UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
June 30, 2015
| [_] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
______ to _______
Commission File Number: 000-21467
(Exact name of registrant as specified in
its charter)
Delaware
(State or other jurisdiction
of incorporation or organization) |
41-2170618
(I.R.S. Employer
Identification No.) |
|
|
400 Capitol Mall, Suite 2060, Sacramento,
California
(Address of principal executive offices) |
95814
(zip code) |
(916) 403-2123
(Registrant’s telephone number, including area code) |
Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check
mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes [X] No [_]
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [_] |
Accelerated filer [X] |
Non-accelerated filer [_] (Do not check if a smaller reporting company) |
Smaller reporting company [_] |
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [_]
No [X]
As of August 10,
2015, there were 42,520,805 shares of Pacific Ethanol, Inc. common stock, $0.001 par value per share, outstanding.
PART I
FINANCIAL INFORMATION
|
|
Page |
ITEM 1. |
FINANCIAL STATEMENTS. |
|
|
Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014 |
1 |
|
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014 (unaudited) |
3 |
|
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 (unaudited) |
4 |
|
Notes to Consolidated Financial Statements (unaudited) |
|
ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
18 |
ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
33 |
ITEM 4. |
CONTROLS AND PROCEDURES. |
34 |
PART II
OTHER INFORMATION
ITEM 1. |
LEGAL PROCEEDINGS. |
36 |
ITEM 1A. |
RISK FACTORS. |
38 |
ITEM 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
52 |
ITEM 3. |
DEFAULTS UPON SENIOR SECURITIES. |
52 |
ITEM 4. |
MINE SAFETY DISCLOSURES. |
52 |
ITEM 5. |
OTHER INFORMATION. |
52 |
ITEM 6. |
EXHIBITS. |
53 |
SIGNATURES |
|
54 |
|
|
|
EXHIBITS FILED WITH THIS REPORT |
|
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PACIFIC ETHANOL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
| |
June 30, | | |
December 31, | |
ASSETS | |
2015 | | |
2014 | |
| |
(unaudited) | | |
* | |
Current Assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 49,262 | | |
$ | 62,084 | |
Accounts receivable, net | |
| 28,591 | | |
| 34,612 | |
Inventories | |
| 18,871 | | |
| 18,550 | |
Prepaid inventory | |
| 8,014 | | |
| 11,595 | |
Other current assets | |
| 12,926 | | |
| 12,710 | |
Total current assets | |
| 117,664 | | |
| 139,551 | |
Property and equipment, net | |
| 160,828 | | |
| 155,302 | |
Other Assets: | |
| | | |
| | |
Intangible assets, net | |
| 2,678 | | |
| 2,786 | |
Other assets | |
| 1,776 | | |
| 1,863 | |
Total other assets | |
| 4,454 | | |
| 4,649 | |
Total Assets | |
$ | 282,946 | | |
$ | 299,502 | |
_______________
* Amounts
derived from the audited financial statements for the year ended December 31, 2014.
See accompanying notes to consolidated financial
statements.
PACIFIC ETHANOL, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(in thousands, except par value and shares)
| |
June 30, | | |
December 31, | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
2015 | | |
2014 | |
| |
(unaudited) | | |
* | |
Current Liabilities: | |
| | | |
| | |
Accounts payable – trade | |
$ | 20,307 | | |
$ | 13,122 | |
Accrued liabilities | |
| 3,305 | | |
| 6,203 | |
Current portion – capital leases | |
| 1,735 | | |
| 4,077 | |
Other current liabilities | |
| 593 | | |
| 2,045 | |
Total current liabilities | |
| 25,940 | | |
| 25,447 | |
| |
| | | |
| | |
Long-term debt, net of current portion | |
| 25,559 | | |
| 34,533 | |
Capital leases, net of current portion | |
| 1,707 | | |
| 2,055 | |
Warrant liabilities at fair value | |
| 1,703 | | |
| 1,986 | |
Deferred tax liabilities | |
| 17,040 | | |
| 17,040 | |
Other liabilities | |
| 427 | | |
| 459 | |
Total Liabilities | |
| 72,376 | | |
| 81,520 | |
| |
| | | |
| | |
Commitments and Contingencies (Notes 6 and 8) | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ Equity: | |
| | | |
| | |
Pacific Ethanol, Inc. Stockholders’ Equity: | |
| | | |
| | |
Preferred stock, $0.001 par value; 10,000,000 shares authorized; Series A: 1,684,375 shares authorized; no shares issued and outstanding as of June 30, 2015 and December 31, 2014; Series B: 1,580,790 shares authorized; 926,942 shares issued and outstanding as of June 30, 2015 and December 31, 2014; liquidation preference of $18,075 as of June 30, 2015 | |
| 1 | | |
| 1 | |
Common stock, $0.001 par value; 300,000,000 shares authorized; 24,694,243 and 24,499,534 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively | |
| 25 | | |
| 25 | |
Additional paid-in capital | |
| 726,873 | | |
| 725,813 | |
Accumulated deficit | |
| (516,329 | ) | |
| (512,332 | ) |
Total Pacific Ethanol, Inc. Stockholders’ Equity | |
| 210,570 | | |
| 213,507 | |
Noncontrolling interests | |
| – | | |
| 4,475 | |
Total Stockholders’ Equity | |
| 210,570 | | |
| 217,982 | |
Total Liabilities and Stockholders’ Equity | |
$ | 282,946 | | |
$ | 299,502 | |
_______________
* Amounts derived from the audited financial statements for the year ended December 31, 2014.
See accompanying notes to consolidated financial
statements.
PACIFIC ETHANOL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per
share data)
| |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
| | |
| | |
| |
Net sales | |
$ | 227,621 | | |
$ | 321,144 | | |
$ | 433,797 | | |
$ | 575,687 | |
Cost of goods sold | |
| 221,367 | | |
| 287,568 | | |
| 428,530 | | |
| 503,566 | |
Gross profit | |
| 6,254 | | |
| 33,576 | | |
| 5,267 | | |
| 72,121 | |
Selling, general and administrative expenses | |
| 3,993 | | |
| 4,315 | | |
| 8,898 | | |
| 7,985 | |
Income (loss) from operations | |
| 2,261 | | |
| 29,261 | | |
| (3,631 | ) | |
| 64,136 | |
Fair value adjustments and warrant inducements | |
| 384 | | |
| 485 | | |
| 211 | | |
| (35,359 | ) |
Interest expense, net | |
| (1,005 | ) | |
| (2,886 | ) | |
| (2,020 | ) | |
| (7,237 | ) |
Loss on extinguishments of debt | |
| – | | |
| (2,363 | ) | |
| – | | |
| (2,363 | ) |
Other expense, net | |
| (58 | ) | |
| (335 | ) | |
| (187 | ) | |
| (562 | ) |
Income (loss) before provision for income taxes | |
| 1,582 | | |
| 24,162 | | |
| (5,627 | ) | |
| 18,615 | |
Provision (benefit) for income taxes | |
| 530 | | |
| 7,196 | | |
| (2,170 | ) | |
| 10,466 | |
Consolidated net income (loss) | |
| 1,052 | | |
| 16,966 | | |
| (3,457 | ) | |
| 8,149 | |
Net (income) loss attributed to noncontrolling interests | |
| (42 | ) | |
| (1,394 | ) | |
| 87 | | |
| (3,403 | ) |
Net income (loss) attributed to Pacific Ethanol | |
$ | 1,010 | | |
$ | 15,572 | | |
$ | (3,370 | ) | |
$ | 4,746 | |
Preferred stock dividends | |
$ | (315 | ) | |
$ | (315 | ) | |
$ | (627 | ) | |
$ | (627 | ) |
Income (loss) available to common stockholders | |
$ | 695 | | |
$ | 15,257 | | |
$ | (3,997 | ) | |
$ | 4,119 | |
Net income (loss) per share, basic | |
$ | 0.03 | | |
$ | 0.77 | | |
$ | (0.16 | ) | |
$ | 0.23 | |
Net income (loss) per share, diluted | |
$ | 0.03 | | |
$ | 0.68 | | |
$ | (0.16 | ) | |
$ | 0.20 | |
Weighted-average shares outstanding, basic | |
| 24,268 | | |
| 19,903 | | |
| 24,589 | | |
| 18,053 | |
Weighted-average shares outstanding, diluted | |
| 24,837 | | |
| 22,276 | | |
| 24,589 | | |
| 20,514 | |
See
accompanying notes to consolidated financial statements.
PACIFIC ETHANOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
| |
Six Months Ended June 30, | |
| |
2015 | | |
2014 | |
Operating Activities: | |
| | | |
| | |
Consolidated net income (loss) | |
$ | (3,457 | ) | |
$ | 8,149 | |
Adjustments to reconcile consolidated net income (loss) to net cash provided by operating activities: | |
| | | |
| | |
Depreciation and amortization of intangibles | |
| 6,748 | | |
| 6,438 | |
Deferred income taxes | |
| – | | |
| 2,874 | |
Loss on extinguishments of debt | |
| – | | |
| 2,363 | |
Fair value adjustments | |
| (211 | ) | |
| 34,559 | |
Amortization of debt discount | |
| 99 | | |
| 1,764 | |
Amortization of deferred financing fees | |
| 121 | | |
| 1,077 | |
Non-cash compensation | |
| 915 | | |
| 743 | |
Derivative instruments | |
| 477 | | |
| (517 | ) |
Bad debt expense | |
| 3 | | |
| (34 | ) |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| 6,018 | | |
| (7,733 | ) |
Inventories | |
| (321 | ) | |
| (4,194 | ) |
Prepaid expenses and other assets | |
| (1,506 | ) | |
| 3,058 | |
Prepaid inventory | |
| 3,581 | | |
| (2,499 | ) |
Accounts payable and accrued expenses | |
| (1,100 | ) | |
| 5,282 | |
Net cash provided by operating activities | |
| 11,367 | | |
| 51,330 | |
Investing Activities: | |
| | | |
| | |
Additions to property and equipment | |
| (12,166 | ) | |
| (6,535 | ) |
Net cash used in investing activities | |
| (12,166 | ) | |
| (6,535 | ) |
Financing Activities: | |
| | | |
| | |
Proceeds from equity offering | |
| – | | |
| 26,073 | |
Proceeds from exercise of warrants | |
| 368 | | |
| 18,240 | |
Principal payments on senior notes | |
| – | | |
| (13,984 | ) |
Principal payment on related party note | |
| – | | |
| (750 | ) |
Parent purchases of Plant Owners’ debt | |
| – | | |
| (17,038 | ) |
Net proceeds from (payments on) Kinergy’s line of credit | |
| (8,974 | ) | |
| 2,329 | |
Principal payments on Plant Owners’ borrowings | |
| – | | |
| (35,378 | ) |
Payments on capital leases | |
| (2,790 | ) | |
| (2,450 | ) |
Debt issuance costs | |
| – | | |
| (438 | ) |
Preferred stock dividends paid | |
| (627 | ) | |
| (627 | ) |
Net cash used in financing activities | |
| (12,023 | ) | |
| (24,023 | ) |
Net increase (decrease) in cash and cash equivalents | |
| (12,822 | ) | |
| 20,772 | |
Cash and cash equivalents at beginning of period | |
| 62,084 | | |
| 5,151 | |
Cash and cash equivalents at end of period | |
$ | 49,262 | | |
$ | 25,923 | |
| |
| | | |
| | |
Supplemental Information: | |
| | | |
| | |
Interest paid | |
$ | 1,911 | | |
$ | 4,520 | |
Income taxes paid | |
$ | – | | |
$ | 3,215 | |
Noncash financing and investing activities: | |
| | | |
| | |
Reclass of warrant liability to equity upon warrant exercises | |
$ | 72 | | |
$ | 20,008 | |
Reclass of noncontrolling interests to APIC upon acquisitions
of ownership positions in PE Op Co. | |
$ | 560 | | |
$ | – | |
Accrued payment for ownership positions in PE Op Co. | |
$ | 3,828 | | |
$ | – | |
Preferred stock dividends paid in common stock | |
$ | – | | |
$ | 1,463 | |
See accompanying notes to consolidated financial
statements.
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 1. | ORGANIZATION AND BASIS OF PRESENTATION. |
Organization and Business
– The consolidated financial statements include, for all periods presented, the accounts of Pacific Ethanol, Inc., a Delaware
corporation (“Pacific Ethanol”), and its direct and indirect subsidiaries (collectively, the “Company”),
including its wholly-owned subsidiaries, Kinergy Marketing LLC, an Oregon limited liability company (“Kinergy”), Pacific
Ag. Products, LLC, a California limited liability company (“PAP”) and PE Op Co., a Delaware corporation (“PE
Op Co.”). The Company’s acquisition of Aventine Renewable Energy Holdings, Inc. (now, Pacific Ethanol Central, LLC,
a Delaware limited liability company, “Aventine”) was consummated on July 1, 2015, and as a result, the Company’s
consolidated financial statements, for all periods presented, exclude the accounts of Aventine.
The Company is a leading
producer and marketer of low-carbon renewable fuels in the United States. The Company’s four ethanol plants in the Western
United States are located in close proximity to both feed and ethanol customers and thus enjoy unique advantages in efficiency,
logistics and product pricing. These plants produce among the lowest-carbon ethanol produced in the United States due to low energy
use in production.
With the addition of
four Midwestern ethanol plants in July 2015 as a result of the Company’s acquisition of Aventine, the Company now has a
combined ethanol production capacity of 515 million gallons per year, markets, on an annualized basis, over 800 million gallons
of ethanol and produces, on an annualized basis, over 1 million tons of co-products such as wet and dry distillers grains, wet
and dry corn gluten feed, condensed distillers solubles, corn gluten meal, corn germ, distillers yeast and CO2. The
Company’s four ethanol plants in the Midwest are located in the heart of the Corn Belt, benefit from low-cost and abundant
feedstock production and allow for access to many additional domestic markets; and the Company’s ability to load unit trains
from these facilities in the Midwest allows for greater access to international markets.
Accounts Receivable and Allowance
for Doubtful Accounts – Trade accounts receivable are presented at face value, net of the allowance for doubtful
accounts. The Company sells ethanol to gasoline refining and distribution companies, sells co-products to dairy operators, animal
feed distributors and poultry and biodiesel customers generally without requiring collateral.
The Company maintains an allowance for
doubtful accounts for balances that appear to have specific collection issues. The collection process is based on the age of the
invoice and requires attempted contacts with the customer at specified intervals. If, after a specified number of days, the Company
has been unsuccessful in its collection efforts, a bad debt allowance is recorded for the balance in question. Delinquent accounts
receivable are charged against the allowance for doubtful accounts once uncollectibility has been determined. The factors considered
in reaching this determination are the apparent financial condition of the customer and the Company’s success in contacting
and negotiating with the customer. If the financial condition of the Company’s customers were to deteriorate, resulting in
an impairment of ability to make payments, additional allowances may be required.
Of the accounts receivable balance, approximately
$22,322,000 and $28,475,000 at June 30, 2015 and December 31, 2014, respectively, were used as collateral under Kinergy’s
operating line of credit. The allowance for doubtful accounts was $9,000 and $6,000 as of June 30, 2015 and December 31, 2014,
respectively. The Company recorded a bad debt expense of $3,000 for the three and six months ended June 30, 2015 and a bad debt
benefit of $34,000 for the six months ended June 30, 2014. The Company did not record a bad debt expense for the three months ended
June 30, 2014. The Company does not have any off-balance sheet credit exposure related to its customers.
Provision for Income Taxes
– For the three and six months ended June 30, 2014, the Company generated significant income subject to income tax partially
as a result of the nontax-deductible nature of its fair value adjustments for the period. As a result, the Company recorded a gross
provision for income taxes of $18.5 million. Further, the Company reversed $8.0 million of its valuation allowance against its
net tax assets, resulting in a net provision for income taxes of $10.5 million for the six months ended June 30, 2014. The resulting
effective tax rates for the six months ended June 30, 2015 and 2014 were 38.6% and 56.2% of pre-tax income, respectively.
Recent Accounting Pronouncements
– In May 2014, the Financial Accounting Standards Board (“FASB”) issued new guidance on the recognition of revenue.
The guidance states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in
an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The
standard was originally effective for annual reporting periods beginning after December 15, 2016, including interim periods within
that reporting period, but has been further deferred one year. The Company’s adoption begins with the first fiscal quarter
of fiscal year 2018. The Company is currently evaluating the impact of the adoption of this accounting standard update on its consolidated
results of operations and financial position.
In April 2015, the FASB issued new guidance
on presentation of debt issuance costs. Historically, entities have presented debt issuance costs as an asset. Under the new guidance,
effective for fiscal years beginning after December 31, 2015, debt issuance costs will be reclassified as a deduction to the carrying
amount of the related debt balance. The guidance does not change any of the Company’s other debt recognition or disclosure.
The Company will adopt the guidance beginning March 31, 2016.
Basis of Presentation–Interim
Financial Statements – The accompanying unaudited consolidated
financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United
States for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Results
for interim periods should not be considered indicative of results for a full year. These interim consolidated financial statements
should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2014. The accounting policies used in preparing these consolidated financial
statements are the same as those described in Note 1 to the consolidated financial statements in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2014. In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair statement of the results for interim periods have been included. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant
estimates are required as part of determining the fair value of warrants and conversion features, allowance for doubtful accounts,
estimated lives of property and equipment and intangibles, long-lived asset impairments, valuation allowances on deferred income
taxes and the potential outcome of future tax consequences of events recognized in the Company’s financial statements or
tax returns. Actual results and outcomes may materially differ from management’s estimates and assumptions.
| 2. | PACIFIC ETHANOL WEST PLANTS. |
As of June 30, 2015, the Company owned
100% of its four ethanol production facilities located in the Western United States through its holding company, PE Op Co., namely,
Pacific Ethanol Madera LLC, Pacific Ethanol Columbia, LLC, Pacific Ethanol Stockton LLC and Pacific Ethanol Magic Valley, LLC
(collectively, the “Pacific Ethanol West Plants”) and their holding company,
Pacific Ethanol Holding Co. LLC (together with the Pacific Ethanol West Plants, the “Plant Owners”).
The Company concluded that since PE Op
Co.’s inception, through the point the Company became a 91% owner of PE Op Co. in December 2013, PE Op Co. was a variable
interest entity because the other owners of PE Op Co., due to the Company’s involvement through its contractual arrangements,
at all times lacked the power to direct the activities that most significantly impacted its economic performance. Since December
2013, as a result of owning 91% of PE Op Co., the Company, with its significant majority position, had the ability to make most
all decisions on its own, and therefore determined that PE Op Co. was no longer considered a variable interest entity.
In May 2015, the Company purchased the
remaining 4% ownership interest in PE Op Co. that it did not own, and now as the 100% owner of PE Op Co., continues to consolidate
PE Op Co.’s financial results under the voting rights model.
