Alto Ingredients(ALTO) - 2019 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. Presents Pacific Ethanol, Inc.'s unaudited Q1 2019 consolidated financial statements, including balance sheets, operations, cash flows, equity, and notes Consolidated Balance Sheets Consolidated Balance Sheets (in thousands) | Metric (in thousands) | March 31, 2019 (unaudited) | December 31, 2018 | | :-------------------- | :------------------------- | :------------------ | | Total Assets | $699,021 | $659,981 | | Total Liabilities | $389,662 | $340,616 | | Total Stockholders' Equity | $309,359 | $319,365 | | Current Assets | $176,697 | $168,804 | | Current Liabilities | $236,169 | $231,859 | - Total Assets increased by $39.04 million (5.9%) from December 31, 2018, to March 31, 2019, primarily driven by an increase in current assets[6] - Total Liabilities increased by $49.05 million (14.4%) over the same period, with current liabilities increasing by $4.31 million[7] - Total Stockholders' Equity decreased by $10.01 million (3.1%) from December 31, 2018, to March 31, 2019[8] Consolidated Statements of Operations Consolidated Statements of Operations (in thousands, except per share) | Metric (in thousands, except per share) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Net Sales | $355,803 | $400,027 | | Cost of Goods Sold | $358,092 | $396,665 | | Gross Profit (Loss) | $(2,289) | $3,362 | | Loss from Operations | $(10,524) | $(5,953) | | Consolidated Net Loss | $(14,161) | $(9,497) | | Net Loss Available to Common Stockholders | $(13,202) | $(8,153) | | Net Loss per Share, Basic and Diluted | $(0.29) | $(0.19) | - Net Sales decreased by $44.22 million (11.1%) year-over-year[11] - The company reported a Gross Loss of $2.29 million in Q1 2019, compared to a Gross Profit of $3.36 million in Q1 2018[11] - Consolidated Net Loss increased to $14.16 million in Q1 2019 from $9.50 million in Q1 2018[11] Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net Cash Provided by (Used in) Operating Activities | $(15,027) | $8,910 | | Net Cash Used in Investing Activities | $(1,112) | $(4,357) | | Net Cash Provided by Financing Activities | $11,263 | $3,338 | | Net Increase (Decrease) in Cash and Cash Equivalents | $(4,876) | $7,891 | | Cash and Cash Equivalents at End of Period | $21,751 | $57,380 | - Operating activities used $15.03 million in cash in Q1 2019, a significant decrease from $8.91 million provided in Q1 2018[13] - Investing activities used less cash in Q1 2019 ($1.11 million) compared to Q1 2018 ($4.36 million), primarily due to reduced capital expenditures[13] - Financing activities provided $11.26 million in cash in Q1 2019, up from $3.34 million in Q1 2018, driven by increased borrowings and common stock issuance[13] Consolidated Statements of Stockholders' Equity Consolidated Statements of Stockholders' Equity (in thousands) | Metric (in thousands) | January 1, 2019 | March 31, 2019 | | :-------------------- | :-------------- | :------------- | | Total Stockholders' Equity | $319,365 | $309,359 | | Common Stock (shares) | 45,771 | 48,884 | | Common Stock (amount) | $46 | $49 | | Additional Paid-In Capital | $932,179 | $936,643 | | Accumulated Deficit | $(630,000) | $(643,202) | - Total Stockholders' Equity decreased by $10.01 million from January 1, 2019, to March 31, 2019, primarily due to a net loss of $14.16 million, partially offset by common stock issuances[15][16] - The company issued 3,137,000 shares of common stock, increasing additional paid-in capital by $3.67 million[16] Notes to Consolidated Financial Statements 1. Organization and Basis of Presentation Pacific Ethanol, Inc., a leading U.S. renewable fuels producer, faced adverse 2018 conditions and is pursuing strategic initiatives to improve liquidity - Pacific Ethanol, Inc. is a leading producer and marketer of low-carbon renewable fuels in the United States[18] - The company has a combined production capacity of 605 million gallons per year across nine ethanol production facilities[19] - The company experienced significant adverse conditions in 2018 due to record low ethanol prices and high inventory levels, resulting in prolonged negative operating margins and substantial net losses[23] - Strategic initiatives are underway to address liquidity, including potential asset sales, debt reduction, and capital raising, aiming to provide sufficient liquidity for the next twelve months[23][26] Available Liquidity and Capital Resources (as of March 31, 2019, in millions) | Resource | Amount (in millions) | | :------- | :------------------- | | Cash | $21.8 | | Excess availability under Kinergy's line of credit | $21.8 | | Equity available under shelf registration | >$20 | - The company adopted ASC 842 on January 1, 2019, recognizing initial right-of-use assets and