-owned subsidiary of Holdings. Holdings was formerly a direct, wholly-owned subsidiary of Processing. Each of Holdings and MGPI Merger Sub, Inc. were organized in connection with the Merger. Processing was the surviving corporation in the Merger and became a direct, wholly-owned subsidiary of Holdings as a result of the Merger. Upon completion of the Reorganization, Holdings replaced Processing as the SEC registrant and publicly-held corporation, and former holders of common stock of Processing now hold the same number of shares and same ownership percentage of the Company as they held of Processing immediately prior to the Reorganization. The consolidated assets and liabilities of Holdings and its subsidiaries immediately after the Reorganization were the same as the consolidated assets and liabilities of Processing and its subsidiaries immediately before the effective time of the Merger. Holdings' articles of incorporation and bylaws are the same in all material respects as those of Processing before the Merger, and each director of Processing became a director of Holdings. Management of Holdings following the Merger is the same in all material respects as the management of Processing prior to the Merger. Processing has distributed three of its formerly directly owned subsidiaries, MGPI-I, D.M. Ingredients, GmbH and Midwest Grain Pipeline, Inc., to Holdings. Processing's other subsidiary, Illinois Corn Processing, LLC, remains a directly owned 30% subsidiary of Processing (ICP was a 50% directly owned subsidiary at December 31, 2011 - see Note 3. Investment in Joint Ventures). By engaging in the Reorganization, the Company sought to better isolate risks that might reside in one facility or operating unit from its other facilities or operating units. It also believes that a holding company structure will facilitate ramp-up and disposition of new businesses that might be developed, accommodate future growth through acquisitions and joint ventures, create tighter focus within operating units and enhance commercial activities and financing possibilities.

As used in Management's Discussion and Analysis, unless the context otherwise requires, the terms "Company," "we," or "our" when referenced to after the Reorganization mean MGP Ingredients, Inc. (formerly named MGPI Holdings, Inc.) and its consolidated subsidiaries, and these same terms when referenced prior to the Reorganization mean Processing (formerly named MGP Ingredients, Inc.) and its consolidated subsidiaries.

As previously announced, on August 25, 2011 we changed our fiscal year end from June 30 to December 31. We filed a transition report on Form 10-K with the SEC for the period beginning July 1, 2011 and ending December 31, 2011. The discussion below compares results for the quarter ended March 31, 2012, which is the first quarter of the fiscal year ending December 31, 2012, to the quarter ended March 31, 2011, which was the third quarter of the fiscal year ended June 30, 2011.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included in this Form 10-Q, as well as our audited consolidated financial statements and accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations-General, set forth in Items 8 and Item 7, respectively of our Form 10-K for the six month transition period ended December 31, 2011.

RECENT INITIATIVES

Acquisition of LDI's Distillery Business and related matters

On December 27, 2011, we acquired substantially all the assets used by Lawrenceburg Distillers Indiana, LLC ("LDI") in its beverage alcohol business, and we now produce premium bourbon, corn and rye whiskeys, gin, grain neutral spirits and distillers feed at our distillery located in Lawrenceburg and Greendale, Indiana ("Indiana Distillery"). The purchase price of the acquisition was equal to the current assets minus current liabilities as of December 27, 2011, which was estimated at closing to be $11,041 and is subject to post closing adjustments for working capital true-ups. Subsequent to March 31, 2012, management and the seller completed working capital true-ups. The result of the true-ups was not material to our financial results.

Since acquiring the distillery operations of LDI, we have taken several steps to improve its profitability. We have also begun the planning stages of implementing an SAP information technology system for accounting, sales, supply chain and manufacturing at this facility. We expect to go live on SAP during the second half of fiscal 2012.

During the quarter ended March 31, 2012, MGPI-I and the union that covers certain employees at the Indiana Distillery ratified a new multi-year collective bargaining unit agreement, that will terminate December 31, 2017.

In conjunction with the acquisition of the distillery operations of LDI, we acquired a grain elevator that was not expected to be used, which was reported as Assets held for sale at December 31, 2011. On March 21, 2012, we sold this facility and its related assets for $2,252, resulting in a loss of $48. Net proceeds received, after fees and prorated taxes, totaled $2,232.

