UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
xx
¨¨
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the
fiscal year ended December 31, 2013
OR
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
PACIFIC ETHANOL, INC.
(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)
Registrant’s telephone number, including area code: (916) 403-2123
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
Common Stock, $0.001 par value
Name of Exchange on Which Registered
The Nasdaq Stock Market LLC
(Nasdaq Capital Market)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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 o
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 o
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or 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. (Check one):
Large accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Accelerated filer o
Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The aggregate market value of the voting common equity held by nonaffiliates of the registrant computed by reference to the closing sale price
of such stock, was approximately $45.3 million as of June 28, 2013, the last business day of the registrant’s most recently completed second
fiscal quarter. The registrant has no non-voting common equity.
The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of March 28, 2014 was 18,014,034.
Part III incorporates by reference certain information from the registrant’s definitive proxy statement (the “Proxy Statement”) for
DOCUMENTS INCORPORATED BY REFERENCE:
the 2014 Annual Meeting of Stockholders to be filed on or before April 30, 2014.
TABLE OF CONTENTS
PART I
Business.
Risk Factors.
Unresolved Staff Comments.
Properties.
Legal Proceedings.
Mine Safety Disclosures.
PART II
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Selected Financial Data.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Quantitative and Qualitative Disclosures About Market Risk.
Financial Statements and Supplementary Data.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Controls and Procedures.
Other Information.
PART III
Directors, Executive Officers and Corporate Governance.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Certain Relationships and Related Transactions, and Director Independence.
Principal Accounting Fees and Services.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Exhibits, Financial Statement Schedules.
Item 15.
Index to Consolidated Financial Statements
Index to Exhibits
Signatures
Exhibits Filed with this Report
PART IV
Page
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F-1
CAUTIONARY STATEMENT
All statements included or incorporated by reference in this Annual Report on Form 10-K, other than statements or
characterizations of historical fact, are forward-looking statements. Examples of forward-looking statements include, but are not limited to,
statements concerning projected net sales, costs and expenses and gross margins; our accounting estimates, assumptions and judgments;
the demand for ethanol and its co-products; the competitive nature of and anticipated growth in our industry; production capacity and goals;
our ability to consummate acquisitions and integrate their operations successfully; and our prospective needs for additional capital. These
forward-looking statements are based on our current expectations, estimates, approximations and projections about our industry and
business, management’s beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can
often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,”
“will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similar expressions and variations or negatives of these words.
These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to
predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a
result of various factors, some of which are listed under “Risk Factors” in Item 1A of this report. These forward-looking statements speak
only as of the date of this report. We undertake no obligation to revise or update publicly any forward-looking statement for any reason,
except as otherwise required by law.
Item 1. Business.
Business Overview
PART I
We are the leading producer and marketer of low-carbon renewable fuels in the Western United States.
We market all the ethanol produced by four ethanol production facilities located in California, Idaho and Oregon, or the Pacific
Ethanol Plants, all the ethanol produced by two other ethanol producers in the Western United States and ethanol purchased from other third-
party suppliers throughout the United States. We also market ethanol co-products, including wet distillers grains, or WDG, and corn oil for the
Pacific Ethanol Plants.
We have extensive customer relationships throughout the Western United States. Our ethanol customers are integrated oil companies
and gasoline marketers who blend ethanol into gasoline. 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, primarily in California, Arizona, Nevada,
Utah, Oregon, Colorado, Idaho and Washington. Our WDG customers are dairies and feedlots located near the Pacific Ethanol Plants. Our
corn oil is sold to poultry and biodiesel customers.
We have extensive supplier relationships throughout the Western and Midwestern United States. In some cases, we have marketing
agreements with suppliers to market all of the output of their facilities.
We hold a 91% ownership interest in New PE Holdco LLC, or New PE Holdco, the owner of each of the plant holding companies,
or the Plant Owners, that collectively own the Pacific Ethanol Plants. We operate and maintain the Pacific Ethanol Plants under the terms of an
asset management agreement with New PE Holdco and the Plant Owners, including supplying all goods and materials necessary to operate
and maintain each Pacific Ethanol Plant. In operating the Pacific Ethanol Plants, we direct the production process to obtain optimal production
yields, lower costs by leveraging our infrastructure, enter into risk management agreements such as insurance policies and manage commodity
risk practices. We also have responsibility for any idled Pacific Ethanol Plant, such as the Madera plant, which has been idled since 2009, and
is now in the process of being restarted.
We market ethanol and its co-products, including WDG and corn oil, produced by the Pacific Ethanol Plants under the terms of
separate marketing agreements with the Plant Owners. The marketing agreements provide us with the absolute discretion to solicit, negotiate,
administer (including payment collection), enforce and execute ethanol and co-product sales agreements with any third party.
The Pacific Ethanol Plants are comprised of the four facilities described immediately below and have an aggregate annual production
capacity of up to 200 million gallons. Three of the facilities are operational and one of the facilities is in the process of restarting production.
As market conditions change, we may increase, decrease or idle production at one or more operational facilities or resume operations at any
idled facility. We are restarting our facility in Madera, California and expect to commence production in the second quarter of 2014.
-1-
Facility Name
Magic Valley
Columbia
Stockton
Madera
Facility Location
Burley, ID
Boardman, OR
Stockton, CA
Madera, CA
Company History
Estimated Annual
Capacity
(gallons)
60,000,000
40,000,000
60,000,000
40,000,000
Current Operating Status
Operating
Operating
Operating
Restarting
We are a Delaware corporation formed in February 2005. Our main Internet address is http://www.pacificethanol.com. Our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and other Securities and
Exchange Commission filings are available free of charge through our website as soon as reasonably practicable after the reports are
electronically filed with, or furnished to, the Securities and Exchange Commission. Our common stock trades on The NASDAQ Capital
Market under the symbol “PEIX.” The inclusion of our Internet address in this report does not include or incorporate by reference into this
report any information contained on our website.
Business Strategy
Our primary goal is to advance our position as the leading marketer and producer of low-carbon renewable fuels in the Western
United States. The key elements of our business and growth strategy to achieve this objective include:
Expand ethanol production and marketing revenues, ethanol markets and distribution infrastructure. We plan to increase our
ethanol production and marketing revenues by restarting production at our Madera, California facility in the second quarter of
2014, expanding our relationships with third-party ethanol producers and our ethanol customers to increase sales volumes of
ethanol throughout the Western United States at profitable margins. In addition, we plan to maintain and increase sales to animal
feed customers in the local markets we serve for WDG and corn oil. We also plan to expand the market for ethanol by continuing
to work with the federal government and state governments to encourage the adoption of policies and standards that promote
ethanol as a component in transportation fuels. In addition, we plan to expand our distribution infrastructure by increasing our
ability to provide transportation, storage and related logistical services to our customers throughout the Western United States.
Focus on cost efficiencies. We operate the Pacific Ethanol Plants in markets where we believe local characteristics create an
opportunity to capture a significant production and shipping cost advantage over competing ethanol production facilities. We
believe a combination of factors will enable us to achieve this cost advantage, including:
o
o
Locations near fuel blending facilities lower our ethanol transportation costs while providing timing and logistical
advantages over competing locations that require ethanol to be shipped over much longer distances, and in many cases,
require double-handling.
Locations adjacent to major rail lines will enable the efficient delivery of corn in large unit trains from major corn-
producing regions.
-2-
o
Locations near large concentrations of dairy and/or beef cattle will enable delivery of WDG over short distances without
the need for costly drying processes.
In addition to these location-related efficiencies, we believe that we can continue to increase operating efficiencies by incorporating
advanced design elements into the Pacific Ethanol Plants to take advantage of state-of-the-art technical and operational efficiencies.
Diversify revenue streams. We engage in corn oil separation at our Magic Valley and Stockton facilities. Corn oil separation
allows us to sell corn oil to poultry and biodiesel customers with little marginal cost, providing an additional co-product revenue
stream from the ethanol production process. We plan to install equipment to enable corn oil separation at our Columbia and
Madera facilities in the next twelve months.
Install new technologies and source new feedstocks. We have installed a number of technologies that we believe will increase the
efficiency of our ethanol production facilities, reduce our use of carbon-based fuels and allow us to produce advanced biofuels.
When available and cost-effective, we are using beet sugar and grain sorghum, also known as milo, in our production process as
an alternative to corn, and will continue to source different and potentially abundant and cost-effective feedstocks, including
cellulosic feedstock, to supplement corn as the raw material used in the production of ethanol.
Evaluate and pursue acquisition opportunities. We intend to evaluate and pursue opportunities to acquire additional ethanol
production, storage and distribution facilities and related infrastructure as financial resources and business prospects make the
acquisition of these facilities advisable. In addition, we may also seek to acquire facility sites under development.
Competitive Strengths
We believe that our competitive strengths include the following:
Our customer and supplier relationships. We have developed extensive business relationships with our customers and
suppliers. In particular, we have developed extensive business relationships with major and independent un-branded gasoline
suppliers who collectively control the majority of all gasoline sales in California and other Western states. In addition, we
have developed extensive business relationships with ethanol and grain suppliers throughout the Western and Midwestern
United States.
Our ethanol distribution network. We believe that we have a competitive advantage due to our experience in marketing to the
segment of customers in major metropolitan and rural markets in the Western United States. We have developed an ethanol
distribution network for delivery of ethanol by truck to virtually every significant fuel terminal as well as to numerous smaller
fuel terminals throughout California and other Western states. Fuel terminals have limited storage capacity and we have been
successful in securing storage tanks at many of the terminals we service. In addition, we have an extensive network of third-
party delivery trucks available to deliver ethanol throughout the Western United States.
Our operational expertise. We began managing ethanol production facilities in 2006. We believe that we have developed
operational expertise and know-how that can be used to continue operating the Pacific Ethanol Plants and provide operational
services to third party facilities.
-3-
Our strategic locations. We believe that our focus on operating ethanol production facilities in markets where local
characteristics create the opportunity to capture a significant production and shipping cost advantage over competing ethanol
production facilities provides us with competitive advantages, including transportation cost, delivery timing and logistical
advantages as well as higher margins associated with the local sale of WDG and other co-products.
Our low carbon-intensity ethanol. The California Air Resources Board has enacted a Low-Carbon Fuel Standard for
transportation fuels. According to the Low-Carbon Fuel Standard, carbon emission levels for ethanol produced in California
are lower than most ethanol plants located in other states. This is primarily because the plants in California, including the
Pacific Ethanol Plants, use less energy in their production process. The ethanol produced in California by the Pacific Ethanol
Plants and certain other California producers, all of which we market, has a lower carbon-intensity rating than either gasoline
or ethanol produced in the mid-west. The lower carbon-intensity rating of ethanol we produce or resell is valued in the market
by our customers and has enabled us to capture premium prices for our ethanol.
Modern technologies. The Pacific Ethanol Plants use the latest production technologies to take advantage of state-of-the-art
technical and operational efficiencies in order to achieve lower operating costs, higher yields and more efficient production of
ethanol and its co-products and reduce our use of carbon-based fuels.
Our experienced management. Neil M. Koehler, our President and Chief Executive Officer, has over 30 years of experience
in the ethanol production, sales and marketing industry. Mr. Koehler is a Director of the Renewable Fuels Association, or
RFA, and is a frequent speaker on the issue of renewable fuels and ethanol marketing, production and policy. In addition to
Mr. Koehler, we have seasoned managers with many years of experience in the ethanol, fuel and energy industries leading
our various departments. We believe that the experience of our management over the past two decades and our ethanol
marketing operations have enabled us to establish valuable relationships in the ethanol industry and understand the business
of marketing and producing ethanol and its co-products.
We believe that these advantages will allow us to capture an increasing share of the total market for ethanol and its co-products.
Industry Overview and Market Opportunity
Overview of Ethanol Market
The primary applications for fuel-grade ethanol in the United States include:
Octane enhancer. On average, regular unleaded gasoline has an octane rating of 87 and premium unleaded gasoline has an
octane rating of 91. In contrast, pure ethanol has an average octane rating of 113. Adding ethanol to gasoline enables refiners
to produce greater quantities of lower octane blend stock with an octane rating of less than 87 before blending. In addition,
ethanol is commonly added to finished regular grade gasoline as a means of producing higher octane mid-grade and premium
gasoline.
Renewable fuels. Ethanol is blended with gasoline in order to enable gasoline refiners to comply with a variety of
governmental programs, in particular, the national Renewable Fuel Standard, or national RFS, which was enacted to promote
alternatives to fossil fuels. See “—Governmental Regulation.”
-4-
Fuel blending. In addition to its performance and environmental benefits, ethanol is used to extend fuel supplies. As the need
for automotive fuel in the United States increases and the dependence on foreign crude oil and refined products grows, the
United States is increasingly seeking domestic sources of fuel. Much of the ethanol blending throughout the United States is
done for the purpose of extending the volume of fuel sold at the gasoline pump.
The United States ethanol industry is supported by federal and state legislation and regulation. For example, the Energy Independence
and Security Act of 2007, which was signed into law in December 2007, significantly increased the prior national RFS. Under the national
RFS, the mandated use of all renewable fuels rises incrementally in succeeding years and peaks at 36.0 billion gallons by 2022. Under the
national RFS, approximately 13.8 billion gallons in 2013 and 14.4 billion gallons in 2014 are required from conventional, or corn-based,
ethanol, which also rises incrementally in succeeding years and peaks at 15.0 billion gallons by 2015. The national RFS allows the
Environmental Protection Agency, or EPA, to adjust the annual requirement based on certain facts. The EPA is reviewing the mandated
amounts for 2014 and has released a draft proposal for a total of 15.2 billion gallons for all renewable fuels, including 13.0 billion gallons for
conventional renewable fuels in 2014. We believe that the national RFS provides long-term support for increasing the demand for ethanol and
other biofuels.
According to the RFA, the domestic ethanol industry produced approximately 13.3 billion gallons of ethanol in 2013. We believe that
the ethanol market in California alone represented approximately 10% of the national market. However, the Western United States has
relatively few ethanol facilities and local ethanol production levels are substantially below the local demand for ethanol. The balance of ethanol
is shipped via rail from the Midwest to the Western United States. Gasoline and diesel fuel that supply the major fuel terminals are shipped in
pipelines throughout portions of the Western United States. Unlike gasoline and diesel fuel, however, ethanol is not shipped in these types of
pipelines because ethanol has an affinity for mixing with water already present in the pipelines. When mixed, water dilutes ethanol and creates
significant quality control issues. Therefore, ethanol must be trucked from rail terminals to regional fuel terminals, or blending racks. Ethanol
prices in the Western United States have typically been $0.20 per gallon higher than in the Midwest due to the freight costs of delivering
ethanol from Midwest production facilities. From October 2013 through March 2014, however, ethanol prices in the Western United States
have averaged $0.40 per gallon higher than ethanol prices in the Midwest due to rail logistics challenges.
We believe that approximately 90% of the ethanol produced in the United States is made in the Midwest from corn. According to the
Department of Energy, or DOE, ethanol is generally blended at 10% by volume, but is also blended at up to 85% by volume for vehicles
designed to operate on 85% ethanol. The EPA has increased the allowable blend of ethanol in gasoline from 10% to 15% for model year 2001
and newer automobiles, pending final approvals by certain state regulatory authorities. Some retailers have begun blending at higher rates in
states that have approved higher blend rates.
Compared to gasoline, ethanol is generally considered to be cleaner burning and contains higher octane. We anticipate that the
increasing demand for renewable transportation fuels coupled with limited opportunities for gasoline refinery expansions and the growing
importance of reducing CO2 emissions through the use of renewable fuels will generate additional growth in the demand for ethanol in the
Western United States.
-5-
According to the DOE, total annual gasoline consumption in the United States is approximately 134 billion gallons and total annual
ethanol consumption represented approximately 10% of this amount in 2013. The domestic ethanol industry has substantially reached the
initial 10% blend ratio, and we believe the industry has significant potential for growth as the industry migrates to an up to 15% blend ratio,
which equals an annual demand of between 13.4 billion and 20.1 billion gallons of ethanol. Furthermore, the national RFS requires an increase
of up to 36.0 billion gallons of ethanol annually by 2022, subject to an annual EPA review to adjust targets based on availability of
commercially produced advanced and cellulose biofuels.
Overview of Ethanol Production Process
The production of ethanol from starch- or sugar-based feedstock has been refined considerably in recent years, leading to a highly-
efficient process that we believe now yields substantially more energy from ethanol and its co-products than is required to make the products.
The modern production of ethanol requires large amounts of corn, or other high-starch grains, and water as well as chemicals, enzymes and
yeast, and denaturants including unleaded gasoline or liquid natural gas, in addition to natural gas and electricity.
In the dry milling process, corn or other high-starch grains are first ground into meal and then slurried with water to form a mash.
Enzymes are then added to the mash to convert the starch into the simple sugar, dextrose. Ammonia is also added for acidic (pH) control and
as a nutrient for the yeast. The mash is processed through a high temperature cooking procedure, which reduces bacteria levels prior to
fermentation. The mash is then cooled and transferred to fermenters, where yeast is added and the conversion of sugar to ethanol and CO2
begins.
After fermentation, the resulting “beer” is transferred to distillation, where the ethanol is separated from the residual “stillage.” The
ethanol is concentrated to 190 proof using conventional distillation methods and then is dehydrated to approximately 200 proof, representing
100% alcohol levels, in a molecular sieve system. The resulting anhydrous ethanol is then blended with about 2.5% denaturant, which is
usually gasoline, and is then ready for shipment to market.
The residual stillage is separated into a coarse grain portion and a liquid portion through a centrifugation process. The soluble liquid
portion is concentrated to about 40% dissolved solids by an evaporation process. This intermediate state is called condensed distillers solubles,
or syrup. The coarse grain and syrup portions are then mixed to produce WDG or can be mixed and dried to produce dried distillers grains
with solubles, or DDGS. Both WDG and DDGS are high-protein animal feed products.
Overview of Distillers Grains Market
Most distillers grains are produced in the Midwest, where producers dry the grains before shipping in order to lower their shipping
costs and extend the life of the product. Successful and profitable delivery of DDGS from the Midwest to markets in the Western United
States faces a number of challenges, including drying of distiller grains which may increase the energy cost to dry the grains and reduce the
quality of the feed product, and longer distance to market, which may increase the handling and transportation costs to deliver the grains to
market. By not drying the distillers grains and by shipping WDG locally, we believe that we will be able to better preserve the feed value of
this product, as the WDG retains a higher percentage of nutrients than DDGS.
Historically, the market price for distillers grains has generally tracked the value of corn. We believe that the market price of DDGS is
determined by a number of factors, including the market value of corn, soybean meal and other competitive ingredients, the performance or
value of DDGS in a particular feed formulation and general market forces of supply and demand. The market price of distillers grains is also
often influenced by nutritional models that calculate the feed value of distillers grains by nutritional content, as well as reliability of consistent
supply.
-6-
Customers
We sell ethanol produced by the Pacific Ethanol Plants and other third-parties to various customers in the Western United States. We
also arrange for transportation, storage and delivery of ethanol purchased by our customers through our agreements with third-party service
providers. In addition, we sell WDG and corn oil produced by the Pacific Ethanol Plants to customers comprised of dairies and feedlots
located near the Pacific Ethanol Plants.
During 2013 and 2012, we produced or purchased ethanol from third parties and resold an aggregate of approximately 302 million
and 285 million gallons of fuel-grade ethanol to approximately 37 and 52 customers, respectively. Sales to our three largest customers,
Chevron Products USA, Valero Energy Corporation and Sinclair Oil Corporation in 2013 and 2012 represented an aggregate of
approximately 52% and 49%, of our net sales, respectively. Sales to each of our other customers represented less than 10% of our net sales in
each of 2013 and 2012.
Most of the largest metropolitan areas in the Western United States have fuel terminals served by rail, but other major metropolitan
areas and more remote smaller cities and rural areas do not. We believe that we have a competitive advantage due to our experience in
marketing to the segment of customers in major metropolitan and rural markets in the Western United States. We manage the complicated
logistics of shipping ethanol purchased from third-parties from the Midwest by rail to intermediate storage locations throughout the Western
United States and trucking the ethanol from these storage locations to blending racks where the ethanol is blended with gasoline. We believe
that by establishing an efficient service for truck deliveries to these more remote locations, we have differentiated ourselves from our
competitors. In addition, by producing ethanol in the Western United States, we believe that we will benefit from our ability to increase spot
sales of ethanol from this additional supply following ethanol price spikes caused from time to time by rail delays in delivering ethanol from
the Midwest to the Western United States. In addition to producing ethanol, we produce ethanol co-products, including WDG. We endeavor to
position WDG as the protein feed of choice for cattle based on its nutritional composition, consistency of quality and delivery, ease of
handling and its mixing ability with other feed ingredients. We are one of the few WDG producers with production facilities located in the
Western United States and we primarily sell our WDG to dairy farmers in close proximity to the Pacific Ethanol Plants.
Suppliers
Our marketing operations are dependent upon various third-party producers of fuel-grade ethanol. In addition, we provide ethanol
transportation, storage and delivery services through third-party service providers with whom we have contracted to receive ethanol at agreed
upon locations from our suppliers and to store and/or deliver the ethanol to agreed-upon locations on behalf of our customers. These contracts
generally run from year-to-year, subject to termination by either party upon advance written notice before the end of the then current annual
term.
During 2013 and 2012, we purchased fuel-grade ethanol and corn, the largest component in producing ethanol, from our suppliers.
Purchases from our two largest suppliers represented an aggregate of approximately 51% and 54% of our total ethanol and corn purchases for
2013 and 2012, respectively. Purchases from each of our other suppliers represented less than 10% of total ethanol and corn purchases in each
of 2013 and 2012.
The ethanol production operations of the Pacific Ethanol Plants are dependent upon various raw materials suppliers, including
suppliers of corn, natural gas, electricity and water. The cost of corn is the most important variable cost associated with the production of
ethanol. An ethanol facility must be able to efficiently ship corn from the Midwest via rail and cheaply and reliably truck ethanol to local
markets. We believe that our existing grain receiving facilities at the Pacific Ethanol Plants are some of the most efficient grain receiving
facilities in the United States. We source corn for the Pacific Ethanol Plants using standard contracts, including spot purchase, forward
purchase and basis contracts. When resources are available to do so, we seek to limit the exposure of the Pacific Ethanol Plants to raw material
price fluctuations by purchasing forward a portion of their corn requirements on a fixed price basis and by purchasing corn and other raw
materials futures contracts.
-7-
Pacific Ethanol Plants
The table below provides an overview of the Pacific Ethanol Plants owned by New PE Holdco and operated by us. Three of the
Pacific Ethanol Plants are operational and one of the facilities is in the process of restarting production. As market conditions change, we may
increase, decrease or idle production at one or more operational facilities or resume operations at any idled facility. We are restarting our
Madera facility and expect to commence production in the second quarter of 2014.
Location
Quarter/Year operations began
Operating status
Approximate maximum annual ethanol production
capacity (in millions of gallons)
Ownership by New PE Holdco
Primary energy source
Estimated annual WDG production capacity (in
thousands of tons)
Commodity Risk Management
Madera
Facility
Madera, CA
4th Qtr., 2006
Restarting
40
100%
Natural Gas
Columbia
Facility
Boardman, OR
3rd Qtr., 2007
Operating
40
100%
Natural Gas
Magic Valley
Facility
Burley, ID
2nd Qtr., 2008
Operating
60
100%
Natural Gas
Stockton
Facility
Stockton, CA
3rd Qtr., 2008
Operating
60
100%
Natural Gas
293
293
418
418
We employ various risk mitigation techniques. For example, we may seek to mitigate our exposure to commodity price fluctuations
by purchasing forward a portion of our corn and natural gas requirements through fixed-price or variable-price contracts with our suppliers, as
well as entering into derivative contracts for ethanol, corn and natural gas. To mitigate ethanol inventory price risks, we may sell a portion of
our production forward under fixed- or index-price contracts, or both. We may hedge a portion of the price risks by selling exchange-traded
futures contracts. Proper execution of these risk mitigation strategies can reduce the volatility of our gross profit margins. However, given the
nature of our business, we cannot effectively hedge against extreme volatility or certain market conditions. For example, ethanol prices, as
reported by the Chicago Board of Trade, or CBOT, ranged from $1.61 to $2.74 per gallon during 2013 and corn prices, as reported by the
CBOT, ranged from $4.12 to $7.41 per bushel during 2013.
Marketing Arrangements
In addition to our marketing agreements with the Plant Owners to market all of the ethanol produced at those Pacific Ethanol Plants,
we have exclusive ethanol marketing agreements with third-party ethanol producers, including Calgren Renewable Fuels, LLC and AE
Advanced Fuels Keyes, Inc. to market and sell their entire ethanol production volumes. Calgren Renewable Fuels, LLC owns and operates an
ethanol production facility in Pixley, California with annual production capacity of 55 million gallons. AE Advanced Fuels Keyes, Inc. owns
and operates an ethanol production facility in Keyes, California with annual production capacity of 55 million gallons. We intend to evaluate
and pursue opportunities to enter into marketing arrangements with other ethanol producers as business prospects make these marketing
arrangements advisable.
-8-
Competition
We operate in the highly competitive ethanol marketing and production industry. The largest ethanol producers in the United States
are Archer Daniels Midland Company and Valero Energy Corporation, collectively with over 20% of the total installed capacity of ethanol in
the United States. In addition, there are many mid-size producers with several plants under ownership, smaller producers with one or two
plants, and several ethanol marketers that create significant competition. Overall, we believe there are over 200 ethanol facilities in the United
States with an installed operating capacity of approximately 14.9 billion gallons and many brokers and marketers with whom we compete for
sales of ethanol and its co-products.
We believe that our competitive strengths include our strategic locations in the Western United States, our extensive ethanol
distribution network, our extensive customer and supplier relationships, our use of modern technologies at our production facilities and our
experienced management. We believe that these advantages will allow us to capture an increasing share of the total market for ethanol and its
co-products and earn favorable margins on ethanol and its co-products that we produce.
Our strategic focus on particular geographic locations designed to capitalize on cost efficiencies may nevertheless result in higher than
expected costs as a result of more expensive raw materials and related shipping costs, including corn, which generally must be transported
from the Midwest. If the costs of producing and shipping ethanol and its co-products over short distances are not advantageous relative to the
costs of obtaining raw materials from the Midwest, then the planned benefits of our strategic locations may not be realized.
Governmental Regulation
Our business is subject to federal, state and local laws and regulations relating to the production of renewable fuels, the protection of
the environment and in support of the corn and ethanol industries. These laws, their underlying regulatory requirements and their enforcement,
some of which are described below, impact, or may impact, our existing and proposed business operations by imposing:
restrictions on our existing and proposed business operations and/or the need to install enhanced or additional controls;
the need to obtain and comply with permits and authorizations;
liability for exceeding applicable permit limits or legal requirements, in some cases for the remediation of contaminated soil
and groundwater at our facilities, contiguous and adjacent properties and other properties owned and/or operated by third
parties; and
specifications for the ethanol we market and produce.
In addition, some governmental regulations are helpful to our ethanol marketing and production business. The ethanol fuel industry is
greatly dependent upon mandates and environmental regulations that favor the use of ethanol in motor fuel blends in North America. Some of
the governmental regulations applicable to our ethanol marketing and production business are briefly described below.
National Energy Legislation
The Energy Independence and Security Act of 2007, which was signed into law in December 2007, significantly increased the prior
national RFS. The national RFS significantly increases the mandated use of renewable fuels, rising incrementally each year, to 36.0 billion
gallons by 2022.
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Under the provisions of the Energy Independence and Security Act of 2007, the EPA has the authority to waive the mandated
national RFS requirements in whole or in part. To grant the waiver, the EPA administrator must determine, in consultation with the Secretaries
of Agriculture and Energy, that there is inadequate domestic renewable fuel supply or implementation of the requirement 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 2014 national RFS. The proposal discusses a
variety of approaches for setting the 2014 standards, and includes a number of production and consumption ranges for key categories of
biofuel covered by the national RFS. The proposal seeks comment on a range of total renewable fuel volumes for 2014 and proposes a level
within that range of 15.2 billion gallons, including approximately 13.0 billion gallons of corn-derived renewable fuel.
Legislation aimed at reducing or eliminating the renewable fuel use required by the national RFS has been introduced in Congress.
On April 10, 2013 the Renewable Fuel Standard Elimination Act was introduced as H.R. 1461. The bill is targeted to repeal the national RFS.
Also introduced on April 10, 2013 was the RFS Reform Bill, H.R. 1462, which would prohibit more than ten percent ethanol in gasoline and
reduce the national RFS mandated volume of renewable fuel. On May 14, 2013, the Domestic Alternatives Fuels Act of 2013 was introduced
in the U.S. House of Representatives as H.R. 1959 to allow ethanol produced from natural gas to be used to meet the national RFS mandate.
These bills were assigned to a congressional committee, which will consider them before possibly sending any on to the House or Senate as a
whole.
E15 (a Blend of Gasoline and Ethanol)
The EPA has allowed fuel and fuel additive manufacturers to introduce into commercial gasoline that contains greater than 10 volume
percent of ethanol, up to 15 volume percent of ethanol, or E15, for vehicles from model year 2001 and beyond. Additional changes to some
states’ laws to allow for the use of E15 are still required, however, commercial sale of E15 has begun in some states.
State Energy Legislation and Regulations
In January 2007, California’s Governor signed an executive order directing the California Air Resources Board to implement
California’s Low-Carbon Fuel Standard for transportation fuels. The Governor’s office estimates that the standard will have the effect of
increasing current renewable fuels use in California by three to five times by 2020.
The State of California established a policy in 2010 to support ethanol produced in California with the California Ethanol Producer
Incentive Program, or CEPIP, a producer incentive which offered up to $0.25 per gallon when ethanol production profitability was less than
prescribed levels determined by the California Energy Commission, or CEC. Our Stockton facility participated in the program in 2010 and
2011 and received $2.0 million under the program. Although the program is no longer funded or available for future incentives, we have an
obligation to repay the $2.0 million received from the program, if margins exceed prescribed levels.
Additional Environmental Regulations
In addition to the governmental regulations applicable to the ethanol marketing and production industries described above, our
business is subject to additional federal, state and local environmental regulations, including regulations established by the EPA, the San
Joaquin Valley Regional Water Quality Control Board, the San Joaquin Valley Air Pollution Control District and the California Air Resources
Board. We cannot predict the manner or extent to which these regulations will harm or help our business or the ethanol production and
marketing industry in general.
Employees
As of March 28, 2014, we had approximately 160 full-time employees. We believe that our employees are highly-skilled, and our
success will depend in part upon our ability to retain our employees and attract new qualified employees, many of whom are in great demand.
We have never had a work stoppage or strike, and no employees are presently represented by a labor union or covered by a collective
bargaining agreement. We consider our relations with our employees to be good.
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Item 1A. Risk Factors.
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 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 negative $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, WDG 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, WDG 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, WDG 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, WDG 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.
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No assurance can be given that corn or natural gas can be purchased at, or near, current or any particular prices or that ethanol, WDG
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, WDG 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, WDG and
other ethanol co-products could decline below the marginal cost of production, which may force us to suspend production of ethanol, WDG
and ethanol co-products at some or all of the Pacific Ethanol 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. Domestic ethanol production capacity has increased steadily from an annualized rate of 1.5 billion gallons per year in January
1999 to 14.9 billion gallons in 2013 according to the RFA. See “Business—Governmental Regulation.” In addition, due to significantly
improved ethanol production margins, we anticipate that owners of idle ethanol production facilities, many of which were idled due to poor
production margins, will restart operations, thereby resulting 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. 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, the ethanol prices, as reported by the CBOT, ranged from $1.61 to $2.74 per gallon during 2013 and corn
prices, as reported by the CBOT, ranged from $4.12 to $7.41 per bushel during 2013. 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.
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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 the Pacific Ethanol Plants and other considerations related to production efficiencies, the Pacific Ethanol 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 the Pacific Ethanol Plants will 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 the Pacific Ethanol
Plants to halt production which could have a material adverse effect on our business, results of operations and financial condition.
We may be unable to timely restart production at our Madera, California plant.
We plan to restart production in the second quarter of 2014 at our 40 million gallon per year facility in Madera, California. Restarting
production at our Madera facility will require, among other things, permit renewals, significant capital and successful testing and start-up
activities. We may be unable to timely renew or obtain the necessary permits or conduct successful testing and start-up activities to restart our
Madera facility as planned, which may adversely impact our results of operations, cash flows and financial condition.
We and the Pacific Ethanol Plants 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, the Pacific Ethanol Plants may
enter into contracts to fix the price of a portion of their ethanol production or purchase a portion of their 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 the Pacific Ethanol Plants could negatively impact sales volumes and could cause us to incur substantial
losses.
Operations at the Pacific Ethanol 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. Insurance obtained by the Pacific Ethanol Plants may not be adequate to fully cover the potential operational hazards
described above or the Pacific Ethanol Plants may not be able to renew this insurance on commercially reasonable terms or at all.
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Moreover, the production facilities at the Pacific Ethanol 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.
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 domestic market for ethanol is significantly impacted by federal mandates for blending ethanol with gasoline. The national RFS
mandated level for conventional biofuels for 2013 of 13.8 billion gallons approximated current domestic production levels. Future demand will
be largely dependent upon the economic incentives to blend based upon the relative value of gasoline versus ethanol, taking into consideration
the relative octane value of ethanol, environmental requirements and the national RFS mandate. Any significant increase in production capacity
beyond the national RFS mandated level 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 Congress.
On April 10, 2013 the Renewable Fuel Standard Elimination Act was introduced as H.R. 1461. The bill is targeted to repeal the national RFS.
Also introduced on April 10, 2013 was the RFS Reform Bill, H.R. 1462, which would prohibit more than ten percent ethanol in gasoline and
reduce the national RFS mandated volume of renewable fuel. On May 14, 2013, the Domestic Alternatives Fuels Act of 2013 was introduced
in the U.S. House of Representatives as H.R. 1959 to allow ethanol produced from natural gas to be used to meet the national RFS mandate.
These bills were assigned to a congressional committee, which will consider them before possibly sending any on to the House or Senate as a
whole. We believe the national RFS is a significant component of national energy policy that reduces United States dependence on foreign oil
and reduces tailpipe emissions. Our operations could be adversely impacted if the RFS Reform Bill of 2013, the RFS Elimination Bill of 2013,
or other legislation reducing the national RFS mandate is enacted.
Under the provisions of the Energy Independence and Security Act of 2007, the EPA has limited authority to waive the mandated
national RFS requirements in whole or in part. To grant the waiver, the EPA administrator must determine, in consultation with the Secretaries
of Agriculture and Energy, that there is inadequate domestic renewable fuel supply or implementation of the requirement 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 2014 Renewable Fuel Standard. The EPA
proposes setting the 2014 Renewable Volume Obligations, or RVO, for key categories of biofuel covered by the national RFS. The proposal
seeks comment on a range of total renewable fuel volumes for 2014, which includes a proposed total RVO of 15.2 billion gallons for total
renewable fuel blended into transportation fuels of which corn ethanol would be approximately 13.0 billion gallons, down from the original
legislative target of 14.1 billion gallons and 0.8 billion gallons less than what was required in 2013. Our operations could be adversely
impacted if the EPA accepts the proposed RVOs.
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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 prices to increase 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 been declining 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.
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 the cost structures of the Pacific Ethanol Plants. Any increase in
domestic or foreign competition could cause the Pacific Ethanol Plants to reduce their prices and take other steps to compete effectively, which
could adversely affect their and our results of operations and financial condition.
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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.
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 covenants regarding its earnings before interest, taxes, depreciation and amortization (EBITDA)
and fixed-charge coverage ratios. 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 high concentration of our sales within the ethanol marketing and production 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 marketing and production of ethanol and its co-products for the foreseeable future. We
may be unable to shift our business focus away from the marketing and production 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.
In addition to ethanol produced by the Pacific Ethanol Plants, we also depend on a small number of third-party suppliers for a
significant portion of the ethanol we sell. If any of these suppliers 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.
In addition to the ethanol produced by the Pacific Ethanol Plants, we also depend, and expect to continue to depend for the
foreseeable future, on a small number of third-party suppliers for a significant portion of the total amount of ethanol that we sell. Our third-
party suppliers are primarily located in the Midwestern United States. The delivery of ethanol from these suppliers is therefore subject to
delays resulting from inclement weather and other conditions. If any of these suppliers 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 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.
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We may be liable for the investigation and cleanup of environmental contamination at each of the Pacific Ethanol Plants and at off-site
locations where we arrange for the disposal of hazardous substances. If these substances 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 the Pacific Ethanol 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 and retain key personnel, our ability to operate effectively may be impaired.
Our ability to operate our business and implement strategies depends, in part, on the efforts of our executive officers and other key
employees. 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. Failure to attract or retain key personnel could have a material adverse effect
on our business 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 2013 and 2012, three customers accounted for an
aggregate of approximately 52% and 49% of our net sales, respectively. 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.
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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.
Our debt levels could negatively impact our business prospects, results of operations, cash flows and financial condition.
As of March 28, 2014, our consolidated debt was $72.7 million, including $47.7 million in consolidated term and revolving debt of
the Plant Owners. Our debt levels could result in significant adverse consequences. For example, we are required to dedicate a substantial
portion of our cash flow from operations to make payments on our debt, thereby reducing the availability of cash flow for working capital,
capital expenditures and other business activities. In addition, our ability to obtain additional financing for working capital, capital
expenditures, acquisitions and other business activities may be limited. Our debt levels may also increase our vulnerability to both general and
industry-specific adverse economic conditions and leave us at a competitive disadvantage against less leveraged competitors.
The Plant Owners’ debt is secured by all of the Plant Owners’ assets, including the Pacific Ethanol Plants. If the Plant Owners are
unable to meet the repayment or other terms of their indebtedness, they will be in default of their obligations to their lenders. Upon the
occurrence of a default, the lenders could foreclose on the Plant Owners’ assets, including the Pacific Ethanol Plants, which would materially
and adversely impact our results of operations, cash flows and financial condition, and could result in no significant assets left for our
stockholders in the event of a liquidation.
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
The conversion or exercise of our outstanding derivative securities or the issuance of shares of our common stock in payment of
interest on outstanding promissory notes or in lieu of accrued and unpaid dividends on our Series B Preferred Stock 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.
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Our Series B Preferred Stock, which is convertible into our common stock, and 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. In addition, we may elect to issue shares of our common stock in
payment of interest on our outstanding promissory notes or in lieu of accrued and unpaid cash dividends on our Series B Preferred Stock. We
have issued common stock in respect of our derivative securities, promissory notes and accrued and unpaid dividends on our Series B
Preferred Stock in the past and expect to do so in the future. If the prices at which our derivative securities are converted or exercised, or at
which shares of common stock in payment of interest on our promissory notes or in lieu of accrued and unpaid dividends on our Series B
Preferred Stock are issued, 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.
We expect to incur significant non-cash expenses in the first quarter of 2014, and may incur additional 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 the first quarter of 2014, we expect to incur
significant non-cash expenses due to adjustments to the fair values of our outstanding warrants to purchase our common stock resulting from
the substantial increase in the market price of our common stock during the period. These non-cash expenses will be significantly higher in the
first quarter of 2014 than in prior quarterly periods. 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.
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, including WDG and corn oil;
the cost of key inputs to the production of ethanol, including corn and natural gas;
our ability to timely restart ethanol production at our Madera, California facility;
the volume and timing of the receipt of orders for ethanol from major customers;
competitive pricing pressures;
our ability to produce, sell and deliver ethanol on a cost-effective and timely basis;
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;
regulatory developments or increased enforcement;
fluctuations in our quarterly or annual operating results;
additions or departures of key personnel;
our inability to obtain 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, including the asset management agreement with the Plant
Owners that provides us with the ability to operate the Pacific Ethanol Plants and the marketing agreements with the Plant
Owners that provide us with the ability to market all ethanol and co-products produced by the Pacific Ethanol Plants.
