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, renewable fuels and essential ingredients 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, including both renewable fuels and specialty alcohols ranging from industrial-, pharmaceutical-, and high-quality food- and beverage-grade alcohols. Of this amount, we can produce up to 110 million gallons annually of specialty alcohols, depending on our product mix among high-quality beverage-grade alcohol and other quality specification alcohols. We market and distribute all of the alcohols produced at our facilities as well as alcohols produced by third parties. In 2024, we marketed and distributed approximately 386 million gallons combined of our own produced alcohols as well as fuel-grade ethanol produced by third parties, and over 1.4 million tons of essential ingredients on a dry matter basis. We also own and operate a liquid CO 2 production facility adjacent to our plant in Oregon for the offtake of CO 2 gas from the plant for conversion to liquid CO 2 and subsequent sale. In addition, we break bulk distribute specialty alcohols, produced by us and third parties, through our Eagle Alcohol business. - 32 - We report our financial and operating performance in three distinct segments: ● 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; ● Marketing and distribution , which includes marketing and merchant trading for company-produced alcohols and essential ingredients on an aggregated basis, and sales of fuel-grade ethanol sourced from third parties; and ● Western production , which includes the production and sale of renewable fuels and essential ingredients and, beginning in 2025, liquid CO 2 produced at our western production facilities, including our liquid CO 2 plant, on an aggregated basis, none of which are individually so significant as to be considered a separately reportable segment. Our mission is to produce the highest quality, sustainable ingredients that make everyday products better. We intend to accomplish this goal in part by investing in our specialized and higher value specialty alcohol production and distribution infrastructure, expanding production in high-demand essential ingredients, expanding and extending the sale of our products into new regional and international markets, building efficiencies and economies of scale and by capturing a greater portion of the value stream. Production Segments We produce specialty alcohols, renewable fuels and essential ingredients, focusing on five key markets: Health, Home & Beauty ; Food & Beverage ; Industry & Agriculture ; Essential Ingredients ; and Renewable Fuels . Products for Health, Home & Beauty markets include specialty alcohols used in mouthwash, cosmetics, pharmaceuticals, hand sanitizers, disinfectants and cleaners. Products for Food & Beverage markets include grain neutral spirits used in alcoholic beverages and vinegar and corn germ used for corn oils. Products for Industry & Agriculture markets include alcohols and other products for paint applications and fertilizers. Products for Essential Ingredients markets include dried yeast, corn protein meal, corn protein feed, corn germ, distillers grains, liquid CO 2 and liquid feed used in commercial animal feed and pet foods. We also sell yeast and liquid CO 2 for human consumption. Our products for the Renewable Fuels markets include fuel-grade ethanol and distillers corn oil used as a feedstock for renewable diesel and biodiesel fuels. Our specialty alcohols for the Industry & Agriculture, Food & Beverage and Health, Home & Beauty markets represented approximately 12%, 7% and 3%, respectively, of our sales in 2024 from these three markets. We produce our alcohols and essential ingredients at our facilities described below. Our production facilities located in Illinois are in the heart of the Corn Belt, benefit from relatively low-cost and abundant feedstock and enjoy logistical advantages that enable us to provide our products to both domestic and international markets via truck, rail or barge. Our production facilities located in Oregon and Idaho are near their respective fuel and feed customers, offering significant timing, product transportation cost and logistical advantages. - 33 - All of our production facilities, other than our Magic Valley plant, were operating for all of 2024, subject to scheduled and unscheduled downtimes to address facility repair and maintenance. In January 2024, we temporarily hot-idled our Magic Valley facility to minimize losses from negative regional crush margins and to expedite the installation of additional equipment to achieve the intended production rate, quality and consistency from our corn oil and high protein system at the facility. We restarted our Magic Valley facility in July 2024 and by October 2024, the facility consistently achieved average ethanol production rates at full capacity, the protein content yield from the plant reached 50% or greater, and we were able to expand our corn oil yields. Increases in regional corn basis and declining market prices for protein and corn oil resulted in overall margin compression, outweighing the economic benefits of our plant improvements. As a consequence, we cold-idled our Magic Valley facility on December 31, 2024 to minimize financial losses. We continue to provide terminal services at the plant and intend to resume operations at the facility when the economic environment in the region sustainably improves. We believe that the cold-idling of our Magic Valley facility will have a positive impact on our overall financial results in 2025 compared to 2024. As market conditions change, we may increase, decrease or idle production at one or more operating facilities or resume operations at any idled facility. Marketing and Distribution Segment We market and distribute all the alcohols and essential ingredients