Ownership change of ICP

On February 1, 2012, Illinois Corn Processing Holdings ("ICP Holdings"), an affiliate of SEACOR Energy, Inc., exercised its option to purchase an additional 20 percent of the membership interest in ICP. The sales price was $9,103 and was determined in accordance with the LLC Interest Purchase Agreement. Following its exercise, ICP Holdings owns 70 percent of ICP, is entitled to name 4 of ICP's 6 advisory board members, and generally has control of ICP's day-to-day operations. The Company owns 30 percent of ICP and is entitled to name 2 of ICP's 6 advisory board members. The transaction resulted in a pre-tax gain of $4,055.

Agreement to Develop New Technologies and Products

On January 5, 2012 we announced that we are teaming up with the Kansas Alliance for Biorefining and Bioenergy ("KABB") and four Kansas universities to develop new technologies and products that use bio-based raw materials. The three-year research and development efforts will seek to find innovative ways to produce cost-competitive bio-based foams, plastics, fuels and other materials from distillers dried grains and soluables.

Grain Supply Agreements

During the quarter ended March 31, 2012, we entered a grain supply contract for the Indiana Distillery and subsequent to March 31, 2012, we extended this agreement for use at our Atchison facility. The grain supply contracts permit us to purchase corn for delivery up to 12 months in the future, at fixed prices. While the Atchinson contract only recently became executed, we made corn purchase commitments for future delivery at our Atchison facility throughout much of the quarter ended March 31, 2012. The pricing for these contracts is based on a formula with several factors, including corn futures prices and the timing of our pricing decisions.

Use of Hedge Accounting

Reducing earnings volatility from commodity price swings has long been at the forefront of our risk management strategy, and in early calendar 2011, the Company's Board of Directors made the decision to adopt hedge accounting. Effective July 1, 2011, we elected to restart the use of hedge accounting for qualifying derivative contracts entered into on and after July 1, 2011. For further discussion related to the accounting policy and accounting requirements for our derivative instruments, see Note 1. Accounting Policies and Basis of Presentation - Derivatives and Note 6. Derivative Instruments and Fair Value Measurements set forth in Part I, Item 1.

Our utilization of hedge accounting proved to mitigate a portion of our earnings volatility that had been experienced over the few years leading up to the restart of hedge accounting.

In connection with our new grain supply agreements discussed above, we now order corn anywhere from a month to 12 months in the future. Accordingly, we de-designated certain cash flow hedges, which resulted in a reclassification of a $27 loss from accumulated other comprehensive income into current period earnings. As of March 31, 2012, we had no exchange traded corn futures contracts designated as cash flow hedges. We expect the volume of corn futures and options and the use of hedge accounting to be reduced in the future under our current strategy.

RESULTS OF OPERATIONS

General

During fiscal 2012, our focus continues to be on a profitable sales mix through value-added products with higher margins as well as pricing initiatives to better align our pricing with higher commodity prices. With our recent acquisition of LDI's beverage alcohol business, we have added bourbon and whiskey to our value-added products, while also increasing our gin, grain neutral spirits and distillers feed output. With this acquisition we now also earn revenue for warehousing services to age customer-owned product. This acquisition added significant volume to our food grade alcohol sales, which we did not have the same period a year ago.

During the quarter ended March 31, 2012, our sales increased over the period ended March 31, 2011, and our pricing out-paced the increased costs of raw materials. This led to an improvement in return on sales in our ingredient solutions segment. In our distillery products segment, our pricing also out-paced the increased costs of raw materials (exclusive of the impact related to the accounting for open commodity contracts); however, our return on sales declined primarily due to the accounting for open commodity contracts.

Critical Accounting Policies and Estimates

Reference is made to Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies, in Item 7 of Form 10-K for the six month transition period ended December 31, 2011, for a discussion of our critical accounting policies and the use of certain judgments and estimates in the preparation of our consolidated financial statements.

DEVELOPMENTS IN THE DISTILLERY PRODUCTS SEGMENT

Our strategy continues to be the production of value added products, which includes a significant proportion of total distillery products sales coming from our high quality food grade alcohol and less focus on the production of fuel grade alcohol. Our goal is to maintain inventory levels for whiskey and bourbon sufficient to satisfy anticipated future purchase orders in the wholesale market, while meeting current demand for new distillate. Production schedules are adjusted from time to time to bring inventories into balance with established future demand.

