Alto Ingredients, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report. This discussion contains forward-looking statements, reflecting our plans and objectives that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors” and elsewhere in this report. Overview We are a leading producer and distributor of specialty alcohols and essential ingredients, and the largest producer of specialty alcohols in the United States. We operate five alcohol production facilities. Three of our production facilities are located in Illinois, one is located in Oregon and another is located in Idaho. We have an annual alcohol production capacity of 350 million gallons, comprised of 210 million gallons of fuel-grade ethanol and up to 140 million gallons of specialty alcohols. We market and distribute all of the alcohols produced at our facilities as well as fuel-grade ethanol produced by third parties. In 2022, we marketed and distributed approximately 420 million gallons combined of our own alcohols as well as fuel-grade ethanol produced by third parties, and over 1.6 million tons of essential ingredients on a dry matter basis. We report our 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 sales of fuel-grade ethanol sourced from third parties, (2) Pekin production, which includes the production and sale of alcohols and essential ingredients produced at our three production facilities located in Pekin, Illinois, which we refer to as our Pekin Campus, and (3) Other production, which includes the production and sale of renewable fuel and essential ingredients produced at all of our other production facilities on an aggregated basis, none of which are individually so significant as to be considered a separately reportable segment. Our mission is to expand our business as a leading producer and distributor of specialty alcohols and essential ingredients. We intend to accomplish this goal in part by investing in our specialized and higher value specialty alcohol production and distribution infrastructure, expanding production in high-demand essential ingredients, expanding and extending the sale of our products into new regional and international markets, building efficiencies and economies of scale and by capturing a greater portion of the value stream. Our wholly-owned subsidiary, Eagle Alcohol Company LLC, or Eagle Alcohol, specializes in break bulk distribution of specialty alcohols. The company purchases bulk alcohol from suppliers and then stores, denatures, packages, and resells alcohol products in smaller sizes, including tank trucks, totes, and drums, that typically garner a premium price to bulk alcohols. Eagle Alcohol delivers products to customers in the beverage, food, industrial and related-process industries via its own dedicated trucking fleet and common carrier. Production Segments We produce specialty alcohols, fuel-grade ethanol and essential ingredients, focusing 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. We also sell yeast for human consumption. Our Renewable Fuels products include fuel-grade ethanol and distillers corn oil used as a feedstock for renewable diesel and biodiesel fuels. Our specialty alcohols for the Food & Beverage and Health, Home & Beauty markets represented approximately 10% and 4%, respectively, of our sales in 2022 from our two production segments. - 26 - We produce our alcohols and essential ingredients at our production facilities described below. Our production facilities located in Illinois are in the heart of the Corn Belt, benefit from low-cost and abundant feedstock and enjoy logistical advantages that enable us to provide our products to both domestic and international markets via truck, rail or barge. Our production facilities located in Oregon and Idaho are near their respective fuel and feed customers, offering significant timing, transportation cost and logistical advantages. Our production facilities were operating for all of 2022. On January 1, 2023, we temporarily hot-idled our Magic Valley production facility due to extreme natural gas prices, other unfavorable market conditions and to facilitate the installation of our new high protein systems. As market conditions change, we may increase, decrease or idle production at one or more operating facilities or resume operations at any idled facility. Annual Alcohol Production Capacity (estimated, in gallons) Production Facility Location Fuel-Grade Ethanol Specialty Alcohol 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 We market and distribute all of the alcohols and essential ingredients we produce at our facilities. We also market and distribute alcohol produced by third parties. We have extensive and long-standing customer relationships, both domestic and international, for our specialty alcohols and essential ingredients. These customers include producers and distributors of ingredients for cosmetics, sanitizers and related products, distilled spirits producers, food products manufacturers, producers of personal health/consumer health and personal care hygiene products, and global trading firms. Our renewable fuel customers are located throughout the Western and Midwestern United States and consist of integrated oil companies and gasoline marketers who blend fuel-grade ethanol into gasoline. Our customers depend on us to provide a reliable supply of fuel-grade ethanol and manage the logistics and timing of delivery. Our customers collectively require fuel-grade ethanol volumes in excess of the supplies we produce at our facilities. We secure additional fuel-grade ethanol supplies from third-party ethanol producers. We arrange for transportation, storage and delivery of fuel-grade ethanol purchased by our customers through our agreements with third-party service providers in the Western United States as well as in the Midwest from a variety of sources. We market our essential ingredient feed products to dairies and feedlots, in many cases located near our production facilities. These customers use our feed products for livestock as a substitute for corn and other sources of starch and protein. We sell our corn oil to poultry and biodiesel customers. We do not market essential ingredients from other producers. See “Note 5 – Segments” to our Notes to Consolidated Financial Statements included elsewhere in this report for financial information about our business segments. - 27 - Current Initiatives and Outlook During the fourth quarter, and December in particular, extreme commodity price volatility from regional natural gas price spikes, high corn basis costs and a dramatic decline in fuel-grade ethanol prices negatively impacted our business. These factors outweighed performance in other areas in an already challenging 2022. Our results for the year demonstrate our need to further mitigate the impact of renewable fuel and commodity price volatility. Current fuel-grade ethanol margins are significantly improved compared to December and January levels and crush margins are positive. Natural gas prices have declined significantly, and we expect a favorable natural gas market during the coming months. Corn prices, however, remain firm due to tight supplies. We continue to focus, both near- and long-term, on driving