we produce at our facilities. We also market and distribute alcohols produced by third parties. We have extensive and long-standing customer relationships, both domestic and international, for our specialty alcohols, renewable fuels 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 fuels customers are located throughout the Western and Midwestern United States and consist of integrated oil companies and gasoline marketers who blend fuel-grade ethanol into gasoline. Our customers depend on us to provide a reliable supply of fuel-grade ethanol and manage the logistics and timing of delivery. Our customers collectively require fuel-grade ethanol volumes in excess of the supplies we produce at our facilities. We secure additional fuel-grade ethanol supplies from third-party ethanol producers. We arrange for transportation, storage and delivery of fuel-grade ethanol purchased by our customers through our agreements with third-party service providers in the Western United States as well as in the Midwest from a variety of sources. We market food-grade essential ingredients to human and pet food markets, our feed products (such as distillers grains) primarily to export markets from our Pekin Campus, and other feed products to dairies and feedlots, in many cases located near our production facilities. These customers use our feed products for livestock as a substitute for corn and other sources of starch and protein. We sell our corn oil to poultry, renewable diesel and biodiesel customers. See “Note 4 – Segments” to our Notes to Consolidated Financial Statements included elsewhere in this report for financial information about our business segments. Financial Review, Current Initiatives and Outlook Our fourth quarter and full-year financial results reflect challenging market conditions, including lower crush margins, compared to the fourth quarter of 2023 and the prior full year. As discussed below, we took decisive action to rationalize our business which, together with over $30 million in associated asset impairments, resulted in a material portion of the substantial non-cash, one-time expenses for the fourth quarter and full year 2024, resetting our base. We also reduced our annual expense run rate by nearly $8 million. Together with improved performance at our Pekin Campus wet mill, our synergistic acquisition of premium liquid CO 2 processing and our entry into the European market through International Sustainability and Carbon Certification, or ISCC, product sales, we are optimistic about 2025. As part of our ongoing efforts to maximize shareholder value, we have engaged an investment banking firm to explore the sale of our production facilities located in Oregon and Idaho. In addition, with the assistance of our financial and legal advisors, we are considering a broad range of other options, including asset sales, a merger or other strategic transactions to better align our long-term value potential. - 34 - In January, we acquired Kodiak Carbonic, a beverage-grade liquid CO 2 processor, for $7.6 million. This processing facility, renamed Alto Carbonic, is located adjacent to our Columbia plant in Boardman, Oregon and has been operating profitably since 2015. Alto Carbonic processes biogenic CO 2 gas produced as a byproduct of the fermentation process at our Columbia plant and converts it into premium liquid CO 2 . The finished product is sold into the Northwestern region of the United States for use in food and beverage processing, industrial cooling, and other applications. The facility produces an average of approximately 56,000 tons annually of liquid CO 2 with the capacity to produce over 70,000 tons annually and the potential for further expansion. Alto Carbonic currently uses only 50% of our Columbia plant’s biogenic CO 2 gas. Simultaneous with this acquisition, we entered into an amended long-term sales offtake agreement with a leading North American industrial gas supplier. The acquisition is immediately accretive and has a compelling payback of approximately two years. We are in the process of integrating the liquid CO 2 plant with our Columbia facility, improving coordination between operations. We expect to realize additional cost savings through synergies in production and overhead. We are also evaluating an opportunity to increase storage capacity at the site to improve logistics and take advantage of spot market demand for premium liquid CO 2 . The acquisition immediately stems the recent lack of profitability at our Columbia plant, provides a stronger financial foundation to overcome competitive challenges for destination plants and significantly increases the value of these combined assets. We integrated Eagle Alcohol’s high quality alcohol bulk operations and customers into our Pekin Campus and Kinergy businesses and have now turned our focus to converting Eagle Alcohol’s break-bulk warehousing and trucking operations into a profitable service center. We also decreased staff at other operations, reducing overhead run-rates of both costs of goods sold and selling, general and administrative expenses. In total, we reduced headcount by 16% and expect to save nearly $8 million annually from these efficiencies, improving our bottom-line run rate and helping us manage our liquidity. We expect to realize the full annualized financial benefit from these cost saving initiatives beginning in the second quarter. As an additional cost saving initiative, we cold-idled our Magic Valley facility at the end of 2024. For context, starting in 2022, we saw an opportunity to take advantage of premium prices for high quality protein and corn oil. Consistent with our business strategy to improve yields of high margin products, we undertook the installation and ultimate commissioning of high-quality protein and corn oil technology at our Magic Valley plant. The installation