As discussed previously in the "- Recent Initiatives" section, we:

· recently acquired the distillery operations of LDI, which added significant volume to our results for the current quarter;

· sold our grain elevator and related assets for $2,252;

· sold 20 percent of our membership interest in ICP; and

· entered into a grain supply contract for our Indiana Distillery and subsequent to March 31, 2012, we extended the grain supply arrangements to our Atchison facility.

In alignment with the strategy described above, increased production volume of our valued added products during the quarters ended March 31, 2012 and 2011 helped us to maintain a high level of sales of high quality food grade alcohol. Sales of food grade alcohol for the periods ending March 31, 2012 and 2011 approximated 82.0 percent of our total distillery products sales for the respective periods. Meanwhile, our sales of fuel grade alcohol approximated 3.1 percent and 5.7 percent of total distillery products sales for the current and year-ago periods, respectively.

DEVELOPMENTS IN THE INGREDIENT SOLUTIONS SEGMENT

Our sales for the quarter ended March 31, 2012 were flat when compared to the same quarter of the previous year; however, our profitability increased due to improved pricing and lower natural gas prices. Sales of our commodity products increased as a percentage of total segment sales. Commodity starch prices experienced a significant increase.

As we move forward, we continue to focus on a profitable sales mix by production of our value-added products with higher margins as well as pricing initiatives to better align our pricing with higher commodity prices.

DEVELOPMENTS IN THE OTHER SEGMENT

As discussed previously, during January 2012 we announced an agreement with the KABB and four Kansas universities to develop new technologies and products that use bio-based raw materials.

GENERAL

Consolidated earnings for the quarter ended March 31, 2012 increased compared to the same period a year ago, with net income of $1,876 on consolidated net sales of $86,344 versus net income of $701 on consolidated net sales of $64,188 in the quarter ended March 31, 2011. We experienced a loss from operations of $2,243 for the quarter ended March 31, 2012 compared to income from operations of $829 for the quarter ended March 31, 2011.

The increase in net sales was primarily the result of our increased sales volume in the distillery products segment. Our operating results experienced an unfavorable swing quarter-over-quarter due to a decrease in earnings from our three segments as well as one-time expenses related to the LDI acquisition and our corporate restructuring. Our combined earnings for the distillery products segment, ingredient solutions and other segment decreased from $5,400 for the quarter ended March 31, 2011 to $4,228 for the quarter ended March 31, 2012. Despite these factors, our net income increased quarter-over-quarter primarily due to a $4,055 gain related to the sale of a 20 percent interest in our joint venture, ICP, as well as earnings from our joint venture operations.

In our distillery products segment, we achieved both volume and pricing increases compared to the same period a year ago. In our ingredient solutions segment we experienced an increase in pricing, which was nearly offset by a decrease in volume. Other segment sales declined slightly. Pricing in all of our segments out-paced the increased costs for corn and flour (exclusive of the impact related to the accounting for open commodity contracts), which led to an increase in return on sales in our ingredients solutions segment from 0.7 percent for the quarter ended March 31, 2011 to 12.1 percent for the quarter ended March 31, 2012. On the other hand, return on sales in our distillery products segment decreased from 10.9 percent for the quarter ended March 31, 2011 to 3.7 percent for the quarter ended March 31, 2012, which was significantly impacted by an unfavorable swing in earnings related to the accounting for open commodity contracts.

NET SALES

Net sales for the quarter ended March 31, 2012 increased $22,156, or 34.5 percent, compared to the quarter ended March 31, 2011. The increase was primarily attributable to increased net sales in the distillery products segment as sales in each of the ingredient solutions and other segments experienced de minimis quarter-over-quarter changes in net sales. Net sales in the distillery products segment as a whole increased primarily as a result of higher volumes of food grade alcohol, as well as from increased prices per unit. Production from our new Indiana Distillery contributed to increased sales of food grade alcohol during the quarter ended March 31, 2012, which we did not own the same period a year ago. The de minimis increase in net sales in the ingredient solutions segment was due to increased pricing partially offset by lower volumes in certain products. The de minimis decrease in net sales for our other segment was due to lower volumes partially offset by increased pricing.

COST OF SALES

For the quarter ended March 31, 2012, cost of sales increased $23,096, or 40.0 percent, compared to the quarter ended March 31, 2011. For the quarter ended March 31, 2012, cost of sales was 93.5 percent of net sales, which generated a gross profit margin of 6.5 percent. For the quarter ended March 31, 2011, cost of sales was 89.8 percent of net sales, which generated a gross margin of 10.2 percent.