margin expansion through a diversified set of revenue streams from a variety of products. We are increasing production of our highest quality products, including grain neutral spirits, or GNS, corn oil, high protein products and primary yeast. We are also in advanced stages to begin our carbon capture and sequestration project. Our goals also continue to emphasize strategies to increase plant efficiency, reliability and capacity by adding corn storage, installing a natural gas pipeline, converting our biogas to renewable natural gas, building energy cogeneration capabilities at our Pekin Campus, and upgrading other equipment, as discussed further below. As we progressed into 2022, the need to accelerate these initiatives became clear, therefore last November, we entered into a six-year term loan for up to $125 million. We are staging our capital improvement projects and drawing loan proceeds in tranches to minimize carrying costs while maximizing return. We spent $12.5 million in the fourth quarter and $37.7 million for all of 2022 on our capital improvement projects. Our efforts will position us to add substantial additional streams of earnings before interest, taxes, depreciation and amortization, or EBITDA, to our business, all of which will increase under an improved operating environment. We expect additional annualized EBITDA of $65 million from current projects by the end of 2025 and total additional annualized EBITDA of $125 million in 2026 when our carbon capture and sequestration, cogeneration and other current initiatives are fully realized. In 2020, we began expanding our high-quality alcohol production and production capacity. In 2021, we refurbished our 20 million gallon per year GNS distillation system at our Pekin Campus wet mill. We raised the quality of our specialty alcohol, earning certifications to attract the most demanding customers in the pharmaceutical industry. In 2022, we further upgraded our GNS system to produce the highest quality beverage-grade product available on the market. With these improvements, we are introducing new high-quality 190 proof and low-moisture 200-proof GNS products to our existing and target customers in the beverage, food, flavor, personal care and pharmaceutical industries. We are working with customers to qualify these new products in preparation for our annual fall contracting period and expect to generate additional annualized EBITDA of $5 million from the products starting in 2024. In early 2022, we also added break bulk and distribution capabilities by acquiring Eagle Alcohol. Eagle Alcohol’s team has provided valuable advice on high-quality alcohol production and distribution, enabling tote and drum packaging and distribution while building customer relationships for our specialty alcohols. We anticipate future synergies with Eagle Alcohol’s business and our new GNS products. In the fourth quarter, natural gas prices increased significantly in the Western region, spiking 400% in December, compared to third quarter prices. In response, we moderated production at our Columbia plant in Boardman, Oregon and temporarily hot-idled our Magic Valley, Idaho facility. We used the opportunity to focus on completing the installation of Harvesting Technology’s patented CoPromax TM system at our Magic Valley plant to extract corn oil and produce enhanced protein. The CoPromax installation project consists of two phases. The first phase – corn oil extraction – was commissioned in October and corn oil production has increased by approximately 40% in pounds per bushel. When combined with the enhanced protein system, we expect corn oil production to ultimately increase by 50% or more in pounds per bushel and generate additional annualized EBITDA of $4.5 million based on current market prices. Given these positive results, we plan to install corn oil extraction technologies at our three other dry mills. Although our other dry mills have somewhat different capacities, on average we expect to produce financial results similar to those of Magic Valley, ultimately generating additional annualized EBITDA of $13.5 million, for total additional annualized EBITDA of $18.0 million from corn oil extraction technologies at all four of our dry mills. The second phase of the Magic Valley system – separating and producing enhanced protein – is on schedule to reach full production in the third quarter of 2023, achieving or exceeding 52% protein content and generating additional annualized EBITDA of $4.5 million based on current market prices. Once the system is fully operational and tested, we will evaluate additional deployments at our other plants. We intend to commercially develop primary yeast through an aerobic fermentation process at our wet mill. Extending our brand along the value chain is a natural progression to other markets that demand higher product quality and offer increased margins, including for flavors, nutraceuticals, and baking and meat substitutes. Although primary yeast production requires a different process and serves a different market, many existing as well as prospective customers have for years expressed interest in a primary yeast product. Having successfully completed product trials, we are in the advanced stages of selecting an engineering and design group to finalize our plans. Our preliminary analysis indicates that our primary yeast product would contribute additional annualized EBITDA of approximately $19 million in the first twelve months of production, rising to approximately $25 million annually thereafter. Construction could begin in late 2023 or early 2024 with a completion date of mid-2025. The outlook for carbon capture and sequestration at our Pekin Campus changed markedly under the Inflation Reduction Act of 2022, which increased the price of carbon to $85 per metric ton for twelve years, significantly strengthening project economics. Our Pekin Campus has an annual capacity of approximately 700,000 metric tons of carbon. In addition, competition for offtake agreements has dramatically lowered project operating costs. Our analysis shows significant potential benefits. We are in advanced negotiations to provide turnkey transportation, sequestration and monitoring services for the project. In addition, we are in the final stages of selecting engineering services for the design and installation of equipment and technologies to meet the capture, compression and energy requirements of the project. We believe that, beginning in 2026, the project will contribute additional annualized EBITDA of over $30 million based solely on the 45Q tax incentive benefits under the Inflation Reduction Act of 2022. Also, by sequestering the carbon dioxide from our Pekin Campus, we expect to materially reduce our carbon footprint enabling us to monetize additional value from the alcohol and essential ingredients we produce. - 28 - We are doubling our corn storage capacity at our Pekin Campus to increase our corn-buying flexibility and reduce the need to purchase product at premium prices when farmers and elevators are less inclined to ship corn, including during holidays, unfavorable weather conditions, or due to supply chain and other logistical constraints. In addition to