Sadot Group Inc. 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of the results of operations and financial condition of Sadot Group Inc. (“Sadot Group”), together with its subsidiaries (collectively, the “Company”) as of December 31, 2024 and 2023 and for the years ended December 31, 2024 and 2023 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Annual Report on Form 10-K following Item 16. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “us,” “we,” “our,” and similar terms refer to Sadot Group. refers to the names under which our corporate and franchised restaurants do business depending on the concept. This Annual Report contains forward-looking statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained in this Annual Report may not occur. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results. The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,” “forecast,” “model,” “proposal,” “should,” “may,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions, are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based. Reference is made to “Factors That May Affect Future Results and Financial Condition” in this Item 7 for a discussion of some of the uncertainties, risks and assumptions associated with these statements. OVERVIEW Sadot Group Inc. is our parent company and is headquartered in Burleson, Texas. In late 2022, Sadot Group began a transformation from a U.S.-centric restaurant business into a global organization focused on the Agri-foods supply-chain. As of December 31, 2024, Sadot Group consisted of one distinct operating unit and one discontinued operations. 1. Sadot LLC (“Sadot Agri-Foods”): Sadot Group’s largest operating unit is a global Agri-Foods company engaged in farming, commodity trading and shipping of food and feed (e.g., soybean meal, wheat and corn) via dry bulk cargo ships across the globe. Sadot Agri-Foods competes with the ABCD commodity companies (ADM, Bunge, Cargill, Louis-Dreyfus) as well as many regional organizations. Sadot Agri-Foods operates, through a majority owned subsidiary, a roughly 5,000 acre crop producing farm in Zambia with a focus on major commodities such as wheat, soy and corn alongside high-value tree crops such as avocado and mango. In addition, the Company has a deposit on farmland in Indonesia. Sadot Agri-Foods was formed as part of the Company’s diversification strategy to own and operate, through its subsidiaries, the business lines throughout the food supply chain. Sadot Agri-Foods seeks to diversify over time into a sustainable and forward-looking global agri-foods company. 2. Sadot Restaurant Group, LLC ("Sadot Food Services"): had three unique “healthier for you” concepts, including two fast casual restaurant concepts, Pokémoto and Muscle Maker Grill, During 2024, the Company operated a subscription-based fresh prep meal concept, SuperFit Foods, which was sold in August 2024. Throughout 2024 the remaining corporate owned restaurants were sold and converted into franchise locations or closed. As of the end of 2024 the Company only operates as the franchisor for Pokémoto and Muscle Maker Grill restaurants. The restaurants were founded on the belief of taking every-day menu options and converting them into “healthier for you” menu choices with the goal of satisfying consumers demand for healthier choices, customization, flavor and convenience. This entire operating segment was identified as held for sale and reported as discontinued operations. On October 9, 2024, the Company filed a Certificate of Change Pursuant to NRS 78.209 with the Nevada Secretary of State to effect a reverse stock split of the Company’s common stock at a ratio of one for- ten (the “Reverse Stock Split”), which became effective 12:01 am eastern on October 18, 2024. As a result of the Reverse Stock Split, every 10 shares of the Company’s common Stock issued and outstanding on the effective date were consolidated into one issued and outstanding share. All stockholders where were entitled to receive fractional share interest. There was no change in the par value of the Company’s common stock. 32 Table of Contents Key Financial Definitions We review a number of financial and operating metrics, including the following key metrics and non-GAAP measures, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions. Governmental and other economic factors affecting our operations may vary. For the Years Ended December 31, 2024 2023 $’000 $’000 Commodity sales 700,937 717,506 Cost of goods sold (695,821) (707,871) Gross profit 5,116 9,635 Depreciation and amortization expenses (259) (1,143) Pre-opening expenses — (336) Stock-based expenses (6,662) (6,192) Sales, general and administrative expenses (9,659) (8,968) Loss from operations (11,464) (7,004) EBITDA 8,647 (6,446) EBITDA attributable to Sadot Group Inc. 8,903 (6,228) Our key business and financial definitions are explained in detail below. Revenues Our revenues are derived from Commodity sales. Commodity sales revenues are comprised of revenues generated from the purchase