Our higher overall costs were directly the result of production increases related to distillery products, higher corn and flour prices, and the unfavorable impact of open derivative contracts. Production of food grade alcohol from our new Indiana Distillery contributed to the overall increase in cost of sales during the quarter ended March 31, 2012, which we did not own the same period a year ago. These cost increases were partially offset by lower natural gas prices. We saw increases in the per-bushel cost of corn and the per-pound cost of flour (exclusive of the impact related to the accounting for open commodity contracts), which averaged 6.0 percent and 5.0 percent higher, respectively, than the quarter ended March 31, 2011. These increases were partially offset by a decrease in the per-million cubic foot cost of natural gas, which averaged nearly 18.7 percent lower than the quarter ended March 31, 2011.

Cost of sales was also impacted by changes in the fair value of open derivatives contracts not designated as cash flow hedges. For the quarter ended March 31, 2012, our open commodity contracts had an $827 unfavorable impact to cost of sales compared to a $1,550 favorable impact for the quarter ended March 31, 2011. We use these contracts to mitigate the impact of changes in commodity prices.

For the quarter ended March 31, 2011, hedge accounting was not used as we did not restart our use of hedge accounting until July 1, 2011 (for qualifying derivative contracts entered into on and after July 1, 2011) as further discussed in "- Recent Initiatives" and in Note 1. Accounting Policies and Basis of Presentation set forth in Item I, Financial Statements of this Form 10-Q and incorporated herein by reference. In connection with the grain supply agreements discussed previously, we de-designated certain cash flow hedges, which resulted in a reclassification of a $27 loss from accumulated other comprehensive income into cost of sales during the quarter ended March 31, 2012. As of March 31, 2012, we had no exchange traded corn futures contracts designated as cash flow hedges.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the quarter ended March 31, 2012 increased by $2,058, or 36.2 percent, compared to the quarter ended March 31, 2011. This increase was primarily due to an increase in professional fees, higher personnel costs and long-term incentives, and increased accruals associated with our short-term incentive program. Professional fees increased primarily due to our corporate reorganization and our acquisition of LDI's beverage alcohol business. The higher personnel costs were impacted by our acquisition of LDI's beverage alcohol business in late 2011.

OTHER OPERATING COSTS

Other operating costs for the quarter ended March 31, 2012 totaled $74 compared to $0 for the quarter ended March 31, 2011. The components of other operating costs include a $48 loss on sale of assets and a $26 increase to our restructuring accrual for rail cars.

GAIN ON SALE OF JOINT VENTURE INTEREST

As previously discussed, on February 1, 2012, ICP Holdings exercised its option to purchase an additional 20 percent of the membership interest in ICP. The sales price was $9,103 and the transaction resulted in a pre-tax gain of $4,055.

INTEREST EXPENSE

Interest expense for the quarter period ended March 31, 2012 increased $163 compared to the same period ended March 31, 2011. This increase was primarily the result higher average daily balance and interest rate on our line of credit as well as higher long term debt compared to the same period a year ago.

EQUITY IN EARNINGS (LOSS) OF JOINT VENTURES

ICP

On February 1, 2012, ICP Holdings exercised its option to purchase an additional 20 percent of the membership interest in ICP. Following its exercise, the Company owns 30 percent of ICP.

For the quarter ended March 31, 2012, ICP had earnings of $1,128. As a 50 percent owner for the month of January 2012 and a 30 percent owner for the months of February and March 2012, our portion of the earnings was $473.

For the quarter ended March 31, 2011, ICP had earnings of $158. As a 50 percent owner, our portion of the earnings was $79.

As further described in Note 3. Investment in Joint Ventures, ICP's Limited Liability Company Agreement gives us and our joint venture partner, ICP Holdings certain rights to shut down the Pekin plant if ICP operates at an EBITDA loss of $500 in any quarter. Such rights are conditional in certain instances but are absolute if EBITDA losses aggregate $1,500 over any three consecutive quarters or if ICP's net working capital is less than $2,500.