reducing the cost of delivered corn, this new storage capacity will lower the cost of silo cleaning and increase our operating reliability at the site. The corn storage silo is undergoing conditioning and we expect completion in the first quarter and full operation in the second quarter, conservatively generating additional annualized EBITDA of $1.6 million in the first year and additional annualized EBITDA of $2.0 million thereafter. Consistent with our sustainability efforts, we examined alternatives to improve energy procurement and usage. We made significant progress in planning the installation of a new natural gas pipeline to bypass our current utility at our Pekin Campus. When fully operational, which we expect in 2024, the pipeline would reduce our energy costs by $3.0 million annually. The line would also help fulfill our increased energy needs associated with our numerous growth initiatives, including primary yeast production and carbon capture and sequestration. The new gas pipeline would also lower our carbon score. We currently produce approximately 250,000 MMTBUs annually in biogas, enough energy to heat 2,300 homes for a full year. Presently, most of our biogas is flared. We believe that once converted to renewable natural gas, we could use the natural gas pipeline to monetize the value of this current waste stream and produce renewable natural gas, generating additional annualized EBITDA of $3.0 million. We are also in the late stages of a third-party study on cogeneration at our Pekin Campus to meet our combined energy requirements for carbon capture and sequestration and our goals of lowering our carbon score and increasing our plant efficiencies. Based on our preliminary analysis, we expect cogeneration at our Pekin Campus to contribute additional annualized EBITDA of $15.0 million based on current energy prices and an expected completion date in late 2025 or early 2026. We expect to maintain or grow our contracted volumes of specialty alcohols for 2023 with our existing customer base. We also expect to add new accounts in the beverage category, particularly in 2024, driven by our improved GNS production system at our Pekin Campus. While we are unable to forecast fuel-grade ethanol margins for 2023, we expect to benefit from additional EBITDA of $10.0 million in 2023 from already completed capital projects and projects that we will complete this year. In addition, with our accelerated investments made possible through funding from our new term loan, we expect to almost double our annualized EBITDA by year-end 2025 compared to our average EBITDA over the past three years and nearly double our annualized EBITDA again when our current projects are fully operational by year-end 2026. We continue to execute on our business transformation plans and focus on the future. We believe that recent extreme commodity price fluctuations are cyclical and will pass. To reduce their impact, we are diversifying our revenue streams and working to increase plant efficiency, reliability and capacity. Use of Non-GAAP Financial Measures Management believes that certain financial measures not in accordance with generally accepted accounting principles, or GAAP, are useful measures of operations. Management provides EBITDA and Adjusted EBITDA as non-GAAP financial measures so that investors will have the same financial information that management uses, which may assist investors in properly assessing our performance on a period-over-period basis. We define Adjusted EBITDA as unaudited consolidated 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. A table is provided below to reconcile Adjusted EBITDA to its most directly comparable GAAP measure, consolidated net income (loss). EBITDA and Adjusted EBITDA are not measures of financial performance under GAAP and should not be considered as alternatives to consolidated net income (loss) or any other measure of performance under GAAP, or to cash flows from operating, investing or financing activities as an indicator of cash flows or as a measure of liquidity. EBITDA and Adjusted EBITDA have limitations as analytical tools and you should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP. Information reconciling forward-looking EBITDA to forward-looking consolidated net income (loss) would require a forward-looking statement of consolidated net income (loss) prepared in accordance with GAAP, which is unavailable to us without unreasonable effort. We are not able to provide a quantitative reconciliation of forward-looking EBITDA to forward-looking consolidated net income (loss) because certain items required for reconciliation are uncertain, outside of our control and/or cannot reasonably be predicted, such as net sales, cost of goods sold, provision (benefit) for income taxes and asset impairments, which we view as the most material components of consolidated net income (loss) that are not presently estimable. Reconciliation of Adjusted EBITDA to Consolidated Net Income (Loss) Years Ended December 31, (in thousands) (unaudited) 2022 2021 Consolidated net income (loss) $ (41,597 ) $ 46,082 Adjustments: Interest expense, net 1,827 3,587 Interest income (510 ) (730 ) Asset impairments — 3,100 Acquisition-related expense 3,500 — Provision for income taxes 1,925 1,469 Depreciation and amortization expense 25,095 23,292 Total adjustments 31,837 30,718 Adjusted EBITDA $ (9,760 ) $ 76,800 - 29 - 2022 Financial Performance Summary Our consolidated net sales increased by $0.1 billion to $1.3 billion for 2022 from $1.2 billion for 2021. Our net income available to common stockholders declined by $87.1 million to a loss of $42.9 million for 2022 from income of $44.2 million for 2021. Factors that contributed to these results of operations for 2022 include: ● Net sales . Our net sales increased by $0.1 billion to $1.3 billion for 2022 from $1.2 billion for 2021 due to an increase in our average sales price per gallon and additional tons of essential ingredients sold at higher prices. These factors were partially offset by fewer total alcohol gallons sold in 2022. o Our average sales price per gallon increased by $0.18, or 7%, to $2.64 for 2022 from $2.46 for 2021. The increase was primarily driven by higher fuel-grade ethanol prices in 2022 largely due to higher oil and gas prices. o Our total gallons sold declined by 61 million gallons, or 13%, to 419 million gallons for 2022 from 480 million gallons for 2021. ◾ Our fuel-grade ethanol production sales volume increased by 48 million gallons, or 30%, to 209 million gallons for 2022 from 161 million gallons for 2021, primarily from additional production in 2022 as all of our fuel-grade ethanol production facilities were operating near full capacity for the year. ◾ Our specialty alcohol production sales volume increased by 3 million gallons, or 3%, to 93 million gallons for 2022 from 90 million gallons for 2021 due to an increase in our contracted sales of specialty alcohols for the year. ◾ Our third-party sales volume declined by 111 million gallons, or 48%, to 118 million gallons for 2022 from 229 million gallons for 2021. As we did in 2021, we continued to intentionally reduce sales of third-party fuel-grade ethanol to focus on sales of