took much longer and cost significantly more than expected. In addition, we underestimated the negative impact that the buildout of renewable diesel and soy crush capacity would have on market prices for protein and corn oil in the region. Compounded by the dramatic swing in delivered corn prices for Western operations compared to our Midwestern facilities, it became impossible to operate our Magic Valley facility profitably. By cold idling the plant and reducing our variable and fixed costs as much as possible, we have stopped this drag on the profitable areas of our business. In the fourth quarter, we took a significant impairment charge related to the Magic Valley plant. To partially offset remaining carry expenses, and to serve our customers in the area, we are opportunistically using the facility as a renewable fuel terminal. At our Pekin Campus, we continue to pursue opportunities to optimize carbon, which historically was considered a waste stream with only marginal value. In November, we achieved an important milestone by finalizing our CO 2 transportation and sequestration agreement with Vault 44.01, or Vault. This partnership is critical to our carbon capture and storage, or CCS, project. In December, Vault submitted the formal application to the EPA for our CCS project to obtain the Class VI permit required to begin construction of the CCS pipeline and for long-term CO 2 storage in deep geological formations. - 35 - CCS operations require significant development and planning. The EPA requires extensive site analysis, monitoring and safety measures to safeguard underground water supplies. The approval process is currently estimated to take at least two years. We expect that this approval timeline will also allow the time necessary to address Illinois’s current moratorium on new CO 2 pipelines imposed as part of its SAFE CCS Act. The moratorium is in effect until the earlier of July 2026 or revised federal safety standards are established. Although progress on our CCS project has been slow, significant changes have occurred in the political and regulatory environment, as well as the carbon market, during that time. Our deliberate pace has been advantageous as we navigate these changes and discover effective paths forward. The extended period required for regulatory approvals affords us additional time to develop the necessary infrastructure plans, including compression and energy solutions. We also intend to use the additional time to secure necessary financing. Finally, working with Vault, we are focused on meeting with local groups and authorities to educate the community about our CCS project, strengthen support and address concerns. At our Pekin Campus, we are proactively modifying our operations to deliver higher value products. Following our biennial wet mill outage in spring 2024, we improved plant utilization, operating the wet mill at nameplate capacity of 100 million gallons. Pekin Campus production volume in the fourth quarter increased 3.8 million gallons over the prior year period. This 7% increase demonstrates the effectiveness of our maintenance program. Carrying these improvements into 2025, we expect to produce an additional 8 million gallons for the full year, lowering our per gallon cost of production and enabling us to produce a greater volume of specialty alcohols. We applied for, and in late summer obtained for our Pekin Campus, ISCC certification for our renewable fuels business to allow us to ship qualified renewable fuel to the European Union where we typically are able to garner premium prices compared to domestic markets. We began exporting certified renewable fuel to European markets in the fourth quarter and anticipate expanding exports in 2025. In our premium specialty alcohol business, we continue to materially differentiate our products through our certifications and customer relationships. For 2024, we sold nearly 92 million gallons of specialty alcohols. In 2025, our goal is to balance production levels between specialty alcohols and ISCC renewable fuels to maximize margins while addressing customer needs. We also completed another ISO 9001 audit with no adverse findings, a testament to our culture of quality. For the fourth quarter, we sold 95.1 million gallons, up from 92.5 million gallons for the same period in 2023, largely reflecting production improvements at our Pekin Campus from our planned repairs and maintenance program. However, our sales price per gallon averaged $1.88 in the fourth quarter compared to $2.24 for the same period in 2023, reducing net sales by $38 million for the year over year period. Market crush margins declined nearly 18 cents per gallon in the fourth quarter resulting in an $8.7 million adverse impact to gross profit for the period. In addition, returns from protein sales were negatively impacted by expanded soy crush intended to meet renewable diesel demand, higher wet feed product mix and the inability of a key customer to take product deliveries following Hurricane Helene. Low carbon fuel credit prices also declined in the fourth quarter compared to the prior year period but improved sequentially from the third quarter of 2024 and continue to recover from market lows. Our realized derivative losses, which are included in Adjusted EBITDA (defined below), were $3.5 million for the fourth quarter compared to $2.3 million for the prior year period. Unrealized derivative gains, which are excluded from Adjusted EBITDA, were $5.5 million for the fourth quarter compared to a loss of $8.2 million for the prior year period, resulting in a positive $13.7 million year-over-year net difference. Our non-cash, lower of cost or market adjustment on physical inventories and mark-to-market on corn commitments resulted in a $3.5 million reserve in the fourth quarter compared to $2.2 million in the prior year