For the prior periods in which the Company
did not wholly-own PE Op Co., it adjusted its consolidated net income (loss) for the income (loss) attributed to PE Op Co.’s
other owners. The remaining amount after this adjustment resulted in net income (loss) attributed to Pacific Ethanol.
Noncontrolling interest decreased from
$4,475,000 at December 31, 2014 to $0 at June 30, 2015 due to the Company’s purchase of the remaining 4% ownership interest
in PE Op Co. for $3,828,000, resulting in a reduction of noncontrolling interest of $4,388,000, and loss attributed to noncontrolling
interest of $87,000 for the six months ended June 30, 2015.
The Company’s acquisition of its
ownership interest in PE Op Co. does not impact the Company’s rights or obligations under any of its contractual arrangements.
Further, creditors of PE Op Co. do not have recourse to Pacific Ethanol, Inc. Since its acquisition, the Company has not provided
any additional support to PE Op Co. beyond the terms of its contractual arrangements.
| 3. | ACQUISITION OF AVENTINE. |
On December 30, 2014, the Company entered
into a definitive merger agreement with Aventine, a Midwest ethanol producer, under which the Company agreed to acquire Aventine
through a stock-for-stock merger. The merger agreement was amended effective March 31, 2015 to address certain conditions to closing
and other matters. The acquisition closed on July 1, 2015 and the Company issued an aggregate of 17,759,193 shares of common stock
and non-voting common stock for 100% of the outstanding shares of common stock of Aventine. The common stock issued as consideration
had a fair value of $174.6 million on the acquisition date.
The Company believes the Aventine acquisition
will result in a number of synergies and strategic advantages. The Company believes the acquisition will spread commodity and basis
price risks across diverse markets and products, assisting in its efforts to optimize margin management; improve its hedging opportunities
with a greater correlation to the liquid physical and paper markets in Chicago; and increase its flexibility and alternatives in
feedstock procurement for its Midwest and Western production facilities. The acquisition also expands the Company’s marketing
reach into new markets and extends its mix of co-products. The Company believes the acquisition will enable it to have deeper market
insight and engagement in major ethanol and feed markets outside the Western United States, thereby improving pricing opportunities;
allows the Company to establish access to markets in 48 states for ethanol sales and access many markets with ethanol and co-product
sales reaching domestic and international customers; and enable it to use its more diverse mix of co-products to generate strong
co-product returns. In addition, the acquisition also increases the Company’s combined annual ethanol production capacity
to 515 million gallons per year and annualized ethanol marketing volume to over 800 million gallons, including Aventine’s
historical volumes.
The following allocation of the preliminary
estimated purchase price assumes, with the exception of property and equipment and long-term debt, carrying values approximate
fair value. Estimates of uncollectible accounts receivable are not considered material due to the short-term nature and customer
collection history. The preliminary property and equipment fair value estimate is based primarily on a high-level review of similar
recent market transactions and is subject to change. A final valuation will be more detailed in its analysis including a further
review of recent market transactions with comparable assets and a discounted cash flow analysis of each facility based on market
conditions and future operational assumptions and capital expenditures plans. Preliminarily, no intangible assets or liabilities
have been estimated due to Aventine’s contracts being materially close to market prices. A final valuation may include either
an asset or liability associated with any material out-of-market contract positions. Given that many of these contracts are short-term
in nature and duration (less than 6 months), an assessment at this time would likely not be indicative of terms and purchase price
allocation at the time the acquisition was closed. The preliminary fair-value determination of long-term debt is based on the current
interest rate and financing markets. A final valuation will consider interest rate and financing market factors and may increase
or decrease the amount estimated on the long-term debt.
Based upon these assumptions,
the preliminary purchase price consideration allocation is as follows (in thousands):
Cash and equivalents | |
$ | 18,800 | |
Accounts receivables | |
| 10,100 | |
Other current assets | |
| 30,800 | |
Total current assets | |
| 59,700 | |
Property and equipment | |
| 306,800 | |
Other assets | |
| 800 | |
Total assets acquired | |
$ | 367,300 | |
| |
| | |
Accounts payable, trade | |
$ | 19,900 | |
Other current liabilities | |
| 9,800 | |
Total current liabilities | |
| 29,700 | |
Long-term debt - revolvers | |
| 13,700 | |
Long-term debt - term debt | |
| 145,600 | |
Other non-current liabilities | |
| 41,000 | |
Total liabilities assumed | |
$ | 230,000 | |
| |
| | |
Net assets acquired | |
$ | 137,300 | |
Estimated goodwill | |
$ | 37,300 | |
Total purchase price | |
$ | 174,600 | |
The actual determination of the purchase price allocation on the
closing date will be based on the final net tangible and intangible assets of Aventine on July 1, 2015 based on completion of
the valuation of the fair value of such net assets. The Company anticipates that the ultimate purchase price allocation of balance
sheet amounts such as current assets and liabilities, property and equipment, intangible assets and long-term assets and liabilities
will differ from the preliminary assessment outlined above. Any changes to the initial estimates of the fair value of the acquired
assets and assumed liabilities will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated
to goodwill if net assets acquired are less than the purchase price. If net assets acquired exceed the purchase price, the residual
amount will result in a bargain purchase gain. The estimated goodwill recognized results from benefits the Company believes it
will achieve in both market growth opportunities discussed above and financial and operational synergies discussed below. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Current Initiatives and
Outlook”.
The following table
presents unaudited pro forma financial information assuming the acquisition occurred on January 1, 2014.
| |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
| | |
| | |
| |
Revenues – pro forma | |
$ | 390,224 | | |
$ | 466,599 | | |
$ | 727,337 | | |
$ | 838,475 | |
Net income (loss) – pro forma | |
$ | (9,428 | ) | |
$ | 26,153 | | |
$ | (28,768 | ) | |
$ | 5,022
| |
Diluted net income (loss) per share – pro forma | |
$ | (0.22 | ) | |
$ | 0.65 | | |
$ | (0.68 | ) | |
$ | 0.13 | |
Diluted weighted-average shares – pro forma | |
| 42,596 | | |
| 40,035 | | |
| 42,348 | | |
| 38,273 | |
The Company is currently evaluating contingencies
associated with the acquisition of Aventine, including its outstanding litigation with the Western Sugar Cooperative relating
to a prior surplus sugar contract dispute and its environmental remediation costs. These costs are not included in the above pro
forma disclosure as the Company is currently evaluating their fair values. For the three and six months ended June 30, 2015, the
Company recorded approximately $0.3 million and $1.2 million, respectively, in costs associated with the Aventine acquisition.
These costs are reflected in selling, general and administrative expenses on the Company’s consolidated statements of operations.
Inventories consisted primarily of bulk
ethanol and unleaded fuel, and are valued at the lower-of-cost-or-market, with cost determined on a first-in, first-out basis.
Inventory balances consisted of the following (in thousands):
| |
June 30, 2015 | | |
December 31, 2014 | |
Finished goods | |
$ | 12,508 | | |
$ | 11,118 | |
Raw materials | |
| 1,854 | | |
| 2,695 | |
Work in progress | |
| 3,087 | | |
| 3,274 | |
Other | |
| 1,422 | | |
| 1,463 | |
Total | |
$ | 18,871 | | |
$ | 18,550 | |
The business and activities of the Company
expose it to a variety of market risks, including risks related to changes in commodity prices and interest rates. The Company
monitors and manages these financial exposures as an integral part of its risk management program. This program recognizes the
unpredictability of financial markets and seeks to reduce the potentially adverse effects that market volatility could have on
operating results.
Commodity Risk –
Cash Flow Hedges – The Company uses derivative instruments to protect cash flows from fluctuations caused by volatility
in commodity prices for periods of up to twelve months in order to protect gross profit margins from potentially adverse effects
of market and price volatility on ethanol sale and purchase commitments where the prices are set at a future date and/or if the
contracts specify a floating or index-based price for ethanol. In addition, the Company hedges anticipated sales of ethanol to
minimize its exposure to the potentially adverse effects of price volatility. These derivatives may be designated and documented
as cash flow hedges and effectiveness is evaluated by assessing the probability of the anticipated transactions and regressing
commodity futures prices against the Company’s purchase and sales prices. Ineffectiveness, which is defined as the degree
to which the derivative does not offset the underlying exposure, is recognized immediately in cost of goods sold. For the three
and six months ended June 30, 2015 and 2014, the Company did not designate any of its derivatives as cash flow hedges.
Commodity Risk – Non-Designated
Hedges – The Company uses derivative instruments to lock in prices for certain amounts of corn and ethanol by entering
into exchange-traded forward contracts for those commodities. These derivatives are not designated for special hedge accounting
treatment. The changes in fair value of these contracts are recorded on the balance sheet and recognized immediately in cost of
goods sold.
The classification and amounts of the Company’s
recognized gains (losses) for its derivatives not designated as hedging instruments are as follows (in thousands):
| |
| |
Realized Gains | |
| |
| |
Three Months Ended June 30, | |
Type of Instrument | |
Statements of Operations Location | |
2015 | | |
2014 | |
Commodity contracts | |
Cost of goods sold | |
$ | 264 | | |
$ | 465 | |
| |
| |
$ | 264 | | |
$ | 465 | |
| |
| |
Unrealized Losses | |
| |
| |
Three Months Ended June 30, | |
Type of Instrument | |
Statements of Operations Location | |
2015 | | |
2014 | |
Commodity contracts | |
Cost of goods sold | |
$ | (552 | ) | |
$ | (17 | ) |
| |
| |
$ | (552 | ) | |
$ | (17 | ) |
| |
| |
Realized Gains | |
| |
| |
Six Months Ended June 30, | |
Type of Instrument | |
Statements of Operations Location | |
2015 | | |
2014 | |
Commodity contracts | |
Cost of goods sold | |
$ | 149 | | |
$ | 549 | |
| |
| |
$ | 149 | | |
$ | 549 | |
| |
| |
Unrealized Losses | |
| |
| |
Six Months Ended June 30, | |
Type of Instrument | |
Statements of Operations Location | |
2015 | | |
2014 | |
Commodity contracts | |
Cost of goods sold | |
$ | (626 | ) | |
$ | (32 | ) |
| |
| |
$ | (626 | ) | |
$ | (32 | ) |
Long-term borrowings are summarized as
follows (in thousands):
| |
June 30, 2015 | | |
December 31, 2014 | |
Kinergy operating line of credit | |
$ | 8,556 | | |
$ | 17,530 | |
Plant Owners’ third-party term debt | |
| 17,003 | | |
| 17,003 | |
| |
| 25,559 | | |
| 34,533 | |
Less short-term portion | |
| – | | |
| – | |
Long-term debt | |
$ | 25,559 | | |
$ | 34,533 | |
Kinergy Operating Line of Credit
– As of June 30, 2015, Kinergy had an outstanding balance of $8,556,000 and an available borrowing base under the credit
facility of $30,000,000.
On July 1, 2015, Kinergy amended its line
of credit to reflect the following changes:
| · | Extended the term and maturity date of the credit facility from December 31, 2016 to December 31,
2020; |
| · | Increased the maximum credit under the credit facility from $30,000,000 to $75,000,000, with an
“accordion” feature to further increase the maximum credit under the credit facility to up to $100,000,000 in minimum
increments of $5,000,000 each, upon Kinergy’s request, but subject to the consent of the agent and the lenders in their sole
discretion. |
| · | Increased the inventory loan limit under the credit facility from $12,500,000 to $40,000,000 and
increased the letter of credit limit under the credit facility from $5,000,000 to $20,000,000; |
| · | Reduced the applicable margin to 1.75% to 2.75% depending on the quarterly average amounts available
for borrowing and reduced the unused line fee under the credit facility to an annual rate equal to 0.25% to 0.375% depending on
the average daily principal balance during the immediately preceding month; and |
| · | Deleted the financial covenant concerning Kinergy’s earnings before interest, taxes, depreciation
and amortization (“EBITDA”) but retained financial covenants concerning its fixed-charge coverage ratios. |
Plant Owners’
Term Debt and Operating Lines of Credit – As of June 30, 2015, the Plant Owners’ term debt had an outstanding
balance of $17,003,000. As of June 30, 2015, the Plant Owners had no outstanding balances on their revolving credit facilities,
with an aggregate of $19,473,000 of borrowing availability.
| 7. | COMMON STOCK AND WARRANTS. |
Warrant Exercises
– During the three and six months ended June 30, 2015, certain holders exercised warrants and received an aggregate of 20,000
and 42,000 shares of the Company’s common stock upon payment of an aggregate of $177,000 and $368,000 in cash, respectively.
During the three and
six months ended June 30, 2014, certain holders exercised warrants and received an aggregate of 1,250,300 and 3,138,000 shares
of the Company’s common stock upon payment of an aggregate of $6,110,000 and $18,240,000 in cash, respectively.
During the three and
six months ended June 30, 2014, the Company paid an aggregate of $800,000 in cash to certain warrant holders as an inducement to
exercise their warrants and recorded an expense of $800,000. During the three and six months ended June 30, 2014, certain warrant
holders exercised warrants on a cashless basis and received 291,000 shares of the Company’s common stock.
Grants of Stock
– In June 2015, the Company granted an aggregate of approximately 41,000 shares of restricted stock to non-employee members
of the Company’s Board of Directors that vest on the earlier of (i) the date of the Company’s 2016 annual meeting of
stockholders, or (ii) July 1, 2016, which had a grant date fair value of $10.87 per share. In March 2015, the Company granted an
aggregate of 194,000 shares of restricted stock to the Company’s executive officers and other eligible employees that vest
in equal amounts on each of April 1, 2016, 2017 and 2018, which had a grant date fair value of $10.20 per share.
| 8. | COMMITMENTS AND CONTINGENCIES. |
Sales Commitments –
At June 30, 2015, the Company had sales contracts with its major customers to sell certain quantities of ethanol and co-products.
The Company had fixed-price sales contracts to sell $2,653,000 of ethanol and indexed-price contracts to sell 180,395,000 gallons
of ethanol. The Company had fixed-price sales contracts to sell $2,020,000 of co-products and indexed-price sales contracts to
sell 61,000 tons of co-products. These sales contracts are scheduled to be completed throughout 2015.
Purchase Commitments –
At June 30, 2015, the Company had fixed-price purchase contracts with its suppliers to purchase $3,735,000 of ethanol and indexed-price
contracts to purchase 29,552,000 gallons of ethanol. These contracts are scheduled to be satisfied throughout the remainder of
2015.
Litigation – General –
The Company is subject to various claims and contingencies in the ordinary course of its business, including those related to litigation,
business transactions, employee-related matters, and others. When the Company is aware of a claim or potential claim, it assesses
the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably
estimated, the Company will record a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably
estimated, the Company discloses the claim if the likelihood of a potential loss is reasonably possible and the amount involved
could be material. While there can be no assurances, the Company does not expect that any of its pending legal proceedings will
have a material financial impact on the Company’s operating results.
On May 24, 2013, GS CleanTech Corporation
(“GS CleanTech”), filed a suit in the United States District Court for the Eastern District of California, Sacramento
Division (Case No.: 2:13-CV-01042-JAM-AC), naming Pacific Ethanol, Inc. as a defendant. On August 29, 2013, the case was transferred
to the United States District Court for the Southern District of Indiana and made part of the pre-existing multi-district litigation
involving GS CleanTech and multiple defendants. The suit alleged infringement of a patent assigned to GS CleanTech by virtue of
certain corn oil separation technology in use at one or more of the ethanol production facilities in which the Company has an interest,
including Pacific Ethanol Stockton LLC (“PE Stockton”), located in Stockton, California. The complaint sought preliminary
and permanent injunctions against the Company, prohibiting future infringement on the patent owned by GS CleanTech and damages
in an unspecified amount adequate to compensate GS CleanTech for the alleged patent infringement, but in any event no less than
a reasonable royalty for the use made of the inventions of the patent, plus attorneys’ fees. The Company answered the complaint,
counterclaimed that the patent claims at issue, as well as the claims in several related patents, are invalid and unenforceable
and that the Company is not infringing. Pacific Ethanol, Inc. does not itself use any corn oil separation technology and may seek
a dismissal on those grounds.
On March 17 and March 18, 2014, GS CleanTech
filed suit naming as defendants two Company subsidiaries: PE Stockton and Pacific Ethanol Magic Valley, LLC (“PE Magic Valley”).
The claims were similar to those filed against Pacific Ethanol, Inc. in May 2013. These two cases were transferred to the multi-district
litigation division in United States District Court for the Southern District of Indiana, where the case against Pacific Ethanol,
Inc. was pending. Although PE Stockton and PE Magic Valley do separate and market corn oil, Pacific Ethanol, Inc., PE Stockton
and PE Magic Valley strongly disagree that either of the subsidiaries use corn oil separation technology that infringes the patent
owned by GS CleanTech. In a January 16, 2015 decision, the District Court for the Southern District of Indiana ruled in favor of
a stipulated motion for partial summary judgment for Pacific Ethanol, Inc., PE Stockton and PE Magic Valley finding that all of
the GS Cleantech patents in the suit were invalid and, therefore, not infringed. GS Cleantech has said it will appeal this decision
when the remaining claim in the suit has been decided. The only remaining claim alleges that GS Cleantech inequitably conducted
itself before the United States Patent Office when obtaining the patents at issue. A trial in the District Court for the Southern
District of Indiana on that single issue is expected later in 2015. If the Defendants, including Pacific Ethanol, Inc., PE Stockton
and PE Magic Valley, succeed in proving inequitable conduct, then the Court will be asked to determine whether GS Cleantech’s
behavior makes this an “exceptional case”. A finding that this is an exceptional case would allow the Court to
award to Pacific Ethanol, Inc., PE Stockton and PE Magic Valley the attorneys’ fees expended to date for defense in this
case. It is unknown whether GS Cleantech would appeal such a ruling. The Company did not record a provision for these matters as
of June 30, 2015 as Company management intends to vigorously defend these allegations and believes a material adverse ruling against
Pacific Ethanol, Inc., PE Stockton and/or PE Magic Valley is not probable. The Company believes that any liability Pacific Ethanol,
Inc., PE Stockton and/or PE Magic Valley may incur would not have a material adverse effect on the Company’s financial condition
or its results of operations.
9.
FAIR VALUE MEASUREMENTS.
The fair value hierarchy prioritizes the
inputs used in valuation techniques into three levels, as follows:
| · | Level 1 – Observable inputs – unadjusted quoted prices in active markets for identical
assets and liabilities; |
| · | Level 2 – Observable inputs other than quoted prices included in Level 1 that are observable
for the asset or liability through corroboration with market data; and |
| · | Level 3 – Unobservable inputs – includes amounts derived from valuation models where
one or more significant inputs are unobservable. For fair value measurements using significant unobservable inputs, a description
of the inputs and the information used to develop the inputs is required along with a reconciliation of Level 3 values from the
prior reporting period. |
The Company recorded its warrants issued
from 2010 through 2013 at fair value and designated them as Level 3 on their issuance dates.