inventory from our own production in 2022. o Our volume of essential ingredients sold increased by 401 tons, or 32%, to 1,637 tons for 2022 from 1,236 tons for 2021 primarily due to higher fuel-grade ethanol production. Our average sales price for our essential ingredients increased primarily due to higher corn prices. ● Gross Profit (Loss) . Our gross profit declined by $95.3 million to a gross loss of $27.5 million for 2022 from gross profit of $67.8 million for 2021 due to extreme commodity price volatility, including regional natural gas price spikes, high corn basis costs and a dramatic decline in fuel-grade ethanol prices, particularly in the fourth quarter. In addition, we experienced an extended shut down for maintenance over the summer of 2022 at our Pekin Campus and logistical constraints and rail interruptions in the third quarter resulting in plant outages in excess of six days at our Western plants. Sales and Margins We generate sales by marketing all of the alcohols produced by our three production facilities in Illinois, all of the fuel-grade ethanol produced by our production facility in Oregon, all of the fuel-grade ethanol produced by our production facility in Idaho, and fuel-grade ethanol purchased from third-party suppliers throughout the United States. We also market essential ingredients produced by our production facilities, including dried yeast, corn gluten meal, corn gluten feed, corn germ, and distillers grains and liquid feed used in commercial animal feed and pet foods. We also sell yeast for human consumption. Our profitability is highly dependent on various commodity prices, including the market prices of corn, natural gas and fuel-grade ethanol. Our consolidated average alcohol sales price increased by 7% to $2.64 per gallon for 2022 compared to $2.46 per gallon for 2021. The average price of fuel-grade ethanol as reported by the Chicago Board of Options Trade, or CBOT, increased 2% to $2.16 per gallon for 2022 compared to $2.11 per gallon for 2021. Our average delivered cost of corn increased 25% to $7.77 per bushel for 2022 from $6.22 per bushel for 2021. The average price of corn as reported by the CBOT increased 22% to $6.94 per bushel for 2022 from $5.67 per bushel for 2021. We believe that our gross profit margins depend primarily on six key factors: ● the prices of our specialty alcohols and the market price of fuel-grade ethanol, the latter of which is impacted by the price of gasoline and related petroleum products, and government regulation, including government ethanol mandates; ● the market prices of key production input commodities, including corn (and corn basis) and natural gas; ● the prices of our essential ingredients; ● our ability to anticipate trends in the prices of our alcohols, essential ingredients, and key input commodities, and our ability to implement appropriate risk management and opportunistic pricing strategies; - 30 - ● the proportion of our sales of specialty alcohols to our sales of fuel-grade ethanol produced at our facilities; and ● the proportion of our sales of fuel-grade ethanol produced at our facilities to our sales of fuel-grade ethanol produced by unrelated third-parties. We seek to optimize our gross profit margins by anticipating the factors above and, when resources are available, implementing hedging transactions and taking other actions designed to limit risk and address these factors. For example, we may seek to reduce inventory levels in anticipation of declining alcohol or essential ingredient prices and increase production and inventory levels in anticipation of rising alcohol or essential ingredient prices. We may also seek to alter our proportion or timing, or both, of purchase and sales commitments. Our inability to anticipate the factors described above or their relative importance, and adverse movements in the factors themselves, could result in declining or even negative gross profit margins over certain periods of time. Our ability to anticipate these factors or favorable movements in these factors may enable us to generate above-average gross profit margins. However, given the difficulty associated with successfully forecasting any of these factors, we are unable to estimate our future gross profit margins. Results of Operations Selected Financial Information The following selected financial information should be read in conjunction with our consolidated financial statements and notes to our consolidated financial statements included elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report. Certain performance metrics that we believe are important indicators of our results of operations include: Years Ended December 31, Percentage Change 2022 2021 2020 2022 vs 2021 2021 vs 2020 Renewable fuel production gallons sold (in millions) 208.5 161.1 181.0 29.5 % (11.0 )% Specialty alcohol production gallons sold (in millions) 92.5 89.5 90.9 3.4 % (1.5 )% Third-party renewable fuel gallons sold (in millions) 117.9 229.0 264.4 (48.5 )% (13.4 )% Total gallons sold (in millions) 418.9 479.6 536.3 (12.7 )% (10.6 )% Total gallons produced (in millions) 300.0 251.7 262.1 19.2 % (4.0 )% Production capacity utilization 86 % 60 % 53 % 43.3 % 13.2 % Average sales price per gallon $ 2.64 $ 2.46 $ 1.63 7.3 % 50.9 % Corn cost per bushel—CBOT equivalent $ 6.92 $ 5.70 $ 3.56 21.4 % 60.1 % Average basis (1) $ 0.85 $ 0.52 $ 0.28 63.5 % 85.7 % Delivered cost of corn $ 7.77 $ 6.22 $ 3.84 24.9 % 62.0 % Total essential ingredients tons sold (in thousands) 1,637.4 1,236.2 1,447.5 32.5 % (14.6 )% Essential ingredient revenues as % of delivered cost of corn (2) 33.8 % 33.7 % 44.1 % 0.3 % (23.6 )% Average CBOT ethanol price per gallon $ 2.16 $ 2.11 $ 1.25 2.4 % 68.8 % Average CBOT corn price per bushel $ 6.94 $ 5.67 $ 3.63 22.4 % 56.2 % (1) Corn basis represents the difference between the immediate cash price of delivered corn and the future price of corn for Chicago delivery. (2) Essential ingredient revenues as a percentage of delivered cost of corn shows our yield based on sales of essential ingredients, including WDG and corn oil, generated from ethanol we produced. - 31 - Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021 Results as a Percentage Dollar Percentage of Net Sales for the Years Ended Change Change Years Ended December 31, Favorable Favorable December 31, 2022 2021 (Unfavorable) (Unfavorable) 2022 2021 (dollars in thousands) Net sales $ 1,335,621 $ 1,207,892 $ 127,729 10.6 % 100.0 % 100.0 % Cost of goods sold 1,363,171 1,140,108 223,063 19.6 % 102.1 % 94.4 % Gross profit (loss) (27,550 ) 67,784 (95,334 ) NM * (2.1 )% 5.6 % Selling, general and administrative expenses (31,579 ) (29,185 ) (2,394 ) (8.2 )% (2.4 )% (2.4 )% Gain (loss) on sale (disposal) of assets (2,230 ) 4,571 (6,801 ) NM (0.2 )% 0.4 % Asset impairments — (3,100 ) 3,100 100.0 % — % (0.3 )% Income (loss) from operations (61,359 ) 40,070 (101,429 ) NM (4.6 )% 3.3 % Income from cash grant 22,652 — 22,652 NM 1.7 % — % Income from loan forgiveness — 9,860 (9,860 ) (100.0 )% — % 0.8 % Interest expense, net (1,827 ) (3,587 ) 1,760 49.1 % (0.1 )% (0.3 )% Other income, net 862 1,208 (346 ) (28.6 )% 0.1 % 0.1 % Income (loss) before income taxes (39,672 ) 47,551 (87,223 ) NM (3.0 )% 