and sales of physical food and feed commodities related to our trading and farming operations. Cost of Goods Sold Cost of goods sold includes commodity costs, labor, rent and other operating expenses. Depreciation and Amortization Expenses Depreciation and amortization expenses primarily consist of the depreciation of property and equipment. Pre-opening Expenses Pre-opening expense primarily consist of expenses associated with expenses related to new business operations prior to the location opening or the transaction is finalized. Stock-based Expenses Stock-based expenses include all expenses that are paid with stock. This includes stock-based consulting fees due to Aggia and other consultants, stock compensation paid to our board of directors, and stock compensation paid to employees. The consulting fees due to Aggia related to ongoing Sadot Agri-Foods and expansion of the global Agri-Foods commodities business. Based on the initial Services Agreement with Aggia LLC FZ, a Company formed under the laws of United Arab Emirates (“Aggia”), the consulting fees were calculated at approximately 80.0% of the Net Income generated by Sadot Agri-Foods through March 31, 2023. As of April 1, 2023 the consulting agreement was amended to calculate consulting fees on 40.0% of the Net income generated by Sadot LLC. For the years ended December 31, 2024 and 2023, $6.7 million and $6.2 million, respectively, are recorded as Stock-based expenses in the accompanying Consolidated Statements of Operations and Other Comprehensive Income / (Loss). 33 Table of Contents Sales, General and Administrative Expenses Sales, general and administrative expenses include expenses associated with corporate and administrative functions that support our operations, including wages, benefits, travel expense, legal and professional fees, training, investor relations and other corporate costs. We incur incremental Sales, general and administrative expenses as a result of being a publicly listed company on the NASDAQ capital market. Total Other (Expense) / Income Accounts Total Other (expense) / income listed below the Loss from operations in the accompanying Consolidated Statements of Operations and Other Comprehensive Income / (Loss) consists of Gain of fair value remeasurement, Other income / (expense), Change in fair value of stock-based compensation, Gain on sale of trading securities and Interest expense, net. Gain on fair value remeasurement consists of the fair value remeasurement recorded on a recurring basis on the forward sales contract which was deemed to be a derivative within the scope of ASC 815. Income Tax Benefit /(Expense) Income tax benefit / (expense) represent federal, state and local current and deferred income tax expense. Net Loss Attributable to Non-controlling Interests Net loss attributable to non-controlling interests was $0.3 million for the year ended December 31, 2024. During the year ended December 31, 2023 the Company created a joint-venture in which the Company has a 70% interest and the third-party equity ownership has a 30% Non-controlling interest. 34 Table of Contents Non-GAAP Measures EBITDA and EBITDA Margin are non-GAAP measures. We define EBITDA as Net loss, adjusted for depreciation, amortization, interest income / (expense), and income taxes. We believe that EBITDA and EBITDA Margin, (collectively, the “Non-GAAP Measures”) are useful metrics for investors to understand and evaluate our operating results and ongoing profitability because they permit investors to evaluate our recurring profitability from our ongoing operating activities. EBITDA and EBITDA Margin, have certain limitations, and you should not consider them in isolation or as a substitute for analysis of our results of operations as reported under U.S. GAAP. We caution investors that amounts presented in accordance with our definitions of any of the Non-GAAP Measures may not be comparable to similar measures disclosed by other issuers, because some issuers calculate certain of the Non-GAAP Measures differently or not at all, limiting their usefulness as direct comparative measures. Reconciliations of EBITDA and Other Non-GAAP Measures The following table presents a reconciliation of EBITDA from the most comparable U.S. GAAP measure, Net loss, and the calculations of the Net loss Margin and EBITDA Margin for the years ended December 31, 2024 and 2023: For the Years Ended December 31, 2024 2023 $’000 $’000 Net income / (loss) 3,736 (8,042) Adjustments to EBITDA: Depreciation and amortization expenses 259 1,143 Interest expense, net 4,649 468 Income tax (benefit) / expense 3 (15) EBITDA 8,647 (6,446) EBITDA attributable to non-controlling interest 256 218 EBITDA attributable to Sadot Group Inc. 8,903 (6,228) Gross Profit 5,116 9,635 Gross Profit attributable to Sadot Group Inc. 5,372 9,853 Net income / (loss) Margin attributable to Sadot Group Inc. 0.5% (1.1)% EBITDA Margin attributable to Sadot Group Inc. 1.3% (0.9)% 35 Table of Contents Consolidated Results of Operations - Year Ended December 31, 2024 