Warrants – Except for
the warrants issued September 26, 2012, the Company’s warrants were valued using a Monte Carlo Binomial Lattice-Based valuation
methodology, adjusted for marketability restrictions. The warrants issued September 26, 2012, due to no anti-dilution protection
features, were valued using the Black-Scholes Valuation Model.
Significant assumptions used and related
fair values for the warrants as of June 30, 2015 were as follows:
Original Issuance | |
Exercise Price | | |
Volatility | | |
Risk Free Interest Rate | | |
Term (years) | | |
Market Discount | | |
Warrants Outstanding | | |
Fair Value | |
09/26/2012 | |
$ | 8.85 | | |
| 38.7% | | |
| 0.01% | | |
| 0.24 | | |
| 27.5% | | |
| 432,000 | | |
$ | 527,000 | |
07/3/2012 | |
$ | 6.09 | | |
| 48.8% | | |
| 0.64% | | |
| 2.01 | | |
| 26.2% | | |
| 211,000 | | |
| 795,000 | |
12/13/2011 | |
$ | 8.43 | | |
| 49.4% | | |
| 0.46% | | |
| 1.46 | | |
| 23.0% | | |
| 138,000 | | |
| 381,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
$ | 1,703,000 | |
Significant assumptions used and related
fair values for the warrants as of December 31, 2014 were as follows:
Original Issuance | |
Exercise Price | | |
Volatility | | |
Risk Free Interest Rate | | |
Term (years) | | |
Market Discount | | |
Warrants Outstanding | | |
Fair Value | |
09/26/2012 | |
$ | 8.85 | | |
| 51.0% | | |
| 0.19% | | |
| 0.74 | | |
| 37.0% | | |
| 473,000 | | |
$ | 748,000 | |
07/3/2012 | |
$ | 6.09 | | |
| 56.1% | | |
| 0.89% | | |
| 2.51 | | |
| 32.8% | | |
| 211,000 | | |
| 811,000 | |
12/13/2011 | |
$ | 8.43 | | |
| 54.3% | | |
| 0.67% | | |
| 1.95 | | |
| 28.7% | | |
| 138,000 | | |
| 427,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
$ | 1,986,000 | |
The estimated fair value of the warrants is affected by the
above underlying inputs. Observable inputs include the values of exercise price, stock price, term and risk-free interest rate.
As separate inputs, an increase (decrease) in either the term or risk free interest rate will result in an increase (decrease)
in the estimated fair value of the warrant.
Unobservable inputs include volatility and market discount.
An increase (decrease) in volatility will result in an increase (decrease) in the estimated warrant value and an increase (decrease)
in the market discount will result in a decrease (increase) in the estimated warrant fair value.
The volatility utilized was a blended average of the Company’s
historical volatility and implied volatilities derived from a selected peer group. The implied volatility component has remained
relatively constant over time given that implied volatility is a forward-looking assumption based on observable trades in public
option markets. Should the Company’s historical volatility increase (decrease) on a go-forward basis, the resulting value
of the warrants would increase (decrease).
The market discount, or a discount for lack of marketability,
is quantified using a Black-Scholes option pricing model, with a primary model input of assumed holding period restriction. As
the assumed holding period increases (decreases), the market discount increases (decreases), conversely impacting the value of
the warrant fair value.
Other Derivative Instruments
– The Company’s other derivative instruments consist of commodity positions. The fair values of the commodity positions
are based on quoted prices on the commodity exchanges and are designated as Level 1 inputs.
The following table summarizes fair value measurements by level
at June 30, 2015 (in thousands):
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Assets: | |
| | | |
| | | |
| | | |
| | |
Commodity contracts(1) | |
$ | 180 | | |
$ | – | | |
$ | – | | |
$ | 180 | |
Total Assets | |
$ | 180 | | |
$ | – | | |
$ | – | | |
$ | 180 | |
| |
| | | |
| | | |
| | | |
| | |
Liabilities: | |
| | | |
| | | |
| | | |
| | |
Warrants(2) | |
$ | – | | |
$ | – | | |
$ | 1,703 | | |
$ | 1,703 | |
Commodity contracts(3) | |
| 369 | | |
| – | | |
| – | | |
| 369 | |
Total Liabilities | |
$ | 369 | | |
$ | – | | |
$ | 1,703 | | |
$ | 2,072 | |
__________
(1) Included in other current assets
in the consolidated balance sheets.
(2) Included in warrant liabilities
at fair value in the consolidated balance sheets.
(3) Included in accrued liabilities
in the consolidated balance sheets.
The following table summarizes fair value measurements by level
at December 31, 2014 (in thousands):
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Assets: | |
| | | |
| | | |
| | | |
| | |
Commodity contracts(1) | |
$ | 1,586 | | |
$ | – | | |
$ | – | | |
$ | 1,586 | |
Total Assets | |
$ | 1,586 | | |
$ | – | | |
$ | – | | |
$ | 1,586 | |
| |
| | | |
| | | |
| | | |
| | |
Liabilities: | |
| | | |
| | | |
| | | |
| | |
Warrants(2) | |
$ | – | | |
$ | – | | |
$ | 1,986 | | |
$ | 1,986 | |
Commodity contracts(3) | |
| 1,149 | | |
| – | | |
| – | | |
| 1,149 | |
Total Liabilities | |
$ | 1,149 | | |
$ | – | | |
$ | 1,986 | | |
$ | 3,135 | |
__________
(1) Included in other current assets
in the consolidated balance sheets.
(2) Included in warrant liabilities
at fair value in the consolidated balance sheets.
(3) Included in accrued liabilities
in the consolidated balance sheets.
For fair value measurements using significant
unobservable inputs (Level 3), a description of the inputs and the information used to develop the inputs is required along with
a reconciliation of Level 3 values from the prior reporting period. The changes in the Company’s fair value of its Level
3 inputs with respect to its warrants were as follows (in thousands):
Balance, December 31, 2014 | |
$ | 1,986 | |
Exercises of warrants | |
| (72 | ) |
Adjustments to fair value for the period | |
| (211 | ) |
Balance, June 30, 2015 | |
$ | 1,703 | |
The following tables compute basic and
diluted earnings per share (in thousands, except per share data):
| |
Three Months Ended June 30, 2015 | |
| |
Income Numerator | | |
Shares Denominator | | |
Per-Share Amount | |
Net income attributed to Pacific Ethanol | |
$ | 1,010 | | |
| | | |
| | |
Less: Preferred stock dividends | |
| (315 | ) | |
| | | |
| | |
Basic income per share: | |
| | | |
| | | |
| | |
Income available to common stockholders | |
$ | 695 | | |
| 24,268 | | |
$ | 0.03 | |
Add: Warrants | |
| – | | |
| 569 | | |
| | |
Diluted income per share: | |
| | | |
| | | |
| | |
Income available to common stockholders | |
$ | 695 | | |
| 24,837 | | |
$ | 0.03 | |
| |
Three Months Ended June 30, 2014 | |
| |
Income Numerator | | |
Shares Denominator | | |
Per-Share Amount | |
Net income attributed to Pacific Ethanol | |
$ | 15,572 | | |
| | | |
| | |
Less: Preferred stock dividends | |
| (315 | ) | |
| | | |
| | |
Basic income per share: | |
| | | |
| | | |
| | |
Income available to common stockholders | |
$ | 15,257 | | |
| 19,903 | | |
$ | 0.77 | |
Add: Warrants | |
| – | | |
| 2,373 | | |
| | |
Diluted income per share: | |
| | | |
| | | |
| | |
Income available to common stockholders | |
$ | 15,257 | | |
| 22,276 | | |
$ | 0.68 | |
| |
Six Months Ended June 30, 2015 | |
| |
Loss Numerator | | |
Shares Denominator | | |
Per-Share Amount | |
Net loss attributed to Pacific Ethanol | |
$ | (3,370 | ) | |
| | | |
| | |
Less: Preferred stock dividends | |
| (627 | ) | |
| | | |
| | |
Basic and diluted loss per share: | |
| | | |
| | | |
| | |
Loss available to common stockholders | |
$ | (3,997 | ) | |
| 24,589 | | |
$ | (0.16 | ) |
| |
Six Months Ended June 30, 2014 | |
| |
Income Numerator | | |
Shares Denominator | | |
Per-Share Amount | |
Net income attributed to Pacific Ethanol | |
$ | 4,746 | | |
| | | |
| | |
Less: Preferred stock dividends | |
| (627 | ) | |
| | | |
| | |
Basic income per share: | |
| | | |
| | | |
| | |
Income available to common stockholders | |
$ | 4,119 | | |
| 18,053 | | |
$ | 0.23 | |
Add: Warrants | |
| – | | |
| 2,461 | | |
| | |
Diluted income per share: | |
| | | |
| | | |
| | |
Income available to common stockholders | |
$ | 4,119 | | |
| 20,514 | | |
$ | 0.20 | |
There were an aggregate of 669,000 and
1,180,000 potentially dilutive weighted-average shares from the Company’s warrants and shares of Series B Cumulative Convertible
Preferred Stock outstanding for the three and six months ended June 30, 2015, respectively. These convertible securities were
not considered in calculating diluted net income (loss) per share for the six months ended June 30, 2015, as their effect would
have been anti-dilutive.
11. SUBSEQUENT EVENTS.
Acquisition of Aventine –
As discussed in Note 3, the Company completed its acquisition of Aventine on July 1, 2015 in a stock-for-stock transaction. On
July 1, 2015, the Company issued an aggregate of 17,759,193 shares of common stock and non-voting common stock for 100% of the
outstanding shares of common stock of Aventine. Aventine is now a wholly-owned subsidiary of Pacific Ethanol, Inc.
Kinergy Operating Line of Credit
– As discussed in Note 6, the Company amended Kinergy’s operating line of credit with the following significant
changes:
| · | Extended the term and maturity date of the credit facility from December 31, 2016 to December 31,
2020; |
| · | Increased the maximum credit under the credit facility from $30,000,000 to $75,000,000, with an
“accordion” feature to further increase the maximum credit under the credit facility to up to $100,000,000 in minimum
increments of $5,000,000 each, upon Kinergy’s request, but subject to the consent of the agent and the lenders in their sole
discretion. |
| · | Increased the inventory loan limit under the credit facility from $12,500,000 to $40,000,000 and
increased the letter of credit limit under the credit facility from $5,000,000 to $20,000,000; |
| · | Reduced the applicable margin to 1.75% to 2.75% depending on the quarterly average amounts available
for borrowing and reduced the unused line fee under the credit facility to an annual rate equal to 0.25% to 0.375% depending on
the average daily principal balance during the immediately preceding month; and |
| · | Deleted the financial covenant concerning Kinergy’s EBITDA but retained financial covenants
concerning its fixed-charge coverage ratios. |
Aurora Coop Settlement –
The Company, through subsidiaries acquired in its acquisition of Aventine, became involved in various pending lawsuits with
Aurora Cooperative Elevator Company (“Aurora Coop”) that pre-dated the Aventine acquisition. On July 26, 2015, the
Company settled all outstanding litigation with Aurora Coop. The Company and Aurora Coop agreed to dismiss all lawsuits with prejudice
with no admission of fault or liability by the parties, and to release the alleged option held by Aurora Coop to repurchase the
land upon which the Company’s 110 million gallon ethanol production facility in Aurora, Nebraska is located (the “Aurora
West Facility”). In addition, the parties agreed to terminate the grain supply, marketing and various other agreements between
them or their subsidiaries. Under the terms of the settlement, the Company and Aurora Coop will each bear its own costs and fees
associated with the lawsuits and the settlement. The Company and Aurora Coop agreed to continue to work together to amend or replace
certain real property easements currently in place to ensure continued mutual access by both parties to a system of rails, rail
switches, roads, electrical improvements, and utilities already constructed near the Aurora West Facility.
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion
and analysis should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements
included elsewhere in this report. This report and our consolidated financial statements and notes to consolidated financial statements
contain forward-looking statements, which generally include the plans and objectives of management for future operations, including
plans and objectives relating to our future economic performance and our current beliefs regarding revenues we might generate and
profits we might earn if we are successful in implementing our business and growth strategies. The forward-looking statements and
associated risks may include, relate to or be qualified by other important factors, including:
| · | fluctuations in the market price of ethanol and its co-products; |
| · | fluctuations in the costs of key production input commodities such as corn and natural gas; |
| · | the projected growth or contraction in the ethanol and co-product markets in which we operate; |
| · | our strategies for expanding, maintaining or contracting our presence in these markets; |
| · | our ability to successfully manage and operate third party ethanol production facilities; |
| · | anticipated trends in our financial condition and results of operations; and |
| · | our ability to distinguish ourselves from our current and future competitors. |
You are cautioned not
to place undue reliance on any forward-looking statements, which speak only as of the date of this report, or in the case of a
document incorporated by reference, as of the date of that document. We do not undertake to update, revise or correct any forward-looking
statements, except as required by law.
Any of the factors described
immediately above, or referenced from time to time in our filings with the Securities and Exchange Commission or in the “Risk
Factors” section below could cause our financial results, including our net income or loss or growth in net income or loss
to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate
substantially.
Recent Development
On July 1, 2015, we consummated our acquisition
of Aventine Renewable Energy Holdings, Inc., now known as Pacific Ethanol Central, LLC, or Aventine, under the terms of an Agreement
and Plan of Merger dated as of December 30, 2014 by and among Pacific Ethanol, Inc., AVR Merger Sub, Inc., one of our wholly-owned
subsidiaries, and Aventine. Under the terms of the acquisition, Aventine became one of our wholly-owned subsidiaries.
In connection with the acquisition, each
issued and outstanding share of Aventine common stock as of July 1, 2015, the effective date of the acquisition, was automatically
cancelled and converted into the right to receive consideration equal to (i) 1.25 shares of our non-voting common stock, plus cash
in lieu of fractional shares, for each issued and outstanding share of Aventine’s common stock, (ii) 1.25 shares of our voting
common stock plus cash in lieu of fractional shares, for each issued and outstanding share of Aventine’s common stock, or
(iii) a combination of non-voting common stock and voting common stock at the ratios provided above, in each case at the election
or deemed election of each Aventine stockholder.
We issued approximately 14.2 million shares
of our voting common stock and approximately 3.6 million shares of our non-voting common stock to the Aventine stockholders in
connection with the acquisition.
We believe the Aventine acquisition will
result in a number of synergies and strategic advantages. We believe the acquisition will spread commodity and basis price risks
across diverse markets and products, assisting in our efforts to optimize margin management; improve our hedging opportunities
with a greater correlation to the liquid physical and paper markets in Chicago; and increase our flexibility and alternatives in
feedstock procurement for our Midwest and Western production facilities. The acquisition also expands our marketing reach into
new markets and extends our mix of co-products. We believe the acquisition will enable us to have deeper market insight and engagement
in major ethanol and feed markets outside the Western United States, thereby improving pricing opportunities; allow us to establish
access to markets in 48 states for ethanol sales and access many markets with ethanol and co-product sales reaching domestic and
international customers; and enable us to use our more diverse mix of co-products to generate strong co-product returns. In addition,
the acquisition also increases our combined ethanol production capacity to 515 million gallons per year and our annualized ethanol
marketing volume to over 800 million gallons, including Aventine’s historical volumes.
Overview
We are a leading producer and marketer of
low-carbon renewable fuels in the United States.
We own and operate
eight strategically-located ethanol production facilities, four in the Western states of California, Oregon and Idaho, and four
in the Midwestern states of Illinois and Nebraska. Our ethanol plants have a combined ethanol production capacity of 515 million
gallons per year. We are the sixth largest producer of ethanol in the United States based on annualized volumes, including Aventine’s
historical volumes.
We have extensive customer relationships
throughout the United States and market and distribute ethanol and co-products domestically and internationally. Our ethanol customers
are integrated oil companies and gasoline marketers who blend ethanol into gasoline.
Our customers collectively require ethanol
volumes in excess of the supplies we produce, and depend on us to provide a reliable supply of product, and manage the logistics
and timing of delivery with very little effort on their side. We secure ethanol supplies from a variety of sources, including our
eight ethanol production facilities, other plants in California for which we market ethanol, and other suppliers in the Midwest,
where a majority of ethanol manufacturers are located. In 2014, we obtained approximately 42% of our ethanol supplies from Midwest
producers to supplement ethanol produced by our plants in the Western United States. We arrange for transportation, storage and
delivery of 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 also produce and market, on an annualized
basis, over 1.0 million tons of ethanol co-products such as wet and dry distillers grains, wet and dry corn gluten feed, condensed
distillers solubles, corn gluten meal, corn germ, corn oil, distillers yeast and CO2. Customers for our distillers grains
and other feed co-products include dairies and feedlots, in many cases located near our ethanol plants. These customers use our
feed co-products for livestock as a substitute for corn and other sources of starch and protein. We sell our corn oil to poultry
and biodiesel customers. We do not market co-products from other ethanol producers.
Our subsidiary, Kinergy Marketing LLC, or
Kinergy, markets all the ethanol produced at our ethanol plants as well as for third parties, with an annualized marketing volume
of over 800 million gallons of ethanol, including Aventine’s historical volumes.
Our ethanol plants
are comprised of the eight production facilities described immediately below. The Pacific Ethanol West facilities are near their
respective fuel and feed customers, offering significant timing, transportation cost and logistical advantages. The Pacific Ethanol
Midwest facilities are located in the heart of the Corn Belt, benefit from low-cost and abundant feedstock production and allow
for access to many additional domestic markets; and our ability to load unit trains from these facilities in the Midwest allows
for greater access to international markets.
|
|
Facility
Name |
Facility
Location |
Estimated
Annual Capacity
(gallons) |
Pacific
Ethanol West
|
{ |
Magic Valley |
Burley, ID |
60,000,000 |
Columbia |
Boardman, OR |
40,000,000 |
Stockton |
Stockton, CA |
60,000,000 |
Madera |
Madera, CA |
40,000,000 |
|
|
|
|
|
Pacific Ethanol Midwest
|
{ |
Aurora West |
Aurora, NE |
110,000,000 |
Aurora East |
Aurora, NE |
45,000,000 |
Pekin Wet |
Pekin, IL |
100,000,000 |
Pekin Dry |
Pekin, IL |
60,000,000 |
Our mission is to be the leading producer
and marketer of low-carbon renewable fuels in the United States. We intend to accomplish this goal in part by expanding our relationships
with our current customers and establishing relationships with new customers. As we develop new customer relationships, we will
seek new suppliers, including through the acquisition of additional production facilities.
Current Initiatives and Outlook
Ethanol industry margins have recovered
since the negative margin environment experienced in the first quarter of 2015. Overall crush and commodity margins, which reflect
ethanol and co-product sales prices relative to production inputs such as corn and natural gas, increased due to higher ethanol
prices and an industry-wide decline in inventory levels from lower production. We, along with others in the industry, reduced production
rates in the first half of 2015 to better balance supply and demand. Margins have improved in the second quarter and are now positive.