3.9 % Provision (benefit) for income taxes 1,925 1,469 (456 ) (31.0 )% 0.1 % 0.1 % Consolidated net income (loss) $ (41,597 ) $ 46,082 $ (87,679 ) NM (3.1 )% 3.8 % Preferred stock dividends (1,265 ) (1,265 ) — — % (0.1 )% (0.1 )% Income allocated to participating securities — (600 ) 600 100.0 % — % (0.0 )% Income (loss) available to common stockholders $ (42,862 ) $ 44,217 $ (87,079 ) NM (3.2 )% 3.7 % * Not meaningful. Net Sales The increase in our consolidated net sales for 2022 as compared to 2021 was primarily due to an increase in our average sales price per gallon for our alcohols and a higher volume of essential ingredients sold at higher sales prices per ton, partially offset by a decrease in our total gallons sold. Our average sales price per gallon increased primarily due to higher fuel-grade ethanol prices largely driven by higher oil and gas prices. We sold more tons of essential ingredients primarily due to higher fuel-grade ethanol production in 2022 compared to 2021. Our average sales price for our essential ingredients increased primarily due to higher corn prices. As we did in 2021, we continued to intentionally reduce sales of third-party fuel-grade ethanol to focus on sales of inventory from our own production in 2022. Pekin Campus Production Segment Net sales of alcohol from our Pekin Campus production segment increased by $23.1 million, or 5%, to $521.3 million for 2022 as compared to $498.2 million for 2021. Our total volume of production gallons sold, however, decreased by 11.9 million gallons, or 6%, to 201.1 million gallons for 2022 as compared to 213.0 million gallons for 2021, due to an extended shut down for maintenance over the summer of 2022. At the segment’s average sales price per gallon of $2.59 for 2022, we generated $30.8 million less in net sales from the segment because of the 11.9 million fewer gallons of alcohol sold in 2022 as compared to 2021. However, an increase of $0.25, or 11%, in the segment’s average sales price per gallon in 2022 as compared to 2021 resulted in a $53.9 million increase in net sales from the segment as compared to 2021. - 32 - Net sales of essential ingredients increased by $36.3 million, or 19%, to $225.8 million for 2022 as compared to $189.5 million for 2021. Our total volume of essential ingredients sold decreased by 24,000 tons, or 3%, to 851,500 tons for 2022 from 875,100 tons for 2021, also due to the above mentioned maintenance work. At our average sales price per ton of $265.26 for 2022, we generated $6.3 million less in net sales from the 24,000 fewer tons of essential ingredients sold in 2022 as compared to 2021. An increase of $48.68, or 23%, in our average sales price per ton in 2022 as compared to 2021 resulted in a $42.6 million increase in net sales from the segment compared to 2021. Marketing and Distribution Segment Net sales of fuel-grade ethanol from our marketing and distribution segment, excluding intersegment sales, decreased by $152.3 million, or 40%, to $228.9 million for 2022 as compared to $381.2 million for 2021. Our volume of third-party fuel-grade ethanol gallons sold reported gross by the segment decreased by 60.4 million gallons, or 43%, to 80.5 million gallons for 2022 as compared to 140.9 million gallons for 2021. This decline is the result of our continued strategic analysis to focus our sales of third-party gallons to certain regions in which we operate. At the segment’s average sales price per gallon of $2.83 for 2022, net sales were $170.8 million lower as a result of the 60.4 million fewer gallons sold in 2022 as compared to 2021. This decline was partially offset by the $0.13 increase in our sales price per gallon for 2022. An increase of $0.13, or 5%, in our average sales price per gallon in 2022 as compared to 2021 resulted in a $19.0 million increase in net sales from our third party fuel-grade ethanol gallons sold by the segment compared to 2021. Our volume of third-party fuel-grade ethanol gallons sold reported net by the segment decreased by 50.7 million gallons, or 58%, to 37.4 million gallons for 2022 as compared to 88.1 million gallons for 2021. The decrease in sales reported net resulted in a decrease of $0.5 million in net sales. Other Production Segment Net sales of alcohol from our Other production segment increased by $145.7 million, or 135%, to $253.6 million for 2022 as compared to $107.9 million for 2021. Our total volume of gallons sold increased by 54.7 million gallons, or 145%, to 92.3 million gallons for 2022 as compared to 37.6 million gallons for 2021. At the segment’s average sales price per gallon of $2.75 for 2022, net sales were $150.3 million higher as a result of the 54.7 million additional gallons sold in 2022 as compared to 2021. This increase was partially offset by a $0.12 reduction in our sales price per gallon for 2022. A decrease of $0.12, or 5%, in our average sales price per gallon in 2022 as compared to 2021 resulted in a $4.6 million decrease in net sales of alcohol from the segment compared to 2021. - 33 - Net sales of essential ingredients increased by $59.1 million, or 190%, to $90.2 million for 2022 as compared to $31.1 million for 2021. Our total volume of essential ingredients sold increased by 424,900 tons, or 118%, to 785,900 tons for 2022 from 361,000 tons for 2021. At our average sales price per ton of $114.78 for 2022, net sales were $48.8 million higher as a result of the 424,900 additional tons sold in 2022 as compared to 2021. In addition, our sales price increased $28.78 per gallon for 2022. An increase of $28.78, or 34%, in our average sales price per ton in 2022 as compared to 2021 resulted in an increase of $10.3 million in net sales of essential ingredients from the segment compared to 2021. Net sales from our Corporate and other segment increased by $15.8 million due to sales from Eagle Alcohol. Cost of Goods Sold and Gross Profit (Loss) Our consolidated gross profit (loss) declined from a gross profit of $67.8 million, representing a gross margin of 5.6%, for 2021, to a gross loss of $27.6 million, representing a gross margin of negative 2.1%, for 2022. Our consolidated gross profit declined due to extreme commodity price volatility, including regional natural gas price spikes, high corn basis costs and a dramatic decline in fuel-grade ethanol prices, particularly in the fourth quarter. In addition, we experienced an extended shut down for maintenance over the summer of 2022 at our Pekin Campus and logistical constraints and rail interruptions in the third quarter resulting in plant outages in excess of six days at our Western plants. Pekin Campus Production Segment Our Pekin Campus production segment’s gross profit declined by $76.2 million to a gross loss of $22.2 million for 2022 from a gross profit of $54.0 million for 2021. Of this decline, $74.7 million is attributable to lower margins primarily due to higher corn costs and $1.5 million is attributable to increased sales volumes at negative margins in 2022 as compared to 2021. Marketing and Distribution Segment Our marketing and distribution segment’s gross profit declined by $11.2 million to a gross loss of $0.4 million for 2022 from a gross profit of $10.8 million for 2021. Of this decrease, $11.6 