Compared to the Year Ended December 31, 2023 The following table represents selected items in our Consolidated Statements of Operations for the years ended December 31, 2024 and 2023, respectively: For the Years Ended December 31, Variance 2024 2023 $ % $’000 $’000 $’000 Commodity sales 700,937 717,506 (16,569) (2.3) % Cost of goods sold (695,821) (707,871) 12,050 (1.7) % Gross profit 5,116 9,635 (4,519) (46.9) % Depreciation and amortization expenses (259) (1,143) 884 (77.3) % Pre-opening expenses — (336) 336 (100.0) % Stock-based expenses (6,662) (6,192) (470) 7.6 % Sales, general and administrative expenses (9,659) (8,968) (691) 7.7 % Loss from continuing operations (11,464) (7,004) (4,460) 63.7 % Other income — 308 (308) (100.0) % Interest expense, net (4,649) (468) (4,181) 893.4 % Change in fair value of stock-based compensation 4,116 1,339 2,777 207.4 % Warrant modification expense — (958) 958 (100.0) % Gain on fair value remeasurement 17,111 1,491 15,620 1047.6 % Gain on sale of trading securities 518 — 518 NM Income / (loss) for continuing operations before income tax 5,632 (5,292) 10,924 (206.4) % Income tax benefit / (expense) (3) 15 (18) (120.0) % Net income / (loss) for continuing operations 5,629 (5,277) 10,906 (206.7) % Net loss for discontinued operations (1,893) (2,765) 872 (31.5) % Net loss attributable to non-controlling interest 256 218 38 17.4 % Net income / (loss) attributable to Sadot Group Inc. 3,992 (7,824) 11,816 (151.0) % NM= not meaningful 36 Table of Contents The following table sets forth our results of operations as a percentage of total revenue for each period presented preceding: For the Years Ended December 31, 2024 2023 Commodity sales 100.0 % 100.0 % Cost of goods sold (99.3) % (98.7) % Gross profit 0.7 % 1.3 % Depreciation and amortization expenses — (0.2) % Pre-opening expenses — — Stock-based expenses (1.0) % (0.9) % Sales, general and administrative expenses (1.4) % (1.2) % Loss from continuing operations (1.7) % (1.0) % Other income — — Interest expense, net (0.7) % (0.1) % Change in fair value of stock-based compensation 0.6 % 0.2 % Warrant modification expense — (0.1) % Gain on fair value remeasurement 2.4 % 0.2 % Gain on sale of trading securities 0.1 % — Income / (loss) for continuing operations before income tax 0.7 % (0.7) % Income tax benefit / (expense) — — Net income / (loss) for continuing operations 0.7 % (0.7) % Net loss for discontinued operations (0.3) % (0.4) % Net loss attributable to non-controlling interest — — Net income / (loss) attributable to Sadot Group Inc. 0.4 % (1.1) % Gross Profit For the Years Ended December 31, Variance 2024 2023 $ % $’000 $’000 $’000 Commodity sales 700,937 717,506 (16,569) (2.3) % Cost of goods sold (695,821) (707,871) 12,050 (1.7) % Gross profit 5,116 9,635 (4,519) (46.9) % NM= not meaningful Our gross profit totaled $5.1 million for the year ended December 31, 2024, compared to $9.6 million for the year ended December 31, 2023. The $4.5 million decrease is primarily attributed to a decrease in Commodity sales and corresponding decrease in Cost of goods sold. We generated Commodity sales of $700.9 million for the year ended December 31, 2024, compared to $717.5 million for the year ended December 31, 2023. The $16.6 million decrease or 2.3% is attributable to a which is attributable to a decline in global prices of staple commodities, market seasonality, the largest global consumer being out of the market for the beginning of 2024. Cost of goods sold for the years ended December 31, 2024 and 2023 totaled $695.8 million and $707.9 million, respectively. The $12.1 million change is a direct result of the decrease in sales. 37 Table of Contents Depreciation and Amortization Expenses For the Years Ended December 31, Variance 2024 2023 $ % $’000 $’000 $’000 Depreciation and amortization expenses (259) (1,143) 884 (77.3) % Depreciation and amortization expenses for the years ended December 31, 2024 and 2023 totaled $0.3 million and $1.1 million, respectively. The $0.9 million decrease is mainly attributed to moving Sadot Food Service assets to Assets Held For Sale and no longer amortizing or depreciating the assets and the closing and refranchising of corporate locations and the disposal of the corresponding assets. Pre-opening Expenses For the Years Ended December 31, Variance 2024 2023 $ % $’000 $’000 $’000 Pre-opening expenses — (336) 336 (100.0) % Pre-opening expenses for the years ended December 31, 2024 and 2023, totaled nil and $0.3 million, respectively. The decrease in pre-opening expense resulted from expenses incurred in 2023 at the farm in Zambia from the time that we signed the paper work for the purchase of the farm assets and when the purchase was finalized by the Zambian government. Stock-Based Expenses For the Years Ended December 31, Variance 2024 2023 $ % $’000 $’000 $’000 Stock-based expenses (6,662) (6,192) (470) 7.6 % Stock-based expenses for the year ended December 31, 2024, totaled $6.7 million compared to $6.2 million for the year ended December 31, 2023. The