A better supply and demand balance now exists
in part due to higher overall demand for gasoline during the summer driving season. In addition, net exports of ethanol continue
to be a positive factor for the industry and are expected to increase beyond 2014 levels, which represented the second-highest
annual total on record. We remain confident in the long-term demand for renewable fuels and our ability to execute and create value.
Ethanol continues to trade at a significant discount to the wholesale price of gasoline. We believe this underscores the value
of ethanol as a high-octane, cleaner-burning and cheapest available liquid transportation fuel.
We expect our acquisition
of Aventine to result in significant synergies in multiple areas of our business. Our goal is to achieve at least $12.0 million
annualized in synergistic benefits. Significant contributors include approximately $1.0 million annually in immediate savings
from staffing reductions; over a period of approximately nine months, we expect to reach $2.0 million in additional annual savings
related to efficiencies in accounting, information technology and professional services; we also expect to implement our operational
practices across our Pacific Ethanol Midwest plants, which we anticipate will result in annual synergies of an estimated $1.5
million; and over the next six months, our goal is to apply our merchandising practices to corn purchases as well as ethanol and
co-product sales, which are expected to result in annual savings of $1.5 million.
On July 26, 2015, we settled all outstanding
litigation with Aurora Cooperative Elevator Company, or Aurora Coop. Pacific Ethanol and Aurora Coop agreed to dismiss all lawsuits
with prejudice with no admission of fault or liability by the parties, and to release the alleged option held by Aurora Coop to
repurchase the land upon which Pacific Ethanol’s 110 million gallon ethanol production facility in Aurora, Nebraska is located.
See “Legal Proceedings”.
In July, we began producing and selling
corn oil at our Boardman, Oregon facility which completes our two-year initiative to add this high-value co-product. We now produce
and sell corn oil at all of our eight ethanol plants, further diversifying our revenue and providing immediate incremental operating
income. Production and sale of corn oil adds approximately $0.05 per gallon of incremental gross profit.
The regulatory environment
continues to support the long-term demand for renewable fuels. California’s Low-Carbon Fuel Standard requires refiners to
reduce the carbon intensity of their fuels by 10% between 2011 and 2020, which we believe is an aggressive requirement that will
necessitate a significant amount of low-carbon fuel to displace gasoline in the California fuel supply. Currently, we receive
a $0.04 per gallon premium over Midwest ethanol on each California production gallon sold into the California market. We expect
this premium to increase as the compliance curve steepens beginning in 2016.
Our goals for the remainder of 2015 include
integrating and optimizing our Pacific Ethanol Midwest plants; continuing to reinvest in our ethanol production business through
initiatives focused on further improving operating efficiencies and yields, diversifying our feedstock, creating new revenue streams
and furthering our advanced biofuels initiatives; and leveraging our state-of-the-art, strategically-located ethanol plants to
expand market share, all of which are directed at expanding our share of the renewable fuels market and delivering long-term, profitable
growth.
Critical Accounting Policies
The preparation of our
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States
of America, requires us to make judgments and estimates that may have a significant impact upon the portrayal of our financial
condition and results of operations. We believe that of our significant accounting policies, the following require estimates and
assumptions that require complex, subjective judgments by management that can materially impact the portrayal of our financial
condition and results of operations: revenue recognition; warrants and conversion features carried at fair value; impairment of
long-lived and intangible assets; and allowance for doubtful accounts. These significant accounting principles are more fully described
in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting
Policies” in our Annual Report on Form 10-K for the year ended December 31, 2014.
Results of Operations
Our acquisition of
Aventine was consummated on July 1, 2015, and as a result, our results of operations for the three and six months ended June 30,
2015 and 2014 exclude Aventine’s results of operations for those periods.
The following selected
financial information should be read in conjunction with our consolidated financial statements and notes to our consolidated financial
statements included elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” contained in this report.
Certain
performance metrics that we believe are important indicators of our results of operations include:
| |
Three Months Ended June 30 | | |
Percentage | | |
Six Months Ended June 30, | | |
Percentage | |
| |
2015 | | |
2014 | | |
Variance | | |
2015 | | |
2014 | | |
Variance | |
Production gallons sold (in millions) | |
| 47.5 | | |
| 46.5 | | |
| 2.2% | | |
| 92.1 | | |
| 86.3 | | |
| 6.7% | |
Third party gallons sold (in millions) | |
| 93.2 | | |
| 85.7 | | |
| 8.8% | | |
| 184.3 | | |
| 158.6 | | |
| 16.2% | |
Total gallons sold (in millions) | |
| 140.7 | | |
| 132.2 | | |
| 6.4% | | |
| 276.4 | | |
| 244.9 | | |
| 12.9% | |
Average sales price per gallon | |
$ | 1.76 | | |
$ | 2.78 | | |
| (36.7 | )% | |
$ | 1.71 | | |
$ | 2.75 | | |
| (37.8 | )% |
Corn cost per bushel – CBOT equivalent | |
$ | 3.67 | | |
$ | 4.84 | | |
| (24.2 | )% | |
$ | 3.77 | | |
$ | 4.67 | | |
| (19.3 | )% |
Average basis (1) | |
$ | 0.95 | | |
$ | 1.13 | | |
| (15.9 | )% | |
$ | 0.94 | | |
$ | 1.20 | | |
| (21.7 | )% |
Delivered cost of corn | |
$ | 4.62 | | |
$ | 5.97 | | |
| (22.6 | )% | |
$ | 4.71 | | |
$ | 5.87 | | |
| (19.8 | )% |
Co-product
revenues as % of delivered cost of corn(2) | |
| 32.8% | | |
| 36.5% | | |
| (10.1 | )% | |
| 33.3% | | |
| 35.3% | | |
| (5.7 | )% |
Average CBOT ethanol price per gallon | |
$ | 1.58 | | |
$ | 2.25 | | |
| (29.8 | )% | |
$ | 1.51 | | |
$ | 2.23 | | |
| (32.3 | )% |
Average CBOT corn price per bushel | |
$ | 3.66 | | |
$ | 4.79 | | |
| (23.6 | )% | |
$ | 3.75 | | |
$ | 4.66 | | |
| (19.5 | )% |
___________
| (1) | Corn basis represents the difference between the immediate cash price of delivered
corn and the future price of corn for Chicago delivery. |
| (2) | Co-product revenues as a percentage of delivered cost of corn shows our yield
based on sales of co-products, including WDG and corn oil, generated from ethanol we produced. |
The disparity between
our average ethanol sales price per gallon and the Chicago Board of Trade, or CBOT, average reflects both the additional basis
costs for West Coast delivery of ethanol as well as the premiums we receive by selling lower-carbon intensity ethanol in the Western
United States. In addition, ethanol prices in the Western United States were higher than ethanol prices in the Midwest in
the second quarter of 2014 due to weather conditions and ongoing rail logistics challenges which constrained the flow of ethanol
and co-products from the Midwest to the markets in which we operate.
Net Sales, Cost
of Goods Sold and Gross Profit
The following table
presents our net sales, cost of goods sold and gross profit in dollars and gross profit as a percentage of net sales (in thousands,
except percentages):
| |
Three Months Ended
June 30, | | |
Variance in | | |
Six Months Ended
June 30, | | |
Variance in | |
| |
2015 | | |
2014 | | |
Dollars | | |
Percent | | |
2015 | | |
2014 | | |
Dollars | | |
Percent | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Net sales | |
$ | 227,621 | | |
$ | 321,144 | | |
$ | (93,523 | ) | |
| (29.1 | )% | |
$ | 433,797 | | |
$ | 575,687 | | |
$ | (141,890 | ) | |
| (24.6 | )% |
Cost of goods sold | |
| 221,367 | | |
| 287,568 | | |
| (66,201 | ) | |
| (23.0 | )% | |
| 428,530 | | |
| 503,566 | | |
| (75,036 | ) | |
| (14.9 | )% |
Gross profit | |
$ | 6,254 | | |
$ | 33,576 | | |
$ | (27,322 | ) | |
| (81.4 | )% | |
$ | 5,267 | | |
$ | 72,121 | | |
$ | (66,854 | ) | |
| (92.7 | )% |
Percentage of net sales | |
| 2.7% | | |
| 10.5% | | |
| | | |
| | | |
| 1.2% | | |
| 12.5% | | |
| | | |
| | |
Net Sales
The decrease in our net
sales for the three and six months ended June 30, 2015 as compared to the same periods in 2014 was due to a decrease in our average
sales price per gallon, partially offset by an increase in our total gallons sold.
Three Months ended
June 30, 2015
Net sales of ethanol
declined by $84.6 million, or 30%, to $200.6 million for the three months ended June 30, 2015 as compared to $285.2 million for
the three months ended June 30, 2014. Our total volume of ethanol gallons sold increased by 8.5 million gallons, or 6%, to 140.7
million gallons for the three months ended June 30, 2015 as compared to 132.2 million gallons for the same period in 2014. Total
gallons sold as a producer or merchant increased 1.0 million gallons and 10.3 million gallons, respectively, for the three months
ended June 30, 2015 as compared to the same period in 2014. At our average sales price per gallon of $1.76 for the three months
ended June 30, 2015, we generated $20.0 million in additional net sales from the 11.3 million additional gallons of ethanol sold
as a producer or merchant for the period as compared to the same period in 2014. In addition, we sold 2.8 million fewer gallons
as an agent during the period. The 2.8 million fewer gallons of ethanol sold as an agent had an immaterial impact on our net sales
for the three months ended June 30, 2015. The decline of $1.02, or 37%, in our average sales price per gallon for the three months
ended June 30, 2015 as compared to the same period in 2014 reduced our net sales by $104.6 million.
Net sales of co-products
declined by $8.6 million, or 25%, to $25.2 million for the three months ended June 30, 2015 as compared to $33.8 million for the
same period in 2014. Our total volume of co-products sold declined by 1,100 tons to 372,800 tons for the three months ended June
30, 2015 from 373,900 tons for the same period in 2014. At our average sales price per ton of $66.04 for the three months ended
June 30, 2015, we generated $0.1 million in fewer net sales from the 1,100 fewer tons of co-products sold in the second quarter
of 2015 as compared to the same period in 2014. The decline of $22.08, or 25%, in our average sales price per ton for the three
months ended June 30, 2015 as compared to the same period in 2014 reduced our net sales by $8.5 million.
We increased both production
and third party gallons sold, but decreased our volume of co-products sold, for the three months ended June 30, 2015 as compared
to the same period in 2014. The increases in our production gallons and third party gallons sold are primarily due to increased
production rates at our own plants and third party supplier plants, respectively, including, in the case of our own plants, as
a result of the restart of production at our Madera plant in the second quarter of 2014. The slight decline in our volume of co-products
sold is due to general supply and demand fluctuations. However, excluding the impact on our production levels due to the restart
of production at our Madera plant, we and our third party suppliers decreased production rates in the first half of 2015, including
in the three months ended June 30, 2015, as compared to the same period in 2014 due to low industry-wide crush margins resulting
from lower ethanol sales prices due to excess ethanol inventories relative to demand, which more than offset the benefit of lower
corn costs.
Six Months ended
June 30, 2015
Net sales of ethanol
declined by $130.0 million, or 26%, to $379.5 million for the six months ended June 30, 2015 as compared to $509.5 million for
the six months ended June 30, 2014. Our total volume of ethanol gallons sold increased by 31.5 million gallons, or 13%, to 276.4
million gallons for the six months ended June 30, 2015 as compared to 244.9 million gallons for the same period in 2014. Total
gallons sold as a producer or merchant increased 5.8 million gallons and 31.0 million gallons, respectively, for the six months
ended June 30, 2015 as compared to the same period in 2014. At our average sales price per gallon of $1.71 for the six months ended
June 30, 2015, we generated $62.9 million in additional net sales from the 36.8 million additional gallons of ethanol sold as a
producer or merchant for the period as compared to the same period in 2014. In addition, we sold 5.3 million fewer gallons as an
agent during the period. The 5.3 million fewer gallons of ethanol sold as an agent had an immaterial impact on our net sales for
the six months ended June 30, 2015. The decline of $1.04, or 38%, in our average sales price per gallon for the six months ended
June 30, 2015 as compared to the same period in 2014 reduced our net sales by $192.9 million.
Net sales of co-products
declined by $10.7 million, or 17%, to $50.6 million for the six months ended June 30, 2015 as compared to $61.3 million for the
same period in 2014. Our total volume of co-products sold increased by 12,300 tons to 728,100 tons for the six months ended June
30, 2015 from 715,800 tons for the same period in 2014. At our average sales price per ton of $67.71 for the six months ended June
30, 2015, we generated $0.8 million in additional net sales from the 12,300 additional tons of co-products sold in the first six
months of 2015 as compared to the same period in 2014. However, the decline of $15.85, or 19%, in our average sales price per ton
for the six months ended June 30, 2015 as compared to the same period in 2014, reduced our net sales by $11.5 million.
We increased both production
and third party gallons sold, and our volume of co-products sold, for the six months ended June 30, 2015 as compared to the same
period in 2014. The increases in our production gallons and third party gallons sold are primarily due to increased production
rates at our own plants and third party supplier plants, respectively, including, in the case of our own plants, as a result of
the restart of production at our Madera plant in the second quarter of 2014. The increase in our volume of co-products sold is
due to increased production at our own plants, including as a result of the restart of production at our Madera plant. However,
excluding the impact on our production levels due to the restart of production at our Madera plant, we and our third party suppliers
decreased production rates in the first half of 2015 as compared to the same period in 2014 due to low industry-wide crush margins
resulting from lower ethanol sales prices due to excess ethanol inventories relative to demand, which more than offset the benefit
of lower corn costs.
Cost of Goods Sold and Gross Profit
Three Months ended June 30, 2015
Our gross profit declined to $6.3 million
for the three months ended June 30, 2015 from $33.6 million for the same period in 2014. Our gross margin declined to 2.7% for
the three months ended June 30, 2015 from a gross margin of 10.5% for the same period in 2014. Our gross profit and gross margin
declined primarily due to significantly lower crush and commodity margins realized at our plants, predominantly related to lower
ethanol sales prices relative to corn costs caused by industry-wide excess ethanol supply relative to demand.
Of the $27.3 million decline in gross profit
for the three months ended June 30, 2015 as compared to the same period in 2014, $25.8 million related to our total production
gallons sold and $1.5 million related to our merchant sales. Our production gallons sold increased by 1.0 million gallons in the
three months ended June 30, 2015 as compared to the same period in 2014. Of the $25.8 million in lower gross profit resulting from
our total production gallons sold, $26.0 million is attributable to our lower gross margins in the second quarter of 2015, which
was partially offset by higher gross profits of $0.2 million attributable to the 1.0 million gallon increase in production gallons
sold in the second quarter of 2015 as compared to the same period in 2014. Of the $1.5 million in lower gross profit resulting
from our merchant sales, $2.2 million is attributable to our lower gross margins in the second quarter of 2015, which was partially
offset by higher gross profits of $0.7 million attributable to the 10.3 million gallon increase in merchant gallons sold in the
second quarter of 2015 as compared to the same period in 2014.
Six Months ended June 30, 2015
Our gross profit declined to $5.3 million
for the six months ended June 30, 2015 from $72.1 million for the same period in 2014. Our gross margin declined to 1.2% for the
six months ended June 30, 2015 from a gross margin of 12.5% for the same period in 2014. Our gross profit and gross margin declined
primarily due to significantly lower crush and commodity margins realized at our plants, predominantly related to lower ethanol
sales prices relative to corn costs caused by industry-wide excess ethanol supply relative to demand.
Of the $66.9 million decline in gross profit
for the six months ended June 30, 2015 as compared to the same period in 2014, $54.8 million related to our total production gallons
sold and $12.1 million related to our merchant sales. Our production gallons sold increased by 5.8 million gallons in the six months
ended June 30, 2015 as compared to the same period in 2014. Of the $54.8 million in lower gross profit resulting from our total
production gallons sold, $54.6 million is attributable to our lower gross margins in the first half of 2015 and $0.2 million is
attributable to the 5.8 million gallon increase in production gallons sold in the first half of 2015 as compared to the same period
in 2014. Of the $12.1 million in lower gross profit resulting from our merchant sales, $14.0 million is attributable to our lower
gross margins in the second quarter of 2015, which was partially offset by higher gross profits of $1.9 million attributable to
the 31.0 million gallon increase in merchant gallons sold in the first half of 2015 as compared to the same period in 2014.
Selling, General
and Administrative Expenses
The following table presents
our selling, general and administrative, or SG&A, expenses in dollars and as a percentage of net sales (in thousands, except
percentages):
| |
Three Months Ended
June 30, | | |
Variance in | | |
Six Months Ended
June 30, | | |
Variance in | |
| |
2015 | | |
2014 | | |
Dollars | | |
Percent | | |
2015 | | |
2014 | | |
Dollars | | |
Percent | |
Selling, general and administrative expenses | |
$ | 3,993 | | |
$ | 4,315 | | |
$ | (322 | ) | |
| (7.5 | )% | |
$ | 8,898 | | |
$ | 7,985 | | |
$ | 913 | | |
| 11.4% | |
Percentage of net sales | |
| 1.8% | | |
| 1.3% | | |
| | | |
| | | |
| 2.1% | | |
| 1.4% | | |
| | | |
| | |
Our SG&A expenses decreased $0.3 million
to $4.0 million for the three months ended June 30, 2014 as compared to $4.3 million for the same period in 2014, and increased
as a percentage of net sales for the three months ended June 30, 2015 as compared to the same period in 2014. The decrease in SG&A
expenses is primarily due to a decrease in compensation costs of $0.3 million due to lower incentive compensation tied to our profitability
compared to the prior year.
Our SG&A expenses increased $0.9 million
to $8.9 million for the six months ended June 30, 2015 as compared to $8.0 million for the same period in 2014. The increase in
SG&A expenses is primarily due to an increase in professional fees of $1.2 million due to costs associated with our acquisition
of Aventine, partially offset by a reduction in compensation costs of $0.6 million due to a decline in incentive compensation compared
to the prior year.
At current levels of operation, including
our recently-acquired Pacific Ethanol Midwest plants, we expect our SG&A expenses will be approximately $7.0 million per quarter
through the end of 2015. In addition, we expect our capital expenditures to average $10.0 million per quarter through 2015.
Fair Value Adjustments
and Warrant Inducements
The following table presents
our fair value adjustments and warrant inducements in dollars and as a percentage of net sales (in thousands, except percentages):
| |
Three Months Ended
June 30, | | |
Variance in | | |
Six Months Ended
June 30, | | |
Variance in
|
| |
2015 | | |
2014 | | |
Dollars | | |
Percent | | |
2015 | | |
2014 | | |
Dollars | | |
Percent |
Fair value adjustments and warrant inducements | |
$ | 384 | | |
$ | 485 | | |
$ | (101 | ) | |
| (20.8 | )% | |
$ | 211 | | |
$ | (35,359 | ) | |
$ | (35,570 | ) | |
NM |
Percentage of net sales | |
| 0.2% | | |
| 0.2% | | |
| | | |
| | | |
| (0.0)% | | |
| (6.1)% | | |
| | | |
|
We issued warrants in
various financing transactions from 2010 through 2013. These warrants were initially recorded at fair value and are adjusted quarterly.