million is attributable to lower margins from sales of third-party fuel-grade ethanol primarily due to higher fuel-grade ethanol delivery costs, partially offset by $0.4 million attributable to lower marketing volumes of third-party fuel-grade ethanol sold at negative margins in 2022 as compared to 2021. Other Production Segment Our Other production segment’s gross profit declined by $12.0 million to a gross loss of $9.0 million for 2022 as compared to a gross profit of $3.0 million for 2021. Of this decline, $6.3 million is attributable to a lower margin environment for fuel-grade ethanol primarily due to higher natural gas, corn and fuel-grade ethanol delivery costs and $5.7 million is attributable to higher sales volumes at negative margins in 2022 as compared to 2021. Gross profit from our Corporate and other segment increased by $4.0 million due to sales from Eagle Alcohol. Selling, General and Administrative Expenses Our selling, general and administrative, or SG&A, expenses increased $2.4 million to $31.6 million for 2022 as compared to $29.2 million for the same period in 2021. SG&A expenses increased primarily due to an acquisition-related accrual of $3.5 million for 2022 for future cash payments attributable to our acquisition of Eagle Alcohol. - 34 - Income from Cash Grant We applied for and received $22.7 million in cash from the USDA’s Biofuel Producer Program. The program was created as part of the CARES Act in 2020, which allocated $700 million to support biofuel producers who experienced market losses due to the pandemic. We are neither required to repay the grant nor will it recur in the future. Interest Expense, net Interest expense, net, decreased by $1.8 million to $1.8 million for 2022 from $3.6 million for 2021. The decrease in interest expense, net, is primarily due to our repayment of debt in 2021 and a lower average debt balance throughout 2022. Year Ended December 31, 2021, Compared to the Year Ended December 31, 2020 An analysis of our financial results comparing 2021 to 2020 can be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the Securities and Exchange Commission on March 15, 2022, which is available free of charge on the Securities and Exchange Commission’s website at www.sec.gov. Liquidity and Capital Resources During the year ended December 31, 2022, we funded our operations primarily from cash flow from operations, cash proceeds from a USDA grant, proceeds from payments on notes receivable, and proceeds from a term loan. A portion of these funds was also used to acquire Eagle Alcohol, pay down our Kinergy line of credit and fund capital improvements to our property and equipment. As of December 31, 2022, we had $36.5 million in cash and cash equivalents and $57.9 million available for borrowing under Kinergy’s operating line of credit. In addition, we have $40.0 million available for capital improvement projects under our term loan. We believe we have sufficient liquidity to meet our anticipated working capital, debt service, capital expenditure and other liquidity needs for at least the next twelve months from the date of this report. Quantitative Year-End Liquidity Status We believe that the following amounts provide insight into our liquidity and capital resources. The following selected financial information should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report (dollars in thousands). - 35 - December 31, 2022 December 31, 2021 Change Cash and cash equivalents $ 36,456 $ 50,612 (28.0 )% Current assets $ 199,121 $ 229,526 (13.2 )% Property and equipment, net $ 239,069 $ 222,550 7.4 % Current liabilities $ 78,017 $ 69,602 12.1 % Long-term debt, noncurrent portion $ 68,356 $ 50,361 35.7 % Working capital $ 121,104 $ 159,924 (24.3 )% Working capital ratio 2.55 3.30 (22.7 )% Restricted Net Assets At December 31, 2022, we had approximately $69.3 million of net assets at our subsidiaries that were not available to be transferred to Alto Ingredients, Inc. in the form of dividends, distributions, loans or advances due to restrictions contained in the credit facilities of the subsidiaries. Changes in Working Capital and Cash Flows Working capital declined to $121.1 million at December 31, 2022, from $159.9 million at December 31, 2021, as a result of a $30.4 million decrease in current assets and an $8.4 million increase in current liabilities. Current assets decreased primarily due to decreases in accounts receivable, cash and equivalents, inventories and derivative instruments due to changes in volumes and commodity prices. Our current liabilities increased primarily due to an increase in accounts payable and accrued expenses due to the timing of payments. Our cash, cash equivalents and restricted cash decreased by $12.6 million due to $37.7 million used in our investing activities, partially offset by $19.0 million in cash provided by our financing activities and $6.0 million in cash provided by our operating activities. Cash provided by our Operating Activities We generated $6.0 million in cash from our operating activities during 2022, as compared to $26.8 million in 2021. Specific factors that contributed significantly to the change in cash generated by our operating activities include: ● a decrease in net income of $87.7 million primarily due to lower margins resulting from higher corn and delivery costs; and ● a decrease in other assets of $31.3 million from 2021 due to sales of plant assets. These amounts were partially offset by: ● an increase related to accounts receivable balances of $67.5 million, primarily due to the timing of payments and higher product sales prices; and ● a decrease related to accounts payable and accrued expenses of $7.3 million, due to lower third-party volumes. - 36 - Cash used in our Investing Activities We used $37.7 million of cash for investing activities for 2022, of which $37.8 million is attributable to additions to property and equipment resulting from our capital improvement projects and $14.7 million is attributable to cash paid to acquire Eagle Alcohol, partially offset by proceeds of $14.8 million from principal payments on our notes receivable. Cash provided by our Financing Activities Cash provided by our financing activities was $19.0 million for 2022, of which $59.1 million is attributable to net proceeds from our term loan, partially offset by $32.3 million in paydowns on Kinergy’s line of credit, $5.2 million in debt issuance costs, $1.3 million in stock repurchases and $1.3 million of preferred stock dividends. Kinergy’s Operating Line of Credit Kinergy maintains an operating line of credit for an aggregate amount of up to $100.0 million. The credit facility matures on November 7, 2027. Interest accrues under the credit facility at a rate equal to (i) the daily Secured Overnight Financing Rate, plus (ii) a specified applicable margin ranging from 1.25% to 1.75%. The credit facility’s monthly unused line fee is 0.25% to 0.375% of the amount by which the maximum credit under the facility exceeds the average daily principal balance during the immediately preceding month. Payments that may be made by Kinergy to Alto Ingredients, Inc. as reimbursement for management and other services provided by Alto Ingredients, Inc. to Kinergy