increase in Stock-based consulting expenses is primarily the result of consulting fees due to Aggia for Sadot Agri-Foods and Farming operations and the vesting of restricted stock for employees, board of directors and consultants. Based on the servicing agreement with Aggia, the consulting fees are calculated at approximately 40.0% of the Net income generated by Sadot LLC which is a decrease from 80.0% in the first quarter of 2023. Sales, General and Administrative Expenses For the Years Ended December 31, Variance 2024 2023 $ % $’000 $’000 $’000 Sales, general and administrative expenses (9,659) (8,968) (691) 7.7 % Sales, general and administrative expenses for the years ended December 31, 2024 and 2023 totaled $9.7 million and $9.0 million, respectively. The $0.7 million increase was primarily attributable to an increase in consulting fees due to trades in Latin America, entering the Brazil and Canada markets and increases due to increases in normal operating activities. 38 Table of Contents Total Other Income / (Expense) Accounts, Net For the Years Ended December 31, Variance 2024 2023 $ % $’000 $’000 $’000 Total other income / (expense), net 17,096 1,712 15,384 898.6 % Other income for the years ended December 31, 2024 and 2023 totaled $17.1 million and $1.7 million, respectively. The other income was primarily attributable to an increase of $15.6 million in the gain on the fair value remeasurement as a result of the mark to market adjustment of derivatives, an increase of $2.8 million in the Change in fair value of stock-based compensation due to the difference in the stock price at the time of the stock issuance and agreed upon price to Aggia, a decrease of $1.0 million in warrant modification expense, and an increase of $0.5 million on the Gain on sale of trading securities, partially offset by a decrease of $0.3 million in Other income and a $4.2 million increase in Interest expense, net. 39 Table of Contents The following table represents selected items in our Consolidated Statements of Operations for the year ended December 31, 2024, by our operating segments: For the Year Ended December 31, 2024 Sadot food service Sadot agri-foods Corporate adj. Total segments $’000 $’000 $’000 $’000 Commodity sales — 700,937 — 700,937 Cost of goods sold — (695,821) — (695,821) Gross profit — 5,116 — 5,116 Depreciation and amortization expenses — (256) (3) (259) Stock-based expenses — — (6,662) (6,662) Sales, general and administrative expenses — (5,219) (4,440) (9,659) (Loss) / income from operations — (359) (11,105) (11,464) Interest expense, net — (2,370) (2,279) (4,649) Change in fair value of stock-based compensation — — 4,116 4,116 Gain on fair value remeasurement — 17,111 — 17,111 Gain on sale of trading securities — 518 — 518 Income / (loss) for continuing operations before income tax — 14,900 (9,268) 5,632 Income tax (expense) benefit — (3) — (3) Net Income / (loss) from continuing operations — 14,897 (9,268) 5,629 Loss on discontinued operations (1,893) — — (1,893) Net (loss) / income (1,893) 14,897 (9,268) 3,736 Net loss attributable to non-controlling interest — 256 — 256 Net (loss) / income attributable to Sadot Group Inc. (1,893) 15,153 (9,268) 3,992 Total assets 5,196 157,881 1,577 164,654 40 Table of Contents The following table represents selected items in our Consolidated Statements of Operations for the year ended December 31, 2023, by our operating segments: For the Year Ended December 31, 2023 Sadot food service Sadot agri-foods Corporate adj. Total segments $’000 $’000 $’000 $’000 Commodity sales — 717,506 — 717,506 Cost of goods sold — (707,871) — (707,871) Gross profit — 9,635 — 9,635 Depreciation and amortization expenses — (151) (992) (1,143) Pre-opening expenses — (336) — (336) Stock-based expenses — — (6,192) (6,192) Sales, general and administrative expenses — (1,552) (7,416) (8,968) (Loss) / income from operations — 7,596 (14,600) (7,004) Other income — — 308 308 Interest expense, net — (52) (416) (468) Change in fair value of stock-based compensation — — 1,339 1,339 Warrant modification expense — — (958) (958) Gain on fair value remeasurement — 1,491 — 1,491 (Loss) / income before income tax — 9,035 (14,327) (5,292) Income tax (expense) benefit — — 15 15 Net Income / (loss) from continuing operations — 9,035 (14,312) (5,277) Loss on discontinued operations (2,765) — — (2,765) Net (loss) / income (2,765) 9,035 (14,312) (8,042) Net loss attributable to non-controlling interest — 218 — 218 Net (loss) / income attributable to Sadot Group Inc. (2,765) 9,253 (14,312) (7,824) Total assets 10,416 162,175 5,500 178,091 41 Table of Contents Liquidity and Capital Resources Working Capital We measure our liquidity in a number of ways, including the following: As of December 31, 2024 December 31, 2023 $’000 $’000 Cash 1,786 1,354 Accounts Receivable, net 18,014 52,920 Inventory 717 2,561 Other current assets (1) 126,966 56,016 Assets held for sale (2) 5,196 — Total current assets 152,679 112,851 Accounts payable and accrued expenses 28,019 50,167 Notes