As a result of quarterly fair value adjustments and warrant inducements, we recorded income of $0.4 million and $0.5 million for
the three months ended June 30, 2015 and 2014, respectively, and we recorded income of $0.2 million and expense of $35.4 million
for the six months ended June 30, 2015 and 2014, respectively.
These changes in fair
value are primarily due to the volatility in the market price of our common stock from period to period. The substantial change
in fair value for the six months ended June 30, 2014 occurred because the exercise prices of our warrants were, as of June 30,
2014, well below the market price of our common stock. At December 31, 2013, the market price of our common stock was $5.09 per
share and our outstanding warrants had a weighted-average exercise price of $7.27 per share. At June 30, 2014, the market price
of our common stock had increased to $15.29 per share, and our outstanding warrants were in-the-money and had significant intrinsic
value.
These fair value adjustments
will continue in future periods until all of our warrants are exercised or expire. These adjustments will generally reduce our
net income or increase our net loss if the market price of our common stock increases from the prior quarter through the date
of a warrant’s exercise, if exercised during the quarter, or if our common stock increases on a quarter over quarter basis
for warrants outstanding at the end of a quarter. Conversely, the adjustments will generally increase our net income or reduce
our net loss if the market price of our common stock declines on a quarter over quarter basis.
We paid an aggregate
of $0.8 million in cash to certain warrant holders as an inducement to exercise their warrants and recorded an expense of $0.8
million for each of the three and six months ended June 30, 2014.
Interest Expense,
net
The following table presents
our interest expense, net in dollars and as a percentage of net sales (in thousands, except percentages):
| |
Three Months Ended
June 30, | | |
Variance in | | |
Six Months Ended
June 30, | | |
Variance in | |
| |
2015 | | |
2014 | | |
Dollars | | |
Percent | | |
2015 | | |
2014 | | |
Dollars | | |
Percent | |
Interest expense, net | |
$ | 1,005 | | |
$ | 2,886 | | |
$ | (1,881 | ) | |
| (65.2)% | | |
$ | 2,020 | | |
$ | 7,237 | | |
$ | (5,217 | ) | |
| (72.1)% | |
Percentage of net sales | |
| 0.4% | | |
| 0.9% | | |
| | | |
| | | |
| 0.5% | | |
| 1.3% | | |
| | | |
| | |
Interest expense, net
declined by $1.9 million to $1.0 million for the three months ended June 30, 2015 from $2.9 million for the same period in 2014.
Interest expense, net declined by $5.2 million to $2.0 million for the six months ended June 30, 2015 from $7.2 million for the
same period in 2014. The decrease in interest expense, net for these periods is primarily due to decreased average debt balances,
partially offset by accelerations of debt discount and deferred financing fees of an aggregate of $0.9 million and $2.5 million
for the three and six months ended June 30, 2014, respectively, due to the early retirement of the indebtedness associated with
our Pacific Ethanol West plants and our senior unsecured notes.
Loss on Extinguishments
of Debt
The following table presents
our loss on extinguishments of debt in dollars and as a percentage of net sales (in thousands, except percentages):
| |
Three Months Ended
June 30, | | |
Variance in | | |
Six Months Ended
June 30, | | |
Variance in | |
| |
2015 | | |
2014 | | |
Dollars | | |
Percent | | |
2015 | | |
2014 | | |
Dollars | | |
Percent | |
Loss on extinguishments of debt | |
$ | – | | |
$ | 2,363 | | |
$ | (2,363 | ) | |
| (100)% | | |
$ | – | | |
$ | 2,363 | | |
$ | (2,363 | ) | |
| (100)% | |
Percentage of net sales | |
| –% | | |
| 0.7% | | |
| | | |
| | | |
| –% | | |
| 0.4% | | |
| | | |
| | |
For the three and six
months ended June 30, 2014, we extinguished certain PE Op Co. debt by paying $2.4 million in cash in excess of the amount of the
debt, and as such, recorded a loss on extinguishments of debt. We retired a total of $31.7 million and $64.8 million in debt in
the three and six months ended June 30, 2014, eliminating all parent level debt and reducing our consolidated third-party debt
at the plant level to $17.0 million.
Other Expense,
net
The following table presents
our other expense, net in dollars and as a percentage of net sales (in thousands, except percentages):
| |
Three Months Ended
June 30, | | |
Variance in | | |
Six Months Ended
June 30, | | |
Variance in | |
| |
2015 | | |
2014 | | |
Dollars | | |
Percent | | |
2015 | | |
2014 | | |
Dollars | | |
Percent | |
Other expense, net | |
$ | 58 | | |
$ | 335 | | |
$ | (277 | ) | |
| (82.7)% | | |
$ | 187 | | |
$ | 562 | | |
$ | (375 | ) | |
| (66.7)% | |
Percentage of net sales | |
| 0.0% | | |
| 0.1% | | |
| | | |
| | | |
| 0.0% | | |
| 0.1% | | |
| | | |
| | |
Other expense, net decreased
by $0.3 million to less than $0.1 million for the three months ended June 30, 2015 from $0.4 million for the same period in 2014.
Other expense, net decreased by $0.4 million to $0.2 million for the six months ended June 30, 2015 from $0.6 million for the same
period in 2014. These decreases in other expense, net are primarily due to lower expenditures related to nonoperational items at
our plants.
Provision (Benefit)
for Income Taxes
The following table presents
our provision (benefit) for income taxes in dollars and as a percentage of net sales (in thousands, except percentages):
| |
Three Months Ended June 30, | | |
Variance in | | |
Six Months Ended June 30, | | |
Variance in | |
| |
2015 | | |
2014 | | |
Dollars | | |
Percent | | |
2015 | | |
2014 | | |
Dollars | | |
Percent | |
Provision (benefit) for income taxes | |
$ | 530 | | |
$ | 7,196 | | |
$ | (6,666 | ) | |
| (92.6)% | | |
$ | (2,170 | ) | |
$ | 10,466 | | |
$ | (12,636 | ) | |
| NM | |
Percentage of net sales | |
| 0.2% | | |
| 2.2% | | |
| | | |
| | | |
| 0.5% | | |
| 1.8% | | |
| | | |
| | |
For the three and six
months ended June 30, 2015, we recorded a provision for income taxes of $0.5 million and a benefit of $2.2 million, respectively,
at an estimated effective tax rate. For the three and six months ended June 30, 2014, we generated income subject to income tax,
partially as a result of the non-tax deductible nature of our fair value adjustments for the period. As a result, we recorded
a gross provision for income taxes of $18.5 million for the six months ended June 30, 2014. Further, we reversed $8.0 million
of our valuation allowance against our net tax assets, resulting in a net provision for income taxes of $10.5 million for the
six months ended June 30, 2014, representing an effective tax rate of 56.2% of pre-tax income. Our remaining net operating loss
carryforwards may be limited on an annual basis for the remainder of the year.
Net (Income) Loss Attributed to Noncontrolling
Interests
The following table presents
the portion of our net (income) loss attributed to noncontrolling interests in dollars and as a percentage of net sales (in thousands,
except percentages):
| |
Three Months Ended
June 30, | | |
Variance in | | |
Six Months Ended
June 30, | | |
Variance in | |
| |
2015 | | |
2014 | | |
Dollars | | |
Percent | | |
2015 | | |
2014 | | |
Dollars | | |
Percent | |
Net (income) loss attributed to noncontrolling interests | |
$ | (42 | ) | |
$ | (1,394 | ) | |
$ | (1,352 | ) | |
| 97.0% | | |
$ | 87 | | |
$ | (3,403 | ) | |
$ | 3,490 | | |
| NM | |
Percentage of net sales | |
| (0.0)% | | |
| (0.4)% | | |
| | | |
| | | |
| 0.0% | | |
| (0.6)% | | |
| | | |
| | |
Net (income) loss attributed
to noncontrolling interests relates to our consolidated treatment of PE Op Co., which indirectly owns our plants located in the
Western United States. For the three and six months ended June 30, 2015 and 2014, we consolidated the entire income statement of
PE Op Co. However, because we owned only 91% and 85% of PE Op Co. for portions of the three and six months ended June 30, 2015
and 2014, respectively, we reduced our consolidated net income (loss) for the noncontrolling interests, which were the ownership
interests that we did not own. The decreases in net income attributed to noncontrolling interests for the periods are primarily
due to lower operating income from significantly improved commodity margins, much of which was generated at the plant level. Going
forward, given our 100% ownership of PE Op Co., no amounts will be recorded for noncontrolling interests.
Net Income (Loss)
Attributed to Pacific Ethanol
The following table presents
our net income (loss) attributed to Pacific Ethanol in dollars and as a percentage of net sales (in thousands, except percentages):
| |
Three Months Ended
June 30, | | |
Variance in | | |
Six Months Ended
June 30, | | |
Variance in | |
| |
2015 | | |
2014 | | |
Dollars | | |
Percent | | |
2015 | | |
2014 | | |
Dollars | | |
Percent | |
Net income (loss) attributed to Pacific Ethanol | |
$ | 1,010 | | |
$ | 15,572 | | |
$ | (14,562 | ) | |
| (93.5)% | | |
$ | (3,370 | ) | |
$ | 4,746 | | |
$ | (8,116 | ) | |
| NM | |
Percentage of net sales | |
| 0.4% | | |
| 4.8% | | |
| | | |
| | | |
| (0.8)% | | |
| 0.8% | | |
| | | |
| | |
Net income attributed
to Pacific Ethanol decreased substantially during the three and six months ended June 30, 2015 as compared to the same periods
in 2014, primarily due to significantly lower crush and commodity margins in 2015 resulting from lower ethanol and co-product
sales prices.
Preferred Stock
Dividends and Income (Loss) Available to Common Stockholders
The following table presents
our preferred stock dividends in dollars for our Series B Cumulative Convertible Preferred Stock, or Series B Preferred Stock,
these preferred stock dividends as a percentage of net sales, and our income (loss) available to common stockholders in dollars
and as a percentage of net sales (in thousands, except percentages):
| |
Three Months Ended
June 30, | | |
Variance in | | |
Six Months Ended
June 30, | | |
Variance in | |
| |
2015 | | |
2014 | | |
Dollars | | |
Percent | | |
2015 | | |
2014 | | |
Dollars | | |
Percent | |
Preferred stock dividends | |
$ | 315 | | |
$ | 315 | | |
$ | – | | |
| –% | | |
$ | 627 | | |
$ | 627 | | |
$ | – | | |
| –% | |
Percentage of net sales | |
| 0.1% | | |
| 0.1% | | |
| | | |
| | | |
| 0.1% | | |
| 0.1% | | |
| | | |
| | |
Income (loss) available to common stockholders | |
$ | 695 | | |
$ | 15,257 | | |
$ | (14,562 | ) | |
| (95.4)% | | |
$ | (3,997 | ) | |
$ | 4,119 | | |
$ | (8,116 | ) | |
| NM | |
Percentage of net sales | |
| 0.3% | | |
| 4.8% | | |
| | | |
| | | |
| (0.9)% | | |
| 0.7% | | |
| | | |
| | |
Shares of our Series B
Preferred Stock are entitled to quarterly cumulative dividends payable in arrears in an amount equal to 7% per annum of the purchase
price per share of the Series B Preferred Stock. We accrued and paid cash dividends on our Series B Preferred Stock in the aggregate
amount of $0.3 million for the three months ended June 30, 2015 and 2014, and $0.6 million for the six months ended June 30, 2015
and 2014.
Liquidity and Capital Resources
During the six months ended June 30, 2015,
we funded our operations primarily from cash flow from operations and cash on hand. These funds were also used to make capital
expenditures and payments on Kinergy’s revolving credit facility.
Our current available capital resources
consist of cash on hand and amounts available for borrowing under Kinergy’s credit facility and under our credit facilities
for our Pacific Ethanol West plants. We expect that our future available capital resources will consist primarily of our remaining
cash balances, amounts available for borrowing, if any, under our credit facilities, cash generated from operations, fees paid
under our asset management agreement relating to our plants, and proceeds from warrant exercises.
We believe that current
and future available capital resources, revenues generated from operations, and other existing sources of liquidity, including
our credit facilities, will be adequate to meet our anticipated capital requirements for at least the next twelve months.
Quantitative Quarter-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):
| |
June 30, 2015 | | |
December 31, 2014 | | |
Variance | |
Cash and cash equivalents | |
$ | 49,262 | | |
$ | 62,084 | | |
| (20.7 | )% |
Current assets | |
$ | 117,664 | | |
$ | 139,551 | | |
| (15.7 | )% |
Current liabilities | |
$ | 25,940 | | |
$ | 25,447 | | |
| 1.9 | % |
Notes payable, noncurrent portion | |
$ | 25,559 | | |
$ | 34,533 | | |
| (26.0 | )% |
Working capital | |
$ | 91,724 | | |
$ | 114,104 | | |
| (19.6 | )% |
Working capital ratio | |
| 4.54 | | |
| 5.48 | | |
| (17.2 | )% |
Change in Working Capital and Cash Flows
Working capital decreased to $91.7 million
at June 30, 2015 from $114.1 million at December 31, 2014 as a result of a decrease in current assets of $21.9 million and
an increase in current liabilities of $0.5 million.
Current assets decreased primarily due to
a decrease in cash and cash equivalents of $12.8 million predominantly due to $12.2 million in capital expenditures and $9.0 million
of payments on Kinergy’s revolving line of credit, a decrease in accounts receivable of $6.0 million primarily due to lower
ethanol prices, a decrease in prepaid inventory of $3.6 million due to lower ethanol prices, partially offset by an increase in
inventories of $0.3 million and other current assets of $0.2 million. Current liabilities increased primarily due to an increase
in accounts payable and accrued liabilities of $4.3 million resulting from the timing of payments during the period, partially
offset by a decrease in the current portion of capital leases of $2.3 million due to capital lease payments made during the quarter,
and a decrease in other current liabilities of $1.5 million due to a reduction in derivative liabilities.
Cash
provided by our operating activities declined by $40.0 million primarily due to lower earnings predominantly from lower crush
margins resulting from lower ethanol prices. Adjustments to reconcile net loss for the six months ended June 30, 2015 to net cash
provided by operating activities include depreciation and amortization of $6.7 million, a decrease in
accounts receivable of $6.0 million predominantly due to lower ethanol prices and a decrease in prepaid inventory of $3.6 million
also due to lower ethanol prices, an increase in prepaid expenses and other assets of $1.5 million resulting from an increased
tax benefit for the period and a decrease in accounts payable of $1.1 million due to the timing of payments during the period.
We used an additional $5.7 million in cash
in our investing activities in the first half of 2015 as compared to the same period in 2014 for additions to property and equipment
associated with our plant improvement initiatives.
Cash used in our financing activities of
$12.0 million in the first half of 2015 resulted from payments on Kinergy’s revolving line of credit of $9.0 million, principal
payments on capital leases of $2.8 million and preferred stock dividends of $0.6 million, which were partially offset by the proceeds
from exercises of our warrants in the aggregate amount of $0.4 million.
Kinergy Operating Line of Credit
Kinergy maintains an operating line of credit
for an aggregate amount of up to $75.0 million. The credit facility expires on December 31, 2020.
Interest accrues under the credit facility at a rate equal to (i) the three-month London Interbank Offered Rate (“LIBOR”),
plus (ii) a specified applicable margin ranging from 1.75% to 2.75%. 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 Pacific Ethanol as reimbursement for management and other services provided
by Pacific Ethanol 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 and any inventory of Pacific Ag. Products, LLC, or PAP, one of our indirect wholly-owned subsidiaries, as additional
collateral.
For all monthly periods in which excess
availability falls below a specified level, Kinergy and PAP must collectively maintain a fixed-charge coverage ratio (calculated
as a twelve-month rolling earnings before interest, taxes, depreciation and amortization (EBITDA) 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 2.0 and are prohibited from incurring any additional indebtedness (other than specific
intercompany indebtedness) or making any capital expenditures in excess of $0.1 million absent the lender’s prior consent.
Kinergy’s and PAP’s obligations under the credit facility are secured by a first-priority security interest in all
of their assets in favor of the lender.
The following table summarizes Kinergy’s
financial covenants and actual results for the periods presented (dollars in thousands):
| |
Three Months Ended June 30, | |
Years Ended December 31, |
| |
2015 | |
2014 | |
2014 | |
2013 |
| |
| |
| |
| |
|
Fixed-Charge Coverage Ratio Requirement | |
2.00 | |
2.00 | |
2.00 | |
2.00 |
Actual | |
10.27 | |
14.54 | |
17.66 | |
8.64 |
Excess | |
8.27 | |
12.54 | |
15.66 | |
6.64 |
Pacific Ethanol has guaranteed all of Kinergy’s
obligations under the credit facility. As of June 30, 2015, Kinergy had an outstanding balance of $8.6 million and an unused
borrowing base of $21.4 million under the credit facility. On July 1, 2015, Kinergy’s available borrowing base increased
to $34.4 million as a result of an amendment to the credit facility which, in addition to increasing the maximum credit available
under the facility and other changes, included additional eligible collateral.
Pacific Ethanol West Term Debt and
Operating Line of Credit
Our indebtedness associated
with our Pacific Ethanol West plants as of June 30, 2015 consisted of a $32.5 million tranche A-1 term loan and a $26.3 million
tranche A-2 term loan. Pacific Ethanol, Inc. holds $41.8 million of these term loans, which are eliminated in consolidation. The
term debt requires monthly interest payments at a floating rate equal to the three-month LIBOR or the Prime Rate of interest, at
our election, plus 10.0%. The revolving credit facilities require monthly interest payments at a floating rate equal to the three-month
LIBOR or the Prime Rate of interest, at our election, plus 10.0%. At June 30, 2015, the average interest rate was approximately
13.25%. Repayments of principal are based on available free cash flow of the Pacific Ethanol West plants, until maturity, when
all principal amounts are due.
As of June 30, 2015,
we had no outstanding principal balances on our revolving credit facilities for the Pacific Ethanol West plants and an aggregate
borrowing availability of $19.5 million.
All of the term loans and revolving credit
facilities represent permanent financing and are secured by a perfected, first-priority security interest in all of the assets,
including inventories and all rights, title and interest in all tangible and intangible assets, of the Pacific Ethanol West plants.
The creditors under the term loans and revolving credit facilities for the Pacific Ethanol West plants do not have recourse to
Pacific Ethanol, Inc.