period. In the fourth quarter, we recognized final acquisition-related expenses for Eagle Alcohol of $5.7 million, of which $5.0 million was non-cash, compared to $0.7 million in the prior year period. - 36 - Asset impairments for the fourth quarter totaled $24.8 million, consisting of $21.4 million related to the cold idling of our Magic Valley plant and $3.4 million related to the impairment of intangibles from the integration of certain Eagle Alcohol activities, compared to a $6.0 million impairment in the prior year period related to Eagle Alcohol’s goodwill. Use of Non-GAAP Financial Measures Management believes that certain financial measures not in accordance with generally accepted accounting principles, or GAAP, are useful measures of operations. Management provides EBITDA and Adjusted EBITDA as non-GAAP financial measures so that investors will have the same financial information that management uses, which may assist investors in properly assessing our performance on a period-over-period basis. We define EBITDA as unaudited consolidated net income (loss) before interest expense, interest income, provision for income taxes and depreciation and amortization expense. We define Adjusted EBITDA as unaudited consolidated net income (loss) before interest expense, interest income, unrealized derivative gains and losses, acquisition-related expense, provision for income taxes, asset impairments, and depreciation and amortization expense. A table is provided below to reconcile Adjusted EBITDA to its most directly comparable GAAP measure, consolidated net income (loss). EBITDA and Adjusted EBITDA are not measures of financial performance under GAAP and should not be considered as alternatives to consolidated net income (loss) or any other measure of performance under GAAP, or to cash flows from operating, investing or financing activities as an indicator of cash flows or as a measure of liquidity. EBITDA and Adjusted EBITDA have limitations as analytical tools and you should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP. Information reconciling forward-looking EBITDA or Adjusted EBITDA to forward-looking consolidated net income (loss) would require a forward-looking statement of consolidated net income (loss) prepared in accordance with GAAP, which is unavailable to us without unreasonable effort. We are not able to provide a quantitative reconciliation of forward-looking EBITDA or Adjusted EBITDA to forward-looking consolidated net income (loss) because certain items required for reconciliation are uncertain, outside of our control and/or cannot reasonably be predicted, such as net sales, cost of goods sold, unrealized derivative gains and losses, asset impairments and provision (benefit) for income taxes, which we view as the most material components of consolidated net income (loss) that are not presently estimable. Reconciliation of Adjusted EBITDA to Consolidated Net Loss Three Months Ended December 31, Years Ended December 31, (in thousands) (unaudited) 2024 2023 2024 2023 Consolidated net loss $ (41,712 ) $ (18,945 ) $ (58,984 ) $ (28,005 ) Adjustments: Interest expense, net 2,474 2,126 7,644 7,425 Interest income (112 ) (265 ) (689 ) (854 ) Unrealized derivative (gains) losses (5,495 ) 8,162 (13,574 ) 9,679 Acquisition-related expense 5,676 700 7,701 2,800 Asset impairments 24,790 5,970 24,790 6,544 Provision for income taxes 173 97 173 97 Depreciation and amortization expense 6,548 5,698 24,408 23,080 Total adjustments 34,054 22,488 50,453 48,771 Adjusted EBITDA $ (7,658 ) $ 3,543 $ (8,531 ) $ 20,766   - 37 - 2024 Financial Performance Summary Our consolidated net sales declined by $0.3 billion to $1.0 billion for 2024 from $1.2 billion for 2023. Our net loss attributable to common stockholders increased by $31.0 million to a net loss of $60.3 million for 2024 from a net loss of $29.3 million for 2023. Factors that contributed to these results of operations for 2024 include: ● Net sales . Our net sales decline of $0.3 billion was due to a decline in our average sales price per gallon and fewer tons of essential ingredients sold, partially offset by an increase in total alcohol gallons sold. o Our average sales price per gallon declined by $0.52, or 21%, to $1.95 for 2024 from $2.47 for 2023. The decline was primarily driven by lower renewable fuel prices in 2024 largely due to lower oil and gasoline prices. o Our volume of essential ingredients sold declined by 0.1 million tons, or 7%, to 1.4 million tons for 2024 from 1.5 million tons for 2023 primarily due to lower alcohol production volumes during 2024. Our average sales price for our essential ingredients also declined primarily due to lower corn prices. o Our total gallons sold increased by 3.5 million gallons, or 1%, to 386.0 million gallons for 2024 from 382.5 million gallons for 2023. ◾ Our specialty alcohol production sales volume increased by 14.8 million gallons, or 19%, to 91.5 million gallons for 2024 from 76.7 million gallons for 2023 primarily due to increased customer demand for specialty alcohols during the year. ◾ Our third-party sales volume increased by 5.7 million gallons, or 6%, to 108.3 million gallons for 2024 from 102.6 million gallons for 2023. This increase resulted from our fulfillment of customer contracts for renewable fuels using third party volumes while our Magic Valley and Pekin Campus plants were offline in 2024. ◾ Our renewable fuel production sales volume declined by 17.0 million gallons, or 8%, to 186.2 million gallons for 2024 from 203.2 million gallons for 2023, primarily due to reduced production in 2024 as our Magic Valley facility was hot-idled for most of the first half of 2024 coupled with scheduled production downtime at our Pekin Campus for repairs and maintenance. ● Gross Profit . Our gross profit declined by $5.9 million to a gross profit of $9.7 million