payable, net 7,390 6,531 Other current liabilities (3) 94,428 47,884 Liabilities held for sale (4) 2,333 — Total current liabilities 132,170 104,582 Working capital (5) 20,509 8,269 Current ratio (6) 1.16 1.08 (1) See Note 6 for full list of items in Other current assets. (2) See Note 3 for additional information (3) Consists of Deferred revenue, current and Other current liabilities. See Note 14 for full list of items in Other current liabilities. (4) See Note 3 for additional information (5) Working Capital is defined as Total current assets less Total current liabilities (6) Current ratio is defined as Total current assets divided by Total current liabilities Availability of Additional Funds Our main financial objectives are to prudently manage financial risk, ensure access to liquidity and minimize cost of capital in order to efficiently finance our business and maintain balance sheet strength. We generally finance our ongoing operations with cash flows generated from operations, borrowings under various credit facilities and term loans. At December 31, 2024, current ratio, which equals Total current assets divided by Total current liabilities, was 1.16, an increase of 0.08, compared to current ratio of 1.08 at December 31, 2023. At December 31, 2024, working capital, which equals Total current assets less Total current liabilities, was $20.5 million, a increase of $12.2 million, compared to working capital of $8.3 million at December 31, 2023. The increase in current ratio and working capital was primarily due to an increase in Other current assets, an increase in Assets held for sale, and a decrease in accounts payable, partially offset by a decrease in Accounts receivable, a decrease in Inventory, an increase in Other current liabilities and an increase in Liabilities held for sale. The Company believes that our existing cash on hand, current accounts receivable and future cash flows from our commodity trading, and farming will be sufficient to fund our operations, anticipated capital expenditures and repayment obligations over the next 12 months. In the event we are required to obtain additional financing, either through borrowings, private placements, public offerings, or some type of business combination, such as a merger, or buyout, there can be no assurance that we will be successful in such pursuits. We may be unable to acquire the additional funding necessary to continue operating. Accordingly, if we are unable to generate adequate cash from operations, and if we are unable to find sources of funding, it may be necessary for us to sell one or more lines of business, all or a portion of our assets, enter into a business combination or reduce or eliminate operations. These possibilities, to the extent available, may be on terms that result in significant dilution to our shareholders or that result in our shareholders losing all of their investment in our Company. 42 Table of Contents We will need to raise additional capital. Such additional capital may not be available nor may the terms of such capital be generally acceptable. In addition, any future sale of our equity securities could dilute the ownership and control of your shares and could be at prices substantially below prices at which our shares currently trade. We may seek to increase our cash reserves through the sale of additional equity or debt securities. The sale of convertible debt securities or additional equity securities could result in additional and potentially substantial dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations and liquidity. In addition, our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. Any failure to raise additional funds on favorable terms could have a material adverse effect on our liquidity and financial condition. Sources and Uses of Cash for the Years Ended December 31, 2024 and December 31, 2023 For the years ended December 31, 2024 and 2023, Net cash used in continuing operating activities was $2.8 million and $13.7 million, respectively, in operations and $0.5 million was used in and $0.1 million was provided by operations, respectively, in discontinued operations. Our Net cash used for the year ended December 31, 2024, was primarily attributable to our Net income of $3.7 million, adjusted for net non-cash expense in the aggregate amount of $14.0 million offset by $7.5 million of Net cash used in changes in the levels of operating assets and liabilities. Our Net cash used for the year ended December 31, 2023, was primarily attributable to our Net loss of $8.0 million, adjusted for net non-cash expenses in the aggregate amount of $5.6 million, partially offset by $11.2 million of Net cash used in changes in the levels of operating assets and liabilities. For the year ended December 31, 2024, Net cash used in investing activities was $4.0 thousand, of which, $37.0 thousand was used to purchase Property and equipment, partially offset by $33.0 thousand, which was generated on the Disposal of property and equipment. Net cash provided by investing