-19-
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 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.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate headquarters, located in Sacramento, California, consists of a 10,000 square foot office under a lease expiring in 2018.
The Pacific Ethanol Plants are located in Madera, California, at a 137 acre facility; Boardman, Oregon, at a 25 acre facility; Burley, Idaho, at a
160 acre facility; and Stockton, California, at a 30 acre facility. The land in Madera, California and Burley, Idaho is owned by the Plant
Owners. The land in Boardman, Oregon and Stockton, California are leased by the Plant Owners under leases expiring in 2026 and 2022,
respectively. See “Business—Production Facilities.”
Item 3. Legal Proceedings.
We are subject to legal proceedings, claims and litigation arising in the ordinary course of business. While the amounts claimed may
be substantial, the ultimate liability cannot presently be determined because of considerable uncertainties that exist. Therefore, it is possible that
the outcome of those legal proceedings, claims and litigation could adversely affect our quarterly or annual operating results or cash flows
when resolved in a future period. However, based on facts currently available, management believes such matters will not adversely affect in
any material respect our financial position, results of operations or cash flows.
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 alleges 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 we have an interest,
including Pacific Ethanol Stockton LLC (“PE Stockton”), located in Stockton, California. The complaint seeks preliminary and permanent
injunctions against us, 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 attorney’s fees. We have since answered the complaint and counterclaimed that the patent claims at issue, as well
as the claims in several related patents, are invalid and unenforceable and that we are not infringing. Pacific Ethanol, Inc. does not itself use
any corn oil separation technology and may seek a dismissal on those grounds.
-20-
On March 17 and March 18, 2014, GS CleanTech filed suit naming as defendants two of our subsidiaries: PE Stockton and Pacific
Ethanol Magic Valley, LLC (“PE Magic Valley”). The claims are similar to those filed against Pacific Ethanol, Inc. in May 2013. These two
cases, currently pending in the United States District Court for the Eastern District of California and United States District Court for the
Eastern District of Idaho, respectively, will be 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. is pending, in accordance with a Conditional Transfer Order issued
by the Judicial Panel on Multidistrict Litigation on March 27, 2014. 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. Pacific Ethanol, Inc., together with PE Stockton and PE Magic Valley, expect to mount
vigorous defenses that include noninfringement, unenforceability, and invalidity of each of the patents at issue.
Item 4. Mine Safety Disclosures.
Not applicable.
-21-
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common trades on The NASDAQ Capital Market under the symbol “PEIX”. On May 14, 2013, we effected a one-for-fifteen
reverse split of our common stock. The table below shows, for each fiscal quarter indicated, the high and low sales prices of shares of our
common stock. The prices for periods prior May 14, 2013 have been retroactively restated as if the reverse split had occurred on January 1,
2012. The prices shown reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent
actual transactions.
Year Ended December 31, 2013:
First Quarter (January 1 – March 31)
Second Quarter (April 1 – June 30)
Third Quarter (July 1 – September 30)
Fourth Quarter (October 1 – December 31)
Year Ended December 31, 2012:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Security Holders
Price Range
High
Low
$
$
$
$
7.05 $
5.69 $
4.98 $
5.52 $
4.50
3.42
3.45
2.33
$
$
$
$
25.35 $
16.95 $
10.50 $
6.45 $
15.00
4.65
4.05
4.50
As of March 28, 2014, we had 18,014,034 shares of common stock outstanding held of record by approximately 375 stockholders.
These holders of record include depositories that hold shares of stock for brokerage firms which, in turn, hold shares of stock for numerous
beneficial owners. On March 28, 2014, the closing sales price of our common stock on The NASDAQ Capital Market was $15.81 per share.
Dividend Policy
We have never paid cash dividends on our common stock and do not intend to pay cash dividends on our common stock in the
foreseeable future. We anticipate that we will retain any earnings for use in the continued development of our business.
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. Further, the holders of our outstanding Series B Preferred Stock are entitled to dividends of 7% per
annum, payable quarterly in arrears. In 2012 and 2013, we declared and paid in cash dividends on our outstanding shares of Series B
Preferred Stock as they became due. As of March 28, 2014, we had accrued unpaid dividends in respect of our Series B Preferred Stock
aggregating approximately $3.7 million. The holders of our outstanding Series B Preferred Stock have agreed to forbear until March 31, 2015
from exercising any and all of their rights and remedies, if any, against us with respect to such unpaid dividends, provided we remain current
in the payment of future dividends. Accrued and unpaid dividends in respect of our Series B Preferred Stock must be paid prior to the
payment of any dividends in respect of shares of our common stock.
-22-
Recent Sales of Unregistered Securities
Not applicable.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We granted to certain employees and directors shares of restricted stock under our 2006 Stock Incentive Plan pursuant to Restricted
Stock Agreements dated and effective as of their respective grant dates by and between us and those employees and directors.
We were obligated to withhold minimum withholding tax amounts with respect to vested shares of restricted stock and upon future
vesting of shares of restricted stock granted to our employees. Each employee was entitled to pay the minimum withholding tax amounts to us
in cash or to elect to have us withhold a vested amount of shares of restricted stock having a value equivalent to our minimum withholding tax
requirements, thereby reducing the number of shares of vested restricted stock that the employee ultimately receives. If an employee failed to
timely make such election, we automatically withheld the necessary shares of vested restricted stock.
In 2013, in connection with satisfying our withholding requirements, we withheld the following number of shares of our common
stock and remitted cash payments to cover the minimum withholding tax amounts, thereby effectively repurchasing from the employees such
number of shares of our common stock at the following deemed purchase prices:
Month
April
October
Total
Item 6. Selected Financial Data.
Not applicable.
Number of
Shares
Withheld
Deemed
Purchase
Price Per Share
Aggregate
Purchase Price
68,364
468
68,832
4.65 $
3.97 $
$
14,702 $
118 $
14,820
-23-
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our
consolidated financial statements and notes to consolidated financial statements included elsewhere in this report. This discussion contains
forward-looking statements, reflecting our plans and objectives that involve risks and uncertainties. Actual results and the timing of events
may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the
section entitled “Risk Factors” and elsewhere in this report.
Overview
We are the leading producer and marketer of low-carbon renewable fuels in the Western United States.
We market all the ethanol produced by the Pacific Ethanol Plants, all the ethanol produced by two other ethanol producers in the
Western United States and ethanol purchased from other third-party suppliers throughout the United States. We also market ethanol co-
products for the Pacific Ethanol Plants, including WDG and corn oil.
We have extensive customer relationships throughout the Western United States. Our ethanol customers are integrated oil companies
and gasoline marketers who blend ethanol into gasoline. 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, primarily in California, Arizona, Nevada,
Utah, Oregon, Colorado, Idaho and Washington. Our WDG customers are dairies and feedlots located near the Pacific Ethanol Plants. Our
corn oil is sold to poultry and biodiesel customers.
We have extensive supplier relationships throughout the Western and Midwestern United States. In some cases, we have marketing
agreements with suppliers to market all of the output of their facilities.
We hold a 91% ownership interest in New PE Holdco which indirectly owns the Pacific Ethanol Plants through its ownership of the
Plant Owners. We operate and maintain the Pacific Ethanol Plants under the terms of an asset management agreement with New PE Holdco
and the Plant Owners. We also market ethanol and its co-products, including WDG and corn oil, produced by the Pacific Ethanol Plants under
the terms of separate marketing agreements with the Plant Owners.
The Pacific Ethanol Plants are comprised of the four facilities described immediately below and have an aggregate annual production
capacity of up to 200 million gallons. Three of the facilities are operational and one of the facilities is in the process of restarting production.
We expect to commence production at our Madera, California facility in the second quarter of 2014.
Facility Name
Magic Valley
Columbia
Stockton
Madera
Facility Location
Burley, ID
Boardman, OR
Stockton, CA
Madera, CA
Estimated Annual
Capacity
(gallons)
60,000,000
40,000,000
60,000,000
40,000,000
Current Operating Status
Operating
Operating
Operating
Restarting
-24-
We earn fees as follows under our asset management and other agreements with New PE Holdco and the Plant Owners:
ethanol marketing fees of approximately 1% of the net sales price, but not less than $0.015 per gallon and not more than
$0.0225 per gallon;
corn procurement and handling fees of $0.045 per bushel;
WDG, syrup and corn oil fees of 5% of the third-party purchase price, excluding freight, but not less than $2.00 per ton and
not more than $3.50 per ton; and
asset management fees of $75,000 per month for each operating facility and $40,000 per month for each idled facility.
We intend to advance our position as the leading marketer and producer of low-carbon renewable fuels in the Western United States,
in part by restarting production at our Madera, California facility in the second quarter of 2014, expanding our relationships with customers
and third-party ethanol producers to market higher volumes of ethanol and by expanding the market for ethanol by continuing to work with
state governments to encourage the adoption of policies and standards that promote ethanol as a fuel additive and transportation fuel. Further,
we may seek to provide management services for other third-party ethanol production facilities in the Western United States.
Current Initiatives and Outlook
Our ownership interest in the Pacific Ethanol Plants is now at 91%. At current production margins, the Pacific Ethanol Plants are
operating profitably and contributing positively to our overall financial position. We expect a balanced supply and demand for ethanol over the
coming months and ethanol blend rates at least at current levels through the balance of 2014.
Ethanol prices in the Western United States have typically been $0.20 per gallon higher than in the Midwest due to the freight costs
of delivering ethanol from Midwest production facilities. From October 2013 through March 2014, however, ethanol prices in the Western
United States have averaged $0.40 per gallon higher than ethanol prices in the Midwest due to rail logistics challenges.
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. 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 will be significantly higher in the first
quarter of 2014 than in prior quarterly periods which will result in an unusually large non-cash expense for the quarter.
We began producing and selling corn oil at our Magic Valley and Stockton facilities in June 2013 and October 2013, respectively,
allowing us to diversify our revenue and providing immediate incremental gross profit. We are currently producing corn oil in meaningful
amounts at both facilities and we are evaluating whether and when to implement corn oil production technology at the remaining two Pacific
Ethanol Plants.
We continue to focus on increasing operating efficiencies and improving yields at the Pacific Ethanol Plants. To this end, we
installed yield-enhancing CellunatorsTM technology at our Stockton facility, allowing us to increase yields by increasing available starch for
conversion. This technology also may allow us to produce cellulosic corn ethanol.
-25-
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. We continue to reduce energy
use at the Pacific Ethanol Plants to lower the carbon intensity of our ethanol. We believe that we have a significant advantage in the
marketplace because we produce among the lowest-carbon ethanol commercially produced in the United States which enables us to capture a
premium for ethanol we produce.
We also continue to diversify our feedstock by using a blend of corn, sorghum and beet sugar, which reduces feedstock costs and
reduces the carbon output of ethanol we produce. The United States Department of Agriculture anticipates a record 2013-2014 corn crop, but
we are uncertain how the new crop will affect our ethanol production and intend to operate the Pacific Ethanol Plants with flexibility in
anticipation of the new crop.
Our strategic goals for 2014 include restarting our Madera, California production facility; further improving operating efficiencies at
the Pacific Ethanol Plants; continuing to diversify our revenue and feedstock; and continuing to increase the value of our produced ethanol by
further reducing its carbon intensity, all of which are directed at supporting sustained profitable growth.
Financial Performance Summary
Consolidation
We consolidate New PE Holdco’s financial results due to the nature of our ownership in and control over New PE Holdco.
However, since we do not wholly-own New PE Holdco, we must adjust our consolidated net income (loss) for the income (loss) attributed to
New PE Holdco’s other owners. This adjustment results in net income (loss) attributed to Pacific Ethanol, Inc. See “—Results of Operations-
Accounting for the Results of New PE Holdco” below.
Summary
Our consolidated net sales increased by 11%, or $92.4 million, to $908.4 million for 2013 from $816.0 million for 2012. Our net
loss attributed to Pacific Ethanol, Inc. decreased by $18.3 million to a net loss of $0.8 million for 2013 from a net loss of $19.1 million for
2012.
Factors that contributed to our results of operations for 2013 include:
Net sales. The increase in our net sales for 2013 as compared to 2012 was primarily due to the following combination of factors:
o Higher production sales volumes. Although our total volume of ethanol sold decreased by 6% to 413.9 million gallons
for 2013 from 440.8 million gallons for 2012, our total production sales volume increased by 6% to 149.7 million
gallons for 2013 from 140.6 million for 2012. Our net sales for the period increased due to the increase in production
gallons sold, all of which are recorded at gross sales prices, whereas our third party gallons sold, which are recorded at
gross or net sales prices, depending on the circumstances, declined. We increased production sales volume due to higher
industry-wide corn crush margins resulting from lower corn costs and tighter supply of ethanol relative to demand. Corn
crush margins are determined based on the difference between ethanol and corn prices.
-26-
o Higher ethanol sales prices. Our average ethanol sales price increased 6% to $2.59 per gallon for 2013 as compared to
$2.45 per gallon for 2012.
Gross margin. Our gross margin increased significantly to positive 3.6% for 2013 from negative 2.4% for 2012. The improvement
in our gross margin was primarily the result of higher corn crush margins at the Pacific Ethanol Plants for most of the year due to
lower corn costs and higher ethanol sales prices.
Selling, general and administrative expenses. Our selling, general and administrative expenses, or SG&A, increased by $1.9
million to $14.0 million for 2013, as compared to $12.1 million for 2012, primarily as a result of higher cash and noncash
compensation expenses.
Fair value adjustments. Warrants we issued and the conversion features of our convertible notes were recorded at fair value,
updated with quarterly adjustments for changes in their fair values, resulting in an expense of $1.0 million for 2013 as compared to
income of $2.0 million for 2012. This expense is primarily due to the increased number of warrants issued in 2013, partially offset
by the decline in fair values due to a decrease in the market price of our common stock at the end of each period as compared to the
beginning of each period.
Interest expense. Our interest expense increased by $2.6 million to $15.7 million for 2013 from $13.0 million for 2012. This
increase is primarily due to increased average debt balances from our senior and convertible notes.
Loss on extinguishments of debt. Our loss on extinguishments of debt was $3.0 million for 2013, which was primarily related to
the retirement of our convertible notes in 2013.
Sales and Margins
We generate sales by marketing all the ethanol produced by the Pacific Ethanol Plants, all the ethanol produced by two other ethanol
producers in the Western United States and ethanol purchased from other third-party suppliers throughout the United States. We also market
ethanol co-products, including WDG and corn oil, for the Pacific Ethanol Plants.
Our profitability is highly dependent on various commodity prices, including the market prices of ethanol, corn and natural gas.
Our average ethanol sales price increased by 5.7% to $2.59 per gallon in 2013 from $2.45 per gallon in 2012 due to higher sales
prices realized in our markets in the Western United States, as many of our contracts are tied to local marked indices. However, the average
price of ethanol, as reported by the CBOT, decreased by 2.6% to $2.25 per gallon for 2013 from $2.31 per gallon for 2012. The drop in the
price of ethanol, as reported by the CBOT, was due to a slight drop for the year in the national demand for gasoline, of which ethanol is a
primary blend stock component. Our average ethanol sales price more closely reflects prices in the Western United States, including any
premiums we are able to obtain from the sale of low-carbon ethanol, as compared to CBOT prices which more closely reflect the national
average price of ethanol.
Our average cost of corn decreased in 2013 as compared to 2012, positively impacting corn crush margins. Specifically, our average
cost of corn decreased by 17% to $5.72 per bushel for 2013 from $6.89 per bushel for 2012. This decrease is commensurate with the decline
in the average price of corn as reported by the CBOT.
-27-
We have three principal methods of selling ethanol: as a merchant, as a producer and as an agent. See “—Critical Accounting Policies
—Revenue Recognition” below.
When acting as a merchant or as a producer, we generally enter into sales contracts to ship ethanol to a customer’s desired location.
We support these sales contracts through purchase contracts with several third-party suppliers or through our own production. We manage the
necessary logistics to deliver ethanol to our customers either directly from a third-party supplier or from our inventory via truck or rail. Our
sales as a merchant or as a producer expose us to significant price risks resulting from potential fluctuations in the market price of ethanol and
corn. Our exposure varies depending on the magnitude of our sales and purchase commitments compared to the magnitude of our existing
inventory, as well as the pricing terms—such as market index or fixed pricing—of our contracts. We seek to mitigate our exposure to price
risks by implementing appropriate risk management strategies.
When acting as an agent for third-party suppliers, we conduct back-to-back purchases and sales in which we match ethanol purchase
and sale contracts of like quantities and delivery periods. When acting in this capacity, we receive a predetermined service fee and have little or
no exposure to price risks resulting from potential fluctuations in the market price of ethanol. For these sales, we record the marketing fee as
net sales.
We believe that our gross profit margins depend primarily on five key factors:
·
·
·
·
·
the market price of ethanol, which we believe is impacted by the degree of competition in the ethanol market; the price of
gasoline and related petroleum products; and government regulation, including government mandates;
the market price of key production input commodities, including corn and natural gas;
the market price of co-products, including WDG and corn oil;
our ability to anticipate trends in the market price of ethanol, co-products, and key input commodities and implement
appropriate risk management and opportunistic strategies; and
the proportion of our sales of ethanol produced at the Pacific Ethanol Plants to our sales of ethanol produced by unrelated
third-parties.
We seek to optimize our gross profit margins by anticipating the factors above and, when resources are available, implementing
hedging transactions and taking other actions designed to limit risk and address these factors. For example, we may seek to decrease inventory
levels in anticipation of declining ethanol prices and increase inventory levels in anticipation of rising ethanol prices. We may also seek to alter
our proportion or timing, or both, of purchase and sales commitments. Furthermore, we may diversify our ethanol feedstock to lower our
average costs and/or increase our ethanol sales prices from premiums for low-carbon intensity rated ethanol.
Our limited resources to act upon the anticipated factors described above and/or our inability to anticipate these factors or their relative
importance, and adverse movements in the factors themselves, could result in declining or even negative gross profit margins over certain
periods of time. Our ability to anticipate these factors or favorable movements in these factors may enable us to generate above-average gross
profit margins. However, given the difficulty associated with successfully forecasting any of these factors, we are unable to estimate our future
gross profit margins.
-28-
Results of Operations
Accounting for the Results of New PE Holdco
Since October 6, 2010, our consolidated financial statements have included the financial statements of New PE Holdco, which in turn
include the financial statements of the Plant Owners. On October 6, 2010, we purchased a 20% ownership interest in New PE Holdco, which
gave us the single largest equity position in New PE Holdco. Based on our ownership interest as well as our asset management and marketing
agreements with New PE Holdco, we determined that, beginning on October 6, 2010, we were the primary beneficiary of New PE Holdco,
and as such, we consolidated New PE Holdco’s financial results with our financial results. As of December 31, 2013, we held a 91%
ownership interest in New PE Holdco.
Selected Financial Information
The following selected financial information should be read in conjunction with our consolidated financial statements and notes to our
consolidated financial statements included elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” contained in this report.
Certain performance metrics that we believe are important indicators of our results of operations include:
Years Ended December 31,
2013
2012
Percentage
Variance
Production gallons sold (in millions)
Third party gallons sold (in millions)
Total gallons sold (in millions)
Average sales price per gallon
Corn cost per bushel—CBOT equivalent
Average basis(1)
Delivered corn cost
Co-product revenues as % of delivered cost of corn(2)
Average CBOT ethanol price per gallon
Average CBOT corn price per bushel
$
$
$
$
$
$
149.7
264.2
413.9
2.59
5.72
1.60
7.32
29.6%
2.25
5.78
$
$
$
$
$
$
140.6
300.2
440.8
2.45
6.89
1.06
7.95
26.8%
2.31
6.95
6.5%
(12.0)%
(6.1)%
5.7%
(17.0)%
51.0%
(7.9)%
10.4%
(2.6)%
(16.8)%
(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 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.
-29-
Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012
Dollar
Years Ended
December 31,
2013
2012
(dollars in thousands)
Percentage
Variance
Favorable
Variance
Favorable
(Unfavorable) (Unfavorable)
Net sales
Cost of goods sold
Gross profit (loss)
Selling, general and administrative
expenses
Income (loss) from operations
Fair value adjustments
Interest expense, net
Loss on extinguishments of debt
Other expense, net
Loss before provision for income
taxes and noncontrolling interest
Provision for income taxes
Consolidated net loss
Net loss attributed to noncontrolling
interest
Net loss attributed to Pacific Ethanol,
Inc.
Preferred stock dividends
Loss available to common
stockholders
Net Sales
$
908,437 $
875,507
32,930
816,044 $
835,568
(19,524)
92,393
(39,939)
52,454
14,021
18,909
(1,013)
(15,671)
(3,035)
(352)
(1,162)
–
(1,162)
12,141
(31,665)
1,954
(13,049)
–
(595)
(43,355)
–
(43,355)
(1,880)
50,574
(2,967)
(2,622)
(3,035)
243
42,193
–
42,193
11.3%
(4.8)%
NM
(15.5)%
NM
(151.8)%
(20.1)%
NM
40.8%
97.3%
–
97.3%
381
24,298
(23,917)
(98.4)%
$
$
(781) $
(1,265)
(19,057) $
(1,268)
18,276
3
(2,046) $
(20,325) $
18,279
95.9%
0.2%
89.9%
Results as a Percentage of
Net Sales for the
Years Ended
December 31,
2013
2012
100.0%
96.4%
3.6%
100.0%
102.4%
(2.4)%
1.5%
2.1%
(0.1)%
(1.7)%
(0.3)%
0.0%
(0.1)%
–
(0.1)%
0.0%
(0.1)%
(0.1)%
(0.2)%
1.5%
(3.9)%
0.2%
(1.6)%
–
(0.1)%
(5.3)%
–
(5.3)%
3.0%
(2.3)%
(0.2)%
(2.5)%
The increase in our net sales for 2013 as compared to 2012 was primarily due to an increase in our total production gallons sold
coupled with an increase in our average sales price per gallon.
Total volume of production gallons sold increased 6.5%, or 9.1 million gallons, to 149.7 million gallons for 2013 as compared to
140.6 million gallons for 2012. The increase in production gallons sold is primarily due to our increased production rates at the Pacific Ethanol
Plants. We increased production rates due to higher industry-wide corn crush margins resulting from lower corn costs and higher ethanol
prices due to tighter ethanol supply relative to demand. Third-party gallons sold, however, decreased by 12.0%, or 36.0 million gallons, to
264.2 million gallons for 2013 as compared to 300.2 million gallons for 2012. The decrease in third-party gallons sold is primarily due to
decreased sales under our third-party ethanol marketing arrangements as our marketing agreement with Front Range Energy expired during the
year. Although our total combined volume of production and third party gallons sold decreased in 2013 as compared to 2012, our net sales for
the period increased because the impact of the increase in our production gallons sold, which are recorded at gross sales prices, was greater
than the impact of the decrease in third party gallons sold, which are recorded at gross or net sales prices, depending on the contract terms.
Our average sales price per gallon increased 5.7% to $2.59 for 2013 from $2.45 for 2012, even though the average CBOT ethanol
price per gallon decreased 2.6% to $2.25 for 2013 from $2.31 for 2012. This disparity between our ethanol sales price per gallon and the
CBOT average reflects both the additional basis costs for West Coast delivery of ethanol as well as the premium we receive by selling lower
carbon intensity ethanol in the Western United States.
Cost of Goods Sold and Gross Profit (Loss)
Our gross profit (loss) improved significantly to a gross profit of $32.9 million for 2013 from a gross loss of $19.5 million for 2012
primarily due to higher corn crush margins realized at the Pacific Ethanol Plants, predominantly related to lower corn costs and tighter ethanol
supply relative to demand. Our gross margin improved substantially to positive 3.6% for 2013 as compared to negative 2.4% for 2012.
-30-
Selling, General and Administrative Expenses
Our SG&A remained consistent at 1.5% of net sales, but increased in absolute terms by $1.9 million to $14.0 million for 2013 as
compared to $12.1 million for 2012. The increase in SG&A is primarily due to the following factors:
·
·
·
·
·
an increase in noncash compensation expense of $0.9 million due to awards of restricted stock and options to our employees
and members of our board of directors during the period;
an increase in cash compensation expense of $0.5 million due to year-end compensation expense primarily driven by
company performance;
an increase in professional fees of $0.5 million due to non-capitalized expenses associated with the issuance of our senior
unsecured notes in January 2013;
an increase in other professional fees of $0.2 million due to expenses related to our special meeting of stockholders in May
2013; and
an increase in regulatory fees of $0.5 million due to increased production activity and projects.
These increases were partially offset by:
·
·
a decrease in lease expense of $0.5 million due to the expiration of certain lease agreements; and
a decrease in depreciation and amortization of intangibles of $0.3 million.
Fair Value Adjustments
We issued certain warrants in various transactions from 2010 through 2013. In addition, in 2013, we issued subordinated convertible
notes. The warrants and conversion features associated with the convertible notes were originally recorded at fair value and are adjusted
quarterly. As a result of quarterly adjustments to their fair values, we recorded an expense of $1.0 million for 2013 as compared to income of
$2.0 million for 2012. This change in fair values is primarily due to the increased number of warrants issued in 2013, partially offset by the
decline in fair values due to a decrease in the market price of our common stock at the end of each period as compared to the beginning of each
period. Due to the substantial increase in the market price of our common stock in the first quarter of 2014 and given that the exercise prices of
these warrants are now well below the market price of our common stock, the resulting fair values and related non-cash expenses will be
significantly higher in the first quarter of 2014 than in prior quarterly periods.
Interest Expense
Interest expense increased by $2.6 million to $15.7 million for 2013 from $13.0 million for 2012. The increase is primarily due to
increased average debt balances, which included our senior notes, subordinated convertible notes and the term loans and credit facilities for the
Plant Owners and Kinergy.
-31-
Loss on Extinguishments of Debt
Loss on extinguishments of debt was $3.0 million for 2013 as compared to no loss on extinguishments of debt for 2012. The
increase is due to early conversions of our subordinated convertible notes into shares of our common stock at a discount to the prevailing
market price of our common stock.
Other Expense, Net
Other expense decreased by $0.2 million to $0.4 million for 2013 from $0.6 million for 2012. The decrease in other expense is
primarily due to a reduction in bank fees.
Net Loss Attributed to Noncontrolling Interest
Net loss attributed to noncontrolling interest relates to the consolidated treatment of New PE Holdco, and represents the
noncontrolling interest of other owners in New PE Holdco’s income or losses. We consolidated New PE Holdco’s financial results for the
periods presented, however, because we owned less than 100% of New PE Holdco during the periods, we accordingly reduced our net loss
for the noncontrolling interest, which represents the remaining ownership interest that we do not own. We increased our ownership interest in
New PE Holdco to 91% during the year. In early 2013, when we owned a smaller percentage of New PE Holdco, gross margins and profits
were lower than in the later part of the year when we owned a higher percentage of New PE Holdco. As a result, income attributed to the
noncontrolling interest was lower and income attributed to us was higher as we owned more of New PE Holdco during periods of higher
gross margins and profits.
Preferred Stock Dividends
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 in cash dividends of $1.3 million for each of 2013
and 2012.
Liquidity and Capital Resources
During 2013, we funded our operations primarily from cash flow from operations, cash on hand, borrowings under our credit
facilities and various capital raising transactions in which we raised net proceeds of $36.7 million through the issuance of senior unsecured
notes, unsecured subordinated convertible notes, net of issuance costs and proceeds in connection with the exercise of warrants. These funds
were used to fund our operations, purchase Pacific Ethanol Plant debt of $27.1 million, make other debt related payments of $25.6 million and
purchase additional ownership interests in New PE Holdco for $2.3 million.
Our current available capital resources consist of cash on hand and amounts available for borrowing under Kinergy’s credit facility.
In addition, the Plant Owners have credit facilities for use in the operations of the Pacific Ethanol Plants. We expect that our future available
capital resources will consist primarily of our remaining cash balances, amounts available for borrowing, if any, under Kinergy’s credit
facility, cash generated from Kinergy’s ethanol marketing business, fees paid under our asset management agreement relating to our operation
of the Pacific Ethanol Plants and dividends, if any, in respect of our ownership interest in New PE Holdco.
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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 working capital and capital expenditure requirements for at
least the next twelve months. If, however, our capital requirements or cash flow vary materially from our current projections, if crush and
commodity margins, which reflect ethanol and co-product sales prices relative to ethanol production inputs such as corn and natural gas,
decline in any material respect, or if other unforeseen circumstances occur, we may require additional financing. Our failure to raise capital, if
and when needed, could restrict our growth or hinder our ability to compete.
Quantitative Year-End Liquidity Status
We believe that the following amounts provide insight into our liquidity and capital resources. The following selected financial
information should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included
elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
contained in this report (dollars in thousands):
Cash and cash equivalents
Current assets
Current liabilities
Property and equipment, net
Notes payable, current portion
Notes payable, noncurrent portion
Working capital
Working capital ratio
Change in Working Capital and Cash Flows
As of and for the
Year Ended December 31,
2013
2012
Variance
$
$
$
$
$
$
$
5,151 $
79,377 $
28,216 $
155,194 $
750 $
98,408 $
51,161 $
2.81
7,586
57,432
12,415
150,409
4,029
117,253
45,017
4.63
(32.1)%
38.2%
127.3%
3.2%
(81.4)%
(16.1)%
13.6%
(39.3)%
Working capital increased from $45.0 million at December 31, 2012 to $51.2 million at December 31, 2013 as a result of an increase
in current assets of $21.9 million, partially offset by an increase in current liabilities of $15.8 million.
Current assets increased primarily due to an increase in inventories due to our purchases of sugar as alternate feedstock in late 2013
and an increase in accounts receivable due to the timing of sales at the end of 2013 as compared to 2012. Current liabilities increased primarily
due to an increase in accounts payable and accrued liabilities due to higher sales volumes at the end of 2013 as compared to 2012. In addition,
we recorded $4.8 million in current portion of capital leases related to our corn oil production systems.
Cash provided by our operating activities of $14.2 million resulted primarily from $12.1 million in depreciation and amortization of
intangibles, an increase in accounts payable and accrued expenses of $8.9 million, interest expense added to the Plant Owners’ debt of $4.7
million, loss on extinguishments of debt of $3.0 million, amortization of deferred financing costs of $2.0 million, a change in the fair value of
derivative instruments of $1.8 million, noncash compensation of $1.7 million, amortization of debt discounts of $1.3 million and fair value
adjustments of warrants and conversion features associated with our convertible notes of $0.2 million, partially offset by our consolidated loss
of $1.2 million, a $9.4 million increase in accounts receivable, a $6.9 million increase in prepaid inventory, an increase in prepaid expenses and
other assets of $2.3 million and an increase in inventories of $2.2 million.
Cash used in our investing activities of $6.3 million resulted primarily from additions to property and equipment of $4.0 million due
to enhancements made at our plants and purchases of additional ownership interests in New PE Holdco for $2.3 million.
-33-
Cash used in our financing activities of $10.3 million resulted primarily from our purchase of $27.1 million of Plant Owners’ debt,
$17.1 million in payments on the Plant Owners’ borrowings, $6.2 million in payments on our senior notes, $1.6 million in payments on
capital lease obligations, $1.6 million in debt issuance costs and $1.3 million in cash dividend payments in respect of our Series B Preferred
Stock, partially offset by $22.2 million in proceeds from the issuance of senior notes and warrants, $14.0 million in proceeds from the
issuance of subordinated convertible notes, $7.0 million in proceeds from the Plant Owners’ borrowings and $2.1 million in proceeds from
warrant exercises.
Kinergy Operating Line of Credit
Kinergy maintains an operating line of credit for an aggregate amount of up to $30.0 million, with an optional accordion feature for
up to an additional $10.0 million. The credit facility expires on December 31, 2015. 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 between 2.25% and 3.25%. The
credit facility’s monthly unused line fee is 0.50% of the amount by which the maximum credit under the facility exceeds the average daily
principal balance. 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 $1.0 million per fiscal quarter in 2014 and $1.1 million per fiscal
quarter in 2015.
The credit facility also includes the accounts receivable of Pacific Ag. Products, LLC, or PAP, one of our indirect wholly-owned
subsidiaries, as additional collateral. Payments that may be made by PAP to Pacific Ethanol as reimbursement for management and other
services provided by Pacific Ethanol to PAP are limited under the terms of the credit facility to the extent that quarterly payments would result
in PAP recording less than $0.1 million of net income in the quarter.
Kinergy and PAP are collectively required to generate aggregate earnings before interest, taxes, depreciation and amortization, or
EBITDA, of $500,000, measured at the end of each calendar month, for each three calendar month period and EBITDA of $1.3 million,
measured at the end of each calendar month, for each six calendar month period. Further, for all monthly periods, Kinergy and PAP must
collectively maintain a fixed-charge coverage ratio (calculated as a twelve-month rolling 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 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):
EBITDA Requirement – Three Months
Actual
Excess
EBITDA Requirement – Six Months
Actual
Excess
Fixed-Charge Coverage Ratio Requirement
Actual
Excess
-34-
$
$
$
$
$
$
Years Ended
December 31,
2013
2012
450 $
3,252 $
2,802 $
1,100 $
4,131 $
3,031 $
2.00
8.64
6.64
450
1,165
715
1,100
3,282
2,182
2.00
8.84
6.84
Pacific Ethanol has guaranteed all of Kinergy’s obligations under the credit facility. As of December 31, 2013, Kinergy had an
available borrowing base under the credit facility of $30.0 million and an outstanding balance of $19.0 million.
Plant Owners’ Term Debt and Operating Lines of Credit
The Plant Owners’ debt as of December 31, 2013 consisted of a $32.5 million tranche A-1 term loan, a $26.3 million tranche A-2
term loan and a $35.4 million revolving credit facility. The term and revolving debt require monthly interest payments at a floating rate equal to
the three-month LIBOR or the Prime Rate of interest, at the Plant Owners’ election, plus 10.0%. At December 31, 2013, the interest rate was
approximately 13.25%. Repayments of principal are based on available free cash flow of the Plant Owners, until maturity, when all principal
amounts are due.
From July 13, 2012 through June 30, 2013, the Plant Owners entered into transactions which amended the term and revolving debt
and extended the maturity dates of the combined term loans and revolving debt from June 25, 2013 to June 30, 2016.
Monthly interest payments due to certain lenders on both the term and revolving debt was deferred and added to the principal amount
of the loans. As of December 31, 2013, the extended principal balances above included $7.5 million of accrued interest that was deferred by
the Plant Owners.
As of December 31, 2013, the aggregate outstanding balance of the revolving credit facility was $35.4 million. Further, since January
1, 2014, we made $19.4 million in additional principal payments in cash, resulting in an outstanding balance of $16.0 million as of March 31,
2014, with availability of $19.4 million.
On October 29, 2012, the Plant Owners entered into a new revolving credit facility that provides for up to an additional $10.0 million
in availability. The Plant Owners may request increases in the amount of the facility in increments of not less than $1.0 million, up to a
maximum additional credit limit of $5.0 million. The Plant Owners have the right at any time, and from time to time, but subject to limitations
imposed by an intercreditor agreement, to prepay in whole or in part the revolving loans and tranche A-1 loans (and the tranche A-2 loans
following the payment in full of the revolving loans and tranche A-1 loans). However, in the event of any prepayment of the tranche A-1 loans
that have a maturity date of June 30, 2016, the Plant Owners must pay a premium equal to the present value of all interest payments that would
have accrued from the date of such payment through June 30, 2016, calculated using a discount rate, applied quarterly, equal to the Treasury
Rate as of such prepayment date plus 50 basis points. The credit agreement also provides for mandatory prepayments in connection with
certain customary events, including any sale of material assets; however, certain mandatory prepayments are not subject to the prepayment
premium. On January 4, 2013, the Plant Owners entered into an amendment to the new revolving credit facility and extended the maturity date
of the facility from June 25, 2013 to June 25, 2015. On March 28, 2013, the lenders approved $5.0 million in additional availability for a
maximum total credit limit of $15.0 million under the facility. As of December 31, 2013, the Plant Owners had unused availability under the
new revolving credit facility of $15.0 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 Plant
Owners. The Plant Owners’ creditors do not have recourse to Pacific Ethanol, Inc.
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Pacific Ethanol Debt
Senior Unsecured Notes
On January 11, 2013 we issued and sold $22.2 million in aggregate principal amount of senior unsecured notes, or January 2013
Notes, and warrants to purchase an aggregate of 1.7 million shares of our common stock for aggregate net proceeds of $22.1 million. The
warrants have an exercise price of $6.32 per share and expire in January 2018.
If we issue equity or equity-linked securities, receive interest from any purchased and outstanding Plant Owners’ term debt, conduct
certain sales of assets or incur certain indebtedness, then we will be obligated to prepay the January notes using all net cash proceeds from the
transaction, provided that any net proceeds received in connection with an equity-linked issuance must be used to either prepay the notes or
purchase certain outstanding debt issued by the Plant Owners. Interest on the notes is payable in cash in arrears on the fifteenth day of each
month beginning on March 15, 2013. Subject to the satisfaction of certain equity conditions, at our option, we may elect to pay interest due
and payable in shares of our common stock, provided that the interest rate applicable to any outstanding amounts we pay in shares of common
stock will increase by 2% per annum from the then applicable interest rate for the period for which such interest is paid. The number of shares
to be issued for any particular interest payment equals the quotient of (x) the amount of interest payable (assuming payment in shares), divided
by (y) the product of (i) the weighted average price of our common stock for the thirty trading days immediately preceding (but excluding) the
payment due date, and (ii) 0.95. During 2013, we made principal cash payments on our January 2013 Notes in the aggregate amount of $6.2
million. In addition, we issued 0.5 million shares of our common stock as a $2.0 million principal payment.
The January 2013 Notes mature on March 30, 2016 and bear interest at a rate of 5% per annum, subject to adjustment. Payments due
under the January 2013 Notes rank senior to all of our other indebtedness, including the indebtedness of our subsidiaries, other than certain
permitted senior indebtedness.
As of December 31, 2013, the aggregate outstanding principal balance of the January 2013 Notes was $14.0 million. Further, since
January 1, 2014, we made $13.1 million in additional principal payments in cash, resulting in an outstanding principal balance of $0.9 million
as of March 31, 2014.
Series A and B Notes
On March 28, 2013, we issued $6.0 million in Series A Subordinated Convertible Notes, or Series A Notes, and warrants to
purchase an aggregate of 1.8 million shares of our common stock for aggregate gross proceeds of $6.0 million. The warrants have an exercise
price of $7.59 per share. Of the warrants issued in the transaction, warrants to purchase 0.8 million shares of common stock expire in March
2015 and warrants to purchase 1.0 million shares of common stock expire in June 2015. On June 21, 2013, we issued $8.0 million in Series B
Subordinated Convertible Notes, or Series B Notes, for aggregate gross proceeds of $8.0 million. We raised aggregate net proceeds from
these offerings of $12.6 million.
Unless converted or redeemed earlier, the Series A and B Notes were to mature on March 28, 2014. The Series A and B Notes bore
interest at 5% per annum, compounded monthly. All amounts due under the Series A and B Notes were convertible at any time, in whole or in
part, at the option of the holders into shares of our common stock at a conversion price, or Fixed Conversion Price, which was subject to
adjustment as described below.
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The Series A and B Notes were initially convertible into shares of our common stock at the initial Fixed Conversion Price of $15.00
per share. If we sold or issued any securities with “floating” conversion prices based on the market price of our common stock, the holder of a
Series A and B Notes would have the right thereafter to substitute the “floating” conversion price for the Fixed Conversion Price upon
conversion of all or part of the Series A and B Notes.