for 2024 from $15.7 million for 2023 partially due to weakened commodity crush margins from lower ethanol sales prices as well as lower corn prices which reduced profits from our essential ingredients. Our gross profit and margins were further impacted by production challenges at our Magic Valley plant as we continued to incur costs to implement our high-protein and corn oil system at the facility coupled with higher repairs and maintenance costs due to our scheduled downtime at our Pekin Campus. - 38 - 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 facilities in Oregon and 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 protein meal, corn protein feed, corn germ, and distillers grains and liquid feed used in commercial animal feed and pet foods. We also sell yeast and liquid CO 2 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 declined by 21% to $1.95 per gallon for 2024 compared to $2.47 per gallon for 2023. The average price of fuel-grade ethanol as reported by the Chicago Mercantile Exchange, or CME, declined by 24% to $1.69 per gallon for 2024 compared to $2.22 per gallon for 2023. Our average cost of corn declined by 28% to $4.72 per bushel for 2024 from $6.58 per bushel for 2023. The average price of corn as reported by the CME declined by 25% to $4.24 per bushel for 2024 from $5.64 per bushel for 2023. We believe that our gross profit margins depend primarily on the following 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, such as corn (including corn basis) and natural gas; ● the market prices of our essential ingredients; ● key variable costs (other than production input commodities), such as production and other personnel staffing; ● our ability to anticipate trends in the market and contracted prices of our alcohols, essential ingredients, and costs of key input commodities, and our ability to implement appropriate risk management through hedging and other means, and opportunistic pricing strategies, as well as the financial results of those hedging activities; ● the proportion of our sales of specialty alcohols to our sales of fuel-grade ethanol produced at our facilities relative to their respective market and contracted prices; 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 relative to the market price of fuel-grade ethanol and marketing and distribution fees payable for third-party sales. 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 lock in margins, limit risk and otherwise 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 sales or 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. - 39 - Certain performance metrics that we believe are important indicators of our results of operations include: Certain performance metrics that we believe are important indicators of our results of operations include the following: Percentage Change Years Ended December 31, 2024 vs 2023 vs 2024 2023 2022 2023 2022 Alcohol Sales (gallons in millions) Pekin Campus renewable fuel gallons sold 125.7 136.2 116.1 (8 )% 17 % Western production renewable fuel gallons sold 60.5 67.0 92.4 (10 )% (27 )% Third-party renewable fuel gallons sold 108.3 102.6 117.9 6 % (13 )% Total renewable fuel gallons sold 294.5 305.8 326.4 (4 )% (6 )% Specialty alcohol gallons sold 91.5 76.7 92.5 19 % (17 )% Total gallons sold 386.0 382.5 418.9 1 % (9 )% Sales Price per Gallon Pekin Campus $ 1.95 $ 2.40 $ 2.55 (19 )% (6 )% Western production $ 1.91 $ 2.49 $ 2.75 (23 )% (9 )% Marketing and distribution $ 2.00 $ 2.56 $ 2.83 (22 )% (10 )% Total $ 1.95 $ 2.47 $ 2.64 (21 )% (6 )% Alcohol Production (gallons in millions) Pekin Campus 212.4 209.7 208.8 1 % 0 % Western production 58.7 68.1 91.2 (14 )% (25 )% Total 271.1 277.8 300.0 (2 )% (7 )% Corn Cost per Bushel Pekin Campus $ 4.45 $ 6.32 $ 7.32 (30 )% (14 )% Western production $ 5.73 $ 7.45 $ 8.97 (23 )% (17 )% Total $ 4.72 $ 6.58 $ 7.77 (28 )% (15 )% Average Market Metrics PLATTS Ethanol price per gallon $ 1.69 $ 2.22 $ 2.47 (24 )% (10 )% CME Corn cost per bushel $ 4.24 $ 5.64 $ 6.94 (25 )% (19 )% Board corn crush per gallon (1) $ 0.18 $ 0.21 $ 0.00 (14 )% — Essential Ingredients Sold (in thousands of tons) Pekin Campus Distillers grains 336.4 332.7 334.4 1 % (1 )% CO 2 188.6 182.4 164.8 3 % 11 % Corn wet feed 121.8 95.0 89.9 28 % 6 % Corn dry feed 87.2 90.6 81.6 (4 )% 11 % Corn oil and germ 75.1 73.8 66.7 2 % 11 % Syrup and other 38.6 41.2 56.9 (6 )% (28 )% Corn meal 35.4 36.8 32.1 (4 )% 15 % Yeast 23.2 25.9 23.9 (10 )% 8 % Total Pekin Campus 906.3 878.4 850.3 3 % 3 % Western production Distillers grains 394.5 459.7 643.7 (14 )% (29 )% CO 2 57.7 119.1 77.4 (52 )% 54 % Syrup and other 54.8 55.5 55.8 (1 )% (1 )% Corn oil 7.6 8.0 10.2 (5 )% (22 )% Total Western Production 514.6 642.3 787.1 (20 )% (18 )% Total Essential Ingredients Sold 1,420.9 1,520.7 1,637.4 (7 )% (7 )% Essential Ingredients return % (2) Pekin Campus Return 49.7 % 45.7 % 41.3 % 9 % 11 % Western Production Return 32.0 % 33.4 % 31.6 % (4 )% 6 % Consolidated Total Return 45.2 % 42.4 % 37.9 % 7 % 12 % (1) Assumes corn conversion of 2.80 gallons of alcohol per bushel of corn. (2) Essential ingredients revenues as a percentage of total corn costs consumed. - 40 - Year Ended December 31, 2024 Compared to the Year Ended December 31, 2023 Years Ended December 31, Dollar Percentage Results as a Percentage of Net Sales for the Years Ended December 31, 2024 2023 Change Change 2024 2023 (dollars in thousands) Net sales $ 965,258 $ 1,222,940 $ (257,682 ) (21.1 )% 100.0 % 100.0 % Cost of goods sold 955,536 1,207,287 (251,751 ) (20.9 )% 99.0 % 98.7 % Gross profit 9,722 15,653 (5,931 ) (37.9 )% 1.0 % 1.3 % Selling, general and administrative expenses (29,736 ) (29,864 ) (128 ) (0.4 )% (3.1 )% (2.4 )% Acquisition-related expenses (7,701 ) (2,800 ) 4,901 175.0 % (0.8 )% (0.2 )% Gain (loss) on sale (disposal) of assets 830 (293 ) 1,123 * (0.0 )% (0.0 )% Asset