activities for discontinued operations was $1.0 million for year ended December 31, 2024. For the year ended December 31, 2023, Net cash used in investing activities was $3.6 million, of which $7.3 million was used to purchase Property and equipment partially offset by investment from non-controlling interest of $3.7 million, and disposal of property and equipment of $25.0 thousand. Net cash provided by investing activities for discontinued operations was $0.1 million for the year ended December 31, 2023. For the year ended December 31, 2024, Net cash provided by financing activities was $2.8 million, consisting of proceeds from notes payable of $11.1 million, partially offset by the repayments of notes payable of $8.3 million. Net cash used in financing activities for discontinued operations was $0.1 million for the year ended December 31, 2024. For the year ended December 31, 2023, Net cash provided by financing activities was $8.6 million, consisting of proceeds from notes payable of $12.1 million and proceeds from exercise of warrants of $2.2 million partially offset by the repayments of notes payable of $5.7 million. Net cash used in financing activities for discontinued operations was $0.1 million for the year ended December 31, 2023. Derivative Financial Instruments Inherent in our business is the risk of matching the timing of our purchase and sales contracts. The prices of food and feed commodities (e.g., soybeans, wheat, corn, etc) and carbon offset units we buy and sell are based on a constantly moving terminal market price determined by various exchanges (e.g., Chicago Board of Trade, Dalian Commodity, Exchange, etc.). Were we not to hedge such exposures, we could be exposed to significant losses due to the continually changing commodity prices. We use commodity futures contracts to manage our exposure to this commodity price risk. It is generally our policy to hedge such risks to the extent practicable. We enter into hedges to limit our exposure to volatile price fluctuations that we believe would impact our gross margins on firm purchase and sales commitments. As an example, if we enter into fixed price contracts with our suppliers and variable priced sales contracts with our customers, we will generally enter into a futures contract to sell the commodity for future delivery in the month when we expect the commodity price to be fixed according to the sales contract terms. We repurchase this position once the pricing has been fixed with our customer. If the underlying commodity price increases, we suffer a hedging loss and have a unrealized loss on derivative contracts, but the sales price to the customer is based on a higher market price and offsets the loss. Conversely, if the commodity price decreases, we have a hedging gain and recognize a unrealized gain on derivative contracts, but the sales price to the customer is based on the lower market price and offsets the gain. At December 31, 2024 and 2023 we had a unrealized loss on derivative contracts of $0.1 million and nil, respectively, on the books related to our hedging policy to manage our exposure to commodity price risk. 43 Table of Contents In accordance with generally accepted accounting principles in the U.S., we designate these derivative contracts as fair value hedges and recognize them on our balance sheet at fair value. We also recognize offsetting changes in the fair value of the related firm purchase and sales commitment to which the hedge is attributable in earnings upon revenue recognition, which occurs at the time of delivery to our customers. As further described under “Risk Factors,” the potential for losses related to our hedging activities, given our hedging methodology, arises from the exchanges for our commodity hedges or customer defaults. In the event of a customer default, we might be forced to sell the commodities in the open market and absorb losses for the commodities. Our results of operations could be materially impacted by any counterparty or customer default, as we might not be able to collect money owed to us and/or our hedge might effectively be cancelled. We use hedges for no purpose other than to avoid exposure to changes in commodity prices between when we buy a shipment of commodities from a supplier and when we deliver it to a customer. Our derivatives are not for purposes of trading in the futures market. We earn our gross profit margin through our business operations and not from the movement of commodity prices. From time to time we may enter into forward sales contract that do not meet the definition or qualify for hedge accounting. Forward sales contracts are derivatives that were entered into to sell goods at a later date at a fixed or determinable price for a specific period. Forward sales contracts are recognized on the balance sheet at the value of the contract and the difference in the fair value and derivative liability is recorded as a unrealized gain on derivative contracts or unrealized loss on derivative contracts. If the underlying commodity