Amortization payments, together with accrued and unpaid interest on the Series A and B Notes, were payable on monthly installment
dates. On or prior to the tenth calendar day before each installment date, we were required to deliver a notice electing to effect a redemption in
cash or a conversion of the installment amount due on the installment date into shares of our common stock. Our ability to pay an installment
amount in shares of our common stock was subject to numerous equity conditions, the failure of any of which, unless waived, would have
required that we pay an installment amount solely in cash. On the applicable installment date, we were required to deliver to the holders of the
Series B Notes an amount of shares of common stock equal to that portion of the installment amount being converted divided by the lesser of
the then existing Fixed Conversion Price and 85% of the Market Price on the installment date, or Company Conversion Price. The “Market
Price” on any given date was equal to the lesser of (i) the volume weighted average price on the trading day immediately preceding the date of
determination, and (ii) the average of the three lowest volume weighted average prices during the ten trading day period ending on the trading
day immediately prior to the date of determination.
The holder of a Series A or B Note could, at the holder’s election by giving notice to us, defer the payment of the installment amount
due on any installment date to another installment date, in which case the amount deferred would become part of the subsequent installment
date and would continue to accrue interest.
On any day during the period commencing on an installment date and ending on the trading day prior to the next installment date, the
holder of a Series A or B Note could, at its election, convert the installment amounts due on up to four future installment dates at the Company
Conversion Price in effect on the current installment date, provided that if we had elected to convert the installment amount due on the current
installment date, the holder could only convert up to three future installment amounts. Upon the occurrence of certain events of default, there
would be no limitation on the number of installment amounts that the holder could accelerate and the Company Conversion Price applicable to
conversions made pursuant to this acceleration feature would equal the lesser of (i) the Company Conversion Price on the current installment
date, (ii) 85% of the Market Price (as defined below), and (iii) the Fixed Conversion Price then in effect.
As of December 31, 2013, the Series A and B Notes had been fully retired.
Note Payable to Related Party
On March 31, 2009, our Chief Executive Officer provided funds in an aggregate amount of $1.0 million for general working capital
purposes, in exchange for an unsecured promissory note issued by us. Interest on the unpaid principal amount accrues at a rate of 8.00% per
annum. As of December 31, 2012, the remaining amount of $0.8 million was due and payable on the extended maturity date of March 31,
2013. On February 7, 2013, the maturity date was further extended to March 31, 2014. On March 31, 2014, we paid in cash the outstanding
balance of the note payable.
Series B Preferred Stock Dividends
We accrue dividends quarterly in respect of our Series B Preferred Stock. Since the beginning of 2012, we have paid these dividends
quarterly in cash. During 2009, 2010 and 2011, however, we accrued but did not pay dividends aggregating $7.3 million. Beginning in 2012,
we entered into a series of agreements with the parties to whom unpaid dividends were owed under which we issued shares of our common
stock in satisfaction of a portion of the accrued and unpaid dividends. In connection with each payment of accrued and unpaid dividends, the
payees agreed to forebear for a term from exercising any rights they may have with the respect to accrued and unpaid dividends. The following
table summarizes the details of our agreements with the holders of our Series B Preferred Stock:
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Agreement Date
Amount of
Dividends Paid
Shares of
Common Stock
Issued
Extended
Forbearance Date
August 12, 2012
December 26, 2012
March 27, 2013
July 26, 2013
September 17, 2013
Total
Accrued and unpaid dividends
$
$
$
$
$
$
$
732,000
732,000
732,000
731,000
731,000
3,658,000
3,657,000
January 1, 2014
June 30, 2014
157,000
144,500
139,000 September 30, 2014
175,000 December 31, 2014
197,000 March 31, 2015
812,500
We believe we have adequate liquidity to continue to pay quarterly dividends in cash for at least the next twelve months. We may
continue to pay down the balance of accrued and unpaid dividends in respect of our Series B Preferred Stock by issuing additional shares of
common stock. We do not believe that these contemplated dividend payments in cash and stock will materially impact our liquidity. If we fail
to make ongoing quarterly cash dividend payments, we will be in default under the terms of our agreements with the holders of our Series B
Preferred Stock and the holders’ current forbearance through March 31, 2015 will be ineffective. We could experience a material adverse
effect on our liquidity if we are required to pay in cash the entire current balance of accrued and unpaid dividends; however, we believe such
an outcome is remote.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of
these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amount of net sales and expenses for each period. The
following represents a summary of our critical accounting policies, defined as those policies that we believe are the most important to the
portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effects of matters that are inherently uncertain.
Revenue Recognition
We recognize revenue when it is realized or realizable and earned. We consider revenue realized or realizable and earned when there
is persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collection is reasonably assured.
We derive revenue primarily from sales of ethanol and related co-products. We recognize revenue when title transfers to our customers, which
is generally upon the delivery of these products to a customer’s designated location. These deliveries are made in accordance with sales
commitments and related sales orders entered into with customers either verbally or in written form. The sales commitments and related sales
orders provide quantities, pricing and conditions of sales. In this regard, we engage in three basic types of revenue generating transactions:
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·
·
·
As a producer. Sales as a producer consist of sales of our inventory produced at the Pacific Ethanol Plants.
As a merchant. Sales as a merchant consist of sales to customers through purchases from third-party suppliers in which we may
or may not obtain physical control of the ethanol or co-products in which shipments are directed from our suppliers to our
terminals or direct to our customers but for which we accept the risk of loss in the transactions.
As an agent. Sales as an agent consist of sales to customers through purchases from third-party suppliers in which the risks and
rewards of inventory ownership remain with third-party suppliers and we receive a predetermined service fee under these
transactions.
Revenue from sales of third-party ethanol and its co-products is recorded net of costs when we are acting as an agent between a
customer and a supplier and gross when we are a principal to the transaction. Several factors are considered to determine whether we are
acting as an agent or principal, most notably whether we are the primary obligor to the customer, whether we have inventory risk and related
risk of loss or whether we add meaningful value to the supplier’s product or service. Consideration is also given to whether we have latitude
in establishing the sales price or have credit risk, or both. When we act as an agent, we record revenues on a net basis, or our predetermined
fees and any associated freight, based upon the amount of net revenues retained in excess of amounts paid to suppliers.
We record revenues based upon the gross amounts billed to our customers in transactions where we act as a producer or a merchant
and obtain title to ethanol and its co-products and therefore own the product and any related unmitigated inventory risk for the ethanol,
regardless of whether we actually obtain physical control of the product.
Warrants and Conversion Features Carried at Fair Value
We have recorded our warrants issued since 2010 and the conversion features of our subordinated convertible notes issued in 2013 at
fair value. We believe the valuation of these warrants and conversion features is a critical accounting estimate because valuation estimates
obtained from third parties involve inputs other than quoted prices to value the warrants and conversion features. Changes in these estimates,
and in particular, certain of the inputs to the valuation estimates, can be volatile from period to period and may markedly impact the total mark-
to-market valuation of the warrants and convertible notes recorded as fair value adjustments in our consolidated statements of operations. We
recorded fair value adjustments on warrants and conversion features as an expense of $0.2 million and income of $2.0 million for the years
ended December 31, 2013 and 2012, respectively. Our senior convertible notes issued in 2013 have been fully retired.
Impairment of Long-Lived and Intangible Assets
Our long-lived assets have been primarily associated with the Pacific Ethanol Plants, reflecting their original book value, adjusted for
any subsequent impairment.
We assess the impairment of long-lived assets, including property and equipment and purchased intangibles subject to amortization,
when events or changes in circumstances indicate that the fair value of an asset could be less than the net book value of the asset. We assess
long-lived assets for impairment by first determining the forecasted, undiscounted cash flows each asset is expected to generate plus the net
proceeds expected from the sale of the asset. If the amount of proceeds is less than the carrying value of the asset, we then determine the fair
value of the asset. An impairment loss would be recognized when the fair value is less than the related net book value, and an impairment
expense would be recorded in the amount of the difference. Forecasts of future cash flows are judgments based on our experience and
knowledge of our operations and the industry in which we operate. These forecasts could be significantly affected by future changes in market
conditions, the economic environment, including inflation, and the purchasing decisions of our customers.
-39-
We review our intangible assets with indefinite lives at least annually or more frequently if impairment indicators arise. In our review,
we determine the fair value of these assets using market multiples and discounted cash flow modeling and compare it to the net book value of
the acquired assets.
We did not recognize any asset impairment charges associated with the Pacific Ethanol Plants in 2013 or 2012.
Allowance for Doubtful Accounts
We sell ethanol primarily to gasoline refining and distribution companies, sell WDG to dairy operators and animal feed distributors
and sell corn oil to poultry and biodiesel customers. We had significant concentrations of credit risk from sales of our ethanol as of December
31, 2013 and 2012, as described in Note 1 to our consolidated financial statements included elsewhere in this report. However, historically,
those ethanol customers have had good credit ratings and we have collected the amounts billed to those customers. Receivables from
customers are generally unsecured. We continuously monitor our customer account balances and actively pursue collections on past due
balances.
We maintain an allowance for doubtful accounts for balances that appear to have specific collection issues. Our 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, we
have been unsuccessful in our collection efforts, we consider recording a bad debt allowance for the balance in question. We would eventually
write-off accounts included in our allowance when we have determined that collection is not likely. The factors considered in reaching this
determination are the apparent financial condition of the customer, and our success in contacting and negotiating with the customer.
We recognized a bad debt expense of $0.2 million and a recovery of less than $0.1 million for the years ended December 31, 2013
and 2012, respectively.
Impact of New Accounting Pronouncements
Not applicable.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
Reference is made to the financial statements, which begin at page F-1 of this report.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
-40-
Item 9A. 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 and 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 December 31, 2013 that our disclosure
controls and procedures were effective at a reasonable assurance level.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed 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. Our internal control over financial reporting includes those policies and procedures that:
(i)
(ii)
(iii)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is defined by the Public Company Accounting Oversight Board’s Audit Standard No. 5 as being a deficiency,
or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis by the company’s
internal controls.
Management assessed and evaluated the effectiveness of our internal control over financial reporting as of December 31, 2013. Based
on the results of management’s assessment and evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of
December 31, 2013, our internal control over financial reporting was effective.
-41-
In making its assessment of our internal control over financial reporting, management used criteria issued by the Committee of
Sponsoring Organizations of the Treadway Commission in its Internal Control—Integrated Framework.
Management’s report was not subject to attestation by our certified registered public accounting firm pursuant to rules established by
the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report on Form 10-K.
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.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Item 9B. Other Information.
None.
-42-
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information under the captions “Information about our Board of Directors, Board Committees and Related Matters” and “Section
16(a) Beneficial Ownership Reporting Compliance,” appearing in the Proxy Statement, is hereby incorporated by reference.
Item 11. Executive Compensation.
The information under the caption “Executive Compensation and Related Information,” appearing in the Proxy Statement, is hereby
incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation
Plan Information,” appearing in the Proxy Statement, is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information under the captions “Certain Relationships and Related Transactions” and “Information about our Board of Directors,
Board Committees and Related Matters—Director Independence” appearing in the Proxy Statement, is hereby incorporated by reference.
Item 14. Principal Accounting Fees and Services.
The information under the caption “Audit Matters—Principal Accountant Fees and Services,” appearing in the Proxy Statement, is
hereby incorporated by reference.
Item 15. Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements
PART IV
Reference is made to the financial statements listed on and attached following the Index to Consolidated Financial Statements
contained on page F-1 of this report.
(a)(2) Financial Statement Schedules
None.
(a)(3) Exhibits
Reference is made to the exhibits listed on the Index to Exhibits.
-43-
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Operations for the Years Ended December 31, 2013 and 2012
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2013 and 2012
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013 and 2012
Notes to Consolidated Financial Statements
F-1
F-2
F-3
F-5
F-6
F-7
F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Pacific Ethanol, Inc.
We have audited the accompanying consolidated balance sheets of Pacific Ethanol, Inc. and subsidiaries as of December 31, 2013 and 2012,
and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pacific
Ethanol, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then
ended, in conformity with U.S. generally accepted accounting principles.
/s/ HEIN & ASSOCIATES LLP
Irvine, California
March 31, 2014
F-2
PACIFIC ETHANOL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and par value)
ASSETS
December 31,
2013
2012
Current Assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $187 and $18, respectively
Inventories
Prepaid inventory
Other current assets
$
Total current assets
Total property and equipment, net
Other Assets:
Intangible assets, net
Other assets
Total other assets
Total Assets
$
5,151 $
35,296
23,386
12,315
3,229
79,377
155,194
3,260
3,218
6,478
241,049 $
7,586
26,051
16,244
5,422
2,129
57,432
150,409
3,734
3,388
7,122
214,963
The accompanying notes are an integral part of these consolidated financial statements.
F-3
PACIFIC ETHANOL, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(in thousands, except shares and par value)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable – trade
Accrued liabilities
Current portion – capital leases
Current portion – long-term debt ($750 and $0 due to a related party, respectively)
Other current liabilities
$
Total current liabilities
Long-term debt, net of current portion ($0 and $750 due to a related party, respectively)
Accrued preferred dividends
Capital leases, net of current portion
Warrant liabilities at fair value
Other liabilities
Total Liabilities
Commitments and contingencies (Notes 1, 5, 6 and 11)
Stockholders’ Equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized:
Series A: 1,684,375 shares authorized; 0 shares issued and outstanding as of
December 31, 2013 and 2012
Series B: 1,580,790 shares authorized; 926,942 shares issued and outstanding as of
December 31, 2013 and 2012; liquidation preference of $21,733 as of December 31,
2013
Common stock, $0.001 par value; 300,000,000 shares authorized; 16,126,287 and
9,789,408 shares issued and outstanding as of December 31, 2013 and 2012, respectively
Additional paid-in capital
Accumulated deficit
Total Pacific Ethanol, Inc. stockholders’ equity
Noncontrolling interest
Total stockholders’ equity
December 31,
2013
2012
11,071 $
5,851
4,830
750
5,714
28,216
98,408
3,657
6,041
8,215
1,611
146,148
–
1
16
621,557
(532,356)
89,218
5,683
94,901
5,104
2,913
–
4,029
369
12,415
117,253
5,852
–
4,892
1,644
142,056
–
1
10
582,861
(530,310)
52,562
20,345
72,907
Total Liabilities and Stockholders’ Equity
$
241,049 $
214,963
The accompanying notes are an integral part of these consolidated financial statements.
F-4
PACIFIC ETHANOL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Net sales
Cost of goods sold
Gross profit (loss)
Selling, general and administrative expenses
Income (loss) from operations
Fair value adjustments
Interest expense, net
Loss on extinguishments of debt
Other expense, net
Loss before provision for income taxes
Provision for income taxes
Consolidated net loss
Net loss attributed to noncontrolling interest
Net loss attributed to Pacific Ethanol, Inc.
Preferred stock dividends
Loss available to common stockholders
Loss per share, basic and diluted
Weighted-average shares outstanding, basic and diluted
Years Ended December 31,
2013
2012
908,437 $
875,507
32,930
14,021
18,909
(1,013)
(15,671)
(3,035)
(352)
(1,162)
–
(1,162)
381
(781) $
(1,265) $
(2,046) $
(0.17) $
12,264
816,044
835,568
(19,524)
12,141
(31,665)
1,954
(13,049)
–
(595)
(43,355)
–
(43,355)
24,298
(19,057)
(1,268)
(20,325)
(2.81)
7,224
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Balances, January
1, 2012
Stock-based
compensation
expense –
restricted stock
and options to
employees and
directors, net of
cancellations
Shares issued on
equity offerings
Warrant exercises
Shares issued as
payment of prior
unpaid Series B
preferred
dividends
Purchases of
interests in New
PE Holdco
Preferred stock
dividends
Net loss
Balances,
December 31,
2012
Stock-based
compensation
expense –
restricted stock
and options to
employees and
directors, net of
cancellations
Shares issued on
convertible notes
Shares issued on
senior notes
Warrant exercises
Shares issued as
payment of prior
unpaid Series B
preferred
dividends
Purchases of
interests in New
PE Holdco
Preferred stock
dividends
Net loss
Balances,
December 31,
2013
PACIFIC ETHANOL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2013 and 2012
(in thousands)
Preferred Stock
Common Stock
Shares
Amount
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Deficit
Non-
controlling
Interest
Total
927
$
1
5,775
$
6
$
556,952
$
(509,985)
$
72,290
$
119,264
–
–
–
–
–
–
–
927
$
–
–
–
–
–
–
–
–
927
$
–
–
–
–
–
–
–
1
–
–
–
–
–
–
–
–
1
(3)
3,700
15
302
–
–
–
–
4
–
–
–
–
–
806
15,856
139
–
–
–
–
–
–
806
15,860
139
1,462
–
–
1,462
7,646
–
(27,647)
(20,001)
–
–
(1,268)
(19,057)
–
(24,298)
(1,268)
(43,355)
9,789
$
10
$
582,861
$
(530,310)
$
20,345
$
72,907
600
4,446
500
280
511
–
–
–
1
4
–
–
1
–
–
–
1,696
18,551
2,000
2,317
–
–
–
–
–
–
–
–
1,697
18,555
2,000
2,317
2,192
–
–
2,193
11,940
–
(14,281)
(2,341)
–
–
(1,265)
(781)
–
(381)
(1,265)
(1,162)
16,126
$
16
$
621,557
$
(532,356)
$
5,683
$
94,901
The accompanying notes are an integral part of these consolidated financial statements.
F-6
PACIFIC ETHANOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Operating Activities:
Consolidated net loss
Adjustments to reconcile consolidated net loss to cash provided by (used in) operating
$
(1,162) $
(43,355)
For the Years Ended December 31,
2013
2012
activities:
Depreciation and amortization of intangibles
Fair value adjustments
Loss on extinguishments of debt
Inventory valuation
Change in fair value on derivative instruments
Amortization of deferred financing costs
Amortization of debt discounts
Noncash compensation
Bad debt expense (recovery)
Interest expense added to Plant Owners’ debt
Interest on convertible debt paid with stock
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other assets
Prepaid inventory
Accounts payable and accrued expenses
Net cash provided by (used in) operating activities
Investing Activities:
Additions to property and equipment
Purchases of New PE Holdco ownership interests
Net cash used in investing activities
Financing Activities:
Proceeds from senior notes and warrants
Proceeds from subordinated convertible notes and warrants
Proceeds from warrant exercises
Net proceeds from common stock and warrants
Proceeds from Plant Owners’ borrowings
Payments on Plant Owners’ borrowings
Purchase of Plant Owners’ debt
Net proceeds (payments) on Kinergy’s line of credit
Payments on senior unsecured notes
Debt issuance costs
Preferred stock dividend payments
Payments on capital leases
Net cash (used in) provided by financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental Information:
Interest paid
Noncash financing and investing activities:
Preferred stock dividends paid in common stock
Notes issued for purchase of 33% ownership in New PEHC
Capital leases added to plant and equipment
Original discount on senior and convertible debt
Purchase of sugar inventory with note
Reclass of warrant liability to equity upon exercises
Reclass of noncontrolling interest to APIC upon acquisitions of ownership interests in New
PE Holdco
Debt extinguished with issuance of common stock
12,136
227
3,035
8
1,821
2,009
1,272
1,724
169
4,745
111
(9,414)
(2,150)
(2,340)
(6,893)
8,889
14,187 $
(3,993) $
(2,340)
(6,333) $
22,192 $
14,000
2,064
–
7,000
(17,115)
(27,088)
(669)
(6,208)
(1,560)
(1,265)
(1,640)
(10,289) $
(2,435)
7,586
5,151 $
7,515 $
2,192 $
– $
12,829 $
8,558 $
5,000 $
260 $
11,940 $
16,000 $
12,205
(1,954)
–
816
(999)
736
–
806
(6)
3,542
–
2,095
(929)
2,251
3,817
129
(20,846)
(2,273)
(10,000)
(12,273)
–
–
–
20,924
24,022
–
–
(721)
(10,000)
(1,166)
(1,268)
–
31,791
(1,328)
8,914
7,586
8,828
1,464
10,000
–
–
–
113
7,646
–
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-7
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES.
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, 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 PEMS
Corp., a Delaware corporation, and including its majority-owned subsidiary, New PE Holdco LLC (“New PE Holdco”), which owns the
Plant Owners (as defined below) (collectively, the “Company”).
The Company is the leading producer and marketer of low-carbon renewable fuels in the Western United States. The Company also sells
ethanol co-products, including wet distillers grain (“WDG”), a nutritious animal feed, and corn oil. Serving integrated oil companies and
gasoline marketers who blend ethanol into gasoline, the Company provides transportation, storage and delivery of ethanol through third-party
service providers in the Western United States, primarily in California, Arizona, Nevada, Utah, Oregon, Colorado, Idaho and Washington.
The Company had a 91% and 67% ownership interest in New PE Holdco, the owner of four ethanol production facilities, as of December 31,
2013 and 2012, respectively. The facilities are near their respective fuel and feed customers, offering significant timing, transportation cost and
logistical advantages. The Company sells ethanol produced by the Pacific Ethanol Plants (as defined below) and unrelated third parties to
gasoline refining and distribution companies, sells its WDG to dairy operators and animal feed distributors and sells its corn oil to poultry and
biodiesel customers.
The Company manages the production and operation of four ethanol production facilities, namely, Pacific Ethanol Madera LLC, Pacific
Ethanol Columbia, LLC, Pacific Ethanol Stockton LLC and Pacific Ethanol Magic Valley, LLC (collectively, the “Pacific Ethanol Plants”) and
their holding company, Pacific Ethanol Holding Co. LLC (“PEHC,” and together with the Pacific Ethanol Plants, the “Plant Owners”). PEHC
is a wholly-owned subsidiary of New PE Holdco. These four facilities have an aggregate annual ethanol production capacity of up to 200
million gallons. As of December 31, 2013, three of the facilities were operating and one of the facilities was idled. As market conditions
change, the Company may increase, decrease or idle production at one or more operational facilities or resume operations at any idled facility.
The Company plans to restart its idled facility located in Madera, California, in the second quarter of 2014.
Basis of Presentation – The consolidated financial statements and related notes have been prepared in accordance with accounting principles
generally accepted in United States (“GAAP”) and include the accounts of the Company. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Consolidation of Variable Interest Entities – The Company applies the guidance in the Financial Accounting Standards Board’s (“FASB”)
Accounting Standards Codification 810, Consolidation, surrounding a company’s analysis to determine whether any of its variable interests
constitute controlling financial interests in a variable interest entity (“VIE”). This analysis identifies the primary beneficiary of a VIE as the
enterprise that has both of the following characteristics: (i) the power to direct the activities of a VIE that most significantly impact the entity’s
economic performance, and (ii) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to
receive benefits from the entity that could potentially be significant to the VIE. Additionally, an enterprise is required to assess whether it has
an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has the power to direct the activities
of the VIE that most significantly impact the entity’s economic performance. The guidance also requires ongoing reassessments of whether an
enterprise is the primary beneficiary of a VIE.
F-8
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On October 6, 2010, the Company purchased an initial 20% ownership interest in New PE Holdco, a VIE at the time, from a number of New
PE Holdco’s owners. At that time, the Company determined it was the primary beneficiary of New PE Holdco, and as such, has since
consolidated the results of New PE Holdco. Through various transactions, the Company increased its ownership interest in New PE Holdco
to 67% at December 31, 2012. In 2013, the Company increased its ownership interest in New PE Holdco through various transactions in
January, March, June and December 2013, acquiring additional ownership interests of 13%, 3%, 2% and 6%, respectively, bringing its
ownership to 91% at December 31, 2013. As a result of owning 91% of New PE Holdco, the Company, with its significant majority position,
has the ability to make most all decisions on its own, and has therefore determined that New PE Holdco is no longer considered a VIE. The
Company continues to consolidate New PE Holdco’s financial results, however, now under the voting rights model. Consequently, since the
Company does not wholly-own New PE Holdco, it must adjust its consolidated net income (loss) for the income (loss) attributed to New PE
Holdco’s other owners. This adjustment results in net income (loss) attributed to Pacific Ethanol, Inc.
Reverse Stock Split – On May 14, 2013, the Company effected a one-for-fifteen reverse stock split. All share and per share information has
been restated to retroactively show the effect of this stock split.
Liquidity – During 2013, the Company funded its operations primarily from cash provided by operations, borrowings under its credit facilities
and various capital raising transactions in which it raised aggregate net proceeds of $36,696,000 through the issuance of senior unsecured
notes, unsecured convertible notes, net of issuance costs and proceeds in connection with the exercise of warrants.
The Company’s current available capital resources consist of cash on hand and amounts available for borrowing under Kinergy’s credit
facility. In addition, the Plant Owners have credit facilities for use in the operations of the Pacific Ethanol Plants. The Company expects that its
future available capital resources will consist primarily of its remaining cash balances, cash flow from operations, if any, amounts available for
borrowing, if any, under Kinergy’s credit facility, cash generated from Kinergy’s ethanol marketing business, fees paid under the asset
management agreement relating to the Company’s operation of the Pacific Ethanol Plants, cash proceeds from warrant exercises and
distributions, if any, in respect of the Company’s ownership interest in New PE Holdco.
The Company believes that current and future available capital resources, revenues generated from operations, and other existing sources of
liquidity, including its credit facilities, will be adequate to meet its anticipated working capital and capital expenditure requirements for at least
the next twelve months. If, however, the Company’s capital requirements or cash flow vary materially from its current projections, if crush
and commodity margins, which reflect ethanol and co-product sales prices relative to ethanol production inputs such as corn and natural gas,
decline in any material respect, or if other unforeseen circumstances occur, the Company may require additional financing. The Company’s
failure to raise capital, if and when needed, could restrict its growth, or hinder its ability to compete.
Cash and Cash Equivalents – The Company considers all highly-liquid investments with an original maturity of three months or less to be
cash equivalents.
F-9
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 WDG to dairy operators and animal feed
distributors and sells corn oil to poultry and biodiesel customers generally without requiring collateral. Due to a limited number of ethanol
customers, the Company had significant concentrations of credit risk from sales of ethanol as of December 31, 2013 and 2012, as described
below.
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 $27,487,000 and $20,627,000 at December 31, 2013 and 2012, respectively, were used as
collateral under Kinergy’s operating line of credit. The allowance for doubtful accounts was $187,000 and $18,000 as of December 31, 2013
and 2012, respectively. The Company recorded a bad debt expense of $169,000 and a recovery of $6,000 for the years ended December 31,
2013 and 2012, respectively. The Company does not have any off-balance sheet credit exposure related to its customers.
Concentrations of Credit Risk – Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed
completely to perform as contracted. Concentrations of credit risk, whether on- or off-balance sheet, that arise from financial instruments exist
for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic or other conditions described below. Financial instruments that subject the
Company to credit risk consist of cash balances maintained in excess of federal depository insurance limits and accounts receivable, which
have no collateral or security. The Company has not experienced any significant losses in such accounts and believes that it is not exposed to
any significant risk of loss of cash.
The Company sells fuel-grade ethanol to gasoline refining and distribution companies. The Company sold ethanol to customers representing
10% or more of the Company’s total net sales, as follows.
Customer A
Customer B
Customer C
Years Ended December 31,
2012
2013
21%
23%
16%
17%
12%
12%
The Company had accounts receivable due from these customers totaling $14,109,000 and $12,011,000, representing 40% and 46% of total
accounts receivable as of December 31, 2013 and 2012, respectively.
F-10
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company purchases fuel-grade ethanol and corn, its largest cost component in producing ethanol, from its suppliers. The Company
purchased ethanol and corn from suppliers representing 10% or more of the Company’s total purchases for the purchase and production of
ethanol, as follows:
Supplier A
Supplier B
Years Ended December 31,
2012
2013
40%
37%
14%
14%
Inventories – Inventories consisted primarily of bulk ethanol, beet sugar 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):
Finished goods
Raw materials
Work in progress
Other
Total
December 31,
2013
2012
10,287 $
9,418
2,766
915
23,386 $
10,230
1,363
3,846
805
16,244
$
$
Property and Equipment – Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the
following estimated useful lives:
Buildings
Facilities and plant equipment
Other equipment, vehicles and furniture
40 years
10 – 25 years
5 – 10 years
The cost of normal maintenance and repairs is charged to operations as incurred. Significant capital expenditures that increase the life of an
asset are capitalized and depreciated over the estimated remaining useful life of the asset. The cost of fixed assets sold, or otherwise disposed
of, and the related accumulated depreciation or amortization are removed from the accounts, and any resulting gains or losses are reflected in
current operations.
Intangible Assets – The Company amortizes intangible assets with definite lives using the straight-line method over their established lives,
generally 2-10 years. Additionally, the Company tests these assets with established lives for impairment if conditions exist that indicate that
carrying values may not be recoverable. Possible conditions leading to the unrecoverability of these assets include changes in market
conditions, changes in future economic conditions or changes in technological feasibility that impact the Company’s assessments of future
operations. If the Company determines that an impairment charge is needed, the charge will be recorded as asset impairment in the
consolidated statements of operations.
Deferred Financing Costs – Deferred financing costs, which are included in other assets, are costs incurred to obtain debt financing, including
all related fees, and are amortized as interest expense over the term of the related financing using the straight-line method which approximates
the interest rate method. Amortization of deferred financing costs was $2,009,000 and $736,000 for the years ended December 31, 2013 and
2012, respectively. Unamortized deferred financing costs were approximately $1,063,000 at December 31, 2013 and are recorded in other
assets in the consolidated balance sheets.
F-11
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative Instruments and Hedging Activities – Derivative transactions, which can include forward contracts and futures positions on the
New York Mercantile Exchange and the Chicago Board of Trade are recorded on the balance sheet as assets and liabilities based on the
derivative’s fair value. Changes in the fair value of derivative contracts are recognized currently in income unless specific hedge accounting
criteria are met. If derivatives meet those criteria, effective gains and losses are deferred in accumulated other comprehensive income (loss) and
later recorded together with the hedged item in consolidated income (loss). For derivatives designated as a cash flow hedge, the Company
formally documents the hedge and assesses the effectiveness with associated transactions. The Company has designated and documented
contracts for the physical delivery of commodity products to and from counterparties as normal purchases and normal sales.
Revenue Recognition – The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized
or realizable and earned when there is persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable,
and collection is reasonably assured. The Company derives revenue primarily from sales of ethanol and related co-products. The Company
recognizes revenue when title transfers to its customers, which is generally upon the delivery of these products to a customer’s designated
location. These deliveries are made in accordance with sales commitments and related sales orders entered into either verbally or in writing
with customers. The sales commitments and related sales orders provide quantities, pricing and conditions of sales. In this regard, the
Company engages in three basic types of revenue generating transactions:
·
·
·
As a producer. Sales as a producer consist of sales of the Company’s inventory produced at the Pacific Ethanol Plants.
As a merchant. Sales as a merchant consist of sales to customers through purchases from third-party suppliers in which the
Company may or may not obtain physical control of the ethanol or co-products, in which shipments are directed from the
Company’s suppliers to its terminals or direct to its customers but for which the Company accepts the risk of loss in the
transactions.
As an agent. Sales as an agent consist of sales to customers through purchases from third-party suppliers in which the risks and
rewards of inventory ownership remain with third-party suppliers and the Company receives a predetermined service fee under
these transactions.
Revenue from sales of third-party ethanol and co-products is recorded net of costs when the Company is acting as an agent between a
customer and a supplier and gross when the Company is a principal to the transaction. The Company recorded $1,928,000 and $2,756,000 in
net sales when acting as an agent for the years ended December 31, 2013 and 2012, respectively. Several factors are considered to determine
whether the Company is acting as an agent or principal, most notably whether the Company is the primary obligor to the customer and
whether the Company has inventory risk and related risk of loss or whether the Company adds meaningful value to the supplier’s product or
service. Consideration is also given to whether the Company has latitude in establishing the sales price or has credit risk, or both. When the
Company acts as an agent, it recognizes revenue on a net basis or recognizes its predetermined fees and any associated freight, based upon the
amount of net revenues retained in excess of amounts paid to suppliers.
The Company records revenues based upon the gross amounts billed to its customers in transactions where the Company acts as a producer or
a merchant and obtains title to ethanol and its co-products and therefore owns the product and any related, unmitigated inventory risk for the
ethanol, regardless of whether the Company actually obtains physical control of the product.
Shipping and Handling Costs – Shipping and handling costs are classified as a component of cost of goods sold in the accompanying
consolidated statements of operations.
F-12
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
California Ethanol Producer Incentive Program – The Company is eligible to participate in the California Ethanol Producer Incentive
Program (“CEPIP”) through the Pacific Ethanol Plants located in California. The CEPIP is a program that may provide funds to an eligible
California facility—up to $0.25 per gallon of production—when current production corn crush spreads, measured as the difference between
specified ethanol and corn index prices, are less than prescribed levels determined by the California Energy Commission (“CEC”). For any
month in which a payment is made by the CEPIP, the Company may be required to reimburse the funds within the subsequent five years from
each payment date, if the corn crush spread exceeds $1.00 per gallon. Since these funds are provided to subsidize current production costs and
encourage eligible facilities to either continue production or start up production in low margin environments, the Company records the
proceeds, if any, as a credit to cost of goods sold. The Company will assess the likelihood of reimbursement in future periods as corn crush
spreads approach $1.00 per gallon. If it becomes likely that amounts may be reimbursable by the Company, the Company will accrue a liability
for such payment and recognize the costs as an increase in cost of goods sold.
The program may provide up to $3,000,000 per plant per year of operation through 2014. However, in 2013 and 2012, this program was not
funded and the Company can provide no assurance that the CEC will decide to fund the CEPIP in 2014 or future periods or that the CEC will
not alter the program thresholds, participant eligibility or other policy choices that may impact the ability of the Pacific Ethanol Plants located in
California to be eligible for the CEPIP in 2014 or future years. The Company recorded $122,000 and $0 as cost of goods sold for the years
ended December 31, 2013 and 2012, respectively, in respect of accrued CEPIP payments as required reimbursement for the Company’s total
$2,000,000 received under the program.
Stock-Based Compensation – The Company accounts for the cost of employee services received in exchange for the award of equity
instruments based on the fair value of the award, determined on the date of grant. The expense is to be recognized over the period during
which an employee is required to provide services in exchange for the award. The Company estimates forfeitures at the time of grant and
makes revisions, if necessary, in the second quarter of each year if actual forfeitures differ from those estimates. Based on historical
experience, the Company estimated future unvested forfeitures at 8% and 5% for the years ended December 31, 2013 and 2012, respectively.
The Company recognizes stock-based compensation expense as a component of selling, general and administrative expenses in the
consolidated statements of operations.
Impairment of Long-Lived Assets – The Company assesses the impairment of long-lived assets, including property and equipment, internally
developed software and purchased intangibles subject to amortization, when events or changes in circumstances indicate that the fair value of
assets could be less than their net book value. In such event, the Company assesses long-lived assets for impairment by first determining the
forecasted, undiscounted cash flows the asset is expected to generate plus the net proceeds expected from the sale of the asset. If this amount is
less than the carrying value of the asset, the Company will then determine the fair value of the asset. An impairment loss would be recognized
when the fair value is less than the related asset’s net book value, and an impairment expense would be recorded in the amount of the
difference. Forecasts of future cash flows are judgments based on the Company’s experience and knowledge of its operations and the
industries in which it operates. These forecasts could be significantly affected by future changes in market conditions, the economic
environment, including inflation, and purchasing decisions of the Company’s customers.
Income Taxes – Income taxes are accounted for under the asset and liability approach, where deferred tax assets and liabilities are determined
based on differences between financial reporting and tax basis of assets and liabilities, and are measured using enacted tax rates and laws that
are expected to be in effect when the differences reverse. Valuation allowances are established when necessary to reduce deferred tax assets to
the amounts expected to be realized.
F-13
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The
first step is to evaluate the tax position for recognition by determining whether it is more likely than not that the position will be sustained on
audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount
which is more than 50% likely of being realized upon ultimate settlement. An uncertain tax position is considered effectively settled on
completion of an examination by a taxing authority if certain other conditions are satisfied. Should the Company incur interest and penalties
relating to tax uncertainties, such amounts would be classified as a component of interest expense, net and other income (expense), net,
respectively.
Income (Loss) Per Share – Basic income (loss) per share is computed on the basis of the weighted-average number of shares of common
stock outstanding during the period. Preferred dividends are deducted from net income (loss) attributed to Pacific Ethanol, Inc. and are
considered in the calculation of income (loss) available to common stockholders in computing basic income (loss) per share.
The following tables compute basic and diluted earnings per share (in thousands, except per share data):
Net loss attributed to Pacific Ethanol, Inc.
Preferred stock dividends
Basic and diluted loss per share:
Loss available to common stockholders
Net loss attributed to Pacific Ethanol, Inc.
Preferred stock dividends
Basic and diluted loss per share:
Loss available to common stockholders
Loss
Numerator
Year Ended December 31, 2013
Shares
Denominator
Per-Share
Amount
(781)
(1,265)
(2,046)
12,264 $
(0.17)
Loss
Numerator
Year Ended December 31, 2012
Shares
Denominator
Per-Share
Amount
(19,057)
(1,268)
(20,325)
7,224 $
(2.81)
$
$
$
$
The Company had accrued and unpaid dividends of $3,657,000, or $0.23 per share of common stock outstanding, as of December 31, 2013 in
respect of its Series B Cumulative Convertible Preferred Stock (“Series B Preferred Stock”).
There were an aggregate of 1,357,000 and 246,000 potentially dilutive shares from convertible securities outstanding as of December 31, 2013
and 2012, respectively. These convertible securities were not considered in calculating diluted income (loss) per common share for the years
ended December 31, 2013 and 2012 as their effect would be anti-dilutive.
Since January 1, 2014, through the date of this report, the Company issued an aggregate of 1,888,000 shares of its common stock upon cash
exercises of certain outstanding warrants.
F-14
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Instruments – The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are
reasonable estimates of their fair values because of the short maturity of these items. The Company recorded at fair value its warrants and
conversion features of its convertible notes. The Company believes the carrying value of its long-term debt approximates fair value because the
interest rates on these instruments are variable.
Estimates and Assumptions – The preparation of the consolidated financial statements in conformity with GAAP 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.
Subsequent Events – Management evaluates, as of each reporting period, events or transactions that occur after the balance sheet date through
the date that the financial statements are issued for either disclosure or adjustment to the consolidated financial results. The Company has
evaluated subsequent events up through the date of the filing of this report with the Securities and Exchange Commission. See Note 14.
Reclassifications – Certain prior year amounts have been reclassified to conform to the current presentation. Such reclassification had no effect
on the consolidated net income (loss) reported in the consolidated statements of operations.
Recent Accounting Pronouncements – There are no current pending recent accounting pronouncements potentially impacting the Company.
2. PACIFIC ETHANOL PLANTS.
Consolidation of New PE Holdco – The Company concluded that since New PE Holdco’s inception, through the point the Company became a
91% owner, New PE Holdco was a VIE because the other owners of New PE Holdco, due to the Company’s involvement through the
contractual arrangements discussed below, at all times lacked the power to direct the activities that most significantly impacted its economic
performance. However, since the Company’s recent acquisition bringing its ownership interest in New PE Holdco to 91%, the Company has
obtained sufficient control both by way of agreements as well as based on structural control of New PE Holdco, such that New PE Holdco is
no longer considered a VIE, and as such the Company will consolidate New PE Holdco under the voting rights model.