impairments (24,790 ) (6,544 ) 18,246 278.8 % (2.6 )% (0.5 )% Loss from operations (51,675 ) (23,848 ) 27,827 116.7 % (5.4 )% (2.0 )% Income from cash grant — 2,812 (2,812 ) (100.0 )% 0.0 % 0.2 % Interest expense, net (7,644 ) (7,425 ) 219 2.9 % (0.8 )% (0.6 )% Other income, net 508 553 (45 ) (8.1 )% 0.1 % 0.0 % Loss before provision for income taxes (58,811 ) (27,908 ) 30,903 110.7 % (6.1 )% (2.3 )% Provision for income taxes 173 97 76 78.4 % 0.0 % 0.0 % Consolidated net loss $ (58,984 ) $ (28,005 ) $ 30,979 110.6 % (6.1 )% (2.3 )% Preferred stock dividends (1,269 ) (1,265 ) 4 0.3 % (0.1 )% (0.1 )% Loss attributable to common stockholders $ (60,253 ) $ (29,270 ) $ 30,983 105.9 % (6.2 )% (2.4 )% * Not meaningful. - 41 - Net Sales The decline in our consolidated net sales for 2024 as compared to 2023 was due to a decrease in our average sales price per gallon for our alcohols and lower volumes of essential ingredients sold at lower prices, partially offset by a higher volume of alcohol sold. Our average sales price per gallon declined primarily due to lower fuel-grade ethanol prices largely driven by lower oil and gasoline prices in 2024 compared to the prior year. We also produced and sold fewer tons of essential ingredients primarily due to lower alcohol production in 2024 compared to 2023. Our average sales price for our essential ingredients declined primarily due to lower corn prices. Partially offsetting these declines, we sold more total gallons for 2024 as compared to 2023 resulting primarily from an increase in our specialty alcohol gallons sold and third-party gallons sold, partially offset by lower renewable fuel production gallons sold due to downtime at both our Magic Valley facility and our Pekin Campus, as discussed above. We were able to produce and sell more specialty alcohol due in part to higher production from our Pekin Campus wet mill after our biennial maintenance outage during the year. Pekin Campus Production Segment Net sales of alcohol from our Pekin Campus production segment declined by $86.5 million, or 17%, to $415.7 million for 2024 as compared to $502.2 million for 2023. Our total volume of production gallons sold, however, increased by 4.7 million gallons, or 2%, to 213.6 million gallons for 2024 as compared to 208.9 million gallons for 2023, due to production benefits realized in second half of the year from our biennial maintenance performed in Spring 2024 resulting in higher production rates. At the segment’s average sales price per gallon of $1.95 for 2024, we generated $9.1 million in additional net sales from the 4.7 million additional gallons of alcohol sold in 2024 as compared to 2023. However, a decrease of $0.45, or 19%, in the segment’s average sales price per gallon in 2024 as compared to 2023 resulted in a $95.6 million decline in net sales as compared to 2023. Net sales of essential ingredients declined by $48.4 million, or 22%, to $169.3 million for 2024 as compared to $217.7 million for 2023. Our total volume of essential ingredients sold increased by 27,900 tons, or 3%, to 906,300 tons for 2024 from 878,400 tons for 2023. Sales volumes of essential ingredients from our Pekin Campus were higher in 2024 due to higher production rates for the year. At our average sales price per ton of $186.81 for 2024, we generated $5.2 million in additional net sales from the 27,900 additional tons of essential ingredients sold in 2024 as compared to 2023. A decrease of $61.03, or 25%, in our average sales price per ton in 2024 as compared to 2023 resulted in a $53.6 million decline in net sales as compared to 2023. Marketing and Distribution Segment Net sales of renewable fuel from our marketing and distribution segment, excluding intersegment sales, decreased by $46.5 million, or 18%, to $216.5 million for 2024 as compared to $263.0 million for 2023. Our volume of third-party renewable fuel sold reported gross by the segment increased by 5.7 million gallons, or 6%, to 108.3 million gallons for 2024 as compared to 102.6 million gallons for 2023. This increase resulted from a shift in the source of renewable fuel from our Magic Valley facility to third-party suppliers. At the segment’s average sales price per gallon of $2.00 for 2024, net sales were $11.4 million higher as a result of the 5.7 million additional gallons sold in 2024 as compared to 2023. This increase was partially offset by the $0.56 decrease in our average sales price per gallon for 2024. The decrease of $0.56, or 22%, in our average sales price per gallon in 2024 as compared to 2023 resulted in a $57.9 million decline in net sales from our third-party renewable fuel sold by the segment compared to 2023. - 42 - Western Production Segment Net sales of alcohol from our Western production segment declined by $51.6 million, or 31%, to $115.4 million for 2024 as compared to $167.0 million for 2023. Our total volume of gallons sold declined by 6.5 million gallons, or 10%, to 60.5 million gallons for 2024 as compared to 67.0 million gallons for 2023. This decline in sales volume primarily resulted from lower production from our Magic Valley facility. At the segment’s average sales price of $1.91 per gallon for 2024, net sales were $12.4 million lower as a result of the 6.5 million fewer gallons sold in 2024 as compared to 2023. A decline of $0.58, or 23%, in our average sales price per gallon in 2024 as compared to 2023 resulted in a $39.2 million decrease in net sales of alcohol from the segment compared to 2023. Net sales of essential ingredients declined by $20.3 million, or 35%, to $37.0 million for 2024 as compared to $57.3 million for 2023. Our total volume of essential ingredients sold declined by 127,700 tons, or 20%, to 514,600 tons for 2024 from 642,300 tons for 2023. At our average sales price of $71.81 per ton for 2024, net sales were $9.2 million lower as a result of the 