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 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 three months ended March 31, 2016 and 2015,
we incurred consolidated net losses of $13.2 million and $4.5 million, respectively, and for the three months ended March 31,
2016, we incurred negative operating cash flow of $5.2 million. For the year ended December 31, 2015, we incurred consolidated
net losses of approximately $18.9 million and incurred negative operating cash flows of $26.8 million. For 2013 and 2012, we incurred
consolidated net losses of $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 a record 14.8 billion gallons in 2015. 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 $1.31 to $1.69 per gallon
during 2015 and $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 could 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. 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 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 has been and will continue to 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:
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complexities
associated with managing the larger, more complex, combined business;
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integrating
personnel;
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potential
unknown liabilities and unforeseen expenses, delays or regulatory conditions associated
with the acquisition; and
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performance
shortfalls as a result of the diversion of management’s attention caused by integrating
Pacific Ethanol’s and Aventine’s operations.
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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.
Our
level of 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.
Our
debt service obligations could have an adverse impact on our earnings and cash flows for as long as the indebtedness is outstanding.
Our indebtedness could also have important consequences to holders of our common stock. For example, it could:
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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;
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limit
our flexibility to pursue other strategic opportunities or react to changes in our business
and the industry in which we operate and, consequently, place us at a competitive disadvantage
to our competitors who have less debt; or
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require
a substantial portion of our cash flows from operations to be used for debt service payments,
thereby reducing the availability of our cash flows to fund working capital, capital
expenditures, acquisitions, dividend payments and other general corporate purposes.
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Based
upon current levels of operations, we expect to generate sufficient cash on a consolidated basis to make all principal and interest
payments when such payments become due under our existing credit facilities, indentures and other instruments governing our outstanding
indebtedness, 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
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, among other things, vacate any
waivers issued under the Clean Air Act to allow the sale of mid-level ethanol blends for use in motor vehicles. A mid-level ethanol
blend is an ethanol-gasoline blend containing 10-20% of ethanol by volume that is intended to be used in any conventional gasoline-powered
motor vehicle or nonroad vehicle or engine. 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 of 2015
(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. For 2016,
the EPA reduced the national RFS from the statutory level of 15.0 billion gallons to 14.0 billion gallons. We believe that 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. Our results
of operations, cash flows and financial condition could be adversely impacted if the EPA further reduces the national RFS requirements
from the statutory 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
ability to utilize net operating loss carryforwards and certain other tax attributes may be limited.
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,
or 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, 2015, we had $137.6 million of federal NOLs that are limited in their annual use under 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 and 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
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, 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 2015, 2014 and 2013, four customers accounted for
an aggregate of approximately $538 million, $659 million and $521 million in net sales, representing 45%, 59% and 58% 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
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:
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fluctuations
in the market prices of ethanol and its co-products;
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the
cost of key inputs to the production of ethanol, including corn and natural gas;
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the
volume and timing of the receipt of orders for ethanol from major customers;
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competitive
pricing pressures;
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our
ability to timely and cost-effectively produce, sell and deliver ethanol;
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the
announcement, introduction and market acceptance of one or more alternatives to ethanol;
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losses
resulting from adjustments to h fair values of our outstanding warrants to purchase our
common stock;
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changes
in market valuations of companies similar to us;
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stock
market price and volume fluctuations generally;
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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;
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regulatory
developments or increased enforcement;
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fluctuations
in our quarterly or annual operating results;
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additions
or departures of key personnel;
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our
inability to obtain any necessary financing;
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our
financing activities and future sales of our common stock or other securities; and
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our
ability to maintain contracts that are critical to our operations.
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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.
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.