lease liabilities of $43.8 million, with no significant impact on the consolidated statement of operations[30] 2. Segments The company operates in ethanol production and marketing/distribution segments, with production experiencing declining sales and higher losses in Q1 2019 Segment Net Sales (in thousands) | Segment | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :------ | :-------------------------------- | :-------------------------------- | | Production | $248,558 | $294,636 | | Marketing and Distribution | $109,427 | $108,091 | | Intersegment Eliminations | $(2,182) | $(2,700) | | Net Sales as Reported | $355,803 | $400,027 | Segment Income (Loss) Before Benefit for Income Taxes (in thousands) | Segment | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :------ | :-------------------------------- | :-------------------------------- | | Production | $(17,566) | $(12,445) | | Marketing and Distribution | $6,119 | $5,750 | | Corporate Activities | $(2,714) | $(3,365) | | Total | $(14,161) | $(10,060) | Segment Total Assets (in thousands) | Segment | March 31, 2019 | December 31, 2018 | | :------ | :------------- | :---------------- | | Production | $558,379 | $532,790 | | Marketing and Distribution | $123,552 | $112,984 | | Corporate Assets | $17,090 | $14,117 | | Total Assets | $699,021 | $659,891 | 3. Inventories Inventories, primarily ethanol and co-products, are valued at lower-of-cost-or-net realizable value, with total balances increasing in Q1 2019 Inventory Balances (in thousands) | Category | March 31, 2019 | December 31, 2018 | | :------- | :------------- | :---------------- | | Finished goods | $42,355 | $35,778 | | Work in progress | $7,180 | $6,855 | | Raw materials | $6,352 | $7,233 | | Low-carbon and RIN credits | $4,973 | $6,130 | | Other | $1,871 | $1,824 | | Total | $62,731 | $57,820 | - Total inventories increased by $4.91 million (8.5%) from December 31, 2018, to March 31, 2019[38] - The inventory valuation adjustment decreased significantly from $2.33 million at December 31, 2018, to $0.22 million at March 31, 2019[37] 4. Derivatives The company uses non-designated derivative instruments for commodity price risk, recognizing fair value changes in cost of goods sold, with a reduced loss in Q1 2019 - The company uses non-designated derivative instruments to lock in prices for corn and ethanol, with changes in fair value recognized immediately in cost of goods sold[42] Fair Value of Non-Designated Derivative Instruments (in thousands) | Type of Instrument | Balance Sheet Location | March 31, 2019 Fair Value (Assets) | March 31, 2019 Fair Value (Liabilities) | December 31, 2018 Fair Value (Assets) | December 31, 2018 Fair Value (Liabilities) | | :----------------- | :--------------------- | :--------------------------------- | :-------------------------------------- | :------------------------------------ | :----------------------------------------- | | Cash collateral balance | Other current assets | $4,409 | — | $8,479 | — | | Commodity contracts | Derivative instruments | $1,155 | $5,156 | $1,765 | $6,309 | Recognized Gains (Losses) for Non-Designated Derivatives (in thousands) | Type of Instrument | Statements of Operations Location | Realized Losses (Q1 2019) | Realized Losses (Q1 2018) | Unrealized Gains (Q1 2019) | Unrealized Gains (Q1 2018) | | :----------------- | :-------------------------------- | :------------------------ | :------------------------ | :------------------------- | :------------------------- | | Commodity contracts | Cost of goods sold | $(630) | $(1,658) | $544 | $1,196 | 5. Leases Adopting ASC 842 in Q1 2019, the company recognized $43.8 million in right-of-use assets and lease liabilities, with no significant impact on operations - The company adopted ASC 842 on January 1, 2019, resulting in the recognition of $43.8 million in initial right-of-use assets and lease liabilities[46] - The adoption of ASC 842 did not have a significant impact on the company's consolidated statement of operations[46] - For the three months ended March 31, 2019, the weighted average remaining lease term was 15.4 years, and the weighted average discount rate was 6.01%[48][49] Operating Lease Liabilities Remaining Maturities (in thousands, as of March 31, 2019) | Year Ended | Amount | | :--------- | :----- | | 2019 | $7,497 | | 2020 | $8,370 | | 2021 | $5,413 | | 2022 | $5,240 | | 2023 | $4,513 | | 2024-76 | $40,282| | Total | $71,315 | - Operating lease costs for Q1 2019 totaled $2.26 million in cost of goods sold and $0.12 million in SG&A expenses[51] 6. Debt Long-term debt increased to $96.43 million in Q1 2019, with recent amendments to credit facilities increasing interest rates and imposing new requirements Long-Term Borrowings (in thousands) | Debt Type | March 31, 2019 | December 31, 2018 | | :-------- | :------------- | :---------------- | | Kinergy line of credit | $70,209 | $57,057 | | Pekin term loan | $43,000 | $43,000 | | Pekin revolving loan | $32,000 | $32,000 | | ICP term loan | $15,000 | $16,500 | | ICP revolving loan | $18,000 | $18,000 | | Parent notes payable | $63,200 | $66,948 | | Total Long-term debt, net of current portion | $96,433 | $84,767 | - Kinergy's credit facility was amended to increase the borrowing base and had $21.85 million in additional borrowing availability as of March 31, 2019[52] - PE Pekin's credit facilities were amended to increase the interest rate by 125 basis points (to LIBOR + 5.00%) and revise working capital requirements[55] - Lenders temporarily waived financial covenant violations and deferred principal payments until July 15, 2019[56] - PE Pekin is required to pay $14.0 million by July 15, 2019, representing deferred and additional scheduled principal payments[58] - Approximately $195.0 million of net assets at subsidiaries were restricted from transfer to Pacific Ethanol, Inc. due to credit facility restrictions as of March 31, 2019[59] 7. Commitments and Contingencies The company has various sales and purchase commitments for 2019 and is involved in legal proceedings not expected to materially impact financials Sales Commitments (as of March 31, 2019) | Product | Type of Contract | Quantity/Value | | :------ | :--------------- | :------------- | | Ethanol | Indexed-price | 241,528,000 gallons | | Ethanol | Fixed-price | $80,294,000 | | Co-products | Fixed-price | $31,376,000 | | Co-products | Indexed-price | 721,000 tons | Purchase Commitments (as of March 31, 2019) | Product | Type of Contract | Quantity/Value | | :------ | :--------------- | :------------- | | Ethanol | Indexed-price | 11,442,000 gallons | | Ethanol | Fixed-price | $5,605,000 | | Corn | Fixed-price | $16,700,000 | - The company is involved in various legal proceedings but does not expect any material adverse impact on its financial condition or results of operations[62] 8. Pension Plans The company sponsors underfunded defined benefit and postretirement plans for unionized employees, incurring net periodic expenses in Q1 2019 - The Retirement Plan, covering 'grandfathered' unionized employees at the Pekin facility, was underfunded by $5.4 million as of December 31, 2018[66] Net Periodic Expense for Pension Plans (in thousands) | Plan | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :-------------------------------- | :-------------------------------- | | Retirement Plan | $94 | $76 | | Postretirement Plan | $102 | $81 | - The Postretirement Plan, providing medical and life insurance benefits, had an accumulated projected benefit obligation of $5.7 million as of December 31, 2018[67] 9. Fair Value Measurements Fair value measurements are categorized into a three-level hierarchy, with derivatives as Level 1 and defined benefit plan assets as Level 2 - Fair value hierarchy prioritizes inputs into Level 1 (unadjusted quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[68][69] - Derivative financial instruments (commodity positions) are classified as Level 1[71] - Defined benefit plan assets (pooled separate accounts) are classified as Level 2[70] Recurring Fair Value Measurements (in thousands, as of March 31, 2019) | Category | Fair Value | Level 1 | Level 2 | Level 3 | | :------- | :--------- | :------ | :------ | :------ | | Assets: Derivative financial instruments | $1,155 | $1,155 | $— | $— | | Liabilities: Derivative financial instruments | $(5,156) | $(5,156)| $— | $— | 10. Earnings Per Share The company reported an increased basic and diluted net loss per share of $(0.29) for Q1 2019, with convertible securities being anti-dilutive Basic and Diluted Earnings Per Share (in thousands, except per share data) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :----- | :-------------------------------- | :-------------------------------- | | Net loss available to common stockholders | $(13,202) | $(8,153) | | Weighted-average shares outstanding | 45,517 | 42,912 | | Net loss per share, basic and diluted | $(0.29) | $(0.19) | - The net loss per share increased from $(0.19) in Q1 2018 to $(0.29) in Q1 2019[74] - Potentially dilutive convertible securities were anti-dilutive and not included in the diluted EPS calculation for both periods[74] 11. Parent Company Financials The parent company reported an increased net loss of $12.89 million in Q1 2019, with significant subsidiary net assets restricted from transfer - As of March 31, 2019, approximately $195.0 million of net assets at the company's subsidiaries were restricted from transfer to Pacific Ethanol, Inc. due to credit facility restrictions[75] Parent Company Statement of Operations (in