127,700 fewer tons sold in 2024 as compared to 2023. In addition, our sales price declined by $17.35 per ton for 2024. The decline of $17.35, or 19%, in our average sales price per ton in 2024 as compared to 2023 resulted in a decrease of $11.1 million in net sales of essential ingredients from the segment compared to 2023. Corporate and Other Segment Net sales from our Corporate and other segment declined by $4.4 million or 28% to $11.4 million for 2024 as compared to $15.8 million for 2023. These results are from Eagle Alcohol’s business. Cost of Goods Sold and Gross Profit Our consolidated gross profit declined to a gross profit of $9.7 million, representing a gross margin of 1.0% for 2024, from $15.7 million, representing a gross margin of 1.3%, for 2023. Our consolidated gross profit declined due to lower overall commodity crush margins, particularly for renewable fuel, primarily due to lower sales prices as well as lower margins on essential ingredients sold due to lower corn prices. We spent a total of $34.6 million for repairs and maintenance, in-line with our 2024 estimate. Pekin Campus Production Segment Our Pekin Campus production segment’s gross profit improved by $12.7 million to a gross profit of $25.9 million from $13.3 million. Of this increase, $12.1 million is attributable to higher commodity crush margins and $0.6 million is attributable to increased sales volumes in 2024 as compared to 2023. Marketing and Distribution Segment Our marketing and distribution segment’s gross profit declined by $0.2 million to a gross profit of $4.0 million for 2024 from $4.2 million for 2023. Of this decrease, $0.4 million is attributable to lower margins from sales of third-party renewable fuel, partially offset by an increase of $0.2 million attributable to higher marketing volumes of third-party renewable fuel sold reported gross in 2024 as compared to 2023. Western Production Segment Our Western production segment’s gross loss worsened by $13.8 million to a gross loss of $19.3 million for 2024 as compared to a gross loss of $5.5 million for 2023. Of this decline, $15.8 million is attributable to significantly lower margins for renewable fuel, partially offset by $2.0 million attributable to lower sales volumes at negative margins in 2024 as compared to 2023. - 43 - Corporate and Other Segment Gross profit and loss from our Corporate and other segment was a gross loss of $0.9 million for 2024 and a gross profit of $3.7 million for 2023, primarily from Eagle Alcohol’s business. Selling, General and Administrative Expenses Our selling, general and administrative, or SG&A, expenses decreased by $0.1 million to $29.7 million for 2024 as compared to $29.8 million for 2023. SG&A expenses decreased primarily due to lower professional fees. Acquisition-related Expenses Our acquisition-related expenses increased by $4.9 million to $7.7 million for 2024 as compared to $2.8 million for 2023. These expenses relate to the acceleration of stock payments to the former owners of Eagle Alcohol. Asset Impairments We recorded asset impairment charges of $24.8 million for 2024 as compared $6.5 million for 2023. The 2024 impairments reflect $21.4 million for our Magic Valley asset group, as we cold-idled the plant at the end of the year, and $3.4 million for intangible assets of Eagle Alcohol. The 2023 impairments relate to the goodwill associated with our acquisition of Eagle Alcohol. Interest Expense, net Interest expense, net, increased by $0.2 million to $7.6 million for 2024 from $7.4 million for 2023. The increase in interest expense, net, is primarily due to higher debt balances, as well as higher interest rates under Kinergy’s line of credit. Year Ended December 31, 2023, Compared to the Year Ended December 31, 2022 An analysis of our financial results comparing 2023 to 2022 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, 2023, filed with the Securities and Exchange Commission on March 14, 2024, 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, 2024, we funded our operations primarily from cash on hand and proceeds from Kinergy’s operating line of credit. In addition to funding our operations, we used our capital resources to continue our capital improvement projects, make an annual cash payment related to our acquisition of Eagle Alcohol and pay preferred stock dividends. As of December 31, 2024, we had $35.5 million in cash and cash equivalents and $23.1 million available for borrowing under Kinergy’s operating line of credit. In addition, we have up to an additional $65.0 million that may be available for capital improvement projects under our Orion term loan discussed below, subject to certain conditions. We believe we have sufficient sources of 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. - 44 - 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). December 31, 2024 December 31, 2023 Change Cash, cash equivalents and restricted cash $ 36,211 $ 45,480 (20 )% Current assets $ 153,118 $ 168,770 (9 )% Property and equipment, net $ 214,742 $ 248,748 (14 )% Current liabilities $ 57,804 $ 65,288 (11 )% Long-term debt, noncurrent portion $ 92,904 $ 82,097 13 % Working capital $ 95,314 $ 103,482 (8 )% Working capital ratio 2.65 2.59 2 % Restricted Net Assets At December 31, 2024, we had approximately $54.1 million of net assets at our subsidiaries that were not available to be transferred to Alto Ingredients, Inc. in the form of dividends, distributions, loans or advances due to restrictions contained in our subsidiaries’ credit facilities. Changes in Working Capital and Cash Flows Working capital declined to $95.3 million at December 31, 2024 from $103.5 million at December 31, 2023 as a result of a $15.7 million decrease in current assets, partially offset by a $7.5 million decrease in current liabilities. Current assets declined primarily due to decreases in