In January, March, June and December 2013, the Company purchased an additional 13%, 3%, 2% and 6% of the ownership interests in New
PE Holdco for $1,308,000, $331,000, $197,000 and $505,000 in cash, respectively, bringing its total ownership interest to 91% as of
December 31, 2013.
At the beginning of the year ended December 31, 2012, the Company had a 34% ownership interest in New PE Holdco. In July 2012, the
Company purchased an additional 33% ownership interest in New PE Holdco for $20,000,000 by paying $10,000,000 in cash and issuing
$10,000,000 in promissory notes.
Because the Company has a controlling financial interest in New PE Holdco, it did not record any gain or loss on these purchases, but instead
reduced the amount of noncontrolling interest on the consolidated balance sheets by an aggregate $14,281,000 and $27,647,000 and recorded
the difference of $11,940,000 and $7,646,000 for the years ended December 31, 2013 and 2012, respectively, which represents the fair value
of these purchases above the price paid by the Company, to additional paid-in capital on the consolidated balance sheets.
F-15
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s acquisition of its ownership interest in New PE Holdco does not impact the Company’s rights or obligations under any of the
agreements described below. Further, creditors of New PE Holdco do not have recourse to the Company. Since its acquisition, the Company
has not provided any additional support to New PE Holdco beyond the terms of the agreements described below.
The Company, directly or through one of its subsidiaries, has entered into the management and marketing agreements described below.
Asset Management Agreement – The Company entered into an Asset Management Agreement (“AMA”) with the Plant Owners under which
the Company agreed to operate and maintain the Pacific Ethanol Plants on behalf of the Plant Owners. These services generally include, but
are not limited to, administering the Plant Owners’ compliance with their credit agreements and performing billing, collection, record keeping
and other administrative and ministerial tasks. The Company agreed to supply all labor and personnel required to perform its services under
the AMA, including the labor and personnel required to operate and maintain the production facilities.
The costs and expenses associated with the Company’s provision of services under the AMA are prefunded by the Plant Owners under a
preapproved budget. The Company’s obligation to provide services is limited to the extent there are sufficient funds advanced by the Plant
Owners to cover the associated costs and expenses.
As compensation for providing the services under the AMA, the Company is paid $75,000 per month for each production facility that is
operational and $40,000 per month for each production facility that is idled. In addition to the monthly fee, if during any six-month period
(measured on September 30 and March 31 of each year commencing March 31, 2011) a production facility has annualized earnings before
interest, taxes, depreciation and amortization (“EBITDA”) per gallon of operating capacity of $0.20 or more, the Company will be paid a
performance bonus equal to 3% of the increment by which EBITDA exceeds such amount. The aggregate performance bonus for all plants is
capped at $2,200,000 for each six-month period. The performance bonus is to be reduced by 25% if all production facilities then operating do
not operate at a minimum average yield of 2.70 gallons of denatured ethanol per bushel of corn. In addition, no performance bonus is to be
paid if there is a default or event of default under the Plant Owners’ credit agreement resulting from their failure to pay any amounts then due
and owing. The AMA also provides the Company with an incentive fee upon any sale of a production facility to the extent the sales price is
above $0.60 per gallon of annual capacity. To date, no such bonuses have been earned by the Company.
The AMA had an initial term of six months and successive six-month renewal periods at the option of the Plant Owners. In addition to typical
conditions for a party to terminate the agreement prior to its expiration, the Company may terminate the AMA, and the Plant Owners may
terminate the AMA with respect to any facility, at any time by providing at least 60 days prior notice of such termination.
The Company recorded revenues and New PE Holdco recorded costs of approximately $3,477,000 and $3,180,000 related to the AMA for
the years ended December 31, 2013 and 2012, respectively. As such, these amounts have been eliminated upon consolidation.
F-16
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ethanol Marketing Agreements – The Company entered into separate ethanol marketing agreements with each of the three Plant Owners
whose facilities are operating, which granted it the exclusive right to purchase, market and sell the ethanol produced at those facilities. Under
the terms of the ethanol marketing agreements, within ten days after delivering ethanol to the Company, an amount is paid to the Company
equal to (i) the estimated purchase price payable by the third-party purchaser of the ethanol, minus (ii) the estimated amount of transportation
costs to be incurred, minus (iii) the estimated incentive fee payable to the Company, which equals 1% of the aggregate third-party purchase
price, provided that the marketing fee shall not be less than $0.015 per gallon and not more than $0.0225 per gallon. Each of the ethanol
marketing agreements had an initial term of one year and successive one year renewal periods at the option of the individual Plant Owner.
The Company recorded revenues and New PE Holdco recorded costs of approximately $3,351,000 and $3,157,000 related to the ethanol
marketing agreements for the years ended December 31, 2013 and 2012, respectively. These amounts have been eliminated upon
consolidation.
Corn Procurement and Handling Agreements – The Company entered into separate corn procurement and handling agreements with each of
the three Plant Owners whose facilities are operating. Under the terms of the corn procurement and handling agreements, each facility
appointed the Company as its exclusive agent to solicit, negotiate, enter into and administer, on its behalf, corn supply arrangements to procure
the corn necessary to operate its facility. The Company also provides grain handling services including, but not limited to, receiving, unloading
and conveying corn into the facility’s storage and, in the case of whole corn delivered, processing and hammering the whole corn.
The Company is to receive a fee of $0.045 per bushel of corn delivered to each facility as consideration for its procurement and handling
services, payable monthly. The Company agreed to enter into an agreement guaranteeing the performance of its obligations under the corn
procurement and handling agreement upon the request of a Plant Owner. Each corn procurement and handling agreement had an initial term of
one year and successive one year renewal periods at the option of the individual Plant Owner.
The Company recorded revenues and New PE Holdco recorded costs of approximately $2,423,000 and $2,271,000 related to the corn
procurement and handling agreements for the years ended December 31, 2013 and 2012, respectively. These amounts have been eliminated
upon consolidation.
Distillers Grains Marketing Agreements – The Company entered into separate distillers grains marketing agreements with each of the three
Plant Owners whose facilities are operating, which grant the Company the exclusive right to market, purchase and sell the WDG and corn oil
produced at each facility. Under the terms of the distillers grains marketing agreements, within ten days after a Plant Owner delivers WDG or
corn oil to the Company, the Plant Owner is paid an amount equal to (i) the estimated purchase price payable by the third-party purchaser of
the WDG or corn oil, minus (ii) the estimated amount of transportation costs to be incurred, minus (iii) the estimated amount of fees and taxes
payable to governmental authorities in connection with the tonnage of WDG or corn oil produced or marketed, minus (iv) the estimated
incentive fee payable to the Company, which equals the greater of (a) 5% of the aggregate third-party purchase price, and (b) $2.00 for each
ton of WDG or corn oil sold in the transaction, but not less than $2.00 per ton and not more than $3.50 per ton. Each distillers grains
marketing agreement had an initial term of one year and successive one year renewal periods at the option of the individual Plant Owner. The
Company recorded revenues and New PE Holdco recorded costs of approximately $4,584,000 and $4,353,000 related to the distillers grain
marketing agreements for the years ended December 31, 2013 and 2012, respectively. These amounts have been eliminated upon
consolidation.
F-17
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets and Liabilities of New PE Holdco – The carrying values and classification of assets that are collateral for the obligations of New PE
Holdco at December 31, 2013 were as follows (in thousands):
Cash and cash equivalents
Other current assets
Property and equipment
Other assets
Total assets
Current liabilities
Long-term debt
Other liabilities
Total liabilities
3. PROPERTY AND EQUIPMENT.
Property and equipment consisted of the following (in thousands):
Facilities and plant equipment
Land
Other equipment, vehicles and furniture
Construction in progress
Accumulated depreciation
$
$
$
$
18
15,820
150,341
2,839
169,018
18,295
94,144
6,281
118,720
December 31,
2013
2012
184,064 $
2,570
5,600
5,007
197,241
(42,047)
155,194 $
169,229
2,570
5,280
4,014
181,093
(30,684)
150,409
$
$
Depreciation expense, including idled facilities, was $11,662,000 and $11,481,000 for the years ended December 31, 2013 and 2012,
respectively. One of the Pacific Ethanol Plants was idled at December 31, 2013 and 2012. The carrying values of this facility totaled
$25,693,000 and $27,773,000 at December 31, 2013 and 2012, respectively. The Company continues to depreciate these assets, resulting in
depreciation expense in the aggregate of $2,108,000 and $2,136,000 for the years ended December 31, 2013 and 2012, respectively.
Included in plant and equipment at December 31, 2013, is $12,829,000 attributable to capital leases. Depreciation expense related to these
capital leases was $340,000 for the year ended December 31, 2013.
In accordance with the Company’s policy for evaluating impairment of long-lived assets under Accounting Codification Standards 360,
management has evaluated the Company’s idled facility for possible impairment based on projected future cash flows from the facility’s
operations. Management has determined that the undiscounted cash flows from operations of this facility over its estimated useful life exceed
its carrying value, and therefore, no impairment has been recognized at December 31, 2013. In determining the future undiscounted cash
flows, the Company made significant assumptions, including the future price of ethanol, the future price of corn, production volumes and the
overall demand in relation to production and supply. If the Company were required to compute the fair value in the future, it may use the work
of a qualified valuation specialist who would assist it in examining replacement costs, recent transactions between third parties and cash flow
that can be generated from operations. If the Company were required to adjust the carrying value of the facility to fair value at some future
point in time, the adjustment could be significant and could significantly impact the Company’s financial position and results of operation. No
adjustment has been made in these financial statements for this uncertainty.
F-18
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4.
INTANGIBLE ASSETS.
Intangible assets consisted of the following (in thousands):
Useful
Life
(Years)
December 31, 2013
Accumulated
Amortization
Net Book
Value
December 31, 2012
Accumulated
Amortization
Net Book
Value
Gross
Gross
Non-Amortizing:
Kinergy tradename
Amortizing:
Customer relationships
Total intangible assets,
net
$
2,678 $
– $
2,678 $
2,678 $
– $
2,678
10
4,741
(4,159)
582
4,741
(3,685)
1,056
$
7,419 $
(4,159) $
3,260 $
7,419 $
(3,685) $
3,734
Kinergy Tradename – The Company recorded a tradename valued at $2,678,000 in 2006 as part of its acquisition of Kinergy. The Company
determined that the Kinergy tradename has an indefinite life and therefore, rather than being amortized, will be tested annually for impairment.
The Company did not record any impairment of the Kinergy tradename for the years ended December 31, 2013 and 2012.
Customer Relationships – The Company recorded customer relationships valued at $4,741,000 as part of its acquisition of Kinergy. The
Company has established a useful life of ten years for these customer relationships.
Amortization expense associated with intangible assets totaled $474,000 and $724,000 for the years ended December 31, 2013 and 2012,
respectively. The weighted-average unamortized life of the intangible assets is 1.2 years. The remaining expected amortization expense relating
to amortizable intangible assets is $474,000 and $108,000 for each of the years ending December 31, 2014 and 2015, respectively.
5. DERIVATIVES.
The business and activities of the Company expose it to a variety of market risks, including risks related to changes in commodity prices. 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 years ended December 31, 2013 and 2012, the Company did not designate any of its derivatives as
cash flow hedges.
F-19
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commodity Risk – Non-Designated Hedges – The Company uses derivative instruments to lock in prices for certain amounts of corn and
ethanol by entering into 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 Company
recognized net losses of $1,821,000 and gains of $999,000 as the change in the fair value of these contracts for the years ended December 31,
2013 and 2012, respectively.
Non Designated Derivative Instruments – The classification and amounts of the Company’s derivatives not designated as hedging instruments
are as follows (in thousands):
As of December 31, 2013
Assets
Liabilities
Type of Instrument
Balance Sheet Location
Fair Value
Balance Sheet Location
Fair Value
Commodity contracts
Other current assets
$
$
961 Accrued liabilities
961
$
$
As of December 31, 2012
Assets
Liabilities
Type of Instrument
Balance Sheet Location
Fair Value
Balance Sheet Location
Fair Value
Commodity contracts
Other current assets
$
$
189 Accrued liabilities
189
$
$
859
859
167
167
The classification and amounts of the Company’s recognized gains (losses) for its derivatives not designated as hedging instruments are as
follows (in thousands):
Type of Instrument
Statements of Operations Location
2013
2012
Realized Gains (Losses)
For the Years Ended December 31,
Commodity contracts
Cost of goods sold
$
$
(1,901) $
(1,901) $
720
720
Unrealized Gains
For the Years Ended December 31,
Type of Instrument
Statements of Operations Location
2013
2012
Commodity contracts
Cost of goods sold
$
$
80 $
80 $
279
279
F-20
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. DEBT.
Long-term borrowings are summarized as follows (in thousands):
December 31,
2013
December 31,
2012
Kinergy operating line of credit
Senior unsecured notes
Plant Owners’ term debt and accrued interest
Plant Owners’ lines of credit and accrued interest
Note payable to related party
Less: Parent purchased Plant Owners’ term debt
Total Consolidated debt
Less: Unamortized discount on senior unsecured notes
Less short-term portion
Long-term debt
$
$
19,042 $
13,984
58,766
35,378
750
127,920
(27,088)
100,832
(1,674)
99,158
(750)
98,408 $
19,711
–
54,714
46,107
750
121,282
–
121,282
–
121,282
(4,029)
117,253
Kinergy Line of Credit – Kinergy has an operating line of credit for an aggregate amount of up to $30,000,000 with an optional accordion
feature for up to an additional $10,000,000. The line of credit matures on December 31, 2015. The credit facility is based on Kinergy’s eligible
accounts receivable and inventory levels, subject to certain concentration reserves. The credit facility is subject to certain other sublimits,
including inventory loan limits. Interest accrues under the line of credit at a rate equal to (i) the three-month London Interbank Offered Rate
(“LIBOR”), plus (ii) a specified applicable margin ranging between 2.25% and 3.25%. The applicable margin was 3.00% at December 31,
2013. The credit facility’s monthly unused line fee is 0.50% of the amount by which the maximum credit under the facility exceeds the average
daily principal balance. Payments that may be made by Kinergy to the Company as reimbursement for management and other services
provided by the Company to Kinergy are limited under the terms of the credit facility to $1,000,000 per fiscal quarter in 2014 and $1,100,000
per fiscal quarter in 2015.
The credit facility also includes the accounts receivable of PAP as additional collateral. Payments that may be made by PAP to Pacific Ethanol
as reimbursement for management and other services provided by Pacific Ethanol to PAP are limited under the terms of the credit facility to
the extent that quarterly payments would result in PAP recording less than $100,000 of net income in the quarter.
For the calendar month ended September 30, 2013 and each calendar month thereafter, Kinergy and PAP are collectively required to generate
aggregate EBITDA of $450,000 for the three months then ended and aggregate EBITDA of $1,100,000 for the six months then ended. These
amounts were required through December 31, 2013. In 2014, the required EBITDA amounts increase to $500,000 for each rolling three
month period and $1,300,000 for each rolling six month period. Further, for all monthly periods, Kinergy and PAP must collectively maintain
a fixed-charge coverage ratio (calculated as a twelve-month rolling 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 $100,000 absent the lender’s prior consent. The Company believes it is in compliance with these covenants.
F-21
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Kinergy 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 Company has guaranteed all of Kinergy’s obligations under the line of credit. As of December 31, 2013, Kinergy had an available
borrowing base under the credit facility of $30,000,000 and an outstanding balance of $19,042,000.
Senior Unsecured Notes – On January 11, 2013, under the terms of a securities purchase agreement dated December 19, 2012 among the
Company and five accredited investors, the Company issued and sold to the investors in a private offering $22,192,000 in aggregate principal
amount of its senior unsecured notes (“January 2013 Notes”) and warrants to purchase an aggregate of 1,708,700 shares of the Company’s
common stock (“January 2013 Financing Transaction”) for aggregate net proceeds of $22,072,000. The warrants have an exercise price of
$6.32 per share and expire in January 2018.
Upon closing of the January 2013 Financing Transaction, the Company recorded a debt discount of $2,657,000 associated with the value of
the warrants issued in connection with the financing. The debt discount will be amortized over the life of the January 2013 Notes to
approximate a yield adjustment.
If at any time the Company receives net cash proceeds from an issuance of equity or equity-linked securities of the Company, interest received
from any purchased and outstanding Plant Owners’ term debt, certain sales of assets or as a result of incurring certain indebtedness, then the
Company will be obligated to prepay the January 2013 Notes using 100% of all such net cash proceeds, provided that any net proceeds
received in connection with an equity-linked issuance must be used to either prepay the January 2013 Notes or purchase certain outstanding
debt issued by the Plant Owners. During 2013, the Company made principal cash payments on the January 2013 Notes in the aggregate
amount of $6,208,000 and Company issued 500,000 shares of its common stock as a $2,000,000 principal payment, resulting in a loss of
$229,000 on extinguishment of debt.
The January 2013 Notes mature on March 30, 2016 and bear interest at a rate of 5% per annum, subject to adjustment. Payments due under
the January 2013 Notes rank senior to all other indebtedness of the Company and its subsidiaries, other than certain permitted senior
indebtedness.
Interest on the January 2013 Notes is payable in cash in arrears on the fifteenth calendar day of each month beginning on March 15, 2013
(each, an “Interest Payment Date”). Subject to the satisfaction of certain equity conditions, at the option of the Company, the Company may
elect to pay interest due and payable in shares of its common stock, provided that the interest rate applicable to any outstanding amounts the
Company pays in shares will increase by 2% per annum from the then applicable interest rate for the period for which such interest is paid.
The number of shares to be issued on any particular Interest Payment Date equals the quotient of (x) the amount of interest payable (assuming
payment in shares) on such Interest Payment Date, divided by (y) the product of (i) the weighted average price of the Company’s common
stock for the thirty trading days immediately preceding (but excluding) the Interest Payment Date, and (ii) 0.95. As of December 31, 2013, the
Company had not made any interest payments in shares of its common stock.
As of December 31, 2013, the aggregate outstanding principal balance of the January 2013 Notes was $13,984,000. Further, since January 1,
2014, the Company made $13,035,000 in additional principal payments in cash, resulting in an outstanding principal balance of $949,000 as
March 31, 2014.
F-22
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restrictive Covenants
The January 2013 Notes prohibit the Company from engaging in various activities, including the following: (i) the Company and its
subsidiaries may not incur other indebtedness, except for certain permitted indebtedness; (ii) the Company and its subsidiaries may not incur
any liens, except for certain permitted liens; (iii) the Company and its subsidiaries may not, directly or indirectly, redeem or repay all or any
portion of any indebtedness (except for certain permitted indebtedness) if at the time such payment is due or is made or, after giving effect to
such payment, an event constituting, or that with the passage of time and without being cured would constitute, an event of default has
occurred and is continuing; (iv) the Company and its subsidiaries may not redeem, repurchase or pay any dividend or distribution on their
respective capital stock without the prior consent of the holders of the January 2013 Notes, other than certain permitted distributions; and (v)
the Company and its subsidiaries may not sell, lease, assign, transfer or otherwise dispose of any assets of the Company or any subsidiary,
except for certain permitted dispositions (including the sales of inventory or receivables in the ordinary course of business).
Registration Rights Agreement
The January 2013 Notes include registration rights which required that the Company file a registration statement with the Securities and
Exchange Commission within 30 days of the closing date for the resale by the January 2013 Note holders of up to 2,200,000 shares of
common stock underlying the warrants and 491,300 shares of common stock that may be issued as interest shares under the January 2013
Notes. The Company filed the initial registration statement by the 30 day deadline. As part of the Company’s issuance of subordinated
convertible notes in March 2013, the initial registration statement was withdrawn with the permission of the January 2013 Note holders. The
Company filed another registration statement with the Securities and Exchange Commission covering the warrant shares and interest shares on
June 28, 2013, which has been declared effective.
Subordinated Convertible Notes – On March 28, 2013, the Company issued $6,000,000 in aggregate principal amount of its Series A
Subordinated Convertible Notes (“Series A Notes”), and warrants to purchase an aggregate of 1,839,600 shares of common stock for
aggregate gross proceeds of $6,000,000. On June 21, 2013, the Company issued $8,000,000 in aggregate principal amount of its Series B
Subordinated Convertible Notes (“Series B Notes”) for aggregate gross proceeds of $8,000,000. The warrants have an exercise price of $7.59
per share. Of the warrants issued in the transaction, warrants to purchase 788,400 shares of common stock expire in March 2015 and warrants
to purchase 1,051,200 shares of common stock expire in June 2015. The net proceeds of these offerings of $12,560,000 were used to (i)
purchase $6,665,000 of the Plant Owners’ debt maturing in June 2013, the maturity of which was also extended at the time from June 2013 to
June 2016, and of which the Company immediately retired $1,122,000; (ii) acquire an additional 5% ownership interest in New PE Holdco;
and (iii) purchase and immediately retire an additional $3,500,000 of the Plant Owners’ term debt.
Unless converted or redeemed earlier, the Series A and B Notes were to mature on March 28, 2014. The Series A and B Notes bore interest at
5% per annum, compounded monthly. All amounts due under the Series A and B Notes were convertible at any time, in whole or in part, at
the option of the holders into shares of the Company’s common stock at a conversion price (“Fixed Conversion Price”), which was subject to
adjustment as described below.
The Series A and B Notes were initially convertible into shares of the Company’s common stock at the initial Fixed Conversion Price of
$15.00 per share. If the Company sold or issued any securities with “floating” conversion prices based on the market price of its common
stock, the holder of a Series A or B Note would have the right thereafter to substitute the “floating” conversion price for the Fixed Conversion
Price upon conversion of all or part of the Series A or B Note.
F-23
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amortization payments, together with accrued and unpaid interest on the Series A and B Notes, were payable on monthly installment dates.
On or prior to the tenth calendar day before each installment date, the Company was required to deliver a notice electing to effect a redemption
in cash or a conversion of the installment amount due on the installment date into shares of its common stock. The Company’s ability to pay an
installment amount in shares of its common stock was subject to numerous equity conditions, the failure of any of which, unless waived,
would require that the Company pay an installment amount solely in cash. On the applicable installment date, the Company was required to
deliver to the holders of Series A and B Notes an amount of shares of common stock equal to that portion of the installment amount being
converted divided by the lesser of the then existing Fixed Conversion Price and 85% of the Market Price on the installment date (“Company
Conversion Price”). The “Market Price” on any given date was equal to the lesser of (i) the volume weighted average price on the trading day
immediately preceding the date of determination, and (ii) the average of the three lowest volume weighted average prices during the ten trading
day period ending on the trading day immediately prior to the date of determination.
The holder of a Series A or B Note could, at the holder’s election by giving notice to the Company, defer the payment of the installment
amount due on any installment date to another installment date, in which case the amount deferred would become part of the subsequent
installment date and would continue to accrue interest.
On any day during the period commencing on an installment date and ending on the trading day prior to the next installment date, the holder of
a Series A or B Note could, at its election, convert the installment amounts due on up to four future installment dates at the Company
Conversion Price in effect on the current installment date, provided that if the Company had elected to convert the installment amount due on
the current installment date, the holder could only convert up to three future installment amounts. Upon the occurrence of certain events of
default, there would be no limitation on the number of installment amounts that the holder could accelerate and the Company Conversion Price
applicable to conversions made pursuant to this acceleration feature would equal the lesser of (i) the Company Conversion Price on the current
installment date, (ii) 85% of the Market Price, and (iii) the Fixed Conversion Price then in effect.
The Company determined that the conversion feature of the Series A and B Notes and the related warrants require bifurcation and liability
classification and measurement, at fair value, and require evaluation at each reporting period. The initial fair values of the conversion feature of
the Series A Notes of $1,400,800 and the warrants of $882,500 were accounted for as a debt discount and were amortized into interest
expense as a yield adjustment over the term of the Series A Notes. The initial fair values of the conversion feature of the Series B Notes of
$2,928,500 and the warrants of $689,300 were accounted for as a debt discount and were amortized into interest expense as a yield adjustment
over the term of the Series B Notes.
From April 1, 2013 through December 31, 2013, the Company made installment payments and processed a number of conversions. In the
aggregate, the Company issued 4,446,000 shares of its common stock in payment of principal and interest in an aggregate amount of the
$14,000,000 in respect of the Series A and B Notes. In connection with these installment payments and conversions, the Company recorded
losses on extinguishments of debt of $4,621,000 for the year ended December 31, 2013.
As of December 31, 2013, the Series A and B Notes had been fully retired.
F-24
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Plant Owners’ Term Debt and Operating Lines of Credit – The Plant Owners’ debt as of December 31, 2013 consisted of a $32,487,000
tranche A-1 term loan, a $26,279,000 tranche A-2 term loan and a $35,378,000 revolving credit facility. The term and revolving debt require
monthly interest payments at a floating rate equal to the three-month LIBOR or the Prime Rate of interest, at the Plant Owners’ election, plus
10.0%. At December 31, 2013, the interest rate was approximately 13.25%. Repayments of principal are based on available free cash flow of
the Plant Owners, until maturity, when all principal amounts are due.
From July 13, 2012 through June 30, 2013, the Plant Owners entered into transactions which amended the term and revolving debt and
extended the maturity dates in respect of the combined term loans and revolving debt from June 25, 2013 to June 30, 2016.
Monthly interest payments due to certain lenders on both the term and revolving debt was deferred and added to the principal amount of the
loans. As of December 31, 2013, the extended principal balances above included $7,487,000 of accrued interest that was deferred by the Plant
Owners.
As of December 31, 2013, the aggregate outstanding balance of the revolving credit facility was $35,378,000. Further, since January 1, 2014,
the Company made $19,378,000 in additional principal payments in cash, resulting in an outstanding balance of $16,000,000 as of March 31,
2014, with availability of $19,378,000.
Acquisitions of Plant Debt – On January 11, 2013, the Company used $21,500,000 of the proceeds of the January 2013 Financing
Transaction to purchase from certain lenders an aggregate amount of $21,500,000 of the Plant Owners’ tranche A-2 term loans. The Company
determined that the acquisition of the plant debt was a modification of terms because the lenders who held the acquired plant debt were the
lenders under the January 2013 Notes. Based on the Company’s review of the present value of cash flows of the January 2013 Notes
compared to the older plant debt, which resulted in a less than 10% change, the modification was not significant and the Company did not
record a gain or loss associated with the modification. The Company expensed certain legal costs associated with the debt modification of
approximately $408,000, rather than amortizing those expenses over the life of the debt. Because the plant debt acquired is now held by Pacific
Ethanol, this specific debt is eliminated in consolidation.
On March 28, 2013, the Company used proceeds from the issuance of its Series A Notes and warrants to purchase $3,500,000 of revolving
credit facility debt, at par, from a lender. Under the terms of the amended credit facility, the Company was obligated to immediately forgive the
purchased amount of revolving credit facility debt and has permanently reduced the maximum commitment on this facility to $36,500,000.
On March 28, 2013, the Company also used proceeds from the issuance of its Series A Notes and warrants to purchase $2,636,000 of tranche
A-2 term loans and an additional 3% ownership interest in New PE Holdco for a combined purchase price of $2,150,000. The Company first
allocated $331,000 of this payment to the New PE Holdco ownership interest and the remainder was allocated to the tranche A-2 term loans.
The $817,000 difference between the amount the Company allocated to the term loans and the face amount of $2,636,000 was recorded as a
gain on extinguishment of debt.
On June 21, 2013, the Company used proceeds from the issuance of its Series B Notes to purchase $1,122,000 of revolving credit facility
debt at a discount. Under the terms of the amended credit facility, the Company was obligated to immediately forgive the purchased amount of
revolving credit facility debt and has permanently reduced the maximum commitment on this facility to $35,378,000.
F-25
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 21, 2013, the Company also used proceeds from the issuance of its Series B Notes to purchase $2,907,000 of tranche A-1 and A-2
term loans at a discount and an additional 2% ownership interest in New PE Holdco for $197,000. The Company recorded a gain on
extinguishment of debt of $998,000 related to the discount it paid for the revolving and term loans.
New Operating Line of Credit – On October 29, 2012, the Plant Owners entered into a new revolving credit facility that initially provided for
up to an additional $10,000,000. The Plant Owners have the right at any time, and from time to time, but subject to limitations imposed by an
intercreditor agreement, to prepay in whole or in part the revolving loans and tranche A-1 loans (and the tranche A-2 loans following the
payment in full of the revolving loans and tranche A-1 loans). However, in the event of any prepayment of the tranche A-1 loans that have a
maturity date of June 30, 2016, the Plant Owners must pay a premium equal to the present value of all interest payments that would have
accrued from the date of such payment through June 30, 2016, calculated using a discount rate, applied quarterly, equal to the Treasury Rate as
of such prepayment date plus 50 basis points. The credit agreement also provides for mandatory prepayments in connection with certain
customary events, including any sale of material assets; however, certain mandatory prepayments are not subject to the prepayment premium.
On January 4, 2013, the Plant Owners entered into an amendment to the new revolving credit facility and extended the maturity date of the
facility from June 25, 2013 to June 25, 2015. On March 28, 2013, the lenders approved $5,000,000 in additional availability for a maximum
total credit limit of $15,000,000 under the facility. At December 31, 2013, the interest rate was approximately 8.75% and the Plant Owners
had unused availability under the new revolving credit facility of $15,000,000.
All of the term loans and revolving credit facilities represent permanent financing and are secured by a perfected, first-priority security interest
in substantially all of the assets, including inventories and all rights, title and interest in all tangible and intangible assets, of the Plant Owners.
The Plant Owners’ creditors do not have recourse to Pacific Ethanol, Inc.
Note Payable to Related Party – The Company had a note payable to its Chief Executive Officer totaling $750,000 as of December 31, 2013.
Interest on the unpaid principal amount accrues at a rate of 8.00% per annum. The Company recorded interest expense for this note of
approximately $60,000 for each of the years ended December 31, 2013 and 2012, respectively. On February 7, 2013, the maturity date was
extended to March 31, 2014. On March 31, 2014, the Company paid in cash the outstanding balance of the note payable.
Interest Expense on Borrowings – Interest expense on all borrowings discussed above was $12,680,000 and $12,314,000 for the years ended
December 31, 2013 and 2012, respectively.
Long-term debt due in each of the next three years as of December 31, 2013 was as follows (in thousands):
Years Ended December 31,
Amount
2014
2015
2016
Total
$
$
750
19,042
81,040
100,832
F-26
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7.
INCOME TAXES.
The asset and liability method is used to account for income taxes. Under this method, deferred tax assets and liabilities are recognized for tax
credits and for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded to reduce the carrying
amounts of deferred tax assets unless it is more likely than not that those assets will be realized.
The Company files a consolidated federal income tax return. This return includes all entities 80% or more owned by the Company as well as
the Company’s pro-rata share of taxable income from pass-through entities in which the Company holds an ownership interest. State tax
returns are filed on a consolidated, combined or separate basis depending on the applicable laws relating to the Company and its subsidiaries.
The Company recorded no provision for income taxes for the years ended December 31, 2013 and 2012.
A reconciliation of the differences between the United States statutory federal income tax rate and the effective tax rate as provided in the
consolidated statements of operations is as follows:
Statutory rate
Change in valuation allowance
Convertible debt instruments
Section 382 reduction to loss carryover
State income taxes, net of federal benefit
Stock compensation
Non-deductible items
Other
Effective rate
F-27
Years Ended December 31,
2012
2013
35.0%
458.0
(297.7)
(141.1)
(8.2)
(20.9)
(27.7)
2.6
0.0%
35.0%
125.5
–
(169.4)
5.5
(1.9)
3.6
1.7
0.0%
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes are provided using the asset and liability method to reflect temporary differences between the financial statement
carrying amounts and the tax bases of assets and liabilities using presently enacted tax rates and laws. The components of deferred income
taxes included in the consolidated balance sheets were as follows (in thousands):
Deferred tax assets:
Net operating loss carryforwards
Capital loss carryover
Stock-based compensation
Enterprise zone credits
Other accrued liabilities
Fixed assets
Other
Total deferred tax assets
Deferred tax liabilities:
Investment in New PE Holdco
Intangibles
Derivative instruments mark-to-market
Total deferred tax liabilities
Valuation allowance
Net deferred tax liabilities
Classified in balance sheet as:
Deferred income tax benefit (current assets)
Deferred income taxes (long-term liability)
December 31,
2013
2012
17,566 $
844
556
259
395
119
217
19,956
(11,074)
(1,325)
(226)
(12,625)
(8,422)
(1,091) $
– $
(1,091)
(1,091) $
17,818
840
278
–
156
167
207
19,466
(7,480)
(1,513)
(9)
(9,002)
(11,555)
(1,091)
–
(1,091)
(1,091)
$
$
$
$
A portion of the Company’s net operating loss carryforwards will be subject to provisions of the tax law that limit the use of losses incurred
by a company prior to the date certain ownership changes occur. The amount of the Company’s net operating loss carryforwards that would
be subject to these limitations was approximately $374,810,000 at December 31, 2013.
Due to the limitation, a significant portion of these net operating loss carryforwards will expire regardless of whether the Company generates
future taxable income. After reducing these net operating loss carryforwards for the amount which will expire, the Company had federal net
operating loss carryforwards of approximately $45,250,000 and $45,424,000, and state net operating loss carryforwards of approximately
$41,695,000 and $48,291,000, at December 31, 2013 and 2012, respectively.
These net operating loss carryforwards expire at various dates beginning in 2014. The deferred tax asset for the Company’s net operating loss
carryforwards at December 31, 2013 does not include $486,000 which relates to the tax benefits associated with warrants and non-statutory
options exercised by employees, members of the board and others under the various incentive plans. These tax benefits will be recognized in
stockholders’ equity rather than in the statements of operations but not until the period in which these amounts decrease taxes payable.
F-28
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In assessing whether the deferred tax assets are realizable, a more likely than not standard is applied. If it is determined that it is more likely
than not that deferred tax assets will not be realized, a valuation allowance must be established against the deferred tax assets. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the associated
temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies in making this assessment.
A valuation allowance has been established in the amount of $8,422,000 and $11,555,000 at December 31, 2013 and 2012, respectively,
based on the Company’s assessment of the future realizability of certain deferred tax assets. For the years ended December 31, 2013 and
2012, the Company recorded a decrease in the valuation allowance of $3,133,000 and $23,797,000, respectively, attributable almost
exclusively to the expected expiration of net operating loss carryforwards due to limitations caused by ownership changes as previously
discussed. The valuation allowance on deferred tax assets is related to future deductible temporary differences and net operating loss
carryforwards (exclusive of net operating losses associated with items recorded directly to equity) for which the Company has concluded it is
more likely than not that these items will not be realized in the ordinary course of operations.
At December 31, 2013, the Company had no increase or decrease in unrecognized income tax benefits for the year as a result of uncertain tax
positions taken in a prior or current period. There was no accrued interest or penalties relating to tax uncertainties at December 31, 2013.
Unrecognized tax benefits are not expected to increase or decrease within the next twelve months.
The Company is subject to income tax in the United States federal jurisdiction and various state jurisdictions and has identified its federal tax
return and tax returns in state jurisdictions below as “major” tax filings. These jurisdictions, along with the years still open to audit under the
applicable statutes of limitation, are as follows:
Jurisdiction
Federal
Arizona
California
Colorado
Idaho
Oregon
Tax Years
2010 – 2012
2010 – 2012
2009 – 2012
2009 – 2012
2010 – 2012
2010 – 2012
However, because the Company had net operating losses and credits carried forward in several of the jurisdictions, including the United States
federal and California jurisdictions, certain items attributable to closed tax years are still subject to adjustment by applicable taxing authorities
through an adjustment to tax attributes carried forward to open years.
8. PREFERRED STOCK.
The Company has 6,734,835 undesignated shares of authorized and unissued preferred stock, which may be designated and issued in the
future on the authority of the Company’s Board of Directors. As of December 31, 2013, the Company had the following designated preferred
stock:
F-29
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Series A Preferred Stock – The Company has authorized 1,684,375 shares of Series A Cumulative Redeemable Convertible Preferred Stock
(“Series A Preferred Stock”), with none outstanding at December 31, 2013 and 2012. Shares of Series A Preferred Stock that are converted
into shares of the Company’s common stock revert to undesignated shares of authorized and unissued preferred stock.
Upon any issuance, the Series A Preferred Stock would rank senior in liquidation and dividend preferences to the Company’s common stock.
Holders of Series A Preferred Stock would be entitled to quarterly cumulative dividends payable in arrears in cash in an amount equal to 5%
per annum of the purchase price per share of the Series A Preferred Stock. The holders of the Series A Preferred Stock would have
conversion rights initially equivalent to two shares of common stock for each share of Series A Preferred Stock, subject to customary
antidilution adjustments. Certain specified issuances will not result in antidilution adjustments. The shares of Series A Preferred Stock would
also be subject to forced conversion upon the occurrence of a transaction that would result in an internal rate of return to the holders of the
Series A Preferred Stock of 25% or more. Accrued but unpaid dividends on the Series A Preferred Stock are to be paid in cash upon any
conversion of the Series A Preferred Stock.
The holders of Series A Preferred Stock would have a liquidation preference over the holders of the Company’s common stock equivalent to
the purchase price per share of the Series A Preferred Stock plus any accrued and unpaid dividends on the Series A Preferred Stock. A
liquidation would be deemed to occur upon the happening of customary events, including transfer of all or substantially all of the Company’s
capital stock or assets or a merger, consolidation, share exchange, reorganization or other transaction or series of related transactions, unless
holders of 66 2/3% of the Series A Preferred Stock vote affirmatively in favor of or otherwise consent to such transaction.
Series B Preferred Stock – The Company has authorized 1,580,790 shares of Series B Preferred Stock, with 926,942 shares outstanding at
December 31, 2013 and 2012. Shares of Series B Preferred Stock that are converted into shares of the Company’s common stock revert to
undesignated shares of authorized and unissued preferred stock.
The Series B Preferred Stock ranks senior in liquidation and dividend preferences to the Company’s common stock. Holders of Series B
Preferred Stock are entitled to quarterly cumulative dividends payable in arrears in cash in an amount equal to 7.00% per annum of the
purchase price per share of the Series B Preferred Stock; however, subject to the provisions of the Letter Agreement described below, such
dividends may, at the option of the Company, be paid in additional shares of Series B Preferred Stock based initially on the liquidation value
of the Series B Preferred Stock. The holders of Series B Preferred Stock have a liquidation preference over the holders of the Company’s
common stock initially equivalent to $19.50 per share of the Series B Preferred Stock plus any accrued and unpaid dividends on the Series B
Preferred Stock. A liquidation will be deemed to occur upon the happening of customary events, including the transfer of all or substantially
all of the capital stock or assets of the Company or a merger, consolidation, share exchange, reorganization or other transaction or series of
related transaction, unless holders of 66 2/3% of the Series B Preferred Stock vote affirmatively in favor of or otherwise consent that such
transaction shall not be treated as a liquidation. The Company believes that such liquidation events are within its control and therefore has
classified the Series B Preferred Stock in stockholders’ equity.
F-30
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The holders of the Series B Preferred Stock have conversion rights initially equivalent to approximately 0.03 shares of common stock for each
share of Series B Preferred Stock. The conversion ratio is subject to customary antidilution adjustments. In addition, antidilution adjustments
are to occur in the event that the Company issues equity securities, including derivative securities convertible into equity securities (on an as-
converted or as-exercised basis), at a price less than the conversion price then in effect. The shares of Series B Preferred Stock are also subject
to forced conversion upon the occurrence of a transaction that would result in an internal rate of return to the holders of the Series B Preferred
Stock of 25% or more. The forced conversion is to be based upon the conversion ratio as last adjusted. Accrued but unpaid dividends on the
Series B Preferred Stock are to be paid in cash upon any conversion of the Series B Preferred Stock.