Aventine Indebtedness
On July 1, 2015, upon
effectiveness of the Aventine acquisition, Aventine became one of our wholly-owned subsidiaries and, on a consolidated basis, the
combined company became obligated with respect to Aventine’s term loan and revolving credit facilities. Aventine’s
creditors under Aventine’s term loan and revolving credit facilities have recourse solely against Aventine and its subsidiaries
and not against Pacific Ethanol, Inc. or its other direct or indirect subsidiaries.
As of July 1, 2015, Aventine’s
term loan facility had an outstanding balance of approximately $145.6 million.
Interest on the term
loan facility accrues and may be paid in cash at a rate of 10.5% per annum or may be paid in-kind at a rate of 15.0% per annum
by adding such interest to the outstanding principal balance. If we elect to pay interest in-kind, the interest is capitalized
at the end of each quarter. The term loan facility matures on September 24, 2017. The term loan facility is secured through a first-priority
lien on substantially all of Aventine’s assets and contains customary financial covenants, including the requirement that
Aventine maintain a cash balance of at least $2.0 million.
As of July 1, 2015, Aventine’s
revolving line of credit had a maximum availability of $40.0 million and an outstanding balance of approximately $13.8 million.
On July 1, 2015, we repaid,
on behalf of Aventine, approximately $14.5 million, including approximately $0.7 million in termination fees, representing all
amounts owed under the revolving line of credit.
We are evaluating opportunities
to consolidate and refinance our total term debt with the intent to lower our overall cost of borrowing.
Contractual Obligations
There have been no material changes in the
three months ended June 30, 2015 to the amounts presented in the table under the Contractual Obligations” section
in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation” of
our Annual Report on Form 10-K for 2014.
Effects of Inflation
The impact of inflation
was not significant to our financial condition or results of operations for the three and six months ended June 30, 2015 and 2014.
Impact of New Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board, or FASB, issued new guidance on the recognition of revenue. The guidance states that an entity should recognize revenue
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. The standard was originally effective for annual reporting periods
beginning after December 15, 2016, including interim periods within that reporting period, but has been further deferred one year.
Our adoption begins with the first fiscal quarter of fiscal year 2018. We are currently evaluating the impact of the adoption of
this accounting standard update on our consolidated results of operations and financial position.
In April 2015, the FASB issued new guidance
on presentation of debt issuance costs. Historically, entities have presented debt issuance costs as an asset. Under the new guidance,
effective for fiscal years beginning after December 31, 2015, debt issuance costs will be reclassified as a deduction to the carrying
amount of the related debt balance. The guidance does not change any of our other debt recognition or disclosure. We will adopt
the guidance beginning March 31, 2016.
ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to various market risks,
including changes in commodity prices and interest rates as discussed below. Market risk is the potential loss arising from adverse
changes in market rates and prices. In the ordinary course of business, we may enter into various types of transactions involving
financial instruments to manage and reduce the impact of changes in commodity prices and interest rates. We do not expect to have
any exposure to foreign currency risk as we conduct all of our transactions in U.S. dollars.
Commodity Risk
We produce ethanol and ethanol co-products.
Our business is sensitive to changes in the prices of each of ethanol and corn. In the ordinary course of business, we may enter
into various types of transactions involving financial instruments to manage and reduce the impact of changes in ethanol and corn
prices. We do not enter into derivatives or other financial instruments for trading or speculative purposes.
We are subject to market risk with respect
to ethanol pricing. Ethanol prices are sensitive to global and domestic ethanol supply, crude-oil supply and demand; crude-oil
refining capacity; carbon intensity; government regulation; and consumer demand for alternative fuels. Our ethanol sales are priced
using contracts that are either based on a fixed price or an indexed price tied to a specific market, such as CBOT or the Oil Price
Information Service. Under these fixed-priced arrangements, we are exposed to risk of a decrease in the market price of ethanol
between the time the price is fixed and the time the ethanol is sold.
We satisfy our physical corn needs, the
principal raw material used to produce ethanol and ethanol co-products, based on supply-guaranteed contracts with our vendors.
Generally, we determine the purchase price of our corn at the time we begin to grind that day’s needs. Sometimes, we may
also enter into contracts with our vendors to fix a portion of the purchase price of our corn requirements. As such, we are also
subject to market risk with respect to the price of corn. The price of corn is subject to wide fluctuations due to unpredictable
factors such as weather conditions, farmer planting decisions, governmental policies with respect to agriculture and international
trade and global supply and demand. Under the fixed-price arrangements, we assume the risk of a decrease in the market price of
corn between the time this price is fixed and the time the corn is utilized.
Ethanol co-products are sensitive to various
demand factors such as numbers of livestock on feed, prices for feed alternatives, and supply factors, primarily production of
ethanol co-products by ethanol plants and other sources.
As noted above, we may attempt to reduce
the market risk associated with fluctuations in the price of ethanol or corn by employing a variety of risk management and hedging
strategies. Strategies include the use of derivative financial instruments such as futures and options executed on the CBOT and/or
the New York Mercantile Exchange, as well as the daily management of physical corn.
These derivatives are not designated for
special hedge accounting treatment, and as such, the changes in the fair values of these contracts are recorded on the balance
sheet and recognized immediately in cost of goods sold. We recognized losses of $0.5 million and gains of $0.5 million related
to settled non-designated hedges as the change in the fair values of these contracts for the six months ended June 30, 2015 and
2014, respectively.
At June 30, 2015, we prepared a sensitivity
analysis to estimate our exposure to ethanol and corn. Market risk related to these factors was estimated as the potential change
in pre-tax income resulting from a hypothetical 10% adverse change in the prices of our expected ethanol and corn volumes. The
results of this analysis as of June 30, 2015, which may differ materially from actual results, are as follows (in millions):
Commodity | |
Six
Months Ended
June 30,
2015 Volume | | |
Unit of
Measure | |
Approximate
Adverse Change to
Pre-Tax Income | |
Ethanol | |
| 276.4 | | |
Gallons | |
$ | 16.4 | |
Corn | |
| 32.9 | | |
Bushels | |
$ | 15.2 | |
Interest Rate Risk
We are exposed to market risk from changes
in interest rates. Exposure to interest rate risk results primarily from our indebtedness that bears interest at variable rates.
At June 30, 2015, all of our long-term debt of $25.6 million was variable-rate in nature. Based on a 100 basis point (1.00%) change
in the interest rate on our long-term debt, pre-tax income for the six months ended June 30, 2015 would be negatively impacted
by approximately $0.1 million.
ITEM 4. CONTROLS AND
PROCEDURES.
Evaluation
of Disclosure Controls and Procedures
We conducted an evaluation
under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls
and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange
Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by
the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures also
include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company
in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management,
including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to
allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded as of June 30, 2015 that our disclosure controls and procedures were effective at a reasonable assurance level.
Changes
in Internal Control over Financial Reporting
There were no changes during the most recently
completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Inherent Limitations on the Effectiveness
of Controls
Management does not expect
that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors
and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations
in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will
be detected.
These inherent limitations
include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or
mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management
override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls
may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Western Sugar Cooperative
Pacific Ethanol, Inc., through a subsidiary
acquired in its acquisition of Aventine, became involved in a pending lawsuit with Western Sugar Cooperative (“Western Sugar”)
that pre-dated the Aventine acquisition.
On February 27, 2015,
Western Sugar filed a complaint in the United States District Court for the District of Colorado (Case No. 1:15-cv-00415) naming
Aventine Renewable Energy, Inc. (“ARE, Inc.”), one of Aventine’s subsidiaries, as defendant. Western Sugar amended
its complaint on April 21, 2015. ARE, Inc. purchased surplus sugar through a United States Department of Agriculture program.
Western Sugar was one of the entities that warehoused this sugar for ARE, Inc. The suit alleges that ARE, Inc. breached its contract
with Western Sugar by failing to pay certain penalty rates for the storage of its sugar or alternatively failing to pay a premium
rate for storage. Western Sugar alleges that the penalty rates apply because ARE, Inc. failed to take timely delivery or otherwise
cause timely shipment of the sugar. Western Sugar claims “expectation damages” in the amount of approximately $8.6
million. ARE, Inc. filed answers to Western Sugar’s complaint and amended complaint generally denying Western Sugar’s
allegations and asserting various defenses. The case is currently in its discovery phase. We are evaluating Western Sugar’s
claims and may accrue a litigation reserve for this matter.
Aurora Cooperative Elevator Company
Pacific Ethanol, Inc., through subsidiaries
acquired in its acquisition of Aventine, became involved in various pending lawsuits with Aurora Coop that pre-dated the Aventine
acquisition.
On July 26, 2015, we settled all outstanding
litigation with Aurora Coop. Pacific Ethanol and Aurora Coop agreed to dismiss all lawsuits with prejudice with no admission of
fault or liability by the parties, and to release the alleged option held by Aurora Coop to repurchase the land upon which Pacific
Ethanol’s 110 million gallon ethanol production facility in Aurora, Nebraska is located (the “Aurora West Facility”).
In addition, the parties agreed to terminate the grain supply, marketing and various other agreements between them or their subsidiaries.
Under the terms of the settlement, Pacific Ethanol and Aurora Coop will each bear its own costs and fees associated with the lawsuits
and the settlement. Pacific Ethanol and Aurora Coop agreed to continue to work together to amend or replace certain real property
easements currently in place to ensure continued mutual access by both parties to a system of rails, rail switches, roads, electrical
improvements, and utilities already constructed near the Aurora West Facility.
Below is a description of the settled litigation
matters involving Aurora Coop.
On May 29, 2012, Aventine filed suit against
Aurora Coop seeking declaratory relief. The suit alleged Aurora Coop had improperly threatened to invoke a purported option to
acquire the land upon which the Aurora West Facility is located. On June 21, 2012, Aurora Coop filed claims against Aventine which
were removed to the United States District Court for the District of Nebraska (Case No. 4:12-cv-0230), naming Aventine and Aventine
Renewable Energy – Aurora West, LLC (“AWLLC”), one of Aventine’s subsidiaries, as defendants. The suit
alleged that Aventine failed to complete construction and operate the Aurora West Facility by a contractual deadline, thereby allowing
Aurora Coop to exercise an option to repurchase 74 acres of land upon which the Aurora West Facility is located, together with
the Aurora West Facility and all related improvements, for a purchase price of $16,500 per acre. Aurora Coop asserted that its
contractual right to exercise this option arose on July 1, 2012 due to Aventine’s alleged failure to complete construction
of the Aurora West Facility as of that date. Aurora Coop also sought a judicial order imposing a constructive trust and requiring
Aventine to account for and pay to Aurora Coop the greater of the profits which Aventine received or may have received in the exercise
of reasonable care in the operation of the Aurora West Facility after July 1, 2012 to compensate Aurora Coop for damages it allegedly
suffered as a result of Aventine’s purported delay in conveying title to the Aurora West Facility and the land upon which
it is located. Aventine answered the suit, arguing that the contract only required Aventine to diligently pursue construction,
that construction was complete, and that there was no contractual ethanol production requirement. On July 26, 2015, we settled
this matter with Aurora Coop, as described above.
On February 4, 2014, Aurora Coop filed suit
in the United States District Court for the District of Nebraska (Case No. 4:14-cv-3032), naming Aventine and AWLLC as defendants.
The suit was for declaratory judgment concerning Aurora Coop’s rights as to certain disputed rail access matters. Aventine
counterclaimed seeking damages for denial of rail access, including access over rail equipment for which it shared the costs of
construction. On July 26, 2015, we settled this matter with Aurora Coop, as described above.
On November 8, 2013, Nebraska Energy, L.L.C.
(“NELLC”), one of Aventine’s subsidiaries, filed suit in the United States District Court for the District of
Nebraska (Case No. 4:13-cv-03190), naming Aurora Coop as defendant. NELLC and Aurora Coop entered into a grain supply agreement
that required NELLC to purchase all grain from Aurora Coop under an actual cost-plus fixed-fee price formula. The suit alleged
breach of contract for failure to permit an audit of transactions between the parties and an unspecified amount of damages resulting
from Aurora Coop’s failure to properly charge NELLC under the price formula. Aurora Coop counterclaimed for breach of certain
grain supply and marketing agreements between the parties. On July 26, 2015, we settled this matter with Aurora Coop, as described
above.
On September 20, 2012, Aurora Coop filed
suit in the United States District Court for the District of Nebraska (Case No. 4:12-cv-03200), naming Aventine, ARE, Inc. and
AWLLC as defendants. The suit alleged that Aurora Coop acquired grain on the Aventine parties’ behalf for which the Aventine
parties had not paid and of which none of the Aventine parties had accepted delivery. The suit sought approximately $1,800,000
in damages. The Aventine parties denied that the grain belonged to any of them and counterclaimed for amounts Aurora Coop owed
to Aventine, which Aurora Coop had set off against amounts allegedly owed by the Aventine parties. The dispute was referred to
the National Grain and Feed Association (NGFA Case No. 2651) for arbitration in which the Aventine parties prevailed. Thereafter,
Aurora Coop sought to recast its claims in the federal suit to include breach of contract damages and other remedies. On July 26,
2015, we settled this matter with Aurora Coop, as described above.
On September 11, 2014, AWLLC filed suit
with the Nebraska Public Service Commission naming Aurora Coop as defendant. The suit was for declaratory judgment on and an unspecified
amount of damages as to Aurora Coop’s denial of rail access and AWLLC’s costs related to the construction of various
infrastructures to work around that denial of access. Aventine claimed that Aurora Coop’s actions in locking out access violated
public policy and state law. On July 26, 2015, we settled this matter with Aurora Coop, as described above.
ITEM
1A. RISK FACTORS.
Before
deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the
other information contained in this report and in our other filings with the Securities and Exchange Commission, including our
subsequent reports on Forms 10-Q and 8-K. The risks and uncertainties described below are not the only ones we face. Additional
risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of
these known or unknown risks or uncertainties actually occurs with material adverse effects on Pacific Ethanol, our business, financial
condition, results of operations and/or liquidity could be seriously harmed. In that event, the market price for our common stock
will likely decline, and you may lose all or part of your investment.
Risks Related to our Business
We have incurred significant losses and negative
operating cash flow in the past and we may incur losses and negative operating cash flow in the future, which may hamper our operations
and impede us from expanding our business.
We have incurred significant losses and
negative operating cash flow in the past. For the six months ended June 30, 2015, we incurred consolidated net losses of approximately
$3.5 million. For 2013 and 2012, we incurred consolidated net losses of approximately $1.2 million and $43.4 million, respectively,
and in 2012 incurred negative operating cash flow of $20.8 million. We may incur losses and negative operating cash flow in the
future. We expect to rely on cash on hand and cash, if any, generated from our operations and from future financing activities
to fund all of the cash requirements of our business. Continued losses and negative operating cash flow may hamper our operations
and impede us from expanding our business.
Our results of operations and our ability to
operate at a profit is largely dependent on managing the costs of corn and natural gas and the prices of ethanol, distillers grains
and other ethanol co-products, all of which are subject to significant volatility and uncertainty.
Our results of operations are highly impacted
by commodity prices, including the cost of corn and natural gas that we must purchase, and the prices of ethanol, distillers grains
and other ethanol co-products that we sell. Prices and supplies are subject to and determined by market and other forces over which
we have no control, such as weather, domestic and global demand, supply shortages, export prices and various governmental policies
in the United States and around the world.
As a result of price volatility of corn,
natural gas, ethanol, distillers grains and other ethanol co-products, our results of operations may fluctuate substantially. In
addition, increases in corn or natural gas prices or decreases in ethanol, distillers grains or other ethanol co-product prices
may make it unprofitable to operate. In fact, some of our marketing activities will likely be unprofitable in a market of generally
declining ethanol prices due to the nature of our business. For example, to satisfy customer demands, we maintain certain quantities
of ethanol inventory for subsequent resale. Moreover, we procure much of our inventory outside the context of a marketing arrangement
and therefore must buy ethanol at a price established at the time of purchase and sell ethanol at an index price established later
at the time of sale that is generally reflective of movements in the market price of ethanol. As a result, our margins for ethanol
sold in these transactions generally decline and may turn negative as the market price of ethanol declines.
No assurance can be given that corn or natural
gas can be purchased at, or near, current or any particular prices or that ethanol, distillers grains or other ethanol co-products
will sell at, or near, current or any particular prices. Consequently, our results of operations and financial position may be
adversely affected by increases in the price of corn or natural gas or decreases in the price of ethanol, distillers grains or
other ethanol co-products.
Over the past several years, the spread
between ethanol and corn prices has fluctuated significantly. Fluctuations are likely to continue to occur. A sustained narrow
spread, whether as a result of sustained high or increased corn prices or sustained low or decreased ethanol prices, would adversely
affect our results of operations and financial position. Further, combined revenues from sales of ethanol, distillers grains and
other ethanol co-products could decline below the marginal cost of production, which may force us to suspend production of ethanol,
distillers grains and ethanol co-products at some or all of our plants.
Increased ethanol production may cause a decline
in ethanol prices or prevent ethanol prices from rising, and may have other negative effects, adversely impacting our results of
operations, cash flows and financial condition.
We believe that the most significant factor
influencing the price of ethanol has been the substantial increase in ethanol production in recent years. According to the Renewable
Fuels Association, domestic ethanol production capacity increased from an annualized rate of 1.5 billion gallons per year in January
1999 to 14.5 billion gallons in 2014. In addition, if ethanol production margins improve, we anticipate that owners of idle ethanol
production facilities, many of which may be idled due to poor production margins, will restart operations, thereby resulting in
more abundant ethanol supplies and inventories. Any increase in the demand for ethanol may not be commensurate with increases in
the supply of ethanol, thus leading to lower ethanol prices. Also, demand for ethanol could be impaired due to a number of factors,
including regulatory developments and reduced United States gasoline consumption. Reduced gasoline consumption has occurred in
the past and could occur in the future as a result of increased gasoline or oil prices or other factors such as increased automobile
fuel efficiency. Any of these outcomes could have a material adverse effect on our results of operations, cash flows and financial
condition.
The market price of ethanol is volatile and
subject to large fluctuations, which may cause our profitability or losses to fluctuate significantly.
The market price of ethanol is volatile
and subject to large fluctuations. The market price of ethanol is dependent upon many factors, including the supply of ethanol
and the price of gasoline, which is in turn dependent upon the price of petroleum which is highly volatile and difficult to forecast.
For example, ethanol prices, as reported by the CBOT, ranged from $1.50 to $3.52 per gallon during 2014. Fluctuations in the market
price of ethanol may cause our profitability or losses to fluctuate significantly.
Some of our marketing activities will likely
be unprofitable in a market of generally declining ethanol prices due to the nature of our business.
Some of our marketing activities will likely
be unprofitable in a market of generally declining ethanol prices due to the nature of our business. For example, to satisfy customer
demands, we maintain certain quantities of ethanol inventory for subsequent resale. Moreover, we procure much of our inventory
outside the context of a marketing arrangement and therefore must buy ethanol at a price established at the time of purchase and
sell ethanol at an index price established later at the time of sale that is generally reflective of movements in the market price
of ethanol. As a result, our margins for ethanol sold in these transactions generally decline and may turn negative as the market
price of ethanol declines.