restricted cash, inventories and other current assets. Our current liabilities declined primarily due to decreases in derivative instruments and accrued liabilities. Our cash, cash equivalents and restricted cash declined by $9.3 million due to $3.5 million of cash used in our operating activities and $13.5 million of cash used in our investing activities primarily for our capital improvement projects, partially offset by $7.7 million in cash provided by our financing activities, primarily due to proceeds from our operating line of credit. Cash used in our Operating Activities We used $3.5 million in cash in our operating activities during 2024, as compared to $22.0 million in cash generated from our operating activities in 2023. Specific factors that contributed significantly to the change in cash generated by our operating activities include: ● an increase of $31.0 million in net loss primarily due to lower commodity crush margins and increased asset impairments; ● a decrease of $19.1 million related to changes in the fair value of our derivative instruments due to changes in commodity prices at period-end 2024 as compared to 2023; ● a decrease of $8.9 million related to accounts receivable balances primarily due to the timing of sales and collections; and ● a decrease of $7.3 million in inventories due to lower period-end commodity prices. - 45 - These amounts were partially offset by: ● an increase of $22.5 million related to accounts payable and accrued expenses due to the timing of payments; and ● an increase of $18.2 million in asset impairments primarily related to the cold-idling of our Magic Valley facility. Cash used in our Investing Activities We used $13.5 million of cash in our investing activities for 2024, of which $11.1 million was for additions to property and equipment resulting from our capital improvement projects and $2.8 million is attributable to cash paid for our acquisition of Eagle Alcohol. Cash provided by our Financing Activities Cash provided by our financing activities was $7.7 million for 2024, of which $9.0 million is attributable to net proceeds from Kinergy’s line of credit, partially offset by $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. - 46 - 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, 2024 2023 Fixed-Charge Coverage Ratio Requirement 1.10 1.10 Actual 3.53 5.22 Excess 2.43 4.12 Alto Ingredients, Inc. has guaranteed all of Kinergy’s obligations under the credit facility. As of December 31, 2024, Kinergy had an outstanding balance of $39.7 million and $23.1 million of unused borrowing availability under the credit facility. Orion Term Loan On November 7, 2022, we entered into a credit agreement with certain funds managed by Orion Infrastructure Capital, or Lenders, under which the Lenders extended a senior secured credit facility in the amount of up to $125.0 million, or Term Loan. The Term Loan is secured by a first priority lien on certain of our assets and a second priority lien on certain assets of Kinergy and Alto Nutrients. 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, 2024 and 2023, the principal amount outstanding under the Term Loan was $60.0 million. Other Cash Obligations As of December 31, 2024, we had future commitments for certain capital projects totaling $9.1 million. These commitments are scheduled to be satisfied through 2025. In connection with our acquisition of Eagle Alcohol, we are committed to pay contingent payments of up to $2.7 million in the first half of 2025. 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. - 47 - 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, in 2022, Kinergy had exclusive sales agreements with two third-party owned fuel-grade ethanol plants under which it sold the plants’ fuel-grade ethanol production for a fee plus the costs to deliver the ethanol to Kinergy’s customers. Kinergy has since terminated these contracts. 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. 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 4 – Segments” of the Notes to Consolidated Financial Statements for our revenue breakdown by type of contract. Impairment of Long-Lived Assets Our long-lived assets have been primarily associated with our production facilities, reflecting their original cost, adjusted for depreciation and amortization and any subsequent impairment. - 48 - 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. When the estimated fair value of the asset group is less than its carrying value, we recognize an impairment expense equal to the difference between the asset group’s carrying value and estimated fair value. 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. As a result, we recorded asset impairments of $21.4 million and $0.6 million with respect to our Magic Valley facility and right of use assets associated with our operating leases for the years ended December 31, 2024 and 2023, respectively. We review our intangible assets, including goodwill, 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 reporting unit. Any assessed impairments will be recorded permanently and expensed in the period in which the impairment is determined. We performed our annual review of impairment and recognized asset impairments of $3.4 million and $6.0 million against our intangible assets and goodwill for the years ended December 31, 2024 and 2023, respectively. We did not recognize any asset impairments for the year ended December 31, 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. 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 net losses of $58.8 million, $27.9 million and $39.7 million for the years ended December 31, 2024, 2023 and 2022, respectively. Based on our current and prior results, we do not have sufficient 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. - 49 - 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.