are limited under the terms of the credit facility to $1.5 million per fiscal quarter. The credit facility also includes the accounts receivable of our indirect wholly-owned subsidiary, Alto Nutrients, LLC, or Alto Nutrients, as additional collateral. Payments that may be made by Alto Nutrients to Alto Ingredients, Inc. as reimbursement for management and other services provided by Alto Ingredients, Inc. to Alto Nutrients are limited under the terms of the credit facility to $0.5 million per fiscal quarter. Alto Nutrients markets our essential ingredients and also provides raw material procurement services to our subsidiaries. In addition, the amount of cash distributions that Kinergy or Alto Nutrients may make to us is also limited to up to 75% of excess cash flow. For all monthly periods in which excess borrowing availability falls below a specified level, Kinergy and Alto Nutrients must collectively maintain a fixed-charge coverage ratio (calculated as a twelve-month rolling earnings before interest, taxes, depreciation and amortization divided by the sum of interest expense, capital expenditures, principal payments of indebtedness, indebtedness from capital leases and taxes paid during such twelve-month rolling period) of at least 1.1 and are prohibited from incurring certain additional indebtedness (other than specific intercompany indebtedness). The obligations of Kinergy and Alto Nutrients under the credit facility are secured by all of our tangible and intangible assets. We believe Kinergy and Alto Nutrients are in compliance with the fixed-charge coverage ratio covenant as of the filing of this report. The following table sets forth the fixed-charge coverage ratio financial covenant and the actual results for the periods presented: Years Ended December 31, 2022 2021 Fixed Charge Coverage Ratio Requirement 1.10 2.00 Actual 3.54 13.32 Excess 2.44 11.32 Alto Ingredients, Inc. has guaranteed all of Kinergy’s obligations under the credit facility. As of December 31, 2022, Kinergy had an outstanding balance of $18.1 million and $57.9 million of unused borrowing availability under the credit facility. - 37 - Orion Term Loan On November 7, 2022, we entered into a credit agreement with certain funds managed by Orion Infrastructure Capital, or Lenders, under which the Lenders extended a senior secured credit facility in the amount of up to $125,000,000, or Term Loan. The Term Loan is secured by a first priority lien on certain of our assets and a second priority lien on certain assets of Kinergy and Alto Nutrients. The Lenders agreed to advance to us up to $100,000,000, with up to an additional $25,000,000 upon the satisfaction of certain conditions. We committed to issue to the Lenders pro rata an aggregate of 1,282,051 shares of our common stock at the initial funding and up to an additional 320,513 shares of our common stock based upon certain further fundings under the credit facility. On November 23, 2022, we received our initial funding of $60,000,000 under the credit facility and issued an aggregate of 1,282,051 shares of our common stock to the Lenders. We received no separate consideration for the shares of common stock issued. Interest accrues on the unpaid principal amount of the Term Loan at a fixed rate of 10% per annum. The Term Loan matures on November 7, 2028, or earlier upon acceleration. We must prepay amounts outstanding under the Term Loan on a semi-annual basis beginning with the six-month period ending December 31, 2023 in an amount equal to a percentage of our excess cash flow based on a specified leverage ratio, as follows: (i) if our leverage ratio is greater than or equal to 3.0x, then the mandatory prepayment amount will equal 100% of our excess cash flow, (ii) if our leverage ratio is less than 3.0x and greater than or equal to 1.5x, then the mandatory prepayment amount will equal 50% of our excess cash flow, and (iii) if our leverage ratio is less than 1.5x, then the mandatory prepayment amount will equal 25% of our excess cash flow. As of December 31, 2022, the amount outstanding under the Term Loan was $60,000,000. Share Repurchase Program For the three months ended December 31, 2022, we repurchased 92,000 shares of our common stock as part of our publicly announced share repurchase program at an average price per share of $3.51 for an aggregate expenditure of $0.3 million during the period. See “Item 5 – Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Purchases of Equity Securities by the Issuer and Affiliated Purchasers.” For the year ended December 31, 2022, we repurchased 351,000 shares of our common stock as part of our publicly announced share repurchase program at an average price per share of $3.77 for an aggregate expenditure of $1.3 million during the period. Other Cash Obligations As of December 31, 2022, we had future commitments for certain capital projects totaling $21.0 million. These commitments are scheduled to be satisfied through 2023. In connection with our acquisition of Eagle Alcohol, we committed to contingent payments of up to $9.0 million in cash over the next three years if certain targets are met. - 38 - Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of net sales and expenses for each period. The following represents a summary of our critical accounting policies and related estimates, defined as those policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. Accounting for Business Combinations Determining the fair value of assets acquired and liabilities assumed in a business combination is considered a critical accounting estimate because the allocation of the purchase price to assets acquired and liabilities assumed based upon fair values requires significant management judgment and the use of subjective measurements. Variability in industry conditions and changes in assumptions or subjective measurements used to allocate fair value are reasonably possible and may have a material impact on our financial position, liquidity or results of operations. Revenue Recognition We recognize revenue primarily from sales of alcohols and essential ingredients. We have five alcohol production facilities from which we produce and sell alcohols to our customers through our subsidiary, Kinergy. Kinergy enters into sales contracts with customers under exclusive intercompany sales agreements with each of our five production facilities. Kinergy also acts as a principal when it purchases third party fuel-grade ethanol which it resells to its customers. Finally, Kinergy has an exclusive sales agreement with a third-party owned fuel-grade ethanol plant under which it sells the plant’s fuel-grade ethanol production for a fee plus the costs to deliver the ethanol to Kinergy’s customers. These sales are referred to as third-party agent sales. Revenue from these third-party agent sales is recorded on a net basis, with Kinergy recognizing its predetermined fees and any associated delivery costs. We have five production facilities from which we produce and sell essential ingredients to our customers through our subsidiary, Alto Nutrients. Alto Nutrients enters into sales contracts with essential ingredient customers under exclusive intercompany sales agreements with each of