thousands) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :----- | :-------------------------------- | :-------------------------------- | | Management fees from subsidiaries | $3,330 | $3,078 | | Selling, general and administrative expenses | $4,729 | $5,376 | | Loss from operations | $(1,399) | $(2,298) | | Consolidated net loss | $(12,890) | $(7,841) | Parent Company Cash Flows (in thousands) | Activity | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(87) | $(4,254) | | Net cash used in investing activities | $— | $(13) | | Net cash used in financing activities | $(390) | $(312) | | Cash and cash equivalents at end of period | $6,282 | $735 | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Management discusses the company's Q1 2019 financial condition and operations, covering business overview, segment performance, strategic initiatives, accounting policies, and liquidity Overview - Pacific Ethanol is a leading producer and marketer of low-carbon renewable fuels in the United States[84] - The company operates nine production facilities with a combined capacity of 605 million gallons per year and markets nearly 1.0 billion gallons of ethanol annually[85] - The business consists of two operating segments: production and marketing[85] - The company's mission is to be a leading producer and marketer of low-carbon renewable fuels, high-value animal feed, and high-quality alcohol products, achieved through investment in infrastructure, carbon intensity reduction, market expansion, and new technologies[86] Production Segment - The company produces ethanol, specialty alcohols, and co-products at its facilities, with West Coast plants offering logistical advantages and Midwest plants benefiting from low-cost feedstock and access to domestic/international markets[87] - All plants, except the Aurora East facility, were operating as of March 31, 2019[89] Ethanol Production Facilities and Capacity | Facility Name | Facility Location | Capacity (gallons) | | :------------ | :---------------- | :----------------- | | 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 | | 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 | | Pekin ICP | Pekin, IL | 90,000,000 | - Co-products include wet and dried distillers grains, corn gluten feed, condensed distillers solubles, corn gluten meal, corn germ, corn oil, dried yeast, and CO2[91] Marketing Segment - The marketing segment sells ethanol, specialty alcohols, and co-products produced by its facilities, as well as third-party ethanol[92] - Ethanol customers are integrated oil companies and gasoline marketers, while distillers grains and other feed co-products are sold to dairies and feedlots[92][93] - The company secures additional ethanol supplies from third-party plants to meet customer demand exceeding its own production[92] Current Initiatives and Outlook - The ethanol market is emerging from a cyclical trough in late 2018, with Q1 2019 results showing improvement due to better crush margins, increased sales of higher-margin third-party ethanol, and cost-cutting efforts[95] - The company is operating at approximately 83% of production capacity, moderating production in areas impacted by high inventory levels and using Kinergy's platform to source third-party ethanol[96] - Positive industry outlook factors include expected resolution of trade disputes with China (potentially opening a 4.0 billion gallon annual market), EPA's final rule facilitating year-round E15 use, and wholesale ethanol trading at a significant discount to gasoline[97][98][99][100] - Strategic initiatives focus on potential asset sales, debt reduction, strengthening liquidity, and pursuing strategic partnerships and capital raising activities to optimize business performance[101] Critical Accounting Policies - The preparation of financial statements requires significant judgments and estimates, which can materially impact the portrayal of financial condition and results of operations[104] - Critical accounting policies include revenue recognition, impairment of long-lived assets, valuation allowance for deferred taxes, derivative instruments, accounting for business combinations, and allowance for doubtful accounts[104] Results of Operations Key Performance Metrics Key Performance Metrics (Three Months Ended March 31) | Metric | 2019 | 2018 | Percentage Change | | :----- | :--- | :--- | :---------------- | | Production gallons sold (in millions) | 116.9 | 140.8 | (17.0)% | | Third party gallons sold (in millions) | 94.9 | 91.9 | 3.3% | | Total gallons sold (in millions) | 211.8 | 232.7 | (9.0)% | | Total gallons produced (in millions) | 122.5 | 142.1 | (13.8)% | | Production capacity utilization | 82% | 94% | (12.8)% | | Average sales price per gallon | $1.53 | $1.57 | (2.5)% | | Delivered cost of corn | $4.11 | $3.84 | 7.0% | | Total co-product tons sold (in thousands) | 684.1 | 798.0 | (14.3)% | | Co-product revenues as % of delivered cost of corn | 38.8% | 37.1% | 4.6% | - Production gallons sold decreased by 17.0% year-over-year, while third-party gallons sold increased by 3.3%[107] - Production capacity utilization declined to 82% in Q1 2019 from 94% in Q1 2018[107] Net Sales, Cost of Goods Sold and Gross Profit (Loss) Consolidated Net Sales, Cost of Goods Sold, and Gross Profit (Loss) (in thousands) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change (Dollars) | Change (Percent) | | :----- | :-------------------------------- | :-------------------------------- | :--------------- | :--------------- | | Net sales | $355,803 | $400,027 | $(44,224) | (11.1)% | | Cost of goods sold | $358,092 | $396,665 | $(38,573) | (9.7)% | | Gross profit (loss) | $(2,289) | $3,362 | $(5,651) | NM | | Percentage of net sales | (0.6)% | 0.8% | | | - Consolidated net sales decreased by 11.1% due to lower total ethanol gallons sold and a 2.5% decrease in average ethanol sales price per gallon[110][112] - The production segment's net sales of ethanol declined by $40.2 million (18%) and co-products by $5.7 million (8%) due to lower production capacity utilization[113][114] - The marketing segment's net sales of ethanol increased by $1.7 million (2%), despite a decline in total gallons sold, due to an increase in higher-margin third-party ethanol sales[115] - Consolidated gross profit declined to a loss of $2.3 million, primarily due to significantly lower crush margins from reduced ethanol prices and higher corn costs[119] Selling, General and Administrative Expenses Selling, General and Administrative Expenses (in thousands) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change (Dollars) | Change (Percent) | | :----- | :-------------------------------- | :-------------------------------- | :--------------- | :--------------- | | SG&A expenses | $8,235 | $9,315 | $(1,080) | (11.6)% | | Percentage of net sales | 2.3% | 2.3% | | | - SG&A expenses decreased by $1.0 million (11.6%) year-over-year, primarily due to a $0.6 million reduction in professional fees[123] - SG&A expenses are anticipated to be approximately $9.0 million for the second quarter of 2019[123] Net Loss Available to Common Stockholders Net Loss Available to Common Stockholders (in thousands) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change (Dollars) | Change (Percent) | | :----- | :-------------------------------- | :-------------------------------- | :--------------- | :--------------- | | Net loss available to Common Stockholders | $13,202 | $8,153 | $5,049 | 61.9% | | Percentage of net sales | 3.7% | 2.0% | | | - Net loss available to common stockholders increased by $5.05 million (61.9%) year-over-year, primarily due to decreased gross profit[124] Liquidity and Capital Resources Quantitative Quarter-End Liquidity Status Quantitative Quarter-End Liquidity Status (in thousands) | Metric | March 31, 2019 | December 31, 2018 | Change (%) | | :----- | :------------- | :---------------- | :--------- | | Cash and cash equivalents | $21,751 | $26,627 | (18.3)% | | Current assets | $176,697 | $168,804 | 4.7% | | Property and equipment, net | $472,735 | $482,657 | (2.1)% | | Current liabilities | $236,169 | $231,859 | 1.9% | | Long-term debt, net of current portion | $96,433 | $84,767 | 13.8% | | Working capital deficit | $(59,472) | $(63,055) | (5.7)% | | Working capital ratio | 0.75 | 0.73 | 2.7% | - The working capital deficit improved to $59.5 million at March 31, 2019, from $63.1 million at December 31, 2018[135][136] Restricted Net Assets - As of March 31, 2019, approximately $195.0 million of net assets at the company's subsidiaries were restricted from transfer to Pacific Ethanol, Inc. due to credit facility restrictions[136] Changes in Working Capital and Cash Flows - Working capital deficit improved by $3.58 million, driven by a $7.9 million increase in current assets (accounts receivable, inventories) partially offset by a $4.3 million increase in current liabilities (operating leases, senior secured notes, Pekin credit facilities)[136][137][139] - Cash and cash equivalents declined by $4.9 million, primarily due to $15.0 million cash used in operating activities, partially offset by $11.3 million from financing activities[140] - Cash used in operating activities increased by $23.9 million year-over-year, mainly due to increased consolidated net loss and changes in accounts receivable, payables, and operating leases[141] - Cash used in investing activities declined by $3.2 million due to reduced capital project spending[142] - Cash provided by financing activities increased by $7.9 million, driven by increased net borrowings under Kinergy's