price increases, we suffer a mark to market loss and have a unrealized loss on derivative contracts. Conversely, if the commodity price decreases, we have a hedging gain and recognize a unrealized gain on derivative contracts. At December 31, 2024 and 2023 we had derivative liabilities of $92.1 million and $92.1 million, with a corresponding unrealized gain on derivative contracts of $18.6 million and $1.5 million, respectively. As part of our business we also engage in the purchase, sale and distribution of food and feed products. If we do not have a matching sales contract related to such products, (for example, any commodity products that are unsold in our inventory), we have price risk that we currently do not or are unable to hedge. As such, any decline in pricing for such products may adversely impact our profitability. Critical Accounting Policies and Estimates We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. We have not identified any critical accounting estimates. Recently Issued Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended subsequently by ASUs 2018-19, 2019-04, 2019-05, 2019-10, 2019-11 and 2020-03. The guidance in the ASUs requires that credit losses be reported using an expected losses model rather than the incurred losses model that is currently used. The standard also establishes additional disclosures related to credit risks. This standard is effective for fiscal years beginning after December 15, 2022. The adoption of this guidance on January 1, 2023 did not have a material impact on the Company's Consolidated Financial Statements and related disclosures. In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06 Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity. Among other changes, ASU 2020-06 removes the liability and equity separation model for convertible instruments with a cash conversion feature, and as a result, after adoption, entities will no longer separately present in equity an embedded conversion feature for such debt. Similarly, the embedded conversion feature will no longer be amortized into income as interest expense over the life of the instrument. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a substantial premium. Additionally, ASU 2020-06 requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share and updates the disclosure requirements in ASC 470-20, making them easier to understand for financial statement preparers and improving the decision-usefulness and relevance of the information for financial statement users. The Company early adopted the new guidance from January 1, 2023, noting no material impact. 44 Table of Contents In November 2023, the FASB issued ASU 2023-07, Segment Reporting—Improvements to Reportable Segment Disclosures (Topic 280). The standard requires incremental disclosures related to reportable segments, including disaggregated expense information and the title and position of the company's chief operating decision maker ("CODM"), as identified for purposes of segment determination. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Entities must adopt the changes to the segment reporting guidance on a retrospective basis. Early adoption is permitted. The adoption of this guidance on December 31, 2024 did not have a material impact on the Company's Consolidated Financial Statements and related disclosures. In December 2023, the FASB issued ASU 2023-09, which focuses on income tax disclosures by requiring public business entities, on an annual basis, to disclose specific categories in the rate reconciliation, provide information for reconciling items that meet a quantitative threshold, and certain information about income taxes paid. The standard is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The amendments should be applied on a prospective basis. Retrospective application is permitted. The adoption of this guidance on December 31, 2024 did not have a material impact on the Company's Consolidated Financial Statements and related disclosures. Seasonality There is a degree of seasonality in the growing cycles, procurement and transportation of crops. The farming industry historically experiences seasonal fluctuations in revenues and net income. Typically, the Company has lower sales and net income during the non-harvest seasons and higher sales and net income during the harvest season and as such, must have sufficient working capital to fund its operations at a reduced level. Failure to generate or obtain sufficient working capital during the winter may have a material adverse effect on the Company. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. Item 7.A. Quantitative and Qualitative Disclosures About Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data The Financial Statements required by this Item 8 are included in this Annual Report following Item 16 hereof. As a smaller reporting company, we are not required to provide supplementary financial information. Item 9. Changes in and Disagreements with Accountants On Accounting and Financial Disclosure None.