our five production facilities. We recognize revenue from sales of alcohols and essential ingredients at the point in time when the customer obtains control of the products, which typically occurs upon delivery depending on the terms of the underlying contracts. In some instances, we enter into contracts with customers that contain multiple performance obligations to deliver volumes of alcohols or essential ingredients over a contractual period of less than 12 months. We allocate the transaction price to each performance obligation identified in the contract based on relative standalone selling prices and recognize the related revenue as control of each individual product is transferred to the customer in satisfaction of the corresponding performance obligations. - 39 - When we are the agent, the supplier controls the products before they are transferred to the customer because the supplier is primarily responsible for fulfilling the promise to provide the product, has inventory risk before the product has been transferred to a customer and has discretion in establishing the price for the product. When we are the principal, we control the products before they are transferred to the customer because we are primarily responsible for fulfilling the promise to provide the products, we have inventory risk before the product has been transferred to a customer and we have discretion in establishing the price for the product. See “Note 5 – Segments” of the Notes to Consolidated Financial Statements for our revenue-breakdown by type of contract. Impairment of Long-Lived Assets and Held-for-Sale Classification Our long-lived assets have been primarily associated with our production facilities, reflecting their original cost, adjusted for depreciation and any subsequent impairment. We assess the impairment of long-lived assets, including property and equipment, when events or changes in circumstances indicate that the fair value of an asset group could be less than the net book value of the asset group. Generally, we assess long-lived assets for impairment by first determining the forecasted, undiscounted cash flows each asset is expected to generate plus the net proceeds expected from the sale of the asset group. If the total amount of the undiscounted cash flows is less than the carrying value of the asset group, we then determine the fair value of the asset group. An impairment loss would be recognized when the fair value is less than the related net book value, and an impairment expense would be recorded in the amount of the difference. Forecasts of future cash flows are estimates based on our experience and knowledge of our operations and the industry in which we operate. These estimates could be significantly affected by future changes in market conditions, the economic environment, including inflation, and the purchasing decisions of our customers. Based on these reviews, we recorded an asset impairment of $2.1 million for 2020 and none for either 2021 or 2022. We review our intangible assets with indefinite lives at least annually or more frequently if impairment indicators arise. In our review, we determine the fair value of these assets using market multiples and discounted cash flow modeling and compare it to the net book value of the acquired assets. Assets held-for-sale are assessed for impairment by comparing the carrying values to their expected net sales proceeds. In 2020, our Board of Directors approved a plan to sell our fuel-grade ethanol production facilities in Madera and Stockton, California, which were ultimately sold in 2021. We reviewed the criteria for held-for-sale classification of the long-lived assets associated with these asset groups. Our analysis concluded that these assets should be classified as held-for-sale as of December 31, 2020, and as such, we estimated an aggregate corresponding asset impairment of $22.3 million for 2020. We further evaluated the original estimate and recorded an additional asset impairment on these assets held-for-sale of $1.2 million for 2021. In 2021, we decided to sell our property and equipment located in Canton, Illinois. We reviewed the criteria for held-for-sale classification of the long-lived assets for this asset group. We concluded that these assets should be classified as held-for-sale as of December 31, 2021, and as such, we estimated a corresponding asset impairment of $1.9 million for 2021. We did not record any impairments for assets held-for-sale for 2022. Valuation Allowance for Deferred Taxes We account for income taxes under the asset and liability approach, where deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. - 40 - We evaluate our deferred tax asset balance for realizability. To the extent we believe it is more likely than not that some portion or all of our deferred tax assets will not be realized, we will establish a valuation allowance against the deferred tax assets. Realization of our deferred tax assets is dependent upon future taxable income during the periods in which the associated temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. These changes, if any, may require possible material adjustments to these deferred tax assets, resulting in a reduction in net income or an increase in net loss in the period when such determinations are made. We had pre-tax consolidated income of $47.6 million for the year ended December 31, 2021. We had pre-tax consolidated losses of $39.7 million and $17.3 million for the years ended December 31, 2022 and 2020, respectively. Based on our current and prior results, we do not have significant evidence to support a conclusion that we will more likely than not be able to benefit from our remaining deferred tax assets. As such, we have recorded a valuation allowance against our net deferred tax assets. Derivative Instruments We evaluate our contracts to determine whether the contracts are derivative instruments. Management may elect to exempt certain forward contracts that meet the definition of a derivative from derivative accounting as normal purchases or normal sales. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from the fair value accounting and reporting requirements of derivative accounting. We enter into short-term cash, option and futures contracts as a means of securing purchases of corn, natural gas and sales of fuel-grade ethanol and managing exposure to changes in commodity prices. All of our exchange-traded derivatives are designated as non-hedge derivatives for accounting purposes, with changes in fair value recognized in net income. Although the contracts are economic hedges of specified risks, they are not designated or accounted for as hedging instruments. Realized and unrealized gains and losses related to exchange-traded derivative contracts are included as a component of cost of goods sold in the accompanying financial statements. The fair values of contracts entered through commodity exchanges are presented on the accompanying balance sheet as derivative assets or liabilities. The selection of normal purchase or sales contracts, and use of hedge accounting, are accounting policies that can change the timing of recognition of gains and losses in the statement of operations.