Disruptions in ethanol production infrastructure
may adversely affect our business, results of operations and financial condition.
Our business depends on the continuing availability
of rail, road, port, storage and distribution infrastructure. In particular, due to limited storage capacity at our plants and
other considerations related to production efficiencies, our plants depend on just-in-time delivery of corn. The production of
ethanol also requires a significant and uninterrupted supply of other raw materials and energy, primarily water, electricity and
natural gas. The prices of electricity and natural gas have fluctuated significantly in the past and may fluctuate significantly
in the future. Local water, electricity and gas utilities may not be able to reliably supply the water, electricity and natural
gas that our plants need or may not be able to supply those resources on acceptable terms. Any disruptions in the ethanol production
infrastructure, whether caused by labor difficulties, earthquakes, storms, other natural disasters or human error or malfeasance
or other reasons, could prevent timely deliveries of corn or other raw materials and energy and may require us to halt production
at one or more plants which could have a material adverse effect on our business, results of operations and financial condition.
We may engage in hedging transactions and other
risk mitigation strategies that could harm our results of operations.
In an attempt to partially offset the effects
of volatility of ethanol prices and corn and natural gas costs, we may enter into contracts to fix the price of a portion of our
ethanol production or purchase a portion of our corn or natural gas requirements on a forward basis. In addition, we may engage
in other hedging transactions involving exchange-traded futures contracts for corn, natural gas and unleaded gasoline from time
to time. The financial statement impact of these activities is dependent upon, among other things, the prices involved and our
ability to sell sufficient products to use all of the corn and natural gas for which forward commitments have been made. Hedging
arrangements also expose us to the risk of financial loss in situations where the other party to the hedging contract defaults
on its contract or, in the case of exchange-traded contracts, where there is a change in the expected differential between the
underlying price in the hedging agreement and the actual prices paid or received by us. As a result, our results of operations
and financial condition may be adversely affected by fluctuations in the price of corn, natural gas, ethanol and unleaded gasoline.
Operational difficulties at our plants could
negatively impact sales volumes and could cause us to incur substantial losses.
Operations at our plants are subject to
labor disruptions, unscheduled downtimes and other operational hazards inherent in the ethanol production industry, including equipment
failures, fires, explosions, abnormal pressures, blowouts, pipeline ruptures, transportation accidents and natural disasters. Some
of these operational hazards may cause personal injury or loss of life, severe damage to or destruction of property and equipment
or environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. Our insurance
may not be adequate to fully cover the potential operational hazards described above or we may not be able to renew this insurance
on commercially reasonable terms or at all.
Moreover, our plants may not operate as
planned or expected. All of these facilities are designed to operate at or above a specified production capacity. The operation
of these facilities is and will be, however, subject to various uncertainties. As a result, these facilities may not produce ethanol
and its co-products at expected levels. In the event any of these facilities do not run at their expected capacity levels, our
business, results of operations and financial condition may be materially and adversely affected.
Future demand for ethanol is uncertain
and may be affected by changes to federal mandates, public perception, consumer acceptance and overall consumer demand for transportation
fuel, any of which could negatively affect demand for ethanol and our results of operations.
Although many trade groups, academics and
governmental agencies have supported ethanol as a fuel additive that promotes a cleaner environment, others have criticized ethanol
production as consuming considerably more energy and emitting more greenhouse gases than other biofuels and potentially depleting
water resources. Some studies have suggested that corn-based ethanol is less efficient than ethanol produced from other feedstock
and that it negatively impacts consumers by causing increased prices for dairy, meat and other food generated from livestock that
consume corn. Additionally, ethanol critics contend that corn supplies are redirected from international food markets to domestic
fuel markets. If negative views of corn-based ethanol production gain acceptance, support for existing measures promoting use and
domestic production of corn-based ethanol could decline, leading to reduction or repeal of federal mandates, which would adversely
affect the demand for ethanol. These views could also negatively impact public perception of the ethanol industry and acceptance
of ethanol as an alternative fuel.
There are limited markets for ethanol beyond
those established by federal mandates. Discretionary blending and E85 blending are important secondary markets. Discretionary blending
is often determined by the price of ethanol versus the price of gasoline. In periods when discretionary blending is financially
unattractive, the demand for ethanol may be reduced. Also, the demand for ethanol is affected by the overall demand for transportation
fuel, which peaked in 2007 and has declined steadily since then. Demand for transportation fuel is affected by the number of miles
traveled by consumers and the fuel economy of vehicles. Market acceptance of E15 may partially offset the effects of decreases
in transportation fuel demand. A reduction in the demand for ethanol and ethanol co-products may depress the value of our products,
erode our margins and reduce our ability to generate revenue or to operate profitably. Consumer acceptance of E15 and E85 fuels
is needed before ethanol can achieve any significant growth in market share relative to other transportation fuels.
If we fail to integrate successfully the businesses
of Pacific Ethanol and Aventine in the expected timeframe our results of operations will be adversely affected.
The success of the Aventine acquisition
will depend, in large part, on our ability to realize the anticipated benefits from combining the businesses of Pacific Ethanol
and Aventine. To realize these anticipated benefits, we must successfully integrate the businesses of Pacific Ethanol and Aventine.
This integration will be complex and time-consuming.
The failure to integrate successfully and
to manage successfully the challenges presented by the integration process may result in our failure to achieve some or all of
the anticipated benefits of the acquisition.
Potential difficulties that may be encountered
in the integration process include the following:
| · | lost sales and customers as a result of customers of either of Pacific Ethanol or Aventine deciding not to do business with
us; |
| · | complexities associated with managing the larger, more complex, combined business; |
| · | potential unknown liabilities and unforeseen expenses, delays or regulatory conditions associated with the acquisition; and |
| · | performance shortfalls as a result of the diversion of management’s attention caused by integrating Pacific Ethanol’s
and Aventine’s operations. |
Our future results will suffer if we do not
effectively manage our expanded operations.
Our business following the Aventine acquisition
is significantly larger than the individual businesses of Pacific Ethanol and Aventine prior to the acquisition. Our future success
depends, in part, upon our ability to manage our expanded business, which will pose substantial challenges for our management,
including challenges related to the management and monitoring of new operations and associated increased costs and complexity.
We cannot assure you that we will be successful or that we will realize the expected operating efficiencies, annual net operating
synergies, revenue enhancements and other benefits currently anticipated to result from the acquisition.
We are currently engaged in a dispute in connection
with the storage of surplus beet sugar and amounts allegedly owed by us.
Pacific Ethanol, Inc., through a subsidiary
acquired in its acquisition of Aventine, became involved in a pending lawsuit with Western Sugar that pre-dated the Aventine acquisition.
In 2013, Aventine’s,
and now our, wholly-owned subsidiary purchased surplus beet sugar through a United States Department of Agriculture program. Western
Sugar was one of the entities that warehoused this surplus sugar. Western Sugar has asserted that Aventine’s subsidiary
breached its contract with Western Sugar by failing to pay certain penalty rates for the storage of its sugar or alternatively
failing to pay a premium rate for storage because the subsidiary failed to take timely delivery or otherwise cause timely shipment
of the sugar. On February 27, 2015, Western Sugar filed an action in the United States District Court, District of Colorado, seeking
payment of the penalty storage fees as “expectation damages,” in the amount of approximately $8.6 million. We are
evaluating Western Sugar’s claims and may accrue a litigation reserve for this matter. Our inability to successfully defend
this matter could have a material adverse effect on our financial condition.
Our level of indebtedness, including Aventine’s
indebtedness, may make it more difficult for us to pay or refinance our debts and we may need to divert our cash flow from operations
to debt service payments. Our indebtedness could limit our ability to pursue other strategic opportunities and could increase our
vulnerability to adverse economic and industry conditions.
As a result of the Aventine acquisition,
on a consolidated basis, we are responsible for Aventine’s outstanding debt. Our total consolidated indebtedness immediately
prior to the acquisition was approximately $25.6 million. Our total consolidated indebtedness immediately after the acquisition
was approximately $171.2 million. Our debt service obligations with respect to this increased indebtedness could have an adverse
impact on our earnings and cash flows for as long as the indebtedness is outstanding.
Our increased indebtedness could also have
important consequences to holders of our common stock. For example, it could:
| · | make it more difficult to pay or refinance our debts as they become due during adverse economic and industry conditions because
any decrease in revenues could cause us to not have sufficient cash flows from operations to make our scheduled debt payments; |
| · | limit our flexibility to pursue other strategic opportunities or react to changes in our business and the industry in which
we operates and, consequently, place us at a competitive disadvantage to our competitors who have less debt; or |
| · | require a substantial portion of our cash flows from operations to be used for debt service payments, thereby reducing the
availability of our cash flow to fund working capital, capital expenditures, acquisitions, dividend payments and other general
corporate purposes. |
Based upon current levels of operations,
we expect to generate sufficient cash on a consolidated basis to make all of the principal and interest payments when such payments
are due under our existing credit facilities, indentures and other instruments governing our outstanding indebtedness, including
Aventine’s outstanding debt, but there can be no assurance that we will be able to repay or refinance such borrowings and
obligations.
If Kinergy fails to satisfy its financial covenants
under its credit facility, it may experience a loss or reduction of that facility, which would have a material adverse effect on
our financial condition and results of operations.
We are substantially dependent on Kinergy’s
credit facility to help finance its operations. Kinergy must satisfy monthly financial covenants under its credit facility, including
fixed-charge coverage ratio covenants. Kinergy will be in default under its credit facility if it fails to satisfy any financial
covenant. A default may result in the loss or reduction of the credit facility. The loss of Kinergy’s credit facility, or
a significant reduction in Kinergy’s borrowing capacity under the facility, would result in Kinergy’s inability to
finance a significant portion of its business and would have a material adverse effect on our financial condition and results of
operations.
The United States ethanol industry is highly
dependent upon certain federal and state legislation and regulation and any changes in legislation or regulation could have a material
adverse effect on our results of operations, cash flows and financial condition.
The Environmental Protection Agency, or
EPA, has implemented the national Renewable Fuel Standard, or national RFS, pursuant to the Energy Policy Act of 2005 and the Energy
Independence and Security Act of 2007. The national RFS program sets annual quotas for the quantity of renewable fuels (such as
ethanol) that must be blended into motor fuels consumed in the United States. The domestic market for ethanol is significantly
impacted by federal mandates under the national RFS program for volumes of renewable fuels (such as ethanol) required to be blended
with gasoline. Future demand for ethanol will be largely dependent upon incentives to blend ethanol into motor fuels, including
the relative price of gasoline versus ethanol, the relative octane value of ethanol, constraints in the ability of vehicles to
use higher ethanol blends, the national RFS, and other applicable environmental requirements. Any significant increase in production
capacity above the national RFS minimum requirements may have an adverse impact on ethanol prices.
Legislation aimed
at reducing or eliminating the renewable fuel use required by the national RFS has been introduced in the United States Congress.
On January 21, 2015, the Leave Ethanol Volumes at Existing Levels (LEVEL) Act (H.R. 434) was introduced in the House. The
bill would amend the national RFS by decreasing the required volume of renewable fuels in 2015-2022 to 7.5 billion gallons per
year. On February 4, 2015, the RFS Elimination Act (H.R. 703) was introduced in the House
of Representatives. The bill would fully repeal the national RFS. Also introduced on February 4, 2015, was the RFS Reform Act
(H.R. 704), which prohibits corn-based ethanol from meeting the national RFS requirements,
caps the amount of ethanol that can be blended into conventional gasoline at 10%, and requires the EPA to set requirements for
cellulosic biofuels at actual production levels. On January 6, 2015, a bill (H.R. 21) was introduced in the House of Representatives
to vacate the waiver issued by EPA allowing the use of 15% ethanol blends in certain light-duty vehicles. On February 26, 2015,
the Corn Ethanol Mandate Elimination Act of 2015 (S. 577) was introduced in the Senate. The bill would eliminate corn ethanol
as qualifying as a renewable fuel under the national RFS. The American Energy Renaissance Act (S. 791 and H.R. 1487), which
was introduced in the Senate on March 18, 2015 and the House on March 19, 2015, would phase out the national RFS over a five-year
period. The Renewable Fuel Standard Repeal Act (S. 1584), which would fully repeal the national RFS, was introduced in
the Senate on June 16, 2015. All of these bills were assigned to a congressional committee, which will consider them before possibly
sending any of them on to the House of Representatives or the Senate as a whole. Our operations could be adversely impacted if
any legislation is enacted that reduces or eliminates the national RFS volume requirements or that reduces or eliminates corn
ethanol as qualifying as a renewable fuel under the national RFS.
Under the provisions
of the Clean Air Act, as amended by the Energy Independence and Security Act of 2007, the EPA has limited authority to waive or
reduce the mandated national RFS requirements, which authority is subject to consultation with the Secretaries of Agriculture
and Energy, and based on a determination that there is inadequate domestic renewable fuel supply or implementation of the applicable
requirements would severely harm the economy or environment of a state, region or the United States. On November 15, 2013, the
EPA released its Notice of Proposed Rulemaking for the national RFS for 2014. The EPA proposed to reduce the Renewable Volume
Obligations, or RVO, for 2014 for key categories of biofuel covered by the national RFS below the 2014 volumes specified in 2007
by the Energy Independence and Security Act of 2007 and below the RVO for 2013. However, the EPA withdrew its proposal on December
9, 2014, and announced that it would not finalize the RVO for 2014 until 2015. In addition, the EPA announced that it would propose
the RVO for 2015 and 2016 simultaneously in 2015. On May 29, 2015, the EPA published its proposed rule for RFS blending requirements
for 2014-2016. Because 2014 has passed, the EPA proposes to base the 2014 blending requirement on the market’s actual use
of renewable fuel. For 2015, the EPA is proposing to reduce the portion of the national RFS mandate for which corn ethanol qualifies
from the statutory level of 15.0 billion gallons to 13.4 billion gallons. For 2016, the EPA is proposing to reduce this portion
of the national RFS from the statutory level of 15.0 billion gallons to 14.0 billion gallons. The EPA’s decision to propose
cuts to the Congressionally established volumes is based on the EPA’s perception that the nation’s refueling infrastructure
is currently unable to distribute the statutorily-required volumes to consumers. The EPA held a public hearing on its proposal
on June 25, 2015, and accepted written comments from the public through July 27, 2015. A final rule for the 2014-2016 national
RFS requirements is expected to be published by the EPA no later than November 30, 2015. Our operations could be adversely impacted
if the EPA finalizes RVO levels that are below the levels specified in the national RFS.
The ethanol production and marketing industry
is extremely competitive. Many of our significant competitors have greater production and financial resources and one or more of
these competitors could use their greater resources to gain market share at our expense. In addition, a number of Kinergy’s
suppliers may circumvent the marketing services we provide, causing our sales and profitability to decline.
The ethanol production and marketing industry
is extremely competitive. Many of our significant competitors in the ethanol production and marketing industry, including Archer
Daniels Midland Company and Valero Energy Corporation, have substantially greater production and/or financial resources. As a result,
our competitors may be able to compete more aggressively and sustain that competition over a longer period of time. Successful
competition will require a continued high level of investment in marketing and customer service and support. Our limited resources
relative to many significant competitors may cause us to fail to anticipate or respond adequately to new developments and other
competitive pressures. This failure could reduce our competitiveness and cause a decline in market share, sales and profitability.
Even if sufficient funds are available, we may not be able to make the modifications and improvements necessary to compete successfully.
We also face increasing competition from
international suppliers. Currently, international suppliers produce ethanol primarily from sugar cane and have cost structures
that are generally substantially lower than our cost structures. Any increase in domestic or foreign competition could cause us
to reduce our prices and take other steps to compete effectively, which could adversely affect our business, financial condition
and results of operations.
In addition, some of our suppliers are potential
competitors and, especially if the price of ethanol reaches historically high levels, they may seek to capture additional profits
by circumventing our marketing services in favor of selling directly to our customers. If one or more of our major suppliers, or
numerous smaller suppliers, circumvent our marketing services, our sales and profitability may decline.
Our success will depend on relationships with
third parties and pre-existing customers of Pacific Ethanol and Aventine, which relationships may be affected by customer preferences
or public attitudes about the Aventine acquisition. Any adverse changes in these relationships could adversely affect our business,
financial condition and results of operations.
Our success will depend on our ability to
maintain and renew business relationships, including relationships with preexisting customers of both Pacific Ethanol and Aventine,
and to establish new business relationships. There can be no assurance that we will be able to maintain preexisting customer contracts
and other business relationships, or enter into or maintain new customer contracts and other business relationships, on acceptable
terms, if at all. The failure to maintain important business relationships could have a material adverse effect on our business,
financial condition or results of operations.
Business issues faced by Pacific Ethanol
or Aventine may be imputed to our operations as a whole or to the operations of the other company.
To the extent that Pacific Ethanol or Aventine
has or is perceived by customers to have operational challenges or other business issues, those challenges or issues may raise
concerns by existing customers as to our operations as a whole or as to the operations of the other company, which may limit or
impede our ability to maintain relationships with those customers.
We have incurred and will incur significant
costs in connection with the Aventine acquisition.
We have incurred and expect to incur significant
costs associated with the Aventine acquisition and combining the operations of Pacific Ethanol and Aventine. Although the exact
amount of these costs is not yet known, we estimate that these costs will be approximately $2.7 million in the aggregate. In addition,
there may be unanticipated costs associated with the integration. Although we expect that the elimination of duplicative costs
and other efficiencies may offset incremental transaction and acquisition-related costs over time, these benefits may not be achieved
in the near term or at all.
Our ability to utilize net operating loss carryforwards
and certain other tax attributes may be limited as a result of the Aventine acquisition.
Federal and state income tax laws impose
restrictions on the utilization of net operating loss, or NOL, and tax credit carryforwards in the event that an “ownership
change” occurs for tax purposes, as defined by Section 382 of the Internal Revenue Code. In general, an ownership change
occurs when stockholders owning 5% or more of a “loss corporation” (a corporation entitled to use NOL or other loss
carryovers) have increased their ownership of stock in such corporation by more than 50 percentage points during any three-year
period. The annual base limitation under Section 382 of the Code is calculated by multiplying the loss corporation’s value
at the time of the ownership change by the greater of the long-term tax-exempt rate determined by the Internal Revenue Service
in the month of the ownership change or the two preceding months.
As of December 31, 2014, Pacific Ethanol
and Aventine had $28.3 million and $63.5 million, respectively, of NOLs that are currently limited in their annual use. As a result
of the Aventine acquisition, it is possible that either or both Pacific Ethanol and Aventine will be deemed to have undergone an
“ownership change” for purposes of Section 382 of the Code. Accordingly, our ability to utilize these NOL carryforwards
may be substantially limited. These limitations could in turn result in increased future tax obligations, which could have a material
adverse effect on our business, financial condition or results of operations.
The high concentration of our sales within
the ethanol production and marketing industry could result in a significant reduction in sales and negatively affect our profitability
if demand for ethanol declines.
We expect to be completely focused on the
production and marketing of ethanol and its co-products for the foreseeable future. We may be unable to shift our business focus
away from the production and marketing of ethanol to other renewable fuels or competing products. Accordingly, an industry shift
away from ethanol or the emergence of new competing products may reduce the demand for ethanol. A downturn in the demand for ethanol
would likely materially and adversely affect our sales and profitability.
We depend in part on one third-party supplier
for a significant portion of the ethanol we sell. If this supplier does not continue to supply us with ethanol in adequate amounts,
we may be unable to satisfy the demands of our customers and our sales, profitability and relationships with our customers will
be adversely affected.
We depend in part, and expect to continue
to depend for the foreseeable future, on one third-party supplier for a significant portion of the total amount of ethanol that
we sell. During 2014, 2013 and 2012, one supplier provided in excess of 10% of the total volume of ethanol we sold, accounting
for an aggregate of approximately $134.6 million, $145.2 million and $109.9 million in net sales, representing 12%, 16% and 13%
of our net sales, respectively, for those periods. This third-party supplier is located in the Midwest. The delivery of ethanol
from this supplier is therefore subject to delays resulting from inclement weather and other conditions. If this supplier is unable
or declines for any reason to continue to supply us with ethanol in adequate amounts, we may be unable to replace that supplier
and source other supplies of ethanol in a timely manner, or at all, to satisfy the demands of our customers. If this occurs, our
sales, profitability and our relationships with our customers will be adversely affected.
We may be adversely affected by environmental,
health and safety laws, regulations and liabilities.
We are subject to various federal, state
and local environmental laws and regulations, including those relating to the discharge of materials into the air, water and ground,
the generation, storage, handling, use, transportation and disposal of hazardous materials and wastes, and the health and safety
of our employees. In addition, some of these laws and regulations require us to operate under permits that are subject to renewal
or modification. These laws, regulations and permits can often require expensive pollution control equipment or operational changes
to limit actual or potential impacts to the environment. A violation of these laws and regulations or permit conditions can result
in substantial fines, natural resource damages, criminal sanctions, permit revocations and/or facility shutdowns. In addition,
we have made, and expect to make, significant capital expenditures on an ongoing basis to comply with increasingly stringent environmental
laws, regulations and permits.
We may be liable for the investigation and
cleanup of environmental contamination at each of our plants and at off-site locations where we arrange for the disposal of hazardous
substances or wastes. If these substances or wastes have been or are disposed of or released at sites that undergo investigation
and/or remediation by regulatory agencies, we may be responsible under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, or other environmental laws for all or part of the costs of investigation and/or remediation, and for damages
to natural resources. We may also be subject to related claims by private parties alleging property damage and personal injury
due to exposure to hazardous or other materials at or from those properties. Some of these matters may require us to expend significant
amounts for investigation, cleanup or other costs.
In addition, new laws, new interpretations
of existing laws, increased governmental enforcement of environmental laws or other developments could require us to make significant
additional expenditures. Continued government and public emphasis on environmental issues can be expected to result in increased
future investments for environmental controls at our plants. Present and future environmental laws and regulations, and interpretations
of those laws and regulations, applicable to our operations, more vigorous enforcement policies and discovery of currently unknown
conditions may require substantial expenditures that could have a material adverse effect on our results of operations and financial
condition.
The hazards and risks associated with producing
and transporting our products (including fires, natural disasters, explosions and abnormal pressures and blowouts) may also result
in personal injury claims or damage to property and third parties. As protection against operating hazards, we maintain insurance
coverage against some, but not all, potential losses. However, we could sustain losses for uninsurable or uninsured risks, or in
amounts in excess of existing insurance coverage. Events that result in significant personal injury or damage to our property or
third parties or other losses that are not fully covered by insurance could have a material adverse effect on our results of operations
and financial condition.
If we are unable to attract or retain key personnel,
including as a result of the Aventine acquisition, our ability to operate effectively may be impaired, which could have a material
adverse effect on our business, financial condition and results of operations.
Our ability to operate our business and
implement strategies depends, in part, on the efforts of our executive officers and other key personnel. Our future success will
depend on, among other factors, our ability to retain our current key personnel and attract and retain qualified future key personnel,
particularly executive management. In addition, the success of the Aventine acquisition will depend in part on our ability to retain
key personnel. It is possible that these personnel might decide not to remain with us now that the acquisition is completed. If
these key personnel terminate their employment, our business activities might be adversely affected and management’s attention
might be diverted from integrating the businesses of Pacific Ethanol and Aventine to recruiting suitable replacement personnel.
We may be unable to locate suitable replacements for any such key personnel or offer employment to potential replacement personnel
on reasonable terms. If we are unable to attract or retain key personnel, our ability to operate effectively may be impaired, which
could have a material adverse effect on our business, financial condition and results of operations.
We depend on a small number of customers for
the majority of our sales. A reduction in business from any of these customers could cause a significant decline in our overall
sales and profitability.
The majority of our sales are generated
from a small number of customers. During 2014, 2013 and 2012, four customers accounted for an aggregate of approximately $659 million,
$521 million and $410 million in net sales, representing 59%, 58% and 51% of our net sales, respectively, for those periods. We
expect that we will continue to depend for the foreseeable future upon a small number of customers for a significant portion of
our sales. Our agreements with these customers generally do not require them to purchase any specified amount of ethanol or dollar
amount of sales or to make any purchases whatsoever. Therefore, in any future period, our sales generated from these customers,
individually or in the aggregate, may not equal or exceed historical levels. If sales to any of these customers cease or decline,
we may be unable to replace these sales with sales to either existing or new customers in a timely manner, or at all. A cessation
or reduction of sales to one or more of these customers could cause a significant decline in our overall sales and profitability.
Our lack of long-term ethanol orders and commitments
by our customers could lead to a rapid decline in our sales and profitability.
We cannot rely on long-term ethanol orders
or commitments by our customers for protection from the negative financial effects of a decline in the demand for ethanol or a
decline in the demand for our marketing services. The limited certainty of ethanol orders can make it difficult for us to forecast
our sales and allocate our resources in a manner consistent with our actual sales. Moreover, our expense levels are based in part
on our expectations of future sales and, if our expectations regarding future sales are inaccurate, we may be unable to reduce
costs in a timely manner to adjust for sales shortfalls. Furthermore, because we depend on a small number of customers for a significant
portion of our sales, the magnitude of the ramifications of these risks is greater than if our sales were less concentrated. As
a result of our lack of long-term ethanol orders and commitments, we may experience a rapid decline in our sales and profitability.
There are limitations on our ability to receive
distributions from our subsidiaries.
We conduct most of our operations through
subsidiaries and are dependent upon dividends or other intercompany transfers of funds from our subsidiaries to generate free cash
flow. Moreover, some of our subsidiaries are limited in their ability to pay dividends or make distributions to us by the terms
of their financing arrangements.
Risks Related to Ownership of our Common
Stock
Resales of shares of our common stock issued
upon closing the Aventine acquisition, or a perception that a substantial number of such shares will be resold into the market,
may cause the market price of our common stock and the value of your investment to decline significantly.
We issued an aggregate of approximately
17.8 million shares of our common stock and non-voting common stock upon the closing the Aventine acquisition. A majority of the
newly issued shares are subject to stockholders agreements entered into by us and certain former Aventine stockholders prohibiting
the sale of our shares issued in connection with the acquisition for various periods of time. The issuance of these new shares
of our common stock and non-voting common stock, and the sale of these new shares of common stock (including shares of common stock
issuable upon conversion of shares of non-voting common stock issued in the acquisition) by former Aventine stockholders (i) after
the acquisition, for those former Aventine stockholders not subject to the stockholders agreements, or (ii) after applicable restrictive
periods have passed for those former Aventine stockholders subject to the stockholders agreements, or the perception that these
sales could occur, could have the effect of depressing the market price for shares of our common stock.
Our stock price is highly volatile, which could
result in substantial losses for investors purchasing shares of our common stock and in litigation against us.
The market price of our common stock has
fluctuated significantly in the past and may continue to fluctuate significantly in the future. The market price of our common
stock may continue to fluctuate in response to one or more of the following factors, many of which are beyond our control:
| · | fluctuations in the market prices of ethanol and its co-products; |
| · | the cost of key inputs to the production of ethanol, including corn and natural gas; |
| · | the volume and timing of the receipt of orders for ethanol from major customers; |
| · | competitive pricing pressures; |
| · | our ability to timely and cost-effectively produce, sell and deliver ethanol; |
| · | the announcement, introduction and market acceptance of one or more alternatives to ethanol; |
| · | losses resulting from adjustments to the fair values of our outstanding warrants to purchase our common stock; |
| · | changes in market valuations of companies similar to us; |
| · | stock market price and volume fluctuations generally; |
| · | the possibility that the anticipated benefits from our acquisition of Aventine cannot be fully realized in a timely
manner or at all, or that integrating the acquired operations will be more difficult, disruptive or costly than anticipated; |
| · | regulatory developments or increased enforcement; |
| · | fluctuations in our quarterly or annual operating results; |
| · | additions or departures of key personnel; |
| · | our inability to obtain any necessary financing; |
| · | our financing activities and future sales of our common stock or other securities; and |
| · | our ability to maintain contracts that are critical to our operations. |
Furthermore, we believe that the economic
conditions in California and other Western states, as well as the United States as a whole, could have a negative impact on our
results of operations. Demand for ethanol could also be adversely affected by a slow-down in the overall demand for oxygenate and
gasoline additive products. The levels of our ethanol production and purchases for resale will be based upon forecasted demand.
Accordingly, any inaccuracy in forecasting anticipated revenues and expenses could adversely affect our business. The failure to
receive anticipated orders or to complete delivery in any quarterly period could adversely affect our results of operations for
that period. Quarterly results are not necessarily indicative of future performance for any particular period, and we may not experience
revenue growth or profitability on a quarterly or an annual basis.
The price at which you purchase shares of
our common stock may not be indicative of the price that will prevail in the trading market. You may be unable to sell your shares
of common stock at or above your purchase price, which may result in substantial losses to you and which may include the complete
loss of your investment. In the past, securities class action litigation has often been brought against a company following periods
of high stock price volatility. We may be the target of similar litigation in the future. Securities litigation could result in
substantial costs and divert management’s attention and our resources away from our business.
Any of the risks described above could have
a material adverse effect on our results of operations or the price of our common stock, or both.
The Aventine acquisition may not be accretive,
and may be dilutive, to our earnings per share, which may negatively affect the market price of our common stock.
Although the Aventine acquisition is expected
to be accretive to earnings per share, the acquisition may not be accretive, and may be dilutive, to our earnings per share. The
expectation that the acquisition will be accretive is based on preliminary estimates that may materially change. All of the risk
factors applicable to the ethanol industry and our business as a marketer and producer of ethanol are also be applicable to Aventine’s
business. In addition, future events and conditions could decrease or delay any accretion, result in dilution or cause greater
dilution than may be expected, including:
| · | adverse changes in market conditions; |
| · | commodity prices for corn, ethanol, gasoline and crude oil; |
| · | laws and regulations affecting the ethanol business; |
| · | capital expenditure obligations; and |
| · | general economic conditions. |
Any dilution of, or decrease or delay of
any accretion to, our earnings per share could cause the price of our common stock to decline.
We will record goodwill in connection with
the Aventine acquisition that could become impaired and adversely affect our results of operations.
The Aventine acquisition will be accounted
for as an acquisition by Pacific Ethanol in accordance with accounting principles generally accepted in the United States. Under
the acquisition method of accounting, the assets and liabilities of Aventine will be recorded, as of completion, at their respective
fair values and added to Pacific Ethanol’s assets and liabilities. The reported financial condition and results of operations
of Pacific Ethanol issued after completion of the acquisition will reflect Aventine balances and results after completion of the
acquisition, but will not be restated retroactively to reflect the historical financial position or results of operations of Aventine
for periods prior to the acquisition.
Under the acquisition method of accounting,
the total purchase price will be allocated to Aventine’s tangible assets and liabilities and identifiable intangible assets
based on their fair values as of the date of completion of the acquisition. The excess of the purchase price over those fair values
will be recorded as goodwill. We expect that the acquisition will result in the creation of goodwill based upon the application
of the acquisition method of accounting. To the extent the value of goodwill or intangibles becomes impaired, we may be required
to incur material non-cash charges relating to such impairment. Such an impairment charge could have a material impact on our results
of operations.
We may incur significant non-cash expenses
in future periods due to adjustments to the fair values of our outstanding warrants. These non-cash expenses may materially and
adversely affect our reported net income or losses and cause our stock price to decline.
From 2010 through 2013, we issued in various
financing transactions warrants to purchase shares of our common stock. The warrants were initially recorded at their fair values,
which are adjusted quarterly, generally resulting in non-cash expenses or income if the market price of our common stock increases
or decreases, respectively, during the period. For example, due to the substantial increase in the market price of our common stock
in the first quarter of 2014 and because the exercise prices of these warrants were, as of March 31, 2014, well below the market
price of our common stock, the fair values of the warrants and the related non-cash expenses were significantly higher in the first
quarter of 2014 than in prior quarterly periods, which resulted in an unusually large non-cash expense for the quarter. These fair
value adjustments will continue in future periods until all of our warrants are exercised or expire. We may incur additional significant
non-cash expenses in future periods due to adjustments to the fair values of our outstanding warrants resulting from increases
in the market price of our common stock during those periods. These non-cash expenses may materially and adversely affect our reported
net income or losses and cause our stock price to decline.
The conversion or exercise of our outstanding
derivative securities could substantially dilute your investment, reduce your voting power, and, if the resulting shares of common
stock are resold into the market, or if a perception exists that a substantial number of shares may be issued and then resold into
the market, the market price of our common stock and the value of your investment could decline significantly.
Our outstanding options to acquire our common
stock issued to employees, directors and others, and warrants to purchase our common stock, allow the holders of these derivative
securities an opportunity to profit from a rise in the market price of our common stock. We have issued common stock in respect
of our derivative securities in the past and may do so in the future. If the prices at which our derivative securities are converted
or exercised, are lower than the price at which you made your investment, immediate dilution of the value of your investment will
occur. Our issuance of shares of common stock under these circumstances will also reduce your voting power. In addition, sales
of a substantial number of shares of common stock resulting from any of these issuances, or even the perception that these sales
could occur, could adversely affect the market price of our common stock. As a result, you could experience a significant decline
in the value of your investment as a result of both the actual and potential issuance of shares of our common stock.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Unregistered Sales of Equity Securities
None.
Dividends
Our current and future
debt financing arrangements may limit or prevent cash distributions from our subsidiaries to us, depending upon the achievement
of specified financial and other operating conditions and our ability to properly service our debt, thereby limiting or preventing
us from paying cash dividends.
For each of the three
months ended June 30, 2015 and 2014, we declared and paid in cash an aggregate of $0.3 million in dividends on our Series B Preferred
Stock. We have never declared or paid cash dividends on our common stock and do not currently intend to pay cash dividends on our
common stock in the foreseeable future. We currently anticipate that we will retain any earnings for use in the continued development
of our business. The holders of our outstanding Series B Preferred Stock are entitled to dividends of 7% per annum, payable quarterly.
Accumulated and unpaid dividends in respect of our Series B Preferred Stock must be paid prior to the payment of any dividends
in respect of our common stock.
ITEM 3. DEFAULTS UPON
SENIOR SECURITIES.
Not applicable.
ITEM 4. MINE SAFETY
DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
Exhibit
Number |
Description |
31.1 |
Certifications Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (*) |
31.2 |
Certifications Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (*) |
32.1 |
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (*) |
101.INS |
XBRL Instance Document (*) |
101.SCH |
XBRL Taxonomy Extension Schema (*) |
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase (*) |
101.DEF |
XBRL Taxonomy Extension Definition Linkbase (*) |
101.LAB |
XBRL Taxonomy Extension Label Linkbase (*) |
101.PRE |
XBRL Taxonomy Extension Presentation Linkbase (*) |
____________________
SIGNATURES
Pursuant to the requirements
of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
|
PACIFIC ETHANOL, INC. |
|
|
|
|
Dated: August 10, 2015 |
By: |
/S/ BRYON T. MCGREGOR |
|
|
|
Bryon T. McGregor |
|
|
|
Chief Financial Officer |
|
|
|
(Principal Financial and Accounting Officer) |
|
EXHIBITS FILED WITH THIS REPORT
Exhibit
Number |
Description |
31.1 |
Certification Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
31.2 |
Certification Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
32.1 |
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
101.INS |
XBRL Instance Document |
|
|
101.SCH |
XBRL Taxonomy Extension Schema |
|
|
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase |
|
|
101.DEF |
XBRL Taxonomy Extension Definition Linkbase |
|
|
101.LAB |
XBRL Taxonomy Extension Label Linkbase |
|
|
101.PRE |
XBRL Taxonomy Extension Presentation Linkbase |
____________________
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE
OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
ACT OF 2002
I, Neil M. Koehler, certify that:
1. I have reviewed this Quarterly Report
on Form 10-Q of Pacific Ethanol, Inc.;
2. Based on my knowledge, this report does
not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying
officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls
and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over
financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the
registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change
in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying
officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material
weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material,
that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
|
/S/
NEIL M. KOEHLER |
|
Neil M. Koehler |
|
President and Chief Executive Officer
(Principal Executive Officer) |
Date:
August 10, 2015
EXHIBIT
31.2
CERTIFICATION OF PRINCIPAL FINANCIAL
OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
ACT OF 2002
I, Bryon T. McGregor, certify that:
1. I have reviewed this Quarterly Report
on Form 10-Q of Pacific Ethanol, Inc.;
2. Based on my knowledge, this report does
not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying
officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls
and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over
financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the
registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change
in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying
officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material
weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material,
that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
|
/S/
BRYON T. MCGREGOR |
|
Bryon T. McGregor |
|
Chief
Financial Officer
(Principal
Financial Officer) |
Date:
August 10, 2015
EXHIBIT
32.1
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the
Quarterly Report on Form 10-Q of Pacific Ethanol, Inc. (the “Company”) for the period ended June 30, 2015 (the “Report”),
the undersigned hereby certify in their capacities as Chief Executive Officer and Chief Financial Officer of the Company, respectively,
pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. the Report fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. the information
contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: August
10, 2015 |
By: |
/S/
NEIL M. KOEHLER |
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|
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Neil M. Koehler |
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President and Chief Executive Officer |
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|
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(Principal Executive Officer) |
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Dated: August
10, 2015 |
By: |
/S/
BRYON T. MCGREGOR |
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|
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Bryon T. McGregor |
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|
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Chief Financial Officer |
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|
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(Principal Financial Officer) |
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A signed original of
this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signatures
that appear in typed form within the electronic version of this written statement required by Section 906, has been provided to
the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
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