D.M. Ingredients, GmbH ("DMI")

On July 17, 2007, we completed a transaction with Crespel and Dieters GmbH & Co. KG for the formation and financing of a joint venture, DMI, located in Ibbenburen, Germany. DMI's primary operation is the production of specialty ingredients for marketing by MGPI domestically and, through Crespel and Dieters and third parties, internationally. We own a 50 percent interest in DMI, and account for it using the equity method of accounting. As of March 31, 2012, we had invested $571 in DMI since July 2007.

For the quarters ended March 31, 2012 and 2011, DMI had earnings (loss) of $(72) and $90, respectively. As a 50 percent joint venture holder, our equity in earnings (loss) was $(36) and $45 for the quarters ended March 31, 2012 and 2011, respectively.

DMI's functional currency is the European Union Euro. Accordingly, changes in the holding value of the Company's investment in DMI resulting from changes in the exchange rate between the U.S. Dollar and the European Union Euro are recorded in other comprehensive income as a translation adjustment on unconsolidated foreign subsidiary net of deferred taxes.

NET INCOME

As the result of the factors outlined above, we experienced net income of $1,876 in the quarter ended March 31, 2012 compared to net income of $701in the quarter ended March 31, 2011.

SEGMENT RESULTS

The following is a summary of revenues and pre-tax profits / (loss) allocated to
each reportable operating segment for the quarterly periods ended March 31, 2012
and 2011. For additional information regarding our operating segments, see Note
7. Operating Segments included under Part 1, Item 1, Financial Statements of
this Form 10-Q and incorporated herein by reference.

                              Quarter Ended
                        March 31,       March 31,
                          2012            2011
Distillery products
Net Sales              $    72,485     $    50,327
Pre-Tax Income               2,686           5,475
Ingredient solutions
Net Sales                   13,578          13,574
Pre-Tax Income               1,638             100
Other
Net Sales                      281             287
Pre-Tax Loss                   (96 )          (175 )

DISTILLERY PRODUCTS

Total distillery products sales revenue for the quarter ended March 31, 2012 increased $22,158, or 44.0 percent, compared to the quarter ended March 31, 2011. This increase was primarily attributable to an increase in sales of high quality food grade alcohol of 44.4 percent, which was due to a 27.9 percent increase in per unit pricing as well as a 12.9 percent increase in volume compared to the same period a year ago. With the recent acquisition of LDI's beverage alcohol business we added significant volume to our food grade alcohol sales, which we did not have the same period a year ago. Also contributing to the overall sales increase in the distillery products segment were increases of $3,725 and $625 in distillers feed and warehousing revenue earned at our Indiana Distillery, respectively, for the quarter ended March 31, 2012 compared to the quarter ended March 31, 2011. Our pricing out-paced the increased costs for raw materials (exclusive of the impact related to the accounting for open commodity contracts). For the quarter ended March 31, 2012, the per-bushel cost of corn averaged nearly 6.0 percent higher than the quarter ended March 31, 2011. The per-million cubic foot cost of natural gas averaged nearly 18.7 percent lower than the same period a year ago. While overall revenues for distillery products increased for the quarter ended March 31, 2012 as compared to the same quarter a year ago, return on sales decreased as previously described in "-General", which was primarily driven by an unfavorable swing in earnings related to the accounting for open commodity contracts. For the quarter ended March 31, 2012, our open commodity contracts had an $827 unfavorable impact to cost of sales compared to a $1,550 favorable impact for the quarter ended March 31, 2011.

INGREDIENT SOLUTIONS

Total ingredient solutions sales revenue for the quarter ended March 31, 2012 increased by $4 compared to the quarter ended March 31, 2011. Specialty starches saw a 13.3 percent decrease in revenues compared to the same period a year ago due to a volume decrease partially offset by an increase in per unit pricing. Revenues for specialty proteins for the quarter ended March 31, 2012 increased 2.9 percent compared to the quarter ended March 31, 2011 due to a volume increase partially offset by a decrease in per unit pricing. Commodity starch saw a 49.0 increase in revenues compared the same period a year ago due to both per unit pricing and volume increases. Revenues for commodity starches and proteins totaled 18.9 percent and 12.8 percent of total segment sales for the quarters ended March 31, 2012 and 2011, respectively. While we experienced a quarter-over-quarter increase in our commodity products as a percentage of total segment sales, our focus remains on the production and commercialization of specialty ingredients. Our margins in the ingredient solutions segment saw an increase during the quarter ended March 31, 2012 compared to the quarter ended March 31, 2011. This was principally due to improved average selling prices, and . . .