The holders of Series B Preferred Stock vote together as a single class with the holders of the Company’s common stock on all actions to be
taken by the Company’s stockholders. Each share of Series B Preferred Stock entitles the holder to approximately 0.03 votes per share on all
matters to be voted on by the stockholders of the Company. Notwithstanding the foregoing, the holders of Series B Preferred Stock are
afforded numerous customary protective provisions with respect to certain actions that may only be approved by holders of a majority of the
shares of Series B Preferred Stock.
In 2008, the Company entered into Letter Agreements with Lyles United LLC (“Lyles United”) and other purchasers under which the
Company expressly waived its rights under the Certificate of Designations relating to the Series B Preferred Stock to make dividend payments
in additional shares of Series B Preferred Stock in lieu of cash dividend payments without the prior written consent of Lyles United and the
other purchasers.
Registration Rights Agreement – In connection with the sale of its Series B Preferred Stock, the Company entered into a registration rights
agreement with Lyles United. The registration rights agreement is to be effective until the holders of the Series B Preferred Stock, and their
affiliates, as a group, own less than 10% for each of the series issued, including common stock into which such Series B Preferred Stock has
been converted. The registration rights agreement provides that holders of a majority of the Series B Preferred Stock, including common stock
into which such Series B Preferred Stock has been converted, may demand and cause the Company to register on their behalf the shares of
common stock issued, issuable or that may be issuable upon conversion of the Preferred Stock and as payment of dividends thereon, and upon
exercise of the related warrants (collectively, the “Registrable Securities”). The Company is required to keep such registration statement
effective until such time as all of the Registrable Securities are sold or until such holders may avail themselves of Rule 144 for sales of
Registrable Securities without registration under the Securities Act of 1933, as amended. The holders are entitled to two demand registrations
on Form S-1 and unlimited demand registrations on Form S-3; provided, however, that the Company is not obligated to effect more than one
demand registration on Form S-3 in any calendar year. In addition to the demand registration rights afforded the holders under the registration
rights agreement, the holders are entitled to unlimited “piggyback” registration rights. These rights entitle the holders who so elect to be
included in registration statements to be filed by the Company with respect to other registrations of equity securities. The Company is
responsible for all costs of registration, plus reasonable fees of one legal counsel for the holders, which fees are not to exceed $25,000 per
registration. The registration rights agreement includes customary representations and warranties on the part of both the Company and the
holders and other customary terms and conditions.
The Company recorded preferred stock dividends of $1,265,000 and $1,268,000 for the years ended December 31, 2013 and 2012,
respectively. For the years ended December 31, 2009, 2010 and 2011, the Company accrued but did not pay any preferred stock dividends.
For the years ended December 31, 2012 and 2013, however, the Company did pay its accrued dividends in cash.
F-31
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Beginning in 2012, the Company has entered into a series of agreements with the parties to whom unpaid dividends were owed under which
the Company issued shares of its common stock in satisfaction of a portion of the accrued and unpaid dividends. In connection with each
payment of accrued and unpaid dividends, the payees agreed to forebear for a term from exercising any rights they may have with the respect
to accrued and unpaid dividends. The following table summarizes the details of the Company’s agreements with the holders of its Series B
Preferred Stock:
Agreement Date
Amount of
Dividends Paid
Shares of
Common Stock
Issued
Extended Forbearance Date
August 12, 2012
December 26, 2012
March 27, 2013
July 26, 2013
September 17, 2013
Total
Accrued and unpaid dividends
$
$
$
$
$
$
$
732,000
732,000
732,000
731,000
731,000
3,658,000
3,657,000
January 1, 2014
June 30, 2014
157,000
144,500
139,000 September 30, 2014
175,000 December 31, 2014
197,000 March 31, 2015
812,500
The Company believes it has adequate liquidity to continue to pay quarterly dividends in cash for at least the next twelve months. The
Company may continue to pay down the balance of accrued and unpaid dividends in respect of its Series B Preferred Stock by issuing
additional shares of common stock. The Company does not believe that these contemplated dividend payments in cash and stock will
materially impact its liquidity. If the Company fails to make ongoing quarterly cash dividend payments, it will be in default under the terms of
its agreements with the holders of its Series B Preferred Stock and the holders’ current forbearance through March 31, 2015 will be
ineffective. The Company could experience a material adverse effect on its liquidity if it is required to pay in cash the entire current balance of
accrued and unpaid dividends; however, the Company believes such an outcome is remote.
9. COMMON STOCK AND WARRANTS.
Warrant issuances – In connection with the January 2013 Financing Transaction, the Company issued warrants to purchase an aggregate of
1,708,700 shares of common stock. The warrants have an exercise price of $6.32 per share and expire in January 2018.
In connection with the Company’s issuance of its Series A and B Notes, the Company issued warrants to purchase up to 788,400 and
1,051,200 shares of common stock. The warrants have an exercise price of $7.59 per share and expire in March 2015 and June 2015,
respectively.
Warrant exercises – During February 2013, certain holders exercised warrants and received an aggregate of 267,733 shares of the Company’s
common stock upon payment of an aggregate of $2,064,000 in cash. The Company paid $785,800 in cash to the warrant holders as an
inducement for these exercises, which was recorded as an expense. In March 2013, a holder exercised warrants on a cashless basis and
received 11,356 shares of the Company’s common stock. From January 1, 2014 through March 31, 2014, certain holders exercised warrants
and received an aggregate of 1,888,000 shares of the Company’s common stock upon payment of an aggregate of $12,122,000 in cash.
F-32
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 2012 Public Offering – On September 26, 2012, the Company raised $10,091,000, net of $909,000 of underwriting fees and
issuance costs, through a public offering of units consisting of an aggregate of 1,833,000 shares of common stock and warrants immediately
exercisable to purchase an aggregate of 1,833,000 shares of common stock at an exercise price of $8.85 per share and which expire in 2015.
The Company accounted for the net proceeds of the offering by first allocating the $1,658,000 fair value of the warrants to liabilities and then
allocating the remaining amount to equity.
July 2012 Public Offering – On July 3, 2012, the Company raised $10,903,000, net of $1,137,000 of underwriting fees and issuance costs,
through a public offering of units consisting of an aggregate of 1,867,000 shares of common stock, warrants immediately exercisable to
purchase an aggregate of 1,867,000 shares of common stock at an exercise price of $9.45 per share and which expire in 2017 (“Series I
Warrants”) and warrants immediately exercisable to purchase an aggregate of 933,000 shares of common stock at an exercise price of $7.95
per share and which expire in 2014 (“Series II Warrants”). The Series I Warrants and the Series II Warrants are subject to “weighted-average”
anti-dilution adjustments if the Company issues or is deemed to have issued securities at a price lower than their then applicable exercise
prices. Due to subsequent transactions, the exercise price of the Series I Warrants was reduced to $6.09 per share and the exercise price of the
Series II Warrants was reduced to $5.47 per share. The Company accounted for the net proceeds of the offering by first allocating the
$3,380,000 fair value of the warrants to liabilities and then allocating the remaining amount to equity. In 2012, certain holders exercised their
warrants with respect to 3,334 shares of common stock for $22,000 in cash.
Warrant Terms – The exercise prices of the warrants described above are subject to adjustment for stock splits, combinations or similar
events, and, in such event, the number of shares issuable upon the exercise of the warrants will also be adjusted so that the aggregate exercise
price shall be the same immediately before and immediately after the adjustment. The warrants generally require payments to be made by the
Company for failure to deliver the shares of common stock issuable upon exercise. The warrants may not be exercised if, after giving effect to
the exercise, the investor together with its affiliates would beneficially own in excess of 4.99% of the Company’s outstanding shares of
common stock. The blocker applicable to the exercise of the warrants may be raised or lowered to any other percentage not in excess of
9.99%, except that any increase will only be effective upon 61-days’ prior notice to the Company. If the Company issues options, convertible
securities, warrants, stock, or similar securities to holders of its common stock generally, each holder of certain warrants has the right to
acquire the same securities as if the holder had exercised its warrants. The warrants prohibit the Company from entering into specified
transactions involving a change of control, unless the successor entity assumes all of the Company’s obligations under the warrants under a
written agreement before the transaction is completed. When there is a transaction involving a permitted change of control, a holder of a
warrant a will have the right to force the Company to repurchase the holder’s warrant for a purchase price in cash equal to the Black-Scholes
value (as calculated under the individual warrant agreements) of the then unexercised portion of the warrant.
Accounting for Warrants – The Company has determined that the warrants issued in the above transactions did not meet the conditions for
classification in stockholders’ equity and as such, the Company has recorded them as a liability at fair value. The Company will revalue them
at each reporting period. Further, as noted above, certain of the exercise prices declined as a result of the anti-dilution adjustments due to
subsequent transactions. Accordingly, the Company recorded fair value adjustments quarterly, with total fair value adjustments of $648,000
and $1,954,000 for the years ended December 31, 2013 and 2012, respectively, which is largely attributed to adjustment, if any, to their
exercise prices, term shortening and changes in the market value of the Company’s common stock. See Note 12 for the Company’s fair value
assumptions.
F-33
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Registration Rights Agreements – In connection with the above issuances, the Company entered into a registration rights agreements with all
of the investors to file registration statements on Form S-1 or S-3 with the Securities and Exchange Commission by certain dates for the resale
by the purchasers of the shares of common stock issued and the shares of common stock issuable upon exercise of the warrants. Subject to
customary grace periods, the Company is required to keep the registration statements (and the accompanying prospectuses) available for use
for resale by the investors on a delayed or continuous basis at then-prevailing market prices at all times until the earlier of (i) the date as of
which all of the investors may sell all of the shares of common stock required to be covered by the registration statement without restriction
under Rule 144 under the Securities Act of 1933, as amended (including volume restrictions) and without the need for current public
information required by Rule 144(c)(1), if applicable) or (ii) the date on which the investors have sold all of the shares of common stock
covered by the registration statement. The Company must pay registration delay payments of up to 2% of each investor’s initial investment per
month if the registration statement ceases to be effective prior to the expiration of deadlines provided for in the registration rights agreement.
The initial registration statements became effective by the stated deadlines and the Company did not record any liability associated with any
registration delay payments under the registration rights agreements.
Warrant Summary – The following table summarizes warrant activity for the years ended December 31, 2013 and 2012 (number of shares in
thousands):
Balance at December 31, 2011
Warrants issued
Warrants exercised
Balance at December 31, 2012
Warrants issued
Warrants exercised
Warrants expired
Balance at December 31, 2013
10. STOCK-BASED COMPENSATION.
Number of
Shares
426
4,633
(20)
5,039
3,548
(285)
(27)
8,275
Price per
Share
$1.80 – $745.50
$6.45 – $8.85
$1.80 – $7.95
$1.80 – $745.50
$6.32 – $7.59
$1.80 – $8.85
$745.50
$5.47– $735.00
$
$
$
$
$
$
$
$
Weighted
Average
Exercise Price
117.60
7.80
2.85
17.10
6.98
7.27
745.50
10.04
The Company has two equity incentive compensation plans: a 2004 Stock Option Plan and a 2006 Stock Incentive Plan.
2004 Stock Option Plan – The 2004 Stock Option Plan authorized the issuance of incentive stock options (“ISOs”) and non-qualified stock
options (“NQOs”) to the Company’s officers, directors or key employees or to consultants that do business with the Company for up to an
aggregate of 23,810 shares of common stock. On September 7, 2006, the Company terminated the 2004 Stock Option Plan, except to the
extent of issued and outstanding options then existing under the plan. The Company had 762 stock options outstanding under its 2004 Stock
Option Plan at December 31, 2013 and 2012.
2006 Stock Incentive Plan – The 2006 Stock Incentive Plan authorizes the issuance of ISOs, NQOs, restricted stock, restricted stock units,
stock appreciation rights, direct stock issuances and other stock-based awards to the Company’s officers, directors or key employees or to
consultants that do business with the Company for up to an aggregate of 914,285 shares of common stock.
F-34
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options – On August 1, 2011, August 25, 2011 and June 18, 2013, the Company granted options to purchase an aggregate of 12,900,
1,000 and 229,000 shares of the Company’s common stock at exercise prices of $12.90, $5.25 and $3.74 per share, which were the respective
closing prices per share of the Company’s common stock on the dates of grant, with estimated fair values of $6.60, $2.70 and $1.68,
respectively. The options granted in 2011 vested as to 33% on each of April 1, 2012 and 2013 and vest as to 34% on April 1, 2014. The
options granted in 2013 vest as to 33% on each of April 1, 2014 and 2015 and vest as to 34% on April 1, 2016. The options expire 10 years
from the date of grant. Fair value was determined using the Black-Scholes Option Pricing Model. For the August 1, 2011 grants, the inputs to
estimating fair value were: exercise price of $12.90; estimated life of 5.0 years; expected volatility of 56.7%; and risk free interest rate of
2.50%. For the August 25, 2011 grants, the inputs to estimating fair value were: exercise price of $5.25; estimated life of 5.0 years; expected
volatility of 56.7% and risk free interest rate of 2.50%. For the June 18, 2013 grants, the inputs to estimating fair value were: exercise price of
$3.74; estimated life of 3.0 years; expected volatility of 68.0% and risk free interest rate of 0.57%. The Company estimates expected volatility
using peer companies within its industry.
Summaries of the status of Company’s stock option plans as of December 31, 2013 and 2012 and of changes in options outstanding under the
Company’s plans during those years are as follows (shares in thousands):
Outstanding at beginning of year
Issued
Cancelled
Outstanding at end of year
Options exercisable at end of year
Years Ended December 31,
2013
2012
Number
of Shares
Weighted Average
Exercise Price
Number
of Shares
Weighted Average
Exercise Price
13 $
229 $
(1) $
241 $
9 $
63.00
3.74
12.90
6.91
88.08
15 $
– $
(2) $
13 $
5 $
56.70
–
8.25
63.00
147.45
Stock options outstanding as of December 31, 2013, were as follows (number of shares in thousands):
Range of
Exercise Prices
Number
Outstanding
Options Outstanding
Weighted Average
Remaining
Contractual Life
(yrs)
Options Exercisable
Weighted Average
Exercise
Price
Number Exercisable
Weighted
Average
Exercise
Price
$3.74
$12.90
$866.25-$871.50
229
11
1
9.47 $
7.59 $
1.57 $
3.74
12.90
867.23
– $
8 $
1 $
–
12.90
867.23
The options outstanding at December 31, 2013 and 2012 had intrinsic values of $309,000 and $0, respectively.
F-35
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock – The Company granted to certain employees and directors shares of restricted stock under its 2006 Stock Incentive Plan
pursuant to restricted stock agreements. A summary of unvested restricted stock activity is as follows (shares in thousands):
Unvested at December 31, 2011
Vested
Canceled
Unvested at December 31, 2012
Issued
Vested
Canceled
Unvested at December 31, 2013
Weighted
Average
Grant Date
Fair Value
Per Share
Number of
Shares
31 $
(13) $
(2) $
16 $
615 $
(142) $
(17) $
472 $
64.05
81.90
61.20
50.40
4.56
7.85
6.10
5.07
The fair value of the common stock at vesting aggregated $601,000 and $112,000 for the years ended December 31, 2013 and 2012,
respectively. Stock-based compensation expense related to employee and non-employee restricted stock and option grants recognized in
income were as follows (in thousands):
Employees
Non-employees
Total stock-based compensation expense
Years Ended December 31,
2012
2013
$
$
1,333 $
391
1,724 $
782
24
806
At December 31, 2013, the total compensation cost related to unvested awards which had not been recognized was $2,400,000 and the
associated weighted-average period over which the compensation cost attributable to those unvested awards would be recognized was 1.65
years.
11. COMMITMENTS AND CONTINGENCIES.
Commitments – The following is a description of significant commitments at December 31, 2013:
Leases – Future minimum lease payments required by non-cancelable leases in effect at December 31, 2013 are as follows (in thousands):
Years Ended December 31,
2014
2015
2016
2017
2018
Thereafter
Total minimum payments
Amount representing interest
Obligations under capital leases
Obligations due within one year
Long-term obligations under capital leases
$
$
Capital Leases
Operating Leases
1,120
1,141
1,103
951
869
2,721
7,905
5,109 $
4,351
746
794
547
–
11,547 $
(676)
10,871
4,830
6,041
Total rent expense during the years ended December 31, 2013 and 2012 was $1,454,000 and $2,252,000, respectively.
F-36
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sales Commitments – At December 31, 2013, the Company had entered into sales contracts with its major customers to sell certain quantities
of ethanol, WDG, corn oil and syrup. The Company had open ethanol indexed-price contracts for 122,273,000 gallons of ethanol as of
December 31, 2013. The Company had open corn oil fixed-price sales contracts valued at $959,000 and open indexed-price sales contracts for
1.8 million pounds of corn oil as of December 31, 2013. The Company had open WDG and syrup fixed-price sales contracts valued at
$105,000 and open indexed-price sales contracts for 270 tons of WDG and syrup as of December 31, 2013. These sales contracts will be
completed throughout 2014.
Purchase Commitments – At December 31, 2013, the Company had indexed-price purchase contracts to purchase 15,457,000 gallons of
ethanol and fixed-price purchase contracts to purchase $18,736,000 of ethanol from its suppliers. These purchase commitments will be
satisfied throughout 2014.
Contingencies – The following is a description of significant contingencies at December 31, 2013:
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 alleges 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 seeks 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 attorney’s fees. The Company has since answered the complaint and 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.
F-37
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 are similar to those filed against Pacific Ethanol, Inc. in May 2013. These two
cases, currently pending in the United States District Court for the Eastern District of California and United States District Court for the
Eastern District of Idaho, respectively, will be 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. is pending, in accordance with a Conditional Transfer Order issued
by the Judicial Panel on Multidistrict Litigation on March 27, 2014. Although PE Stockton and PE Magic Valley do separate and market corn
oil, the Company, 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. The Company, PE Stockton and PE Magic Valley expect to mount vigorous defenses that
include noninfringement, unenforceability, and invalidity of each of the patents at issue.
12. 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 2011 through 2013 and its conversion features associated with its convertible notes at fair
value and designated them as Level 3 on their issuance date.
Warrants – Except for the warrants issued September 26, 2012, the 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.
F-38
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant assumptions used and related fair values for the warrants as of December 31, 2013 were as follows:
Original Issuance
06/21/2013
03/28/2013
01/11/2013
09/26/2012
07/3/2012
07/3/2012
12/13/2011
$
$
$
$
$
$
$
Exercise
Price
7.59
7.59
6.32
8.85
6.09
5.47
8.43
Risk Free
Volatility
52.4%
52.4%
63.3%
58.5%
61.2%
52.8%
60.4%
Interest Rate Term (years)
1.24
1.20
4.03
1.74
3.51
0.01
2.95
0.13%
0.13%
1.27%
0.38%
1.27%
0.01%
0.78%
Market
Discount
Warrants
Outstanding
22.7%
22.7%
43.8%
42.3%
40.2%
42.3%
37.9%
1,051,000 $
788,000
1,709,000
1,771,000
1,812,000
804,000
306,000
$
Fair Value
660,000
495,000
2,892,000
702,000
3,008,000
3,000
455,000
8,215,000
Significant assumptions used and related fair values for the warrants as of December 31, 2012 were as follows:
Original Issuance
09/26/2012
07/3/2012
07/3/2012
12/13/2011
10/6/2010
$
$
$
$
$
Exercise
Price
8.85
7.50
6.45
12.45
1.80
Risk Free
Volatility
70.2%
76.1%
69.3%
74.4%
76.0%
Interest Rate Term (years)
2.74
4.51
1.01
3.95
4.80
0.36%
0.72%
0.16%
0.54%
0.72%
Market
Discount
Warrants
Outstanding
53.9%
55.5%
55.5%
52.3%
46.4%
1,833,000 $
1,867,000
930,000
330,000
17,000
$
Fair Value
1,112,000
2,756,000
509,000
480,000
35,000
4,892,000
Convertible Notes – The conversion feature imbedded in the convertible notes was valued using a Monte Carlo Binomial Lattice-Based
valuation methodology, adjusted for marketability restrictions. The Company estimated the fair value of the conversion feature until the
retirement of the convertible notes in December 2013.
Other Derivative Instruments – The Company’s other derivative instruments consist of commodity positions. The fair value of the commodity
positions are based on quoted prices on the commodity exchanges and are designated as Level 1.
The following table summarizes fair value measurements by level at December 31, 2013 (in thousands):
Level 1
Level 2
Level 3
Total
Assets:
Commodity contracts(1)
Total Assets
Liabilities:
Warrants(2)
Commodity contracts(3)
Total Liabilities
$
$
$
$
961 $
961 $
– $
859
859 $
– $
– $
– $
–
– $
– $
– $
8,215 $
–
8,215 $
961
961
8,215
859
9,074
__________
(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.
F-39
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes fair value measurements by level at December 31, 2012 (in thousands):
Assets:
Commodity contracts(1)
Total Assets
Liabilities:
Warrants
Commodity contracts(2)
Total Liabilities
$
$
$
$
Level 1
Level 2
Level 3
Total
189 $
189 $
– $
167
167 $
– $
– $
– $
–
– $
– $
– $
4,892 $
–
4,892 $
189
189
4,892
167
5,059
__________
(1) Included in other current assets in the consolidated balance sheets.
(2) Included in other current 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 were as follows (in thousands):
Balance, December 31, 2011
Issuance of warrants in July offering
Issuance of warrants in September offering
Exercises of warrants
Adjustments to fair value for the period
Balance, December 31, 2012
Issuance of warrants in January offering
Issuance of notes and warrants in March offering
Issuance of notes in June offering
Conversions of notes
Exercises of warrants
Adjustments to fair value for the period
Balance, December 31, 2013
13. RELATED PARTY TRANSACTIONS.
Warrants
Conversion
Features
$
$
$
$
1,921 $
3,380
1,658
(113)
(1,954)
4,892 $
2,657 $
1,572
–
–
(260)
(646)
8,215 $
–
–
–
–
–
–
–
1,401
2,929
(5,205)
–
875
–
Preferred Dividends – The Company had accrued and unpaid dividends in respect of its Series B Preferred Stock of $3,657,000 and
$5,852,000 as of December 31, 2013 and 2012, respectively. As further discussed in Note 8, the Company issued common stock in payment
of certain accrued and unpaid dividends.
Note Payable to Related Party – The Company has a note payable to its Chief Executive Officer totaling $750,000 as of December 31, 2013
and 2012. The maturity date is March 31, 2014.
F-40
PACIFIC ETHANOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SUBSEQUENT EVENTS.
Warrant Exercises – From January 1, 2014 through March 31, 2014, certain holders exercised warrants and received an aggregate of
1,888,000 shares of the Company’s common stock upon payment of $12,122,000 in cash.
A summary as of March 31, 2014 of outstanding warrants, which we recorded at fair value, with a weighted-average exercise price of $7.55,
is as follows:
Issuance Date
06/21/2013
03/28/2013
01/11/2013
09/26/2012
07/3/2012
12/13/2011
Expiration Date
06/21/2015
03/28/2015
01/11/2018
09/26/2015
07/03/2017
12/13/2016
Exercise Price
$7.59
$7.59
$6.32
$8.85
$6.09
$8.43
Warrants Outstanding
1,051,000
788,000
813,000
1,639,000
976,000
281,000
5,548,000
Payments on January 2013 Notes – From January 1, 2014 through March 31, 2014, the Company made $13,035,000 in additional principal
payments in cash on its January 2013 Notes. As of March 31, 2014, the remaining principal balance on the January 2013 Notes was
$949,000.
Payments on Plant Owners’ Revolving Credit Facility – From January 1, 2014 through March 31, 2014, the Company made $19,378,000 in
principal payments on its revolving line of credit. As of March 31, 2014, the outstanding principal balance on this revolving line of credit was
$16,000,000, with $19,378,000 of availability.
Payments on Note Payable to Related Party – The Company paid in full its $750,000 note payable to its Chief Executive Officer on its March
31, 2014 maturity date.
F-41
INDEX TO EXHIBITS
Exhibit
Number
2.1
Description*
Call Option Agreement dated June 29, 2010 between the
Registrant, New PE Holdco LLC and certain Members
Form
8-K
Where Located
Exhibit
Number
10.1
File
Number
000-21467
Filing
Date
07/06/2010
Filed
Herewith
2.2
2.3
2.4
2.5
2.6
2.7
2.8
Agreement for Purchase and Sale of Units in New PE Holdco
LLC dated September 28, 2010 between the Registrant and CS
Candlewood Special Situations Fund, L.P.
Agreement for Purchase and Sale of Units in New PE Holdco
LLC dated November 29, 2011 between the Registrant and
Pacific Ethanol Equity Holdings LLC
Agreement for Purchase and Sale of Units in New PE Holdco
LLC dated December 8, 2011 between the Registrant and
Candlewood Special Situations Fund, L.P.
Agreement for Purchase and Sale of Units in New PE Holdco
LLC dated December 9, 2011 between the Registrant and
Wexford Spectrum Investors LLC
Agreement for Purchase and Sale of Units in New PE Holdco
LLC dated December 9, 2011 between the Registrant and
Wexford Catalyst Investors LLC
Agreement for Purchase and Sale of Units in New PE Holdco
LLC dated December 9, 2011 between the Registrant and
Debello Investors LLC
Form of Agreements for Purchase and Sale of Units in New PE
Holdco LLC dated June 21, 2012 between the Registrant and
each of Credit Suisse Securities (USA) LLC, Continental
Casualty Company, Wexford Catalyst Investors LLC, Wexford
Spectrum Investors LLC, Debello Investors LLC and
Candlewood Special Situations Fund L.P.
-44-
8-K
000-21467
10.5
09/28/2010
8-K
000-21467
10.1
12/02/2011
S-1
333-178685
2.8
12/22/2011
S-1
333-178685
2.9
12/22/2011
S-1
333-178685
2.10
12/22/2011
S-1
333-178685
2.11
12/22/2011
8-K
000-21467
10.1
06/27/2012
2.9
Form of Agreement for Purchase and Sale of Units in New PE
Holdco LLC dated December 19, 2012 between the Registrant and
each of Candlewood Special Situations Fund, LP, CCVF PacEth
LLC and Candlewood Credit Value Fund II, LP
8-K
000-21467
10.5
12/19/2012
2.10 Agreement for Purchase and Sale of Units in New PE Holdco LLC
8-K
000-21467
10.5
12/19/2012
dated January 11, 2013 between the Registrant and Credit Suisse
Loan Funding LLC
2.11 Agreement for Purchase and Sale of Loans and Units in New PE
Holdco LLC dated March 27, 2013 among the Registrant,
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank
Nederland”, New York Branch and Series G of Special Assets
Equity Holdings Series, LLC
2.12 Agreement for Purchase and Sale of Loans and Units in New PE
Holdco LLC dated June 21, 2013 among the Registrant,
NordkapAG and NKPacific, LLC
2.13
Form of Agreement for Purchase and Sale of Units in New PE
Holdco LLC dated December 6, 2013 between the Registrant and
each of CIFC Funding 2007-III Asset-V LLC and CIFC Funding
2007-IV Asset-IV LLC
2.14 Agreement for Purchase and Sale of Units in New PE Holdco LLC
dated December 10, 2013 between the Registrant and Armory Fund
L.P.
2.15
Form of Agreement for Purchase and Sale of Units in New PE
Holdco LLC dated December 14, 2013 between the Registrant and
each of Mariner Partners, L.P. and Dee River Holdings, Inc.
S-1
333-189713
2.15
6/28/2013
8-K
000-21467
10.3
06/26/2013
X
X
X
3.1
Certificate of Incorporation
10-Q
000-21467
3.1
08/07/2013
-45-
3.2
3.3
3.4
3.5
3.6
Certificate of Designations, Powers, Preferences and Rights of the
Series A Cumulative Redeemable Convertible Preferred Stock
10-Q
000-21467
3.2
08/07/2013
Certificate of Designations, Powers, Preferences and Rights of the
Series B Cumulative Convertible Preferred Stock
10-Q
000-21467
3.3
08/07/2013
Certificate of Amendment to Certificate of Incorporation dated June
10, 2010
10-Q
000-21467
3.4
08/07/2013
Certificate of Amendment to Certificate of Incorporation dated June
8, 2011
10-Q
000-21467
3.5
08/07/2013
Certificate of Amendment to Certificate of Incorporation dated May
14, 2013
10-Q
000-21467
3.6
08/07/2013
3.7
Bylaws of the Registrant
10.1
2004 Stock Option Plan#
8-K
S-8
000-21467
333-123538
3.2
4.1
03/29/2005
03/24/2005
10.2 Amended 1995 Incentive Stock Plan#
10-KSB
000-21467
10.7
03/31/2003
10.3
First Amendment to 2004 Stock Option Plan#
10.4
2006 Stock Incentive Plan, as amended#
10.5
Form of Employee Restricted Stock Agreement#
10.6
Form of Non-Employee Director Restricted Stock Agreement#
10.7 Amended and Restated Executive Employment Agreement dated
December 11, 2007 between the Registrant and Neil M. Koehler#
10.8 Amended and Restated Executive Employment Agreement dated
December 11, 2007 between the Registrant and Christopher W.
Wright#
10.9 Amended and Restated Executive Employment Agreement dated
November 25, 2009 between the Registrant and Bryon T.
McGregor#
8-K
S-8
8-K
8-K
8-K
000-21467
10.3
02/01/2006
333-189478
4.1
06/20/2013
000-21467
10.2
10/10/2006
000-21467
10.3
10/10/2006
000-21467
10.3
12/17/2007
8-K
000-21467
10.5
12/17/2007
8-K
000-21467
10.1
11/27/2009
10.10 Executive Employment Agreement dated January 6, 2013 between
8-K
000-21467
10.1
01/10/2013
the Registrant and Michael D. Kandris#
10.11 Amended and Restated Executive Employment Agreement dated
October 1, 2012 between the Registrant and Paul P. Kohler#
10.12 Employment Agreement dated November 12, 2012 between the
Registrant and James R. Sneed#
-46-
X
X
10.13 Form of Indemnity Agreement between the Registrant and each of
10-K
000-21467
10.46
03/31/2010
its Executive Officers and Directors#
10.14 Promissory Note dated March 30, 2009 by the Registrant in favor
8-K
000-21467
10.6
04/02/2009
of Neil M. Koehler
10.15 First Amendment to Promissory Note dated March 29, 2010
S-1
333-189713
10.49
06/28/2013
between the Registrant and Neil M. Koehler
10.16 Second Amendment to Promissory Note dated November 5, 2010
S-1
333-189713
10.49
06/28/2013
between the Registrant and Neil M. Koehler
10.17 Third Amendment to Promissory Note dated March 7, 2012
S-1
333-189713
10.49
06/28/2013
between the Registrant and Neil M. Koehler
10.18 Fourth Amendment to Promissory Note dated February 7, 2013
S-1
333-189713
10.49
06/28/2013
between the Registrant and Neil M. Koehler
10.19 Warrant dated March 27, 2008 issued by the Registrant to Lyles
8-K
000-21467
10.3
03/27/2008
United, LLC
10.20 Registration Rights Agreement dated March 27, 2008 between the
8-K
000-21467
10.4
03/27/2008
Registrant and Lyles United, LLC
10.21 Letter Agreement dated March 27, 2008 between the Registrant and
8-K
000-21467
10.5
03/27/2008
Lyles United, LLC
10.22 Form of Warrant dated May 22, 2008 issued by the Registrant
10.23 Letter Agreement dated May 22, 2008 among the Registrant, Neil
M. Koehler, Bill Jones, Paul P. Koehler and Thomas D. Koehler#
10.24 Form of Warrant dated May 23, 2008 issued by the Registrant
10.25 Amended and Restated Loan and Security Agreement dated May 4,
2012 among Kinergy Marketing LLC, Pacific Ag. Products, LLC,
the parties thereto from time to time as Lenders, Wells Fargo Bank,
National Association and Wells Fargo Capital Finance, LLC
8-K
8-K
8-K
8-K
000-21467
10.2
05/23/2008
000-21467
10.3
05/23/2008
000-21467
10.5
05/23/2008
000-21467
10.1
05/08/2012
10.26 Amended and Restated Guarantee dated May 4, 2012 by the
8-K
000-21467
10.2
05/08/2012
Registrant in favor of Wells Fargo Capital Finance, LLC for and on
behalf of Lenders
-47-
10.27 Second Amended and Restated Asset Management Agreement
8-K
000-21467
10.1
07/06/2011
dated June 30, 2011 among the Registrant, Pacific Ethanol Holding
Co. LLC, Pacific Ethanol Madera LLC, Pacific Ethanol Columbia,
LLC, Pacific Ethanol Stockton LLC and Pacific Ethanol Magic
Valley, LLC
10.28 Form of Amended and Restated Ethanol Marketing Agreement
10.29 Form of Amended and Restated Corn Procurement and Handling
Agreement
8-K
8-K
000-21467
10.2
07/06/2011
000-21467
10.4
07/06/2011
10.30 Form of Amended and Restated Distillers Grains Marketing
8-K
000-21467
10.5
07/06/2011
Agreement
10.31 Limited Liability Company Agreement of New PE Holdco LLC
10-K
000-21467
10.34
03/31/2011
10.32 Form of Amendment and Exchange Agreement dated January 7,
8-K
000-21467
10.1
01/07/2011
2011
10.33 Form of Warrants dated January 7, 2011 issued by the Registrant
10.34 Securities Purchase Agreement dated December 8, 2011 between
the Registrant and the investors identified therein
8-K
S-1
000-21467
10.3
01/07/2011
333-178685
2.11
12/22/2011
10.35 Registration Rights Agreement dated December 13, 2011 between
8-K
000-21467
10.3
12/09/2011
the Registrant and the investors identified therein
10.36 Amendment No. 1 to Registration Rights Agreement dated
February 22, 2012 between the Registrant and the investors
identified therein
10-K
000-21467
10.43
03/08/2012
10.37 Form of Warrants dated December 13, 2011 issued by the
8-K/A
000-21467
10.2
12/12/2011
Registrant
10.38 Form of Series I Warrants and Series II Warrants issued by the
Registrant on July 3, 2012 (the forms of Series I Warrants and
Series II Warrants are identical in all respects other than the exercise
price and term applicable to each of such series of Warrants)
8-K
000-21467
10.1
06/28/2012
10.39 Form of Warrants dated September 26, 2012 issued by the
8-K
000-21467
10.1
09/21/2012
Registrant
-48-
10.40 Second Amended and Restated Credit Agreement dated October 29,
10-Q
000-21467
10.6
11/14/2012
2012 among Pacific Ethanol Holding Co. LLC, Pacific Ethanol
Madera LLC, Pacific Ethanol Columbia , LLC, Pacific Ethanol
Stockton LLC, Pacific Ethanol Magic Valley, LLC, the Lenders
referred to therein, Wells Fargo Bank, N.A. and Amarillo National
Bank
10.41 First Amendment to Second Amended and Restated Credit
S-1
333-189713
10.44
06/28/2013
Agreement dated January 4, 2013 among Pacific Ethanol Holding
Co. LLC, Pacific Ethanol Madera LLC, Pacific Ethanol Columbia ,
LLC, Pacific Ethanol Stockton LLC, Pacific Ethanol Magic Valley,
LLC, the Lenders referred to therein, Wells Fargo Bank, N.A. and
the other parties identified therein
10.42 Credit Agreement dated October 29, 2012 among Pacific Ethanol
Holding Co. LLC, Pacific Ethanol Madera LLC, Pacific Ethanol
Columbia , LLC, Pacific Ethanol Stockton LLC, Pacific Ethanol
Magic Valley, LLC, the Lenders referred to therein, Wells Fargo
Bank, N.A., Credit Suisse Loan Funding LLC and Amarillo
National Bank
10-Q
000-21467
10.7
11/14/2012
10.43 First Amendment to Credit Agreement dated January 4, 2013,
S-1
333-189713
10.46
06/28/2013
among Pacific Ethanol Holding Co. LLC, Pacific Ethanol Madera
LLC, Pacific Ethanol Columbia , LLC, Pacific Ethanol Stockton
LLC, Pacific Ethanol Magic Valley, LLC, the Lenders referred to
therein, Wells Fargo Bank, N.A., Credit Suisse Loan Funding LLC
and the other parties identified therein
10.44
Intercreditor Agreement dated October 29, 2012 among Pacific
Ethanol Holding Co. LLC, Pacific Ethanol Madera LLC, Pacific
Ethanol Columbia , LLC, Pacific Ethanol Stockton LLC, Pacific
Ethanol Magic Valley, LLC and Wells Fargo Bank, N.A.
10-Q
000-21467
10.8
11/14/2012
10.45 Securities Purchase Agreement dated December 19, 2012 among
8-K
000-21467
10.1
12/19/2012
the Registrant and the investors identified therein
-49-
10.46 Form of Senior Unsecured Notes issued on January 11,
8-K
000-21467
10.2
01/15/2013
2013
10.47 Form of Warrants issued on January 11, 2013
8-K
000-21467
10.48 Registration Rights Agreement dated January 11, 2013
among the Registrant and the investors identified therein
8-K
000-21467
10.3
10.4
12/19/2012
01/15/2013
10.49 Form of Amendment Agreement dated March 28, 2013
among the Registrant and the investors identified therein
8-K
000-21467
10.6
03/28/2013
10.50 Securities Purchase Agreement dated March 28, 2013
8-K
000-21467
10.1
03/28/2013
between the Registrant and the investors identified therein
10.51 Form of Series A Notes issued on March 28, 2013 and
8-K
000-21467
10.2
03/28/2013
Series B Notes issued on June 20, 2013
10.52 Form of Series A Warrants and Series B Warrants issued
8-K
000-21467
10.3
03/28/2013
on March 28, 2013
10.53 Form of Base Indenture between the Registrant and U.S.
8-K
000-21467
10.4
03/28/2013
Bank, National Association
10.54 Form of First Supplemental Indenture and Second
8-K
000-21467
10.5
03/28/2013
Supplemental Indenture
10.55 Letter Agreement dated December 16, 2013 among the
Registrant and the holders of the Registrant’s Series B
Cumulative Convertible Preferred Stock
21.1
Subsidiaries of the Registrant
23.1 Consent of Independent Registered Public Accounting
Firm
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
8-K
000-21467
10.1
12/16/2013
X
X
X
X
-50-
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**
X
X
X
X
X
X
X
_______________
(#) A contract, compensatory plan or arrangement to which a director or executive officer is a party or in which one or more directors or
executive officers are eligible to participate.
(*) Certain of the agreements filed as exhibits contain representations and warranties made by the parties thereto. The assertions embodied in
such representations and warranties are not necessarily assertions of fact, but a mechanism for the parties to allocate risk. Accordingly,
investors should not rely on the representations and warranties as characterizations of the actual state of facts or for any other purpose at
the time they were made or otherwise.
(**) Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the
submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities
laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data
files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised
that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.
-51-
Pursuant to the requirements of Section 13 or 15(d) 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 on this 31st day of March, 2014.
SIGNATURES
PACIFIC ETHANOL, INC.