line of credit and common stock sales[143] Capital Expenditures - Capital expenditures totaled $1.1 million for Q1 2019, primarily for ongoing repair and maintenance[144] - Expected capital expenditures for all of 2019 are $4.0 million, almost solely for normal repair and maintenance[144] Kinergy Operating Line of Credit - Kinergy maintains an operating line of credit up to $100.0 million, maturing on August 2, 2022[145] - Interest accrues at three-month LIBOR plus an applicable margin (1.50%-2.00%, or up to 4.00% for additional borrowings)[145] - As of March 31, 2019, Kinergy had an outstanding balance of $70.2 million and $21.8 million in additional borrowing availability[147] Kinergy's Fixed-Charge Coverage Ratio (Three Months Ended March 31, 2019) | Metric | Three Months Ended March 31, 2019 | Years Ended December 31, 2018 | | :----- | :-------------------------------- | :---------------------------- | | Requirement | 2.00 | 2.00 | | Actual | 16.35 | 19.06 | Pekin Credit Facilities - PE Pekin has term and revolving credit facilities of $64.0 million and $32.0 million, respectively, maturing in 2021 and 2022[148] - On March 21, 2019, the interest rate was increased by 125 basis points to 30-day LIBOR plus 5.00%[153] - Lenders temporarily waived financial covenant violations and deferred principal payments, expiring July 15, 2019, contingent on a $30.0 million contribution from PE Central[154][155] - PE Pekin is required to pay $14.0 million by July 15, 2019, for deferred and scheduled principal payments[156] ICP Credit Facilities - ICP has term and revolving credit facilities of $24.0 million and $18.0 million, respectively, maturing in 2021 and 2022[157] - Interest accrues at 30-day LIBOR plus 3.75%, with quarterly principal payments of $1.5 million[157] - ICP is required to maintain at least $8.0 million in working capital and an annual debt service coverage ratio of not less than 1.5 to 1.0[157] Pacific Ethanol, Inc. Notes Payable - The company has $68.9 million in aggregate principal amount of senior secured notes, with $63.2 million outstanding as of March 31, 2019[159][160] - The notes mature on December 15, 2019, with interest accruing at a variable rate (currently LIBOR plus 11%)[160] - The company is actively evaluating opportunities to repay or refinance these notes as part of its strategic initiatives[161] At-the-Market Program - Through its 'at-the-market' equity distribution program, the company sold 3,137,392 shares of common stock for net proceeds of $3.74 million in Q1 2019[162] - Net proceeds from these issuances are used to repay a portion of the senior secured notes maturing December 15, 2019[162] Effects of Inflation - The impact of inflation was not significant to the company's financial condition or results of operations for the three months ended March 31, 2019 and 2018[163] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. This item is not applicable to the company for this reporting period ITEM 4. CONTROLS AND PROCEDURES. Management concluded the company's disclosure controls and procedures were effective as of March 31, 2019, with no material changes in internal control - Management concluded that disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2019[164] - There has been no material change in internal control over financial reporting during the most recently completed fiscal quarter[165] - Management acknowledges that control systems provide only reasonable, not absolute, assurance and have inherent limitations[165] PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The company is involved in ordinary course legal proceedings, which management does not expect to materially adversely affect its financial condition - The company is subject to various claims and contingencies in the ordinary course of business[168] - Management does not expect any pending legal proceedings to have a material adverse impact on the company's financial condition or results of operations[168] ITEM 1A. RISK FACTORS. The company faces significant risks related to strategic execution, financing, commodity volatility, operations, regulations, competition, and common stock ownership Risks Related to our Business - Failure to timely implement strategic initiatives and raise sufficient capital could lead to insufficient liquidity and potentially result in seeking protection under the U.S. Bankruptcy Code[170][172] - The company may not have sufficient liquidity to satisfy obligations under its Pekin credit facility ($14.0 million due by July 15, 2019) and senior secured notes ($63.2 million due December 15, 2019), risking foreclosure on assets or bankruptcy[174][175] - The company has incurred significant losses and negative operating cash flow in the past and may continue to do so, hampering operations and expansion[176][177] - Results are highly dependent on volatile commodity prices (corn, natural gas, ethanol, co-products), which can lead to substantial fluctuations in profitability or losses[178][180][181][182][183] - Increased ethanol production or high inventory levels could cause price declines, negatively impacting results[184] - Disruptions in production or distribution infrastructure (e.g., rail, water, electricity, natural gas) could adversely affect business and financial condition[190][191] - Hedging transactions and other risk mitigation strategies may not always be effective and could lead to financial losses or liquidity issues due to margin calls[192][193] - Operational difficulties at plants, including labor disruptions, unscheduled downtimes, equipment failures, or natural disasters, could negatively impact sales volumes and cause substantial losses[195][196] - Future demand for ethanol is uncertain and could be negatively affected by changes to federal mandates (RFS), public perception, or overall consumer demand for transportation fuel[197][198][199] - The company's plant indebtedness exposes it to risks such as difficulty in debt repayment, limited flexibility, and increased debt service obligations due to variable interest rates[202][203][204][205] - Failure of Kinergy to satisfy financial covenants under its credit facility could result in loss or reduction of the facility, materially affecting financial condition[206][207] - The U.S. ethanol industry is highly dependent on federal and state legislation and regulation (e.g., RFS), and any changes could materially impact results[209][210][211] - The ethanol production and marketing industry is extremely competitive, with many competitors having greater resources, potentially leading to market share decline and reduced profitability[212][213][214] - The ability to utilize net operating loss carryforwards and other tax attributes may be limited due to 'ownership changes' under Section 382 of the Internal Revenue Code[216][217] - The company's business is not diversified, with sales highly concentrated in the ethanol production and marketing industry, making it vulnerable to declines in ethanol demand[218][219] - The company is exposed to environmental, health, and safety laws, regulations, and liabilities, which could require significant expenditures or result in fines and operational disruptions[220][221][223][224] - Inability to attract or retain key personnel could impair effective operations[225][226] - Dependence on a small number of customers for the majority of sales poses a risk of significant decline in sales and profitability if business from these customers is reduced[227][228] - Significant expenses are incurred to maintain and upgrade operating equipment and plants, and interruptions in facility operations can harm performance[229][230] - Lack of long-term ethanol orders and commitments by customers could lead to rapid declines in sales and profitability[232][233] - Limitations on the ability to receive distributions from subsidiaries, due to financing arrangements, restrict the parent company's free cash flow[234] Risks Related to Ownership of our Common Stock - The company's stock price is highly volatile and subject to significant fluctuations due to various factors, including commodity prices, operational results, and strategic initiatives, which could result in substantial losses for investors and potential litigation[235][237][238] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. No unregistered equity sales occurred; the company paid preferred stock dividends but retains common stock earnings for business development - No unregistered sales of equity securities occurred[239] - The company paid $0.3 million in dividends on Series B Cumulative Convertible Preferred Stock for the three months ended March 31, 2019 and 2018[242] - The company has never declared or paid cash dividends on its common stock and does not intend to in the foreseeable future, planning to retain earnings for business development[242] ITEM 3. DEFAULTS UPON SENIOR SECURITIES. This item is not applicable to the company for this reporting period ITEM 4. MINE SAFETY DISCLOSURES. This item is not applicable to the company for this reporting period ITEM 5. OTHER INFORMATION. This item is not applicable to the company for this reporting period ITEM 6. EXHIBITS. This section lists the exhibits filed as part of the Form 10-Q, including various amendments to credit agreements, notes, security agreements, and certifications SIGNATURES SIGNATURES The report is duly signed on behalf of Pacific Ethanol, Inc. by Bryon T. McGregor, Chief Financial Officer, on May 3, 2019 - The report was signed by Bryon T. McGregor, Chief Financial Officer, on May 3, 2019[246]