/s/ NEIL M. KOEHLER
Neil M. Koehler
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ WILLIAM L. JONES
William L. Jones
/s/ NEIL M. KOEHLER
Neil M. Koehler
/s/ BRYON T. MCGREGOR
Bryon T. McGregor
/s/ MICHAEL D. KANDRIS
Michael D. Kandris
/s/ TERRY L. STONE
Terry L. Stone
/s/ JOHN L. PRINCE
John L. Prince
/s/ DOUGLAS L. KIETA
Douglas L. Kieta
/s/ LARRY D. LAYNE
Larry D. Layne
Chairman of the Board and Director
March 31, 2014
President, Chief Executive Officer (Principal Executive Officer)
and Director
March 31, 2014
Chief Financial Officer (Principal Financial and Accounting
Officer)
March 31, 2014
Chief Operating Officer and Director
March 31, 2014
Director
Director
Director
Director
-52-
March 31, 2014
March 31, 2014
March 31, 2014
March 31, 2014
EXHIBITS FILED WITH THIS REPORT
Exhibit
Number Description
2.13 Form of Agreement for Purchase and Sale of Units in New PE Holdco LLC dated December 6, 2013 between the Registrant and each
of CIFC Funding 2007-III Asset-V LLC and CIFC Funding 2007-IV Asset-IV LLC
2.14 Agreement for Purchase and Sale of Units in New PE Holdco LLC dated December 10, 2013 between the Registrant and Armory
Fund L.P.
2.15 Form of Agreement for Purchase and Sale of Units in New PE Holdco LLC dated December 14, 2013 between the Registrant and
each of Mariner Partners, L.P. and Dee River Holdings, Inc.
10.11 Amended and Restated Executive Employment Agreement dated October 1, 2012 between the Registrant and Paul P. Kohler
10.12 Employment Agreement dated November 12, 2012 between the Registrant and James R. Sneed
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Registered Public Accounting Firm
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.CALXBRL Taxonomy Extension Calculation Linkbase*
101.DEF XBRL Taxonomy Extension Definition Linkbase*
101.LABXBRL Taxonomy Extension Label Linkbase*
101.PRE XBRL Taxonomy Extension Presentation Linkbase*
(*) Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the
submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws
as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after
becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to
Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.
-53-
Exhibit 2.13
EXECUTION COPY
FORM OF
AGREEMENT FOR PURCHASE AND SALE OF
UNITS IN NEW PE HOLDCO LLC
THIS AGREEMENT FOR PURCHASE AND SALE OF UNITS IN NEW PE HOLDCO LLC, (“Agreement”)
dated as of December 6, 2013, is made by and among _________________________________ (“Seller”) and PACIFIC ETHANOL,
INC., a Delaware corporation (“Buyer”). Unless otherwise defined in this Agreement, capitalized terms used in this Agreement are defined in
Exhibit A.
W I T N E S S E T H
WHEREAS, New PE Holdco LLC, a Delaware limited liability company (the “Company”), issued certain limited liability
company interests denominated as “Units” pursuant to the LLC Agreement (as defined below) to Seller in connection with the consummation
of that certain Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, dated April 16, 2010, filed with the United
States Bankruptcy Court for the District of Delaware by the predecessors in interest to the Company’s direct and indirect wholly- owned
subsidiaries;
WHEREAS, in connection with the issuance of the Units, the Company and Seller, among others, have executed that
certain Limited Liability Company Agreement of New PE Holdco LLC (the “LLC Agreement”); and
WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase from Seller, ______Units (the “Seller Units”).
NOW, THEREFORE, in consideration of the agreements and mutual covenants and based upon the representations and
warranties set forth herein, the parties agree as follows:
1. Purchase and Sale of Seller Units.
(a) Subject to the terms and conditions of this Agreement, Buyer agrees to purchase, and Seller agrees to irrevocably sell,
convey, assign, transfer and deliver to Buyer, the Seller Units, free and clear of all Encumbrances, on the Closing Date.
(b) As consideration for the sale of the Seller Units to Buyer at the Closing, Buyer shall pay to Seller, in cash, a total of
$__________, reflecting a sales price of $7,500 per Unit (the “Cash Consideration”), by wire transfer to the account designed by Seller.
(c) The closing of the sale of the Seller Units to Buyer (the “Closing”) shall take place on such date as Buyer may designate
in a written notice delivered to Seller, provided that such date shall occur on, or as soon as possible after, the date hereof (the “Closing
Date”).
(d) As of the Closing Date, Buyer shall assume the Seller Units and all of the obligations, commitments, and liabilities of
Seller under the LLC Agreement with respect to the Seller Units arising from and after the Closing Date and shall be bound by all the terms
and provisions of the LLC Agreement with respect thereto.
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2 . Conditions Precedent to Buyer’s Obligation to Close. Buyer’s obligation to purchase the Seller Units is subject to the
fulfillment or satisfaction on or before the Closing of each of the following conditions (any one of which may be waived by Buyer, but only in
a writing signed by Buyer):
(a) The representations and warranties of Seller set forth in Section 4 or otherwise provided to Buyer in writing in
connection with this Agreement shall be true and correct in every material respect on and as of the Closing Date with the same force and effect
as if they had been made at the Closing.
(b) Seller shall have performed and complied in all material respects with all of its covenants required to be performed by it
under this Agreement including those covenants contained in Section 10.
(c) The Closing shall occur within the time period set forth in Section 1(c).
3. Conditions Precedent to Seller’s Obligation to Close. Seller’s obligation to sell the Seller Units is subject to the fulfillment or
satisfaction on or before the Closing of the following condition:
(a) The representations and warranties of Buyer set forth in Section 5 or otherwise provided to Seller in writing in
connection with this Agreement shall be true and correct in every material respect on and as of the Closing Date with the same force and effect
as if they had been made at the Closing.
(b) Buyer shall have performed and complied in all material respects with all of its covenants required to be performed by it
under this Agreement including those covenants contained in Section 10.
(c) The Closing shall occur within the time period set forth in Section 1(c).
(d) at the Closing, Buyer will tender to the Seller the consideration set forth in Section 1(c) above.
4. Seller Representations. Seller represents and warrants to Buyer as follows:
(a) Organization. Seller is a limited liability company duly organized, validly existing and in good standing under the laws
of the State of Delaware. Seller is in good standing and qualified to do business as a foreign corporation in any state in which it is doing
business.
(b) Due Authorization; Enforceability. The execution, delivery and performance of this Agreement have been duly and
validly authorized by Seller. Assuming the due authorization, execution and delivery of the same by Buyer, this Agreement and all other
agreements and instruments entered into pursuant hereto (collectively, the “Transaction Documents”) constitute the legal, valid and binding
obligation of Seller, enforceable against Seller in accordance with their respective terms (except as may be limited by bankruptcy, insolvency,
reorganization and other similar laws and equitable principles relating to or limiting creditors’ rights generally).
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(c) Non-Contravention; Consents. Seller need not give any notice to, make any filing with, or obtain any authorization,
consent, or approval of any government or governmental agency in order to consummate the purchase and sale of the Seller Units (the
“Transaction”). Neither the execution and delivery of this Agreement and the other Transaction Documents, nor the consummation of the
Transaction, will directly or indirectly (with or without notice or lapse of time): (i) conflict with or result in a violation or breach of any of the
terms, conditions or provisions of the Charter Documents of Seller or the Company; (ii) conflict with or violate any statute, regulation, rule,
injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which Seller or
the Company is subject; (iii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the
right to accelerate, terminate, modify or cancel, or require any notice under any agreement, contract, lease, license, instrument or other
arrangement to which Seller or the Company is a party or by which either is bound; or (iv) result in the imposition or creation of an
Encumbrance upon the Seller Units.
(d) Ownership of Seller Units. Seller is the unconditional and sole legal, beneficial, record and equitable owner of the
Seller Units and Seller has full power and authority to sell and transfer the Seller Units, free and clear of any restrictions on transfer or any
other Encumbrances. Seller has not ever sold, assigned transferred or otherwise disposed of all or any portion of Seller Units. Seller is not a
party to any option, warrant, purchase right, or other contract or commitment (other than this Agreement) that could require Seller to sell,
transfer, or otherwise dispose of any Seller Units, or any voting or economic right therein, of the Company. Seller is not a party to any voting
trust, proxy, or other agreement or understanding with respect to the voting of any Seller Units.
(e) Distributions. Seller has no current outstanding obligation to return to the Company all or any portion of any
distribution previously received from the Company in respect of the Seller Units.
(f) LLC Agreement. The LLC Agreement is a valid and binding obligation of Seller, enforceable against Seller in
accordance with its terms (except as may be limited by bankruptcy, insolvency, reorganization and other similar laws and equitable principles
relating to or limiting creditors’ rights generally).
(g) Brokers. Seller has not agreed or become obligated to pay, or has taken any action that might result in any person, entity
or governmental body claiming to be entitled to receive, any brokerage commission, finder’s fee or similar commission or fee in connection
with the Transaction.
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(h) Taxes, etc. Seller has no knowledge of any sales taxes, use taxes, transfer taxes, documentary charges, recording fees or
similar taxes, charges, fees or expenses that will become due and payable as a result of the consummation of the Transaction.
5. Buyer Representations. Buyer represents and warrants to Seller as follows:
(a) Organization. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State
of Delaware. Seller is in good standing and qualified to do business as a foreign corporation in any state in which it is doing business.
(b) Due Authorization; Enforceability. The execution, delivery and performance of this Agreement have been duly and
validly authorized by Buyer. Assuming the due authorization, execution and delivery of the same by Seller, this Agreement and the other
Transaction Documents hereto constitute the legal, valid and binding obligation of Buyer, enforceable against Buyer in accordance with their
respective terms (except as may be limited by bankruptcy, insolvency, reorganization and other similar laws and equitable principles relating to
or limiting creditors’ rights generally).
(c) Non-Contravention; Consents. Buyer need not give any notice to, make any filing with, or obtain any authorization,
consent, or approval of any government or governmental agency in order to consummate the Transaction. Neither the execution and delivery
of this Agreement and the other Transaction Documents, nor the consummation of the Transaction, will directly or indirectly (with or without
notice or lapse of time): (i) conflict with or result in a violation or breach of any of the terms, conditions or provisions of the Charter
Documents of Buyer or the Company; (ii) conflict with or violate any statute, regulation, rule, injunction, judgment, order, decree, ruling,
charge, or other restriction of any government, governmental agency, or court to which Buyer or the Company is subject; or (iii) conflict with,
result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify or
cancel, or require any notice under any agreement, contract, lease, license, instrument or other arrangement to which Buyer or the Company is
a party or by which either is bound.
(d) LLC Agreement. The LLC Agreement is a valid and binding obligation of Buyer, enforceable against Buyer in
accordance with its terms (except as may be limited by bankruptcy, insolvency, reorganization and other similar laws and equitable principles
relating to or limiting creditors’ rights generally).
(e) Conditions Precedent in Unit Assignment Met. Upon execution and delivery of the Unit Assignment to the
Company, the Company shall have received all information required pursuant to the LLC Agreement to effectuate this Transaction, as set forth
in the Unit Assignment (as defined below).
(f) Taxes, etc. Buyer has no knowledge of any sales taxes, use taxes, transfer taxes, documentary charges, recording fees or
similar taxes, charges, fees or expenses that will become due and payable as a result of the consummation of the Transaction.
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(g) No Registration under Securities Act. Buyer understands and acknowledges that the sale of the Seller Units has not
and is not being registered under the Securities Act of 1933, as amended (the “Securities Act”) or the securities laws of any U.S. state or
other jurisdiction, nor is such registration contemplated, and the Seller Units cannot be resold without registration thereunder or exemption
therefrom. Buyer recognizes that no public market now exists for any of the Seller Units issued by the Company, and that no such market is
expected to develop in the future. Buyer acknowledges that the Seller Units may be required to be held indefinitely unless subsequently
registered under the Securities Act or an exemption from registration is available.
(h) Sophistication. Buyer is a sophisticated buyer and has adequate information concerning the Seller Units and the
Company to make an informed decision regarding the purchase contemplated by this Agreement, is able to bear the economic risk associated
with the purchase of the Seller Units, has such knowledge and experience, and has undertaken transactions regarding investments of a similar
nature, so as to be aware of the risks and uncertainties inherent in the purchase of rights and assumption of obligations of the type
contemplated herein, and has independently and without reliance upon Seller, and based on such information as it has deemed appropriate,
made its own analysis and decision to enter into this letter agreement, except that Buyer has relied upon the representations, warranties and
covenants of Seller expressly provided in this Agreement.
6. Closing Deliverables by Seller. At the Closing, Seller shall deliver the following to Buyer:
(a) a certificate from Seller certifying that (i) each of the representations and warranties made by Seller in this Agreement is
true and correct as of the date of this Agreement and the date of the Closing and (ii) each of the covenants and agreement that Seller is required
to have complied with or performed pursuant to this Agreement at or prior to the Closing has been duly complied with and performed in all
respects; and
(b) a countersigned copy of the “New PE Holdco LLC Unit Assignment” required for transfers of Units under the terms of
the LLC Agreement (the “Unit Assignment”).
7. Closing Deliverables by Buyer. At the Closing, Buyer shall deliver the following to Seller:
(a) a certificate from Buyer certifying that (i) each of the representations and warranties made by Seller in this Agreement is
true and correct as of the date of this Agreement and the date of the Closing and (ii) each of the covenants and agreement that Buyer is required
to have complied with or performed pursuant to this Agreement at or prior to the Closing has been duly complied with and performed in all
respects;
(b) the Cash Consideration; and
(c) a countersigned copy of the Unit Assignment.
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8. Survival of Representations and Covenants.
(a) The covenants and agreements of each Party shall survive the Closing for the periods specified in such covenants and
agreements, or if no period is specified, until the first anniversary of the Closing. The representations and warranties of each Party shall
survive until the Closing and the full and irrevocable performance of all of the obligations by each such Party hereunder.
(b) The representations, warranties, covenants and obligations of Seller and Buyer and the rights and remedies that may be
exercised by any Indemnified Party shall not be limited or otherwise affected by or as a result of any information furnished to, or any
investigation made by or any knowledge of, any of the Indemnified Parties or any of their Representatives.
9. Indemnification by Seller. Each Party shall hold harmless and indemnify each of the other Party’s respective Indemnified Parties
from and against, and shall compensate and reimburse each of such Indemnified Parties for, any Losses that are directly suffered or incurred
by any of such Indemnified Parties at any time and that arise directly from or as a direct result of, or are directly connected with:
(a) any breach by the Party of any of its representations or warranties contained in this Agreement, any other Transaction
Document or in any certificate delivered by such Party pursuant to any provision of this Agreement or any other Transaction Document; or
(b) any breach of any covenant or agreement of the Party contained in this Agreement or any other Transaction Document.
Notwithstanding the foregoing, in no case shall a Party be liable for consequential or punitive damages.
10. Additional Agreements.
(a) Further Assurances. Each Party agrees to execute and deliver such further documents and instruments and to take such
further actions after the Closing as may be necessary or desirable and reasonably requested by the other Party to give effect to the Transaction.
(b) Expenses; Attorneys’ Fees. Each Party shall bear and pay all fees, costs and expenses that have been incurred or that
are in the future incurred by, on behalf of, such Party in connection with the negotiation, preparation and review of this Agreement, the other
Transaction Documents and all certificates and other instruments and documents delivered or to be delivered in connection with the
Transaction, and the consummation and performance of the Transaction. If a Party shall bring any action, suit, counterclaim, appeal,
arbitration, or mediation for any relief against the other Party, declaratory or otherwise, to enforce the terms hereof or to declare rights
hereunder (referred to herein as an “Action”), the non-prevailing party attorneys’ fees and expenses.
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11. Miscellaneous.
(a) Notices. All notices, demands and other communications to be given or delivered under or by reason of the provisions
of this Agreement shall be in writing and shall be and shall be sent by certified mail, return receipt requested, by hand delivery (against a
signed receipt), or by reputable overnight delivery service (such as Federal Express) which can certify actual delivery, or by facsimile or e-
mail. Notices, demands and communications to Seller or Buyer shall, unless another address is specified in writing in accordance herewith, be
sent to the address indicated below:
Notices to Seller:
Notices to Buyer:
____________________________
c/o CIFC Asset Management LLC
250 Park Ave.
New York, NY 10177
Attn: Robert Ranocchia
Tel: 212-624-1216
Email: rranocchia@cifc.com
Pacific Ethanol, Inc.
400 Capitol Mall
Suite 2060
Sacramento, CA 95814
Attn: General Counsel
Tel: (916) 403-2123
Fax: (916) 403-2785
Email: cwright@pacificethanol.net
Any notice given by certified mail, as aforesaid, shall be deemed given on the third (3rd) day after such notice is deposited with the United
States Postal Service. Any notice given by hand, as aforesaid, shall be deemed given when received (against a signed receipt). Any notice
given by overnight delivery service, as aforesaid, shall be deemed given on the first business day following the date when such notice is
deposited with such delivery service. Any notice given by facsimile, as aforesaid, shall be deemed given upon receipt of answerback
confirmation. Any notice given by e-mail, as aforesaid, shall be deemed given upon receipt of notice of delivery.
(b) Amendment. No amendment, modification or waiver of this Agreement shall be valid unless the same shall be in
writing and signed by Seller and Buyer. A waiver or amendment by a Party shall only be effective if (a) it is in writing and signed by the
relevant Party or Parties, (b) it specifically refers to this Agreement and (c) it specifically states that it is intended to amend or modify this
Agreement or waive a right hereunder. Any such amendment, modification or waiver shall be effective only in the specific instance and for the
purpose for which it was given.
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(c) Waiver. No failure or delay on the part of the parties or any of them in exercising any right, power or privilege
hereunder, nor any course of dealing between the parties or any of them shall operate as a waiver of any such right, power or privilege nor
shall any single or partial exercise of any such right, power or privilege preclude the simultaneous or later exercise of any other right, power or
privilege. The rights and remedies herein expressly provided are cumulative and are not exclusive of any rights or remedies which the parties
or any of them would otherwise have.
(d) Counterparts. This Agreement may be executed in any number of counterparts with the same effect as if all of the
parties hereto had signed the same document. All counterparts shall be construed together and shall constitute one agreement. This Agreement
and any amendments hereto, to the extent signed and delivered by means of a facsimile machine or electronic transmission (including a PDF
file), shall be treated in all manner and respects as an original Agreement and shall be considered to have the same binding legal effect as if it
were the original signed version thereof delivered in person. No party hereto shall raise the use of a facsimile machine or electronic
transmission to deliver a signature or the fact that any signature was transmitted or communicated through the use of a facsimile machine or
electronic transmission as a defense to the formation of a contract and each such party forever waives any such defense.
(e) GOVERNING LAW. THE LAWS OF THE STATE OF DELAWARE SHALL GOVERN THE VALIDITY OF
THIS AGREEMENT, THE CONSTRUCTION OF ITS TERMS, AND THE INTERPRETATION OF THE RIGHTS AND DUTIES
ARISING HEREUNDER, WITHOUT REGARD TO ITS CONFLICTS OF LAWS PROVISIONS.
(f) Submission to Jurisdiction; Waiver of Jury Trial and Venue.
( 1 ) SUBMISSION TO
JURISDICTION. EACH PARTY HERETO
IRREVOCABLY AND
UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THE
COURTS OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY AND OF THE UNITED STATES DISTRICT
COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, IN ANY
ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR FOR RECOGNITION OR
ENFORCEMENT OF ANY JUDGMENT, AND EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY
AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED
IN SUCH NEW YORK STATE COURT OR, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, IN SUCH
FEDERAL COURT. EACH OF THE PARTIES HERETO AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR
PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE
JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW.
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( 2 ) WAIVER OF JURY TRIAL AND VENUE. EACH PARTY HERETO IRREVOCABLY AND
UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, (i) ANY AND ALL RIGHTS
SUCH PARTY MAY HAVE TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR AND (ii) ANY OBJECTION THAT SUCH PARTY MAY NOW OR HEREAFTER HAVE
TO THE LAYING OF VENUE OF ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT
IN ANY COURT REFERRED TO ABOVE. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE
MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT.
summons and complaint, or other pleading, by certified mail, return receipt requested, in accordance with Section11(a).
(3) Service of Process. Each party hereto agrees that service of process may be effectuated by mailing a copy of the
(g) Benefit and Binding Effect. Except as otherwise provided in this Agreement, no right under this Agreement shall be
assignable and any attempted assignment in violation of this provision shall be void. Every covenant, term, and provision of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their respective executors, administrators, heirs, successors, transferees,
and assigns. It is understood and agreed among the parties that this Agreement and the covenants made herein are made expressly and solely
for the benefit of the parties hereto, and that no other Person, other than as expressly set forth in this, shall be entitled or be deemed to be
entitled to any benefits or rights hereunder, nor be authorized or entitled to enforce any rights, claims or remedies hereunder or by reason
hereof.
(h) Severability. Any provision of this Agreement which is prohibited, unenforceable or not authorized in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or nonauthorization without invalidating the
remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction. The parties hereto
agree to negotiate in good faith to replace any illegal, invalid or unenforceable provision of this Agreement with a legal, valid and enforceable
provision that, to the extent possible, will preserve the economic bargain of this Agreement. If any time period set forth herein is held by a
court of competent jurisdiction to be unenforceable, a different time period that is determined by the court to be more reasonable shall replace
the unenforceable time period.
(i) Headings; Construction. Section and other headings contained in this Agreement are for reference purposes only and
are not intended to describe, interpret, define, or limit the scope, extent, or intent of this Agreement or any provision hereof. Every covenant,
term, and provision of this Agreement shall be construed simply according to its fair meaning and not strictly for or against any party. Every
schedule and other addendum attached to this Agreement and referred to herein is incorporated in this Agreement by reference unless this
Agreement expressly otherwise provides. All terms and any variations thereof shall be deemed to refer to masculine, feminine, or neuter,
singular or plural, as the identity of the Person or Persons may require.
9
(j) Entire Agreement. This Agreement contains the entire understanding and agreement among the parties hereto with
respect to the subject matter hereof, and supersedes all prior agreements and all contemporaneous oral agreements.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement for Purchase And Sale of Units in New PE Holdco
LLC as of the day and year first above written.
BUYER
PACIFIC ETHANOL, INC.
By: _________________________
Name: Byron T. McGregor
Title: Chief Financial Officer
SELLER
__________________________________
By: _______________________
Name: _________________
Title: __________________
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EXHIBIT A
DEFINITIONS
“Action” is defined in Section 10(b).
“Affiliate” means an individual or entity that directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is
under common control with, a specified individual or entity. For purposes of this definition, “control” shall include, without limitation, the
exertion of significant influence over an individual or entity and shall be conclusively presumed as to any fifty percent (50%) or greater equity
interest.
“Buyer” is defined in the preamble hereof.
“Cash Consideration” is defined in Section 1(b).
“Charter Documents” shall mean, as applicable, the specified entity’s (i) certificate of incorporation or formation or other charter or
organizational documents, and (ii) bylaws or operating agreement, each as from time to time in effect.
“Closing” is defined in Section 1(c).
“Closing Date” is defined in Section 1(c).
“Company” is defined in the recitals hereto.
“Encumbrance” means any lien, pledge, hypothecation, charge, mortgage, security interest, encumbrance, equity, trust, equitable interest,
claim, preference, right of possession, lease, tenancy, license, encroachment, covenant, infringement, interference, Order, proxy, option, right
of first refusal, preemptive right, community property interest, legend, defect, impediment, exception, reservation, limitation, impairment,
imperfection of title, condition or restriction of any nature (including any restriction on the transfer of an asset, any restriction on the receipt of
any income derived from an asset, any restriction on the use of any asset and any restriction on the possession, exercise or transfer of any
other attribute of ownership of an asset).
“Indemnified Party” means: (a) in respect of Buyer, Buyer and its Affiliates; and (b) in respect of Seller, Seller and its Affiliates.
“LLC Agreement” is defined in the recitals hereto.
“Loss” shall include any loss, damage, injury, decline in value, liability, claim, demand, settlement, judgment, award, fine, penalty, tax, fee
(including any legal fee, expert fee, accounting fee or advisory fee), charge, cost (including court costs and any cost of investigation) or
expense of any nature.
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“Party” or “Parties” means any of Seller and Buyer.
“Person” means any individual, person, limited liability company, partnership, trust, unincorporated organization, corporation, association,
joint stock company, business, group, government, government agency or authority or other entity.
“Representatives” shall mean partners, officers, directors, employees, agents, attorneys, accountants, advisors and representatives of the
respective Party or, in the case of Seller, its manager.
“Seller” is defined in the preamble hereof.
“Seller Units” is defined in the preamble hereof.
“Transaction” is defined in 4(c).
“Transaction Documents” is defined in Section 4(b).
“Unit” is defined in the recitals hereto.
“Unit Assignment” is defined in Section 6(b).
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Exhibit 2.14
AGREEMENT FOR PURCHASE AND SALE OF
UNITS IN NEW PE HOLDCO LLC
EXECUTION COPY
THIS AGREEMENT FOR PURCHASE AND SALE OF UNITS IN NEW PE HOLDCO LLC, (“Agreement”)
dated as of December 10, 2013, is made by and among ARMORY FUND L.P. (“Seller”) and PACIFIC ETHANOL, INC., a Delaware
corporation (“Buyer”). Unless otherwise defined in this Agreement, capitalized terms used in this Agreement are defined in Exhibit A.
W I T N E S S E T H
WHEREAS, New PE Holdco LLC, a Delaware limited liability company (the “Company”), issued certain limited liability
company interests denominated as “Units” pursuant to the LLC Agreement (as defined below) to Seller in connection with the consummation
of that certain Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, dated April 16, 2010, filed with the United
States Bankruptcy Court for the District of Delaware by the predecessors in interest to the Company’s direct and indirect wholly- owned
subsidiaries;
WHEREAS, in connection with the issuance of the Units, the Company and Seller, among others, have executed that
certain Limited Liability Company Agreement of New PE Holdco LLC (the “LLC Agreement”); and
WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase from Seller, 26.39 Units (the “Seller Units”).
NOW, THEREFORE, in consideration of the agreements and mutual covenants and based upon the representations and
warranties set forth herein, the parties agree as follows:
1. Purchase and Sale of Seller Units.
(a) Subject to the terms and conditions of this Agreement, Buyer agrees to purchase, and Seller agrees to sell, convey,
assign, transfer and deliver to Buyer, the Seller Units, free and clear of all Encumbrances, on the Closing Date.
(b) As consideration for the sale of the Seller Units to Buyer at the Closing, Buyer shall pay to Seller, in cash, a total of
$263,900, reflecting a sales price of 10,000 per Unit (the “Consideration”), by wire transfer to the account designed by Seller.
(c) The closing of the sale of the Seller Units to Buyer (the “Closing”) shall take place on such date as Buyer may designate
in a written notice delivered to Seller, provided that such date shall occur on, or as soon as possible after, the date hereof (the “Closing
Date”).
2. Conditions Precedent to Buyer’s Obligation to Close. Buyer’s obligation to purchase the Seller Units is subject to the
fulfillment or satisfaction on or before the Closing of each of the following conditions (any one of which may be waived by Buyer, but only in
a writing signed by Buyer):
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(a) The representations and warranties of Seller set forth in Section 4 or otherwise provided to Buyer in writing in
connection with this Agreement shall be true and correct in every material respect on and as of the Closing Date with the same force and effect
as if they had been made at the Closing.
(b) Seller shall have performed and complied in all material respects with all of its covenants required to be performed by it
under this Agreement including those covenants contained in Section 10.
(c) The Closing shall occur within the time period set forth in Section 1(c).
3. Conditions Precedent to Seller’s Obligation to Close. Seller’s obligation to sell the Seller Units is subject to the fulfillment
or satisfaction on or before the Closing of the following conditions (any one of which may be waived by Seller, but only in a writing signed
by Seller):
(a) The representations and warranties of Buyer set forth in Section 5 or otherwise provided to Seller in writing in
connection with this Agreement shall be true and correct in every material respect on and as of the Closing Date with the same force and effect
as if they had been made at the Closing.
(b) Buyer shall have performed and complied in all material respects with all of its covenants required to be performed by it
under this Agreement including those covenants contained in Section 10.
(c) The Closing shall occur within the time period set forth in Section 1(c).
(d) at the Closing, Buyer will tender to the Seller the Consideration set forth in Section 1(c) above.
4. Seller Representations. Seller represents and warrants to Buyer as follows:
(a) Organization. Seller is a limited liability company duly organized, validly existing and in good standing under the laws
of Delaware. Seller is in good standing and qualified to do business as a foreign corporation in any state in which it is doing business.
(b) Due Authorization; Enforceability. The execution, delivery and performance of this Agreement have been duly and
validly authorized by Seller. Assuming the due authorization, execution and delivery of the same by Buyer, this Agreement and all other
agreements and instruments entered into pursuant hereto (collectively, the “Transaction Documents”) constitute the legal, valid and binding
obligation of Seller, enforceable against Seller in accordance with their respective terms (except as may be limited by bankruptcy, insolvency,
reorganization and other similar laws and equitable principles relating to or limiting creditors’ rights generally).
2
(c) Non-Contravention; Consents. Seller need not give any notice to, make any filing with, or obtain any authorization,
consent, or approval of any government or governmental agency in order to consummate the purchase and sale of the Seller Units (the
“Transaction”). Neither the execution and delivery of this Agreement and the other Transaction Documents, nor the consummation of the
Transaction, will directly or indirectly (with or without notice or lapse of time): (i) conflict with or result in a violation or breach of any of the
terms, conditions or provisions of the Charter Documents of Seller or the Company; (ii) conflict with or violate any statute, regulation, rule,
injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which Seller or
the Company is subject; (iii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the
right to accelerate, terminate, modify or cancel, or require any notice under any agreement, contract, lease, license, instrument or other
arrangement to which Seller or the Company is a party or by which either is bound; or (iv) result in the imposition or creation of an
Encumbrance upon the Seller Units.
(d) Ownership of Seller Units. Seller is the unconditional and sole legal, beneficial, record and equitable owner of the
Seller Units and Seller has full power and authority to sell and transfer the Seller Units, free and clear of any restrictions on transfer or any
other Encumbrances. Seller has not ever sold, assigned transferred or otherwise disposed of all or any portion of Seller Units. Seller is not a
party to any option, warrant, purchase right, or other contract or commitment (other than this Agreement) that could require Seller to sell,
transfer, or otherwise dispose of any Seller Units, or any voting or economic right therein, of the Company. Seller is not a party to any voting
trust, proxy, or other agreement or understanding with respect to the voting of any Seller Units.
(e) Distributions. Seller has no current outstanding obligation to return to the Company all or any portion of any
distribution previously received from the Company in respect of the Seller Units.
(f) LLC Agreement. The LLC Agreement is a valid and binding obligation of Seller, enforceable against Seller in
accordance with its terms (except as may be limited by bankruptcy, insolvency, reorganization and other similar laws and equitable principles
relating to or limiting creditors’ rights generally).
(g) Brokers. Seller has not agreed or become obligated to pay, or has taken any action that might result in any person, entity
or governmental body claiming to be entitled to receive, any brokerage commission, finder’s fee or similar commission or fee in connection
with the Transaction.
(h) Taxes, etc. Seller has no knowledge of any sales taxes, use taxes, transfer taxes, documentary charges, recording fees or
similar taxes, charges, fees or expenses that will become due and payable as a result of the consummation of the Transaction.
5. Buyer Representations. Buyer represents and warrants to Seller as follows:
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(a) Organization. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State
of Delaware. Seller is in good standing and qualified to do business as a foreign corporation in any state in which it is doing business.
(b) Due Authorization; Enforceability. The execution, delivery and performance of this Agreement have been duly and
validly authorized by Buyer. Assuming the due authorization, execution and delivery of the same by Seller, this Agreement and the other
Transaction Documents hereto constitute the legal, valid and binding obligation of Buyer, enforceable against Buyer in accordance with their
respective terms (except as may be limited by bankruptcy, insolvency, reorganization and other similar laws and equitable principles relating to
or limiting creditors’ rights generally).
(c) Non-Contravention; Consents. Buyer need not give any notice to, make any filing with, or obtain any authorization,
consent, or approval of any government or governmental agency in order to consummate the Transaction. Neither the execution and delivery
of this Agreement and the other Transaction Documents, nor the consummation of the Transaction, will directly or indirectly (with or without
notice or lapse of time): (i) conflict with or result in a violation or breach of any of the terms, conditions or provisions of the Charter
Documents of Buyer or the Company; (ii) conflict with or violate any statute, regulation, rule, injunction, judgment, order, decree, ruling,
charge, or other restriction of any government, governmental agency, or court to which Buyer or the Company is subject; or (iii) conflict with,
result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify or
cancel, or require any notice under any agreement, contract, lease, license, instrument or other arrangement to which Buyer or the Company is
a party or by which either is bound.
(d) LLC Agreement. The LLC Agreement is a valid and binding obligation of Buyer, enforceable against Buyer in
accordance with its terms (except as may be limited by bankruptcy, insolvency, reorganization and other similar laws and equitable principles
relating to or limiting creditors’ rights generally).
(e) Conditions Precedent in Unit Assignment Met. Upon execution and delivery of the Unit Assignment to the
Company, the Company shall have received all information required pursuant to the LLC Agreement to effectuate this Transaction, as set forth
in the Unit Assignment (as defined below).
(f) Taxes, etc. Buyer has no knowledge of any sales taxes, use taxes, transfer taxes, documentary charges, recording fees or
similar taxes, charges, fees or expenses that will become due and payable as a result of the consummation of the Transaction.
(g) No Registration under Securities Act. Buyer understands and acknowledges that the sale of the Seller Units has not
and is not being registered under the Securities Act of 1933, as amended (the “Securities Act”) or the securities laws of any U.S. state or
other jurisdiction, nor is such registration contemplated, and the Seller Units cannot be resold without registration thereunder or exemption
therefrom. Buyer recognizes that no public market now exists for any of the Seller Units issued by the Company, and that no such market is
expected to develop in the future. Buyer acknowledges that the Seller Units may be required to be held indefinitely unless subsequently
registered under the Securities Act or an exemption from registration is available.
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(h) Sophistication. Buyer is a sophisticated buyer and has adequate information concerning the Seller Units and the
Company to make an informed decision regarding the purchase contemplated by this Agreement, is able to bear the economic risk associated
with the purchase of the Seller Units, has such knowledge and experience, and has undertaken transactions regarding investments of a similar
nature, so as to be aware of the risks and uncertainties inherent in the purchase of rights and assumption of obligations of the type
contemplated herein, and has independently and without reliance upon Seller, and based on such information as it has deemed appropriate,
made its own analysis and decision to enter into this letter agreement, except that Buyer has relied upon the representations, warranties and
covenants of Seller expressly provided in this Agreement.
6. Closing Deliverables by Seller. At the Closing, Seller shall deliver the following to Buyer:
( a ) if the Closing occurs after the date of this Agreement, a certificate from Seller certifying that (i) each of the
representations and warranties made by Seller in this Agreement is true and correct as of the date of this Agreement and the date of the Closing
and (ii) each of the covenants and agreement that Seller is required to have complied with or performed pursuant to this Agreement at or prior
to the Closing has been duly complied with and performed in all respects; and
(b) the “New PE Holdco LLC Unit Assignment” required for transfers of Units under the terms of the LLC Agreement (the
“Unit Assignment”).
7. Closing Deliverables by Buyer. At the Closing, Buyer shall deliver the following to Seller:
( a ) if the Closing occurs after the date of this Agreement, a certificate from Buyer certifying that (i) each of the
representations and warranties made by Seller in this Agreement is true and correct as of the date of this Agreement and the date of the Closing
and (ii) each of the covenants and agreement that Buyer is required to have complied with or performed pursuant to this Agreement at or prior
to the Closing has been duly complied with and performed in all respects;
(b) the Consideration; and
(c) a countersigned copy of the Unit Assignment.
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8. Survival of Representations and Covenants.
(a) The covenants and agreements of each Party shall survive the Closing for the periods specified in such covenants and
agreements, or if no period is specified, until the first anniversary of the Closing. The representations and warranties of each Party shall
survive until the Closing and the full and irrevocable performance of all of the obligations by each such Party hereunder.
(b) The representations, warranties, covenants and obligations of Seller and Buyer and the rights and remedies that may be
exercised by any Indemnified Party shall not be limited or otherwise affected by or as a result of any information furnished to, or any
investigation made by or any knowledge of, any of the Indemnified Parties or any of their Representatives.
9. Indemnification by Seller. Each Party shall hold harmless and indemnify each of the other Party’s respective Indemnified
Parties from and against, and shall compensate and reimburse each of such Indemnified Parties for, any Losses that are directly or indirectly
suffered or incurred by any of such Indemnified Parties or to which any of such Indemnified Parties may otherwise become subject at any
time and that arise directly from or as a direct result of, or are directly connected with:
(a) any breach by the Party of any of its representations or warranties contained in this Agreement, any other Transaction
Document or in any certificate delivered by such Party pursuant to any provision of this Agreement or any other Transaction Document; or
(b) any breach of any covenant or agreement of the Party contained in this Agreement or any other Transaction Document.
Notwithstanding the foregoing, in no case shall a Party be liable for consequential or punitive damages.
10. Additional Agreements.
(a) Further Assurances. Each Party agrees to execute and deliver such further documents and instruments and to take such
further actions after the Closing as may be necessary or desirable and reasonably requested by the other Party to give effect to the Transaction.
(b) Expenses; Attorneys’ Fees. Each Party shall bear and pay all fees, costs and expenses that have been incurred or that
are in the future incurred by, on behalf of, such Party in connection with the negotiation, preparation and review of this Agreement, the other
Transaction Documents and all certificates and other instruments and documents delivered or to be delivered in connection with the
Transaction, and the consummation and performance of the Transaction. If a Party shall bring any action, suit, counterclaim, appeal,
arbitration, or mediation for any relief against the other Party, declaratory or otherwise, to enforce the terms hereof or to declare rights
hereunder (referred to herein as an “Action”), the non-prevailing party attorneys’ fees and expenses.
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11. Miscellaneous.
(a) Notices. All notices, demands and other communications to be given or delivered under or by reason of the provisions
of this Agreement shall be in writing and shall be and shall be sent by certified mail, return receipt requested, by hand delivery (against a
signed receipt), or by reputable overnight delivery service (such as Federal Express) which can certify actual delivery, or by facsimile or e-
mail. Notices, demands and communications to Seller or Buyer shall, unless another address is specified in writing in accordance herewith, be
sent to the address indicated below:
Notices to Seller:
Notices to Buyer:
Armory Fund L.P.
999 Fifth Avenue, Suite 450
San Rafael, CA 94901-2949
(415) 259-2742 (Phone)
(415) 259-2745 (Fax)
Email: jburnham@armoryfunds.com
Pacific Ethanol, Inc.
400 Capitol Mall
Suite 2060
Sacramento, CA 95814
Attn: General Counsel
Tel: (916) 403-2123
Fax: (916) 403-2785
Email: cwright@pacificethanol.net
Any notice given by certified mail, as aforesaid, shall be deemed given on the third (3rd) day after such notice is deposited with the United
States Postal Service. Any notice given by hand, as aforesaid, shall be deemed given when received (against a signed receipt). Any notice
given by overnight delivery service, as aforesaid, shall be deemed given on the first business day following the date when such notice is
deposited with such delivery service. Any notice given by facsimile, as aforesaid, shall be deemed given upon receipt of answerback
confirmation. Any notice given by e-mail, as aforesaid, shall be deemed given upon receipt of notice of delivery.
(b) Amendment. No amendment, modification or waiver of this Agreement shall be valid unless the same shall be in
writing and signed by Seller and Buyer. A waiver or amendment by a Party shall only be effective if (a) it is in writing and signed by the
relevant Party or Parties, (b) it specifically refers to this Agreement and (c) it specifically states that it is intended to amend or modify this
Agreement or waive a right hereunder. Any such amendment, modification or waiver shall be effective only in the specific instance and for the
purpose for which it was given.
7
(c) Waiver. No failure or delay on the part of the parties or any of them in exercising any right, power or privilege
hereunder, nor any course of dealing between the parties or any of them shall operate as a waiver of any such right, power or privilege nor
shall any single or partial exercise of any such right, power or privilege preclude the simultaneous or later exercise of any other right, power or
privilege. The rights and remedies herein expressly provided are cumulative and are not exclusive of any rights or remedies which the parties
or any of them would otherwise have.
(d) Counterparts. This Agreement may be executed in any number of counterparts with the same effect as if all of the
parties hereto had signed the same document. All counterparts shall be construed together and shall constitute one agreement. This Agreement
and any amendments hereto, to the extent signed and delivered by means of a facsimile machine or electronic transmission (including a PDF
file), shall be treated in all manner and respects as an original Agreement and shall be considered to have the same binding legal effect as if it
were the original signed version thereof delivered in person. No party hereto shall raise the use of a facsimile machine or electronic
transmission to deliver a signature or the fact that any signature was transmitted or communicated through the use of a facsimile machine or
electronic transmission as a defense to the formation of a contract and each such party forever waives any such defense.
(e) GOVERNING LAW. THE LAWS OF THE STATE OF DELAWARE SHALL GOVERN THE VALIDITY OF
THIS AGREEMENT, THE CONSTRUCTION OF ITS TERMS, AND THE INTERPRETATION OF THE RIGHTS AND DUTIES
ARISING HEREUNDER, WITHOUT REGARD TO ITS CONFLICTS OF LAWS PROVISIONS.
(f) Submission to Jurisdiction; Waiver of Jury Trial and Venue.
( 1 ) SUBMISSION TO
JURISDICTION. EACH PARTY HERETO
IRREVOCABLY AND
UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THE
COURTS OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY AND OF THE UNITED STATES DISTRICT
COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, IN ANY
ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR FOR RECOGNITION OR
ENFORCEMENT OF ANY JUDGMENT, AND EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY
AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED
IN SUCH NEW YORK STATE COURT OR, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, IN SUCH
FEDERAL COURT. EACH OF THE PARTIES HERETO AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR
PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE
JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW.
( 2 ) WAIVER OF JURY TRIAL AND VENUE. EACH PARTY HERETO IRREVOCABLY AND
UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, (i) ANY AND ALL RIGHTS
SUCH PARTY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR AND (ii) ANY OBJECTION THAT MAY HAVE
TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR PROCEEDING SUCH PARTY MAY NOW OR HEREAFTER HAVE
TO THE LAYING OF VENUE OF ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT
IN ANY COURT REFERRED TO ABOVE. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE
MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT.
8
summons and complaint, or other pleading, by certified mail, return receipt requested, in accordance with Section11(a).
(3) Service of Process. Each party hereto agrees that service of process may be effectuated by mailing a copy of the
(g) Benefit and Binding Effect. Except as otherwise provided in this Agreement, no right under this Agreement shall be
assignable and any attempted assignment in violation of this provision shall be void. Every covenant, term, and provision of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their respective executors, administrators, heirs, successors, transferees,
and assigns. It is understood and agreed among the parties that this Agreement and the covenants made herein are made expressly and solely
for the benefit of the parties hereto, and that no other Person, other than as expressly set forth in this, shall be entitled or be deemed to be
entitled to any benefits or rights hereunder, nor be authorized or entitled to enforce any rights, claims or remedies hereunder or by reason
hereof.
(h) Severability. Any provision of this Agreement which is prohibited, unenforceable or not authorized in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or nonauthorization without invalidating the
remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction. The parties hereto
agree to negotiate in good faith to replace any illegal, invalid or unenforceable provision of this Agreement with a legal, valid and enforceable
provision that, to the extent possible, will preserve the economic bargain of this Agreement. If any time period set forth herein is held by a
court of competent jurisdiction to be unenforceable, a different time period that is determined by the court to be more reasonable shall replace
the unenforceable time period.
(i) Headings; Construction. Section and other headings contained in this Agreement are for reference purposes only and
are not intended to describe, interpret, define, or limit the scope, extent, or intent of this Agreement or any provision hereof. Every covenant,
term, and provision of this Agreement shall be construed simply according to its fair meaning and not strictly for or against any party. Every
schedule and other addendum attached to this Agreement and referred to herein is incorporated in this Agreement by reference unless this
Agreement expressly otherwise provides. All terms and any variations thereof shall be deemed to refer to masculine, feminine, or neuter,
singular or plural, as the identity of the Person or Persons may require.
9
(j) Entire Agreement. This Agreement contains the entire understanding and agreement among the parties hereto with
respect to the subject matter hereof, and supersedes all prior agreements and all contemporaneous oral agreements.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement for Purchase And Sale of Units in New PE Holdco LLC as
of the day and year first above written.
BUYER
PACIFIC ETHANOL, INC.
By: /s/ Byron T. McGregor
Name: Byron T. McGregor
Title: Chief Financial Officer
SELLER
ARMORY FUND L.P.
By: Armory Advisors LLC its Investment Manager
By: /s/ Jay Burnham
Name: Jay Burnham
Title: Manager
10
EXHIBIT A
DEFINITIONS
“Action” is defined in Section 10(b).
“Affiliate” means an individual or entity that directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is
under common control with, a specified individual or entity. For purposes of this definition, “control” shall include, without limitation, the
exertion of significant influence over an individual or entity and shall be conclusively presumed as to any fifty percent (50%) or greater equity
interest.
“Buyer” is defined in the preamble hereof.
“Consideration” is defined in Section 1(b).
“Charter Documents” shall mean, as applicable, the specified entity’s (i) certificate of incorporation or formation or other charter or
organizational documents, and (ii) bylaws or operating agreement, each as from time to time in effect.
“Closing” is defined in Section 1(c).
“Closing Date” is defined in Section 1(c).
“Company” is defined in the recitals hereto.
“Encumbrance” means any lien, pledge, hypothecation, charge, mortgage, security interest, encumbrance, equity, trust, equitable interest,
claim, preference, right of possession, lease, tenancy, license, encroachment, covenant, infringement, interference, Order, proxy, option, right
of first refusal, preemptive right, community property interest, legend, defect, impediment, exception, reservation, limitation, impairment,
imperfection of title, condition or restriction of any nature (including any restriction on the transfer of an asset, any restriction on the receipt of
any income derived from an asset, any restriction on the use of any asset and any restriction on the possession, exercise or transfer of any
other attribute of ownership of an asset).
“Indemnified Party” means, in respect of Buyer, Buyer and its Affiliates and, in respect of Seller, Seller and its Affiliates.
“LLC Agreement” is defined in the recitals hereto.
“Loss” shall include any loss, damage, injury, decline in value, liability, claim, demand, settlement, judgment, award, fine, penalty, tax, fee
(including any legal fee, expert fee, accounting fee or advisory fee), charge, cost (including court costs and any cost of investigation) or
expense of any nature.
11
“Party” or “Parties” means any of Seller and Buyer.
“Person” means any individual, person, limited liability company, partnership, trust, unincorporated organization, corporation, association,
joint stock company, business, group, government, government agency or authority or other entity.
“Representatives” shall mean partners, officers, directors, employees, agents, attorneys, accountants, advisors and representatives of the
respective Party or, in the case of Seller, its manager.
“Seller” is defined in the preamble hereof.
“Seller Units” is defined in the preamble hereof.
“Transaction” is defined in 4(c).
“Transaction Documents” is defined in Section 4(b).
“Unit” is defined in the recitals hereto.
“Unit Assignment” is defined in Section 6(b).
12
Exhibit 2.15
EXECUTION COPY
FORM OF
AGREEMENT FOR PURCHASE AND SALE OF
UNITS IN NEW PE HOLDCO LLC
THIS AGREEMENT FOR PURCHASE AND SALE OF UNITS IN NEW PE HOLDCO LLC, (“Agreement”)
dated as of December 14, 2013, is made by and among ______________________ (“Seller”) and PACIFIC ETHANOL, INC., a
Delaware corporation (“Buyer”). Unless otherwise defined in this Agreement, capitalized terms used in this Agreement are defined in Exhibit
A.
W I T N E S S E T H
WHEREAS, New PE Holdco LLC, a Delaware limited liability company (the “Company”), issued certain limited liability
company interests denominated as “Units” pursuant to the LLC Agreement (as defined below) to Seller in connection with the consummation
of that certain Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, dated April 16, 2010, filed with the United
States Bankruptcy Court for the District of Delaware by the predecessors in interest to the Company’s direct and indirect wholly- owned
subsidiaries;
WHEREAS, in connection with the issuance of the Units, the Company and Seller, among others, have executed that
certain Limited Liability Company Agreement of New PE Holdco LLC (the “LLC Agreement”); and
WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase from Seller, ____ Units (the “Seller Units”).
NOW, THEREFORE, in consideration of the agreements and mutual covenants and based upon the representations and
warranties set forth herein, the parties agree as follows:
1. Purchase and Sale of Seller Units.
(a) Subject to the terms and conditions of this Agreement, Buyer agrees to purchase, and Seller agrees to sell, convey,
assign, transfer and deliver to Buyer, the Seller Units, free and clear of all Encumbrances, on the Closing Date.
(b) As consideration for the sale of the Seller Units to Buyer at the Closing, Buyer shall pay to Seller, in cash, a total of
$______, reflecting a sales price of 10,000 per Unit (the “Consideration”), by wire transfer to the account designed by Seller.
(c) The closing of the sale of the Seller Units to Buyer (the “Closing”) shall take place on such date as Buyer may designate
in a written notice delivered to Seller, provided that such date shall occur on, or as soon as possible after, the date hereof (the “Closing
Date”).
2. Conditions Precedent to Buyer’s Obligation to Close. Buyer’s obligation to purchase the Seller Units is subject to the
fulfillment or satisfaction on or before the Closing of each of the following conditions (any one of which may be waived by Buyer, but only in
a writing signed by Buyer):
1
(a) The representations and warranties of Seller set forth in Section 4 or otherwise provided to Buyer in writing in
connection with this Agreement shall be true and correct in every material respect on and as of the Closing Date with the same force and effect
as if they had been made at the Closing.
(b) Seller shall have performed and complied in all material respects with all of its covenants required to be performed by it
under this Agreement including those covenants contained in Section 10.
(c) The Closing shall occur within the time period set forth in Section 1(c).
3. Conditions Precedent to Seller’s Obligation to Close. Seller’s obligation to sell the Seller Units is subject to the fulfillment or
satisfaction on or before the Closing of the following conditions (any one of which may be waived by Seller, but only in a writing signed by
Seller):
(a) The representations and warranties of Buyer set forth in Section 5 or otherwise provided to Seller in writing in
connection with this Agreement shall be true and correct in every material respect on and as of the Closing Date with the same force and effect
as if they had been made at the Closing.
(b) Buyer shall have performed and complied in all material respects with all of its covenants required to be performed by it
under this Agreement including those covenants contained in Section 10.
(c) The Closing shall occur within the time period set forth in Section 1(c).
(d) at the Closing, Buyer will tender to the Seller the Consideration set forth in Section 1(c) above.
4. Seller Representations. Seller represents and warrants to Buyer as follows:
(a) Organization. Seller is a limited partnership duly organized, validly existing and in good standing under the laws of
Delaware. Seller is in good standing and qualified to do business as a foreign corporation in any state in which it is doing business.
(b) Due Authorization; Enforceability. The execution, delivery and performance of this Agreement have been duly and
validly authorized by Seller. Assuming the due authorization, execution and delivery of the same by Buyer, this Agreement and all other
agreements and instruments entered into pursuant hereto (collectively, the “Transaction Documents”) constitute the legal, valid and binding
obligation of Seller, enforceable against Seller in accordance with their respective terms (except as may be limited by bankruptcy, insolvency,
reorganization and other similar laws and equitable principles relating to or limiting creditors’ rights generally).
2
(c) Non-Contravention; Consents. Seller need not give any notice to, make any filing with, or obtain any authorization,
consent, or approval of any government or governmental agency in order to consummate the purchase and sale of the Seller Units (the
“Transaction”). Neither the execution and delivery of this Agreement and the other Transaction Documents, nor the consummation of the
Transaction, will directly or indirectly (with or without notice or lapse of time): (i) conflict with or result in a violation or breach of any of the
terms, conditions or provisions of the Charter Documents of Seller or the Company; (ii) conflict with or violate any statute, regulation, rule,
injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which Seller or
the Company is subject; (iii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the
right to accelerate, terminate, modify or cancel, or require any notice under any agreement, contract, lease, license, instrument or other
arrangement to which Seller or the Company is a party or by which either is bound; or (iv) result in the imposition or creation of an
Encumbrance upon the Seller Units.
(d) Ownership of Seller Units. Seller is the unconditional and sole legal, beneficial, record and equitable owner of the
Seller Units and Seller has full power and authority to sell and transfer the Seller Units, free and clear of any restrictions on transfer or any
other Encumbrances. Seller has not ever sold, assigned transferred or otherwise disposed of all or any portion of Seller Units. Seller is not a
party to any option, warrant, purchase right, or other contract or commitment (other than this Agreement) that could require Seller to sell,
transfer, or otherwise dispose of any Seller Units, or any voting or economic right therein, of the Company. Seller is not a party to any voting
trust, proxy, or other agreement or understanding with respect to the voting of any Seller Units.
(e) Distributions. Seller has no current outstanding obligation to return to the Company all or any portion of any
distribution previously received from the Company in respect of the Seller Units.
(f) LLC Agreement. The LLC Agreement is a valid and binding obligation of Seller, enforceable against Seller in
accordance with its terms (except as may be limited by bankruptcy, insolvency, reorganization and other similar laws and equitable principles
relating to or limiting creditors’ rights generally).
(g) Brokers. Seller has not agreed or become obligated to pay, or has taken any action that might result in any person, entity
or governmental body claiming to be entitled to receive, any brokerage commission, finder’s fee or similar commission or fee in connection
with the Transaction.
(h) Taxes, etc. Seller has no knowledge of any sales taxes, use taxes, transfer taxes, documentary charges, recording fees or
similar taxes, charges, fees or expenses that will become due and payable as a result of the consummation of the Transaction.
3
5. Buyer Representations. Buyer represents and warrants to Seller as follows:
(a) Organization. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State
of Delaware. Buyer is in good standing and qualified to do business as a foreign corporation in any state in which it is doing business.
(b) Due Authorization; Enforceability. The execution, delivery and performance of this Agreement have been duly and
validly authorized by Buyer. Assuming the due authorization, execution and delivery of the same by Seller, this Agreement and the other
Transaction Documents hereto constitute the legal, valid and binding obligation of Buyer, enforceable against Buyer in accordance with their
respective terms (except as may be limited by bankruptcy, insolvency, reorganization and other similar laws and equitable principles relating to
or limiting creditors’ rights generally).
(c) Non-Contravention; Consents. Buyer need not give any notice to, make any filing with, or obtain any authorization,
consent, or approval of any government or governmental agency in order to consummate the Transaction. Neither the execution and delivery
of this Agreement and the other Transaction Documents, nor the consummation of the Transaction, will directly or indirectly (with or without
notice or lapse of time): (i) conflict with or result in a violation or breach of any of the terms, conditions or provisions of the Charter
Documents of Buyer or the Company; (ii) conflict with or violate any statute, regulation, rule, injunction, judgment, order, decree, ruling,
charge, or other restriction of any government, governmental agency, or court to which Buyer or the Company is subject; or (iii) conflict with,
result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify or
cancel, or require any notice under any agreement, contract, lease, license, instrument or other arrangement to which Buyer or the Company is
a party or by which either is bound.
(d) LLC Agreement. The LLC Agreement is a valid and binding obligation of Buyer, enforceable against Buyer in
accordance with its terms (except as may be limited by bankruptcy, insolvency, reorganization and other similar laws and equitable principles
relating to or limiting creditors’ rights generally).
(e) Conditions Precedent in Unit Assignment Met. Upon execution and delivery of the Unit Assignment to the
Company, the Company shall have received all information required pursuant to the LLC Agreement to effectuate this Transaction, as set forth
in the Unit Assignment (as defined below).
(f) Taxes, etc. Buyer has no knowledge of any sales taxes, use taxes, transfer taxes, documentary charges, recording fees or
similar taxes, charges, fees or expenses that will become due and payable as a result of the consummation of the Transaction.
(g) No Registration under Securities Act. Buyer understands and acknowledges that the sale of the Seller Units has not
and is not being registered under the Securities Act of 1933, as amended (the “Securities Act”) or the securities laws of any U.S. state or
other jurisdiction, nor is such registration contemplated, and the Seller Units cannot be resold without registration thereunder or exemption
therefrom. Buyer recognizes that no public market now exists for any of the Seller Units issued by the Company, and that no such market is
expected to develop in the future. Buyer acknowledges that the Seller Units may be required to be held indefinitely unless subsequently
registered under the Securities Act or an exemption from registration is available.
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(h) Sophistication. Buyer is a sophisticated buyer and has adequate information concerning the Seller Units and the
Company to make an informed decision regarding the purchase contemplated by this Agreement, is able to bear the economic risk associated
with the purchase of the Seller Units, has such knowledge and experience, and has undertaken transactions regarding investments of a similar
nature, so as to be aware of the risks and uncertainties inherent in the purchase of rights and assumption of obligations of the type
contemplated herein, and has independently and without reliance upon Seller, and based on such information as it has deemed appropriate,
made its own analysis and decision to enter into this letter agreement, except that Buyer has relied upon the representations, warranties and
covenants of Seller expressly provided in this Agreement.
6. Closing Deliverables by Seller. At the Closing, Seller shall deliver the following to Buyer:
( a ) if the Closing occurs after the date of this Agreement, a certificate from Seller certifying that (i) each of the
representations and warranties made by Seller in this Agreement is true and correct as of the date of this Agreement and the date of the Closing
and (ii) each of the covenants and agreement that Seller is required to have complied with or performed pursuant to this Agreement at or prior
to the Closing has been duly complied with and performed in all respects; and
(b) the “New PE Holdco LLC Unit Assignment” required for transfers of Units under the terms of the LLC Agreement (the
“Unit Assignment”).
7. Closing Deliverables by Buyer. At the Closing, Buyer shall deliver the following to Seller:
( a ) if the Closing occurs after the date of this Agreement, a certificate from Buyer certifying that (i) each of the
representations and warranties made by Buyer in this Agreement is true and correct as of the date of this Agreement and the date of the
Closing and (ii) each of the covenants and agreement that Buyer is required to have complied with or performed pursuant to this Agreement at
or prior to the Closing has been duly complied with and performed in all respects;
(b) the Consideration; and
(c) a countersigned copy of the Unit Assignment.
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8. Survival of Representations and Covenants.
(a) The covenants and agreements of each Party shall survive the Closing for the periods specified in such covenants and
agreements, or if no period is specified, until the first anniversary of the Closing. The representations and warranties of each Party shall
survive until the Closing and the full and irrevocable performance of all of the obligations by each such Party hereunder.
(b) The representations, warranties, covenants and obligations of Seller and Buyer and the rights and remedies that may be
exercised by any Indemnified Party shall not be limited or otherwise affected by or as a result of any information furnished to, or any
investigation made by or any knowledge of, any of the Indemnified Parties or any of their Representatives.
9. Indemnification by Seller. Each Party shall hold harmless and indemnify each of the other Party’s respective Indemnified Parties
from and against, and shall compensate and reimburse each of such Indemnified Parties for, any Losses that are directly or indirectly suffered
or incurred by any of such Indemnified Parties or to which any of such Indemnified Parties may otherwise become subject at any time and that
arise directly from or as a direct result of, or are directly connected with:
(a) any breach by the Party of any of its representations or warranties contained in this Agreement, any other Transaction
Document or in any certificate delivered by such Party pursuant to any provision of this Agreement or any other Transaction Document; or
(b) any breach of any covenant or agreement of the Party contained in this Agreement or any other Transaction Document.
Notwithstanding the foregoing, in no case shall a Party be liable for consequential or punitive damages.
10. Additional Agreements.
(a) Further Assurances. Each Party agrees to execute and deliver such further documents and instruments and to take such
further actions after the Closing as may be necessary or desirable and reasonably requested by the other Party to give effect to the Transaction.
(b) Expenses; Attorneys’ Fees. Each Party shall bear and pay all fees, costs and expenses that have been incurred or that
are in the future incurred by, on behalf of, such Party in connection with the negotiation, preparation and review of this Agreement, the other
Transaction Documents and all certificates and other instruments and documents delivered or to be delivered in connection with the
Transaction, and the consummation and performance of the Transaction. If a Party shall bring any action, suit, counterclaim, appeal,
arbitration, or mediation for any relief against the other Party, declaratory or otherwise, to enforce the terms hereof or to declare rights
hereunder (referred to herein as an “Action”), the non-prevailing party attorneys’ fees and expenses.
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11. Miscellaneous.
(a) Notices. All notices, demands and other communications to be given or delivered under or by reason of the provisions
of this Agreement shall be in writing and shall be and shall be sent by certified mail, return receipt requested, by hand delivery (against a
signed receipt), or by reputable overnight delivery service (such as Federal Express) which can certify actual delivery, or by facsimile or e-
mail. Notices, demands and communications to Seller or Buyer shall, unless another address is specified in writing in accordance herewith, be
sent to the address indicated below:
Notices to Seller:
Notices to Buyer:
______________________
Riva Ridge Capital Management LP
55 Fifth Ave., 18th Floor New York, NY 10003
(646) 284-9903 (Phone)
(646) 284-9919 (Fax)
Email: pfinelli@rivaridgecapital.com
Pacific Ethanol, Inc.
400 Capitol Mall
Suite 2060
Sacramento, CA 95814
Attn: General Counsel
Tel: (916) 403-2123
Fax: (916) 403-2785
Email: cwright@pacificethanol.net
Any notice given by certified mail, as aforesaid, shall be deemed given on the third (3rd) day after such notice is deposited with the United
States Postal Service. Any notice given by hand, as aforesaid, shall be deemed given when received (against a signed receipt). Any notice
given by overnight delivery service, as aforesaid, shall be deemed given on the first business day following the date when such notice is
deposited with such delivery service. Any notice given by facsimile, as aforesaid, shall be deemed given upon receipt of answerback
confirmation. Any notice given by e-mail, as aforesaid, shall be deemed given upon receipt of notice of delivery.
(b) Amendment. No amendment, modification or waiver of this Agreement shall be valid unless the same shall be in
writing and signed by Seller and Buyer. A waiver or amendment by a Party shall only be effective if (a) it is in writing and signed by the
relevant Party or Parties, (b) it specifically refers to this Agreement and (c) it specifically states that it is intended to amend or modify this
Agreement or waive a right hereunder. Any such amendment, modification or waiver shall be effective only in the specific instance and for the
purpose for which it was given.
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(c) Waiver. No failure or delay on the part of the parties or any of them in exercising any right, power or privilege
hereunder, nor any course of dealing between the parties or any of them shall operate as a waiver of any such right, power or privilege nor
shall any single or partial exercise of any such right, power or privilege preclude the simultaneous or later exercise of any other right, power or
privilege. The rights and remedies herein expressly provided are cumulative and are not exclusive of any rights or remedies which the parties
or any of them would otherwise have.
(d) Counterparts. This Agreement may be executed in any number of counterparts with the same effect as if all of the
parties hereto had signed the same document. All counterparts shall be construed together and shall constitute one agreement. This Agreement
and any amendments hereto, to the extent signed and delivered by means of a facsimile machine or electronic transmission (including a PDF
file), shall be treated in all manner and respects as an original Agreement and shall be considered to have the same binding legal effect as if it
were the original signed version thereof delivered in person. No party hereto shall raise the use of a facsimile machine or electronic
transmission to deliver a signature or the fact that any signature was transmitted or communicated through the use of a facsimile machine or
electronic transmission as a defense to the formation of a contract and each such party forever waives any such defense.
(e) GOVERNING LAW. THE LAWS OF THE STATE OF DELAWARE SHALL GOVERN THE VALIDITY OF
THIS AGREEMENT, THE CONSTRUCTION OF ITS TERMS, AND THE INTERPRETATION OF THE RIGHTS AND DUTIES
ARISING HEREUNDER, WITHOUT REGARD TO ITS CONFLICTS OF LAWS PROVISIONS.
(f) Submission to Jurisdiction; Waiver of Jury Trial and Venue.
( 1 ) SUBMISSION TO
JURISDICTION. EACH PARTY HERETO
IRREVOCABLY AND
UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THE
COURTS OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY AND OF THE UNITED STATES DISTRICT
COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, IN ANY
ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR FOR RECOGNITION OR
ENFORCEMENT OF ANY JUDGMENT, AND EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY
AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED
IN SUCH NEW YORK STATE COURT OR, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, IN SUCH
FEDERAL COURT. EACH OF THE PARTIES HERETO AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR
PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE
JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW.
( 2 ) WAIVER OF JURY TRIAL AND VENUE. EACH PARTY HERETO IRREVOCABLY AND
UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, (i) ANY AND ALL RIGHTS
SUCH PARTY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR AND (ii) ANY OBJECTION THAT SUCH PARTY
MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT IN ANY COURT REFERRED TO ABOVE. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE DEFENSE OF AN
INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT.
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summons and complaint, or other pleading, by certified mail, return receipt requested, in accordance with Section11(a).
(3) Service of Process. Each party hereto agrees that service of process may be effectuated by mailing a copy of the
(g) Benefit and Binding Effect. Except as otherwise provided in this Agreement, no right under this Agreement shall be
assignable and any attempted assignment in violation of this provision shall be void. Every covenant, term, and provision of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their respective executors, administrators, heirs, successors, transferees,
and assigns. It is understood and agreed among the parties that this Agreement and the covenants made herein are made expressly and solely
for the benefit of the parties hereto, and that no other Person, other than as expressly set forth in this, shall be entitled or be deemed to be
entitled to any benefits or rights hereunder, nor be authorized or entitled to enforce any rights, claims or remedies hereunder or by reason
hereof.
(h) Severability. Any provision of this Agreement which is prohibited, unenforceable or not authorized in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or nonauthorization without invalidating the
remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction. The parties hereto
agree to negotiate in good faith to replace any illegal, invalid or unenforceable provision of this Agreement with a legal, valid and enforceable
provision that, to the extent possible, will preserve the economic bargain of this Agreement. If any time period set forth herein is held by a
court of competent jurisdiction to be unenforceable, a different time period that is determined by the court to be more reasonable shall replace
the unenforceable time period.
(i) Headings; Construction. Section and other headings contained in this Agreement are for reference purposes only and
are not intended to describe, interpret, define, or limit the scope, extent, or intent of this Agreement or any provision hereof. Every covenant,
term, and provision of this Agreement shall be construed simply according to its fair meaning and not strictly for or against any party. Every
schedule and other addendum attached to this Agreement and referred to herein is incorporated in this Agreement by reference unless this
Agreement expressly otherwise provides. All terms and any variations thereof shall be deemed to refer to masculine, feminine, or neuter,
singular or plural, as the identity of the Person or Persons may require.
9
(j) Entire Agreement. This Agreement contains the entire understanding and agreement among the parties hereto with
respect to the subject matter hereof, and supersedes all prior agreements and all contemporaneous oral agreements.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement for Purchase And Sale of Units in NewPE Holdco LLC as
of the day and year flrst above written.
BUYER
PACIFIC ETHANOL, INC.
By:
Name: Byron T. McGregor
Title: Chief Financial Officer
SELLER
MARINER PARTNERS, L.P.
By:
Name: _____________
Title: ______________
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EXHIBIT A
DEFINITIONS
“Action” is defined in Section 10(b).
“Affiliate” means an individual or entity that directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is
under common control with, a specified individual or entity. For purposes of this definition, “control” shall include, without limitation, the
exertion of significant influence over an individual or entity and shall be conclusively presumed as to any fifty percent (50%) or greater equity
interest.
“Buyer” is defined in the preamble hereof.
“Consideration” is defined in Section 1(b).
“Charter Documents” shall mean, as applicable, the specified entity’s (i) certificate of incorporation or formation or other charter or
organizational documents, and (ii) bylaws or operating agreement, each as from time to time in effect.
“Closing” is defined in Section 1(c).
“Closing Date” is defined in Section 1(c).
“Company” is defined in the recitals hereto.
“Encumbrance” means any lien, pledge, hypothecation, charge, mortgage, security interest, encumbrance, equity, trust, equitable interest,
claim, preference, right of possession, lease, tenancy, license, encroachment, covenant, infringement, interference, Order, proxy, option, right
of first refusal, preemptive right, community property interest, legend, defect, impediment, exception, reservation, limitation, impairment,
imperfection of title, condition or restriction of any nature (including any restriction on the transfer of an asset, any restriction on the receipt of
any income derived from an asset, any restriction on the use of any asset and any restriction on the possession, exercise or transfer of any
other attribute of ownership of an asset).
“Indemnified Party” means, in respect of Buyer, Buyer and its Affiliates and, in respect of Seller, Seller and its Affiliates.
“LLC Agreement” is defined in the recitals hereto.
“Loss” shall include any loss, damage, injury, decline in value, liability, claim, demand, settlement, judgment, award, fine, penalty, tax, fee
(including any legal fee, expert fee, accounting fee or advisory fee), charge, cost (including court costs and any cost of investigation) or
expense of any nature.
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“Party” or “Parties” means any of Seller and Buyer.
“Person” means any individual, person, limited liability company, partnership, trust, unincorporated organization, corporation, association,
joint stock company, business, group, government, government agency or authority or other entity.
“Representatives” shall mean partners, officers, directors, employees, agents, attorneys, accountants, advisors and representatives of the
respective Party or, in the case of Seller, its manager.
“Seller” is defined in the preamble hereof.
“Seller Units” is defined in the preamble hereof.
“Transaction” is defined in 4(c).
“Transaction Documents” is defined in Section 4(b).
“Unit” is defined in the recitals hereto.
“Unit Assignment” is defined in Section 6(b).
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Exhibit 10.11
PACIFIC ETHANOL, INC.
AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT
for
PAUL P. KOEHLER
This Employment Agreement (“Agreement”) by and between Paul P. Koehler (“Employee”) and Pacific Ethanol, Inc. (the
“Company”) (collectively, the “Parties”) is effective as of October 1, 2012.
WHEREAS, the Company desires to employ Employee to provide personal services to the Company, and wishes to provide
Employee with certain compensation and benefits in return for his services;
WHEREAS, Employee wishes to be employed by the Company and to provide personal services to the Company in return for
certain compensation and benefits; and
WHEREAS, the Parties entered into an Executive Employment Agreement on or about June 23, 2005, and an Amendment thereto
on December 19, 2008, setting forth certain terms of Employee’s employment with the Company (the “Original Employment Agreement”) and
now seek to supersede and replace the Original Employment Agreement with this Agreement;
WHEREAS, once this Agreement is effective, the parties agree that the Original Employment Agreement shall have no further force
or effect;
NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, it is hereby agreed by and between
the parties hereto as follows:
1. EMPLOYMENT BY THE COMPANY.
1.1 Position. Subject to terms and conditions set forth herein, the Company agrees to employ Employee in the position of
Vice President of Business Development, and Employee hereby accepts such employment. During the term of Employee’s employment with
the Company, Employee will devote Employee’s best efforts and substantially all of Employee’s business time and attention to the business of
the Company.
1.2 Duties and Location. Employee shall perform such duties as are customarily associated with Employee’s then current
title. Employee shall report to the Company’s Chief Financial Officer. Employee’s primary office location shall be Employee’s residence in
Portland, Oregon. The Company reserves the right to reasonably require Employee to perform Employee’s duties at places other than
Employee’s primary office location from time to time as agreed to by Employee, and to require reasonable business travel. The Company shall
be reimburse Employee for the cost of such business travel, including transportation between Portland, Oregon and Sacramento, California.
1
1.3 Policies and Procedures. The employment relationship between the parties shall be governed by the general
employment policies and practices of the Company, except that when the terms of this Agreement differ from or are in conflict with the
Company’s general employment policies or practices, this Agreement shall control.
2. COMPENSATION.
2.1 Salary. For services to be rendered hereunder, Employee shall receive an annual salary at the rate of $220,000.00, paid
bi-weekly in the amount of $8,461.54 (the “Base Salary”), subject to standard payroll deductions and withholdings and payable in accordance
with the Company’s regular payroll schedule. Employee’s Base Salary shall be reviewed annually and may be increased as approved by the
Company’s Board of Directors (the “Board”) in its sole discretion.
2.2 Annual Bonus. Employee will be eligible to earn an annual discretionary bonus with a target of thirty percent (30%) of
Employee’s Base Salary (the “Annual Bonus”). Whether any Annual Bonus will be awarded, and the amount of the Annual Bonus awarded
to Employee, shall be determined by the Board in its sole discretion based upon its consideration of both the Company’s performance and
Employee’s performance. Since the Annual Bonus is intended both to reward past Company and Employee performance and to provide an
incentive for Employee to remain with the Company, Employee must remain an active employee through the date that any such Annual Bonus
is paid to him in order to earn any such bonus. Employee will not earn any Annual Bonus (including a prorated bonus) if Employee’s
employment terminates for any reason before the Annual Bonus is paid to him. Any earned Annual Bonus shall be paid as soon as
administratively feasible following the analysis of the calendar year as to which performance was measured.
2.3 Employee Benefits, Stock Options, And Incentive Compensation, And Other Compensation Plans And
Programs. Employee shall be entitled to participate in such of the Company’s benefit and deferred compensation plans and programs as may
be made available to employees of the Company, including, without limitation, the Company’s Long Term Incentive Plan, subject in each case
to: (i) the generally applicable terms and conditions of the applicable plan or program and to the determinations of the Board or other person
administering such plan or program, (ii) determinations by the Board or any such person as to whether and to what extent Employee shall so
participate or cease to participate, and (iii) amendment, modification or termination of any such plan or program in the sole and absolute
discretion of the Board.
3. CONFIDENTIAL INFORMATION OBLIGATIONS.
3.1 Confidential Information Agreement. As a condition of employment, Employee agrees to execute and abide by the
Employee Confidential Information and Inventions Agreement attached hereto as Exhibit A.
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3.2 Third Party Agreements and Information. Employee represents and warrants that Employee’s employment by the
Company will not conflict with any prior employment or consulting agreement or other agreement with any third party, and that Employee will
perform Employee’s duties to the Company without violating any such agreement. Employee represents and warrants that Employee does not
possess confidential information arising out of prior employment, consulting, or other third party relationships, which would be used in
connection with Employee’s employment by the Company, except as expressly authorized by that third party. During Employee’s employment
by the Company, Employee will use in the performance of Employee’s duties only information which is generally known and used by persons
with training and experience comparable to Employee’s own, common knowledge in the industry, otherwise legally in the public domain, or
obtained or developed by the Company or by Employee in the course of Employee’s work for the Company.
4. OUTSIDE ACTIVITIES DURING EMPLOYMENT.
4.1 Non-Company Business. Except with the prior written consent of the Chief Financial Officer (in consultation with the
General Counsel), Employee will not during the term of Employee’s employment with the Company undertake or engage in any other
employment, occupation or business enterprise, other than ones in which Employee is a passive investor. Employee may engage in civic and
not-for-profit activities so long as such activities do not materially interfere with the performance of Employee’s duties hereunder.
4.2 No Adverse Interests. Employee agrees not to acquire, assume or participate in, directly or indirectly, any position,
investment or interest known by him to be adverse or antagonistic to the Company, its business or prospects, financial or otherwise, except as
a passive investor in mutual or exchange traded funds.
5. TERMINATION OF EMPLOYMENT.
5.1 At-Will Relationship. Employee’s employment relationship is at-will. Either Employee or the Company may terminate
the employment relationship at any time, with or without Cause or advance notice.
5.2 Termination without Cause; Resignation for Good Reason. If, at any time, the Company terminates Employee’s
employment without Cause (as defined herein), or Employee resigns with Good Reason (as defined herein), and Employee executes and
delivers the Separation Date Release of all claims set forth as Exhibit B hereto within the timeframe set forth therein and allows such release to
become effective, then the Company shall pay Employee severance in the form of continuation of Employee’s Base Salary in effect on
Employee’s last day of employment (the “Separation Date”) for a period of nine (9) months after Employee’s termination. This severance shall
be paid in substantially equal installments on the Company’s regular payroll schedule (subject to standard deductions and withholdings) over
the nine (9) month period following the Separation Date; provided, however, that no payments will be made prior to the effective date of the
release of claims. On the first payroll date following the effective date of the release, the Company will pay Employee the payments that
Employee would have received on or prior to such date in a lump sum under the original schedule but for the delay in effectiveness of the
release, with the balance of the cash severance being paid as originally scheduled.
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5.3 Termination for Cause; Resignation. If the Company terminates Employee’s employment with the Company for
Cause, or Employee resigns without Good Reason, then Employee will not be entitled to any further compensation from the Company (other
than accrued salary, and accrued and unused vacation, through Employee’s last day of employment), including severance pay, pay in lieu of
notice or any other such compensation.
5.4 Termination Due to Death or Disability.
(a) Death. This Agreement and Employee’s employment shall terminate immediately upon Employee’s death and
Employee’s estate shall not be entitled to any further compensation from the Company (other than accrued salary, and accrued and unused
vacation, through Employee’s last day of employment), including severance pay, pay in lieu of notice or any other such compensation.
(b) Disability. If Employee is prevented from performing his duties as described in Section 1.1 of this Agreement
by reason of any physical or mental incapacity that results in Employee’s satisfaction of all requirements necessary to receive benefits under
the Company’s long-term disability plan due to a total disability, then, to the extent permitted by law, the Company may terminate the
employment of Employee and this Agreement at or after such time. In such an event, and if Employee or someone authorized to act on his
behalf executes and delivers the Separation Date Release of all claims set forth as Exhibit B hereto within the timeframe set forth therein and
allows such release to become effective, then the Company shall pay Employee severance in the form of continuation of Employee’s Base
Salary in effect on Employee’s Separation Date for a period of nine (9) months after Employee’s termination. This severance shall be paid in
substantially equal installments on the Company’s regular payroll schedule (subject to standard deductions and withholdings) over the nine (9)
month period following the Separation Date; provided, however, that no payments will be made prior to the effective date of the release of
claims. On the first payroll date following the effective date of the release, the Company will pay Employee the payments that Employee would
have received on or prior to such date in a lump sum under the original schedule but for the delay in effectiveness of the release, with the
balance of the cash severance being paid as originally scheduled. The severance benefits provided for in this Section 5.4 shall be reduced by
any amounts provided to Employee by any federal or state disability insurance payments or benefits, and any private insurance disability
payments or benefits, provided to Employee.
5.5 Health Insurance. To the extent provided by the federal continuation of coverage law or, if applicable, state laws of
similar effect (collectively, “COBRA”), and by the Company’s then-current group health insurance policies, Employee may be eligible to
continue Employee’s then-current group health insurance benefits at Employee’s own expense after the termination of Employee’s
employment. Employee will be provided with a separate notice describing Employee’s rights and obligations under the applicable state and/or
federal COBRA laws on or after the Separation Date.
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5.6 Deferred Compensation. Notwithstanding anything to the contrary set forth herein, any payments and benefits
provided under this Agreement (the “Severance Benefits”) that constitute “deferred compensation” within the meaning of Section 409A of the
Internal Revenue Code of 1986, as amended (the “Code”) and the regulations and other guidance thereunder and any state law of similar effect
(collectively “Section 409A”) shall not commence in connection with Employee’s termination of employment unless and until Employee has
also incurred a “separation from service” (as such term is defined in Treasury Regulation Section 1.409A-1(h) (“Separation From Service”),
unless the Company reasonably determines that such amounts may be provided to Employee without causing Employee to incur the additional
20% tax under Section 409A.
It is intended that each installment of the Severance Benefits payments provided for in this Agreement is a separate “payment” for purposes of
Treasury Regulation Section 1.409A2(b)(2)(i). For the avoidance of doubt, it is intended that payments of the Severance Benefits set forth in
this Agreement satisfy, to the greatest extent possible, the exemptions from the application of Section 409A provided under Treasury
Regulation Sections 1.409A-1(b)(4), 1.409A-1(b)(5) and 1.409A-1(b)(9).
If Employee is a “specified employee” within the meaning of 409A(a)(2)(B)(i) of the Code, any Severance Benefit payments that are triggered
by a separation from service shall be accelerated to the minimum extent necessary so that (a) the lesser of (y) the total cash severance payment
amount, or (z) six (6) months of such installment payments are paid no later than March 15 of the calendar year following such termination,
and (b) all amounts paid pursuant to the foregoing clause (a) will constitute separate payments for purposes of Section 1.409A-2(b)(2) of the
Treasury Regulations and thus will be payable pursuant to the “short-term deferral” rule set forth in Section 1.409A-1(b)(4) of the Treasury
Regulations. It is intended that if Employee is a “specified employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code at the time
of such separation from service the foregoing provision shall result in compliance with the requirements of Section 409A(a)(2)(B)(i) of the
Code since payments to Employee will either be payable pursuant to the “short-term deferral” rule set forth in Section 1.409A-1(b)(4) of the
Treasury Regulations or will not be paid until at least 6 months after separation from service.
Notwithstanding any other payment schedule set forth in this Agreement, none of the Severance Benefits will be paid or otherwise delivered
prior to the effective date of the Separation Date Release of all claims set forth as Exhibit B hereto. On the first regular payroll pay day
following the effective date of the Separation Date Release of all claims, the Company will pay Employee the Severance Benefits Employee
would otherwise have received under the Agreement on or prior to such date but for the delay in payment related to the effectiveness of the
release of claims, with the balance of the Severance Benefits being paid as originally scheduled. All amounts payable under the Agreement will
be subject to standard payroll taxes and deductions.
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In the event that the payments or other benefits provided for in this Agreement or otherwise payable to Employee (i) constitute “parachute
payments” within the meaning of Section 280G of the Code, and (ii) would be subject to the excise tax imposed by Section 4999 of the Code
(the “Excise Tax”), then Employee’s benefits under this Agreement shall be either (a) delivered in full, or (b) delivered to such lesser extent
which would result in no portion of such benefits being subject to the Excise Tax, whichever of the foregoing amounts, taking into account the
applicable federal, state and local income taxes and the Excise Tax, results in the receipt by Employee on an after-tax basis, of the greatest
amount of benefits, notwithstanding that all or some portion of such benefits may be taxable under Section 4999 of the Code. If a reduction in
payments or benefits constituting “parachute payments” is necessary pursuant to the foregoing provision, reduction shall occur in the
following order: reduction of cash payments; cancellation of accelerated vesting of stock awards; reduction of employee benefits. If
acceleration of vesting of stock award compensation is to be reduced, such acceleration of vesting shall be cancelled in the reverse order of the
date of grant of the Employee’s stock awards.
5.7 No Mitigation. Employee shall not be required to mitigate damages or the amount of any payment provided for under
this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be
reduced by any compensation earned by Employee as the result of employment by another employer after the date of termination, or otherwise.
5.8 Definitions.
(a) For purposes of this Agreement, “Cause” shall mean any one or more of the following:
(i) Employee’s indictment or conviction of any felony or of any crime involving dishonesty;
(including any material breach of Company policy that causes or reasonably could cause harm to the Company);
(ii) Employee’s participation in any fraud or other act of willful misconduct against the Company
(iii) Employee’s refusal to comply with any lawful directive of the Company;
the Company (including any material breach of this Agreement or the Confidential Information and Inventions Agreement); or
(v) Conduct by Employee which in the good faith and reasonable determination of the Board
(iv) Employee’s material breach of Employee’s fiduciary, statutory, contractual, or common law duties to
demonstrates gross unfitness to serve.
Provided, however, that in the event that any of the foregoing events is reasonably capable of being cured, the Company shall, within twenty
(20) days after the discovery of such event, provide written notice to the Employee describing the nature of such event and Employee shall
thereafter have ten (10) business days to cure such event.
6
(b) For purposes of this Agreement, Employee shall have “Good Reason” for Employee’s resignation if: (w) any
of the following occurs without Employee’s consent; (x) Employee notifies the Company in writing, within twenty (20) days after the
occurrence of one of the following events that Employee intends to terminate his employment no earlier than thirty (30) days after providing
such notice; (y) the Company does not cure such condition within thirty (30) days following its receipt of such notice or states unequivocally
in writing that it does not intend to attempt to cure such condition, and (z) the Employee resigns from employment within thirty (30) days
following the end of the period within which the Company was entitled to remedy the condition constituting Good Reason but failed to do so:
(i) the assignment to Employee of any duties or responsibilities which result in the material diminution of
Employee’s authority, duties or responsibility; provided, however, that the acquisition of the Company and subsequent conversion of the
Company to a division or unit of the acquiring corporation will not by itself result in a material diminution of Employee’s authority, duties or
responsibility;
salaries of all other executive officers of the Company are accordingly reduced;
(ii) a material reduction by the Company in Employee’s annual base salary, except to the extent the base
principal office is at such offices, to a location that increases Employee’s daily one-way commute by more than thirty-five (35) miles; or
(iii) a relocation of Employee’s place of work, or the Company’s principal executive offices if Employee’s
(iv) any material breach by the Company of any material provision of this Agreement, including but not
limited to Section 7.7.
6. ARBITRATION.
To ensure the timely and economical resolution of disputes that may arise in connection with Employee’s employment with
the Company, Employee and the Company agree that any and all disputes, claims, or causes of action arising from or relating to the
enforcement, breach, performance, negotiation, execution, or interpretation of this Agreement, Employee’s employment, or the termination of
Employee’s employment, shall be resolved to the fullest extent permitted by law by final, binding and confidential arbitration, by a single
arbitrator, in Sacramento, California, conducted by JAMS under the then applicable JAMS rules. By agreeing to this arbitration procedure,
both Employee and the Company waive the right to resolve any such dispute through a trial by jury or judge or administrative
proceeding. The arbitrator shall: (a) have the authority to compel adequate discovery for the resolution of the dispute and to award such relief
as would otherwise be permitted by law; and (b) issue a written arbitration decision, to include the arbitrator’s essential findings and
conclusions and a statement of the award. The arbitrator shall be authorized to award any or all remedies that Employee or the Company would
be entitled to seek in a court of law. The Company shall pay all JAMS’ arbitration fees in excess of the amount of court fees that would be
required if the dispute were decided in a court of law. Nothing in this Agreement is intended to prevent either Employee or the Company from
obtaining injunctive relief in court to prevent irreparable harm pending the conclusion of any such arbitration.
7
7. GENERAL PROVISIONS.
7.1 Notices. Any notices provided hereunder must be in writing and shall be deemed effective upon the earlier of personal
delivery (including personal delivery by fax) or the next day after sending by overnight carrier, to the Company at its primary office location
and to Employee at his address as listed on the Company payroll.
7.2 Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any
applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other
jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction to the extent possible in keeping with the intent
of the parties.
7.3 Waiver. Any waiver of any breach of any provisions of this Agreement must be in writing to be effective, and it shall
not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement.
7.4 Complete Agreement. This Agreement, including Exhibit A, constitutes the entire agreement between Employee and
the Company and it is the complete, final, and exclusive embodiment of their agreement with regard to this subject matter. This Agreement
supersedes and replaces the Original Employment Agreement in its entirety and the Original Employment Agreement shall have no further
force or effect. It is entered into without reliance on any promise or representation other than those expressly contained herein, and it cannot be
modified or amended except in a writing signed by the Employee and a duly authorized officer of the Company.
7.5 Counterparts. This Agreement may be executed in separate counterparts, any one of which need not contain signatures
of more than one party, but all of which taken together will constitute one and the same Agreement.
7.6 Headings. The headings of the sections hereof are inserted for convenience only and shall not be deemed to constitute a
part hereof nor to affect the meaning thereof.
7.7 Successors and Assigns. This Agreement is intended to bind and inure to the benefit of and be enforceable by
Employee and the Company, and their respective successors, assigns, heirs, executors and administrators, except that Employee may not
assign any of his duties hereunder and he may not assign any of his rights hereunder without the written consent of the Company, which shall
not be withheld unreasonably. The Company shall obtain the assumption of this Agreement by any successor or assign of the Company.
8
7.8 Choice of Law. All questions concerning the construction, validity and interpretation of this Agreement will be
governed by the law of the State of California.
IN WITNESS WHEREOF, the parties have executed this Agreement, effective as of the date first above written.
Pacific Ethanol, Inc.
By: /s/ Bryon T. McGregor
Bryon T. McGregor
Chief Financial Officer
Understood and Agreed:
Employee
By: /s/ Paul P. Koehler
Paul P. Koehler
9
EXHIBIT A
CONFIDENTIAL INFORMATION AND INVENTIONS AGREEMENT
EMPLOYEE CONFIDENTIAL INFORMATION AND INVENTIONS ASSIGNMENT AGREEMENT
In consideration of my employment or continued employment by Pacific Ethanol, Inc. (“Company”), and the compensation paid to
me now and during my employment with the Company, I agree to the terms of this Agreement as follows:
1. CONFIDENTIAL INFORMATION PROTECTIONS.
1.1 Nondisclosure; Recognition of Company’s Rights. At all times during and after my employment, I will hold in confidence
and will not disclose, use, lecture upon, or publish any of Company’s Confidential Information (defined below), except as may be required in
connection with my work for Company, or as expressly authorized by the Chief Executive Officer (the “CEO”) of Company. I will obtain the
CEO’s written approval before publishing or submitting for publication any material (written, oral, or otherwise) that relates to my work at
Company and/or incorporates any Confidential Information. I hereby assign to Company any rights I may have or acquire in any and all
Confidential Information and recognize that all Confidential Information shall be the sole and exclusive property of Company and its assigns.
1.2 Confidential Information. The term “Confidential Information” shall mean any and all confidential knowledge, data or
information related to Company’s business or its actual or demonstrably anticipated research or development, including without limitation (a)
trade secrets, inventions, ideas, processes, computer source and object code, data, formulae, programs, other works of authorship, know-how,
improvements, discoveries, developments, designs, and techniques; (b) information regarding products, services, plans for research and
development, marketing and business plans, budgets, financial statements, contracts, prices, suppliers, and customers; (c) information
regarding the skills and compensation of Company’s employees, contractors, and any other service providers of Company; and (d) the
existence of any business discussions, negotiations, or agreements between Company and any third party.
1.3 Third Party Information. I understand that Company has received and in the future will receive from third parties confidential
or proprietary information (“Third Party Information”) subject to a duty on Company’s part to maintain the confidentiality of such
information and to use it only for certain limited purposes. During and after the term of my employment, I will hold Third Party Information in
strict confidence and will not disclose to anyone (other than Company personnel who need to know such information in connection with their
work for Company) or use, Third Party Information, except in connection with my work for Company or unless expressly authorized by an
officer of Company in writing.
1.4 No Improper Use of Information of Prior Employers and Others. I represent that my employment by Company does not
and will not breach any agreement with any former employer, including any noncompete agreement or any agreement to keep in confidence or
refrain from using information acquired by me prior to my employment by Company. I further represent that I have not entered into, and will
not enter into, any agreement, either written or oral, in conflict with my obligations under this Agreement. During my employment by
Company, I will not improperly make use of, or disclose, any information or trade secrets of any former employer or other third party, nor will
I bring onto the premises of Company or use any unpublished documents or any property belonging to any former employer or other third
party, in violation of any lawful agreements with that former employer or third party. I will use in the performance of my duties only
information that is generally known and used by persons with training and experience comparable to my own, is common knowledge in the
industry or otherwise legally in the public domain, or is otherwise provided or developed by Company.
1
2. INVENTIONS.
2.1 Inventions and Intellectual Property Rights. As used in this Agreement, the term “Invention” means any ideas, concepts,
information, materials, processes, data, programs, know-how, improvements, discoveries, developments, designs, artwork, formulae, other
copyrightable works, and techniques and all Intellectual Property Rights in any of the items listed above. The term “Intellectual Property
Rights” means all trade secrets, copyrights, trademarks, mask work rights, patents and other intellectual property rights recognized by the
laws of any jurisdiction or country.
2.2 Prior Inventions. I have disclosed on Exhibit A a complete list of all Inventions that (a) I have, or I have caused to be, alone or
jointly with others, conceived, developed, or reduced to practice prior to the commencement of my employment by Company; (b) in which I
have an ownership interest or which I have a license to use; (c) and that I wish to have excluded from the scope of this Agreement (collectively
referred to as “Prior Inventions”). If no Prior Inventions are listed in Exhibit A, I warrant that there are no Prior Inventions. I agree that I
will not incorporate, or permit to be incorporated, Prior Inventions in any Company Inventions (defined below) without Company’s prior
written consent. If, in the course of my employment with Company, I incorporate a Prior Invention into a Company process, machine or other
work, I hereby grant Company a non-exclusive, perpetual, fully-paid and royalty-free, irrevocable and worldwide license, with rights to
sublicense through multiple levels of sublicensees, to reproduce, make derivative works of, distribute, publicly perform, and publicly display
in any form or medium, whether now known or later developed, make, have made, use, sell, import, offer for sale, and exercise any and all
present or future rights in, such Prior Invention.
2.3 Assignment of Company Inventions. Inventions assigned to the Company or to a third party as directed by the Company
pursuant to the section titled “Government or Third Party” are referred to in this Agreement as “Company Inventions.” Subject to the section
titled “Government or Third Party” and except for Inventions that I can prove qualify fully under the provisions of California Labor Code
section 2870 and I have set forth in Exhibit A, I hereby assign and agree to assign in the future (when any such Inventions or Intellectual
Property Rights are first reduced to practice or first fixed in a tangible medium, as applicable) to Company all my right, title, and interest in and
to any and all Inventions (and all Intellectual Property Rights with respect thereto) made, conceived, reduced to practice, or learned by me,
either alone or with others, during the period of my employment by Company.
2.4 Obligation to Keep Company Informed. During the period of my employment and for one (1) year after my employment
ends, I will promptly and fully disclose to Company in writing (a) all Inventions authored, conceived, or reduced to practice by me, either
alone or with others, including any that might be covered under California Labor Code section 2870, and (b) all patent applications filed by me
or in which I am named as an inventor or co-inventor.
2.5 Government or Third Party. I agree that, as directed by the Company, I will assign to a third party, including without limitation
the United States, all my right, title, and interest in and to any particular Company Invention.
2.6 Enforcement of Intellectual Property Rights and Assistance. During and after the period of my employment, I will assist
Company in every proper way to obtain and enforce United States and foreign Intellectual Property Rights relating to Company Inventions in
all countries. If the Company is unable to secure my signature on any document needed in connection with such purposes, I hereby
irrevocably designate and appoint Company and its duly authorized officers and agents as my agent and attorney in fact, which appointment is
coupled with an interest, to act on my behalf to execute and file any such documents and to do all other lawfully permitted acts to further such
purposes with the same legal force and effect as if executed by me.
2
2.7 Incorporation of Software Code. I agree that I will not incorporate into any Company software or otherwise deliver to
Company any software code licensed under the GNU General Public License or Lesser General Public License or any other license that, by its
terms, requires or conditions the use or distribution of such code on the disclosure, licensing, or distribution of any source code owned or
licensed by Company.
3. RECORDS. I agree to keep and maintain adequate and current records (in the form of notes, sketches, drawings and in any other form that
is required by the Company) of all Inventions made by me during the period of my employment by the Company, which records shall be
available to, and remain the sole property of, the Company at all times.
4. ADDITIONAL ACTIVITIES. I agree that (a) during the term of my employment by Company, I will not, without Company’s express
written consent, engage in any employment or business activity that is competitive with, or would otherwise conflict with my employment by,
Company, and (b) for the period of my employment by Company and for one (l) year thereafter, I will not, either directly or indirectly, solicit
or attempt to solicit any employee, independent contractor, or consultant of Company to terminate his, her or its relationship with Company in
order to become an employee, consultant, or independent contractor to or for any other person or entity.
5. RETURN OF COMPANY PROPERTY. Upon termination of my employment or upon Company’s request at any other time, I will
deliver to Company all of Company’s property, equipment, and documents, together with all copies thereof, and any other material containing
or disclosing any Inventions, Third Party Information or Confidential Information and certify in writing that I have fully complied with the
foregoing obligation. I agree that I will not copy, delete, or alter any information contained upon my Company computer or Company
equipment before I return it to Company. In addition, if I have used any personal computer, server, or e-mail system to receive, store, review,
prepare or transmit any Company information, including but not limited to, Confidential Information, I agree to provide the Company with a
computer-useable copy of all such Confidential Information and then permanently delete and expunge such Confidential Information from
those systems; and I agree to provide the Company access to my system as reasonably requested to verify that the necessary copying and/or
deletion is completed. I further agree that any property situated on Company’s premises and owned by Company is subject to inspection by
Company’s personnel at any time with or without notice. Prior to the termination of my employment or promptly after termination of my
employment, I will cooperate with Company in attending an exit interview and certify in writing that I have complied with the requirements of
this section.
6. NOTIFICATION OF NEW EMPLOYER. If I leave the employ of Company, I consent to the notification of my new employer of my
rights and obligations under this Agreement, by Company providing a copy of this Agreement or otherwise.
7. GENERAL PROVISIONS.
7.1 Governing Law and Venue. This Agreement and any action related thereto will be governed and interpreted by and under the
laws of the State of California, without giving effect to any conflicts of laws principles that require the application of the law of a different
state. I expressly consent to personal jurisdiction and venue in the state and federal courts for the county in which Company’s principal place
of business is located for any lawsuit filed there against me by Company arising from or related to this Agreement.
3
7.2 Severability. If any provision of this Agreement is, for any reason, held to be invalid or unenforceable, the other provisions of
this Agreement will remain enforceable and the invalid or unenforceable provision will be deemed modified so that it is valid and enforceable
to the maximum extent permitted by law.
7.3 Survival. This Agreement shall survive the termination of my employment and the assignment of this Agreement by Company to
any successor or other assignee and be binding upon my heirs and legal representatives.
7.4 Employment. I agree and understand that nothing in this Agreement shall give me any right to continued employment by
Company, and it will not interfere in any way with my right or Company’s right to terminate my employment at any time, with or without
cause and with or without advance notice.
7.5 Notices. Each party must deliver all notices or other communications required or permitted under this Agreement in writing to the
other party at the address listed on the signature page, by courier, by certified or registered mail (postage prepaid and return receipt requested),
or by a nationally-recognized express mail service. Notice will be effective upon receipt or refusal of delivery. If delivered by certified or
registered mail, notice will be considered to have been given five (5) business days after it was mailed, as evidenced by the postmark. If
delivered by courier or express mail service, notice will be considered to have been given on the delivery date reflected by the courier or
express mail service receipt. Each party may change its address for receipt of notice by giving notice of the change to the other party.
7.6 Injunctive Relief. I acknowledge that, because my services are personal and unique and because I will have access to the
Confidential Information of Company, any breach of this Agreement by me would cause irreparable injury to Company for which monetary
damages would not be an adequate remedy and, therefore, will entitle Company to injunctive relief (including specific performance). The rights
and remedies provided to each party in this Agreement are cumulative and in addition to any other rights and remedies available to such party
at law or in equity.
7.7 Waiver. Any waiver or failure to enforce any provision of this Agreement on one occasion will not be deemed a waiver of that
provision or any other provision on any other occasion.
7.8 Export. I agree not to export, directly or indirectly, any U.S. technical data acquired from Company or any products utilizing
such data, to countries outside the United States, because such export could be in violation of the United States export laws or regulations.
7.9 Entire Agreement. If no other agreement governs nondisclosure and assignment of inventions during any period in which I was
previously employed or am in the future employed by Company as an independent contractor, the obligations pursuant to sections of this
Agreement titled “Confidential Information Protections” and “Inventions” shall apply. This Agreement is the final, complete and exclusive
agreement of the parties with respect to the subject matter hereof and supersedes and merges all prior communications between us with respect
to such matters. No modification of or amendment to this Agreement, or any waiver of any rights under this Agreement, will be effective
unless in writing and signed by me and the CEO of Company. Any subsequent change or changes in my duties, salary or compensation will
not affect the validity or scope of this Agreement.
4
This Agreement shall be effective as of the first day of my employment with Company.
EMPLOYEE:
COMPANY:
I HAVE READ, UNDERSTAND, AND ACCEPT THIS
AGREEMENT AND HAVE BEEN GIVEN THE
OPPORTUNITY TO REVIEW IT WITH INDEPENDENT
LEGAL COUNSEL.
ACCEPTED AND AGREED:
(Signature)
(Signature)
By:
Title:
Date:
Address:
By:
Title:
Date:
Address:
5
EXHIBIT A
INVENTIONS
1. Prior Inventions Disclosure. The following is a complete list of all Prior Inventions (as provided in Section 2.2 of the attached Employee
Confidential Information and Inventions Assignment Agreement, defined herein as the “Agreement”):
o None
o See immediately below:
2. Limited Exclusion Notification.
THIS IS TO NOTIFY you in accordance with Section 2872 of the California Labor Code that the foregoing Agreement between
you and Company does not require you to assign or offer to assign to Company any Invention that you develop entirely on your own time
without using Company’s equipment, supplies, facilities or trade secret information, except for those Inventions that either:
a. Relate at the time of conception or reduction to practice to Company’s business, or actual or demonstrably anticipated research or
development; or
b. Result from any work performed by you for Company.
To the extent a provision in the foregoing Agreement purports to require you to assign an Invention otherwise excluded from the
preceding paragraph, the provision is against the public policy of this state and is unenforceable.
This limited exclusion does not apply to any patent or Invention covered by a contract between Company and the United States or
any of its agencies requiring full title to such patent or Invention to be in the United States.
A-1
EXHIBIT B
SEPARATION DATE RELEASE
(To be signed on or within 21 days after the employment termination date.)
In exchange for the severance benefits to be provided to me by Pacific Ethanol, Inc. (the “Company”) pursuant to the terms of my
Employment Agreement (the “Agreement”), I hereby provide the following General Release of Claims (the “Release”). I understand that, on
the last date of my employment with the Company, the Company will pay me any accrued salary to which I am entitled by law, regardless of
whether I sign this Release, but I am not entitled to any severance benefits unless I sign and return this Release to the Company and I allow it
to become effective.
I hereby generally and completely release the Company and its directors, officers, employees, shareholders, partners, agents, attorneys,
predecessors, successors, parent and subsidiary entities, insurers, affiliates, and assigns (collectively the “Released Parties”) of and from any
and all claims, liabilities and obligations, both known and unknown, arising out of or in any way related to events, acts, conduct, or omissions
occurring at any time prior to or at the time that I sign this Release.
This general release includes, but is not limited to: (1) all claims arising out of or in any way related to my employment with the Company or
the termination of that employment; (2) all claims related to my compensation or benefits from the Company, including salary, bonuses,
commissions, vacation pay, expense reimbursements, severance pay, fringe benefits, stock, stock options, or any other ownership or equity
interests in the Company; (3) all claims for breach of contract, wrongful termination, and breach of the implied covenant of good faith and fair
dealing (including claims based on or arising under the Agreement); (4) all tort claims, including claims for fraud, defamation, emotional
distress, and discharge in violation of public policy; and (5) all federal, state, and local statutory claims, including claims for discrimination,
harassment, retaliation, attorneys’ fees, or other claims arising under the federal Civil Rights Act of 1964 (as amended), the federal Americans
with Disabilities Act of 1990, the federal Age Discrimination in Employment Act (as amended) (“ADEA”), the federal Family and Medical
Leave Act, the California Labor Code (as amended), the California Family Rights Act, and the California Fair Employment and Housing Act
(as amended).
I understand that notwithstanding the foregoing, the following are not included in the Released Claims (the “Excluded Claims”): (i) any rights
or claims for indemnification I may have pursuant to any written indemnification agreement to which I am a party, the charter, bylaws, or
operating agreements of any of the Released Parties, or under applicable law; or (ii) any rights which are not waivable as a matter of law. In
addition, I understand that nothing in this release prevents me from filing, cooperating with, or participating in any proceeding before the Equal
Employment Opportunity Commission, the Department of Labor, or the California Department of Fair Employment and Housing, except that I
acknowledge and agree that I shall not recover any monetary benefits in connection with any such claim, charge or proceeding with regard to
any claim released herein. I hereby represent and warrant that, other than the Excluded Claims, I am not aware of any claims I have or might
have against any of the Released Parties that are not included in the Released Claims.
B-1
I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the ADEA, and that the consideration
given for the waiver and release in the preceding paragraph is in addition to anything of value to which I am already entitled. I further
acknowledge that I have been advised by this writing that: (1) my waiver and release do not apply to any rights or claims that may arise after
the date I sign this Release; (2) I should consult with an attorney prior to signing this Release (although I may choose voluntarily not to do so);
(3) I have twenty-one (21) days to consider this Release (although I may choose voluntarily to sign it earlier); (4) I have seven (7) days
following the date I sign this Release to revoke it by providing written notice of revocation to the Company’s Chief Financial Officer; and (5)
this Release will not be effective until the date upon which the revocation period has expired, which will be the eighth calendar day after the
date I sign it provided that I do not revoke it (the “Effective Date”).
I UNDERSTAND THAT THIS AGREEMENT INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS. I
acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: “A general release does not
extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if
known by him or her must have materially affected his or her settlement with the debtor.” I hereby expressly waive and relinquish all
rights and benefits under that section and any law or legal principle of similar effect in any jurisdiction with respect to my release of claims
herein, including but not limited to the release of unknown and unsuspected claims.
I hereby represent that I have been paid all compensation owed and for all hours worked, I have received all the leave and leave benefits and
protections for which I am eligible, pursuant to the Family and Medical Leave Act, the California Family Rights Act, or otherwise, and I have
not suffered any on-the-job injury for which I have not already filed a workers’ compensation claim.
I further agree: (1) not to disparage the Company, its parent, or its or their officers, directors, employees, shareholders, affiliates and agents, in
any manner likely to be harmful to its or their business, business reputation, or personal reputation (although I may respond accurately and
fully to any question, inquiry or request for information as required by legal process); (2) not to voluntarily (except in response to legal
compulsion) assist any third party in bringing or pursuing any proposed or pending litigation, arbitration, administrative claim or other formal
proceeding against the Company, its parent or subsidiary entities, affiliates, officers, directors, employees or agents; and (3) to reasonably
cooperate with the Company, by voluntarily (without legal compulsion) providing accurate and complete information, in connection with the
Company’s actual or contemplated defense, prosecution, or investigation of any claims or demands by or against third parties, or other matters,
arising from events, acts, or failures to act that occurred during the period of my employment by the Company.
By:
[VP NAME]
Date
B-2
Exhibit 10.12
PACIFIC ETHANOL, INC.
EMPLOYMENT AGREEMENT
for
JAMES SNEED
This Employment Agreement ("Agreement") by and between James Sneed ("Employee") and Pacific Ethanol, Inc. (the "Company")
(collectively, the "Parties") is effective as of the last date signed by the Parties.
WHEREAS, the Company desires to employ Employee to provide personal services to the Company, and wishes to provide Employee
with certain compensation and benefits in return for his services;
WHEREAS, Employee wishes to be employed by the Company and to provide personal services to the Company in return for certain
compensation and benefits; and
WHEREAS, the Parties entered into an offer letter on or about September 3, 2012 setting forth certain terms of Employee's employment
with the Company and now seek to supersede and replace the offer letter with this Agreement;
Now, THEREFORE, in consideration of the mutual promises and covenants contained herein, it is hereby agreed by and between the
parties hereto as follows:
1. EMPLOYMENT BY THE COMPANY.
1.1 Position. Subject to terms and conditions set forth herein, the Company agrees to employ Employee in the position of Vice
President, Ethanol Supply and Trading and Employee hereby accepts such employment. During the term of Employee's employment with the
Company, Employee will devote Employee's best efforts and substantially all of Employee's business time and attention to the business of the
Company.
1.2 Duties and Location. Employee shall perform such duties as are customarily associated with Employee's then current title.
Employee's primary office location shall be in Peoria Illinois with the understanding that Employee's duties will also require Employee to be
present in the Sacramento office a substantial portion of the time. When in Peoria, Employee will work from his personal residence, and the
Company will issue provide the necessary computer and telecommunications equipment. The Company will reimburse Employee for travel
and living expenses associated with travel between Peoria and Sacramento and any other work-related travel expenses pursuant to its regular
business practice.
1.3 Policies and Procedures. The employment relationship between the parties shall be governed by the general employment
policies and practices of the Company, except that when the terms of this Agreement differ from or are in conflict with the Company's general
employment policies or practices, this Agreement shall control.
1
2. COMPENSATION.
2.1 Salary. For services to be rendered hereunder, Employee shall receive a bi-weekly salary of $8,461.53, approximately $220,000
on an annualized basis (the "Base Salary"), subject to standard payroll deductions and withholdings and payable in accordance with the
Company's regular payroll schedule. Employee's Base Salary shall be reviewed annually and may be increased as approved by the Company's
Board of Directors (the "Board") in its sole discretion.
2.2 Annual Bonus. Beginning January 1, 2013, Employee will be eligible to participate in the Kinergy Incentive plan which is an
annual cash bonus program based on Kinergy financial metrics. The details of the Kinergy incentive plan will be developed with your input
and will require approval of the Executive Committee and the Compensation Committee of the Board. However, you will be guaranteed a
minimum annual bonus of $30,000 for the performance year of 2013 to be paid concurrent with the bonus process for the rest of the Company
(anticipated to be paid March or April of 2014). Aside from the guaranteed bonus for 2013, whether any Annual Bonus will be awarded, and
the amount of the Annual Bonus awarded to Employee, shall be determined by the Board in its sole discretion based upon its consideration of
both the Company's performance and Employee's performance. Since the Annual Bonus (including the guaranteed 2013 bonus) is intended
both to reward past Company and Employee performance and to provide an incentive for Employee to remain with the Company, Employee
must remain an active employee through the date that any such Annual Bonus is paid to him in order to earn any such bonus. Employee will
not earn any Annual Bonus (including a prorated bonus) if Employee's employment terminates for any reason before the Annual Bonus is
paid to him. Any earned Annual Bonus shall be paid not later than March 15th of the year following the calendar year as to which
performance was measured.
2.3 Sign-On Bonus. The Company has paid you a lump of $75,000 (gross).
2.4 Employee Benefits, Stock Options, And Incentive Compensation, And Other Compensation Plans And Programs.
Employee shall be entitled to participate in such of the Company's benefit and deferred compensation plans and programs as may be made
available to employees of the Company, including, without limitation, the Company's Long Term Incentive Plan, subject in each case to: (i) the
generally applicable terms and conditions of the applicable plan or program and to the determinations of the Board or other person
administering such plan or program, (ii) determinations by the Board or any such person as to whether and to what extent Employee shall so
participate or cease to participate, and (iii) amendment, modification or termination of any such plan or program in the sole and absolute
discretion of the Board.
2
3. CONFIDENTIAL INFORMATION OBLIGATIONS.
3.1 Confidential Information Agreement. As a condition of employment, Employee agrees to execute and abide by the Employee
Confidential Information and Inventions Agreement attached hereto as Exhibit A.
3.2 Third Party Agreements and Information. Employee represents and warrants that Employee's employment by the Company
will not conflict with any prior employment or consulting agreement or other agreement with any third party, and that Employee will perform
Employee's duties to the Company without violating any such agreement. Employee represents and warrants that Employee does not possess
confidential information arising out of prior employment, consulting, or other third party relationships, which would be used in connection
with Employee's employment by the Company, except as expressly authorized by that third party. During Employee's employment by the
Company, Employee will use in the performance of Employee's duties only information which is generally known and used by persons with
training and experience comparable to Employee's own, common knowledge in the industry, otherwise legally in the public domain, or
obtained or developed by the Company or by Employee in the course of Employee's work for the Company.
4. OUTSIDE ACTIVITIES DURING EMPLOYMENT.
4.1 Non-Company Business. Except with the prior written consent of the Chief Executive Officer (in consultation with the
General Counsel), Employee will not during the term of Employee's employment with the Company undertake or engage in any other
employment, occupation or business enterprise, other than ones in which Employee is a passive investor. Notwithstanding the foregoing,
Employee may continue to manage certain rental properties and earn fees from consulting and tax return preparation as such activities have
been described to the Company so long as those activities do not materially interfere with the performance of Employee's duties hereunder.
Employee may also engage in civic and not-for-profit activities so long as such activities do not materially interfere with the performance of
Employee's duties hereunder.
4.2 No Adverse Interests. Employee agrees not to acquire, assume or participate in, directly or indirectly, any position, investment
or interest known by him to be adverse or antagonistic to the Company, its business or prospects, financial or otherwise, except as a passive
investor in mutual or exchange traded funds.
5. TERMINATION OF EMPLOYMENT.
5.1 At-Will Relationship. Employee's employment relationship is at-will. Either Employee or the Company may terminate the
employment relationship at any time, with or without Cause or advance notice.
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5.2 Termination without Cause; Resignation for Good Reason. If, at any time, the Company terminates Employee's
employment without Cause (as defined herein), or Employee resigns with Good Reason (as defined herein), and Employee executes and
delivers the Separation Date Release of all claims set forth as Exhibit B hereto within the timeframe set forth therein and allows such release to
become effective, then the Company shall pay Employee severance in the form of continuation of Employee's Base Salary in effect on
Employee's last day of employment (the "Separation Date") for a period of nine (9) months after Employee's termination. This severance shall
be paid in substantially equal installments on the Company's regular payroll schedule (subject to standard deductions and withholdings) over
the nine (9) month period following the Separation Date; provided, however, that no payments will be made prior to the effective date of the
release of claims. On the first payroll date following the effective date of the release, the Company will pay Employee the payments that
Employee would have received on or prior to such date in a lump sum under the original schedule but for the delay in effectiveness of the
release, with the balance of the cash severance being paid as originally scheduled.
5.3 Termination for Cause; Resignation. If the Company terminates Employee's employment with the Company for Cause, or
Employee resigns without Good Reason, then Employee will not be entitled to any further compensation from the Company (other than
accrued salary, and accrued and unused vacation, through Employee's last day of employment), including severance pay, pay in lieu of notice
or any other such compensation.
5.4 Termination Due to Death or Disability.
(a) Death. This Agreement and Employee's employment shall terminate immediately upon Employee's death and Employee's
estate shall not be entitled to any further compensation from the Company (other than accrued salary, and accrued and unused vacation,
through Employee's last day of employment), including severance pay, pay in lieu of notice or any other such compensation.
(b) Disability. If Employee is prevented from performing his duties as described in Section 1.1 of this Agreement by reason of
any physical or mental incapacity that results in Employee's satisfaction of all requirements necessary to receive benefits under the Company's
long-term disability plan due to a total disability, then, to the extent permitted by law, the Company may terminate the employment of
Employee and this Agreement at or after such time. In such an event, and if Employee or someone authorized to act on his behalf executes and
delivers the Separation Date Release of all claims set forth as Exhibit B hereto within the timeframe set forth therein and allows such release to
become effective, then the Company shall pay Employee severance in the form of continuation of Employee's Base Salary in effect on
Employee's Separation Date for a period of nine (9) months after Employee's termination. This severance shall be paid in substantially equal
installments on the Company's regular payroll schedule (subject to standard deductions and withholdings) over the nine (9) month period
following the Separation Date; provided, however, that no payments will be made prior to the effective date of the release of claims. On the
first payroll date following the effective date of the release, the Company will pay Employee the payments that Employee would have received
on or prior to such date in a lump sum under the original schedule but for the delay in effectiveness of the release, with the balance of the cash
severance being paid as originally scheduled. The severance benefits provided for in this Section 5.4 shall be reduced by any amounts
provided to Employee by any federal or state disability insurance payments or benefits, and any private insurance disability payments or
benefits, provided to Employee.
4
5.5 Health Insurance. To the extent provided by the federal continuation of coverage law or, if applicable, state laws of similar
effect (collectively, "COBRA"), and by the Company's then-current group health insurance policies, Employee may be eligible to continue
Employee's then-current group health insurance benefits at Employee's own expense after the termination of Employee's employment.
Employee will be provided with a separate notice describing Employee's rights and obligations under the applicable state and/or federal
COBRA laws on or after the Separation Date.
5.6 Deferred Compensation. Notwithstanding anything to the contrary set forth herein, any payments and benefits provided under
this Agreement (the "Severance Benefits") that constitute "deferred compensation" within the meaning of Section 409A of the Internal
Revenue Code of 1986, as amended (the "Code") and the regulations and other guidance thereunder and any state law of similar effect
(collectively "Section 409A") shall not commence in connection with Employee's termination of employment unless and until Employee has
also incurred a "separation from service" (as such term is defined in Treasury Regulation Section 1.409A-1(h) ("Separation From Service"),
unless the Company reasonably determines that such amounts may be provided to Employee without causing Employee to incur the additional
20% tax under Section 409A.
It is intended that each installment of the Severance Benefits payments provided for in this Agreement is a separate "payment" for purposes of
Treasury Regulation Section 1.409A2(b)(2)(i). For the avoidance of doubt, it is intended that payments of the Severance Benefits set forth in
this Agreement satisfy, to the greatest extent possible, the exemptions from the application of Section 409A provided under Treasury
Regulation Sections 1.409A-1(b)(4), 1.409A-1(b)(5) and 1.409A-1(b)(9).
If Employee is a "specified employee" within the meaning of 409A(a)(2)(B)(i) of the Code, any Severance Benefit payments that are triggered
by a separation from service shall be accelerated to the minimum extent necessary so that (a) the lesser of (y) the total cash severance payment
amount, or (z) six (6) months of such installment payments are paid no later than March 15 of the calendar year following such termination,
and (b) all amounts paid pursuant to the foregoing clause (a) will constitute separate payments for purposes of Section 1.409A-2(b)(2) of the
Treasury Regulations and thus will be payable pursuant to the "short-term deferral" rule set forth in Section 1.409A-1(b)(4) of the Treasury
Regulations. It is intended that if Employee is a "specified employee" within the meaning of Section 409A(a)(2)(B)(i) of the Code at the time
of such separation from service the foregoing provision shall result in compliance with the requirements of Section 409A(a)(2)(B)(i) of the
Code since payments to Employee will either be payable pursuant to the "short-term deferral" rule set forth in Section 1.409A-1(b)(4) of the
Treasury Regulations or will not be paid until at least 6 months after separation from service.
5
Notwithstanding any other payment schedule set forth in this Agreement, none of the Severance Benefits will be paid or otherwise delivered
prior to the effective date of the Separation Date Release of all claims set forth as Exhibit B hereto. On the first regular payroll pay day
following the effective date of the Separation Date Release of all claims, the Company will pay Employee the Severance Benefits Employee
would otherwise have received under the Agreement on or prior to such date but for the delay in payment related to the effectiveness of the
release of claims, with the balance of the Severance Benefits being paid as originally scheduled. All amounts payable under the Agreement will
be subject to standard payroll taxes and deductions.
In the event that the payments or other benefits provided for in this Agreement or otherwise payable to Employee (i) constitute "parachute
payments" within the meaning of Section 280G of the Code, and (ii) would be subject to the excise tax imposed by Section 4999 of the Code
(the "Excise Tax"), then Employee's benefits under this Agreement shall be either (a) delivered in full, or (b) delivered to such lesser extent
which would result in no portion of such benefits being subject to the Excise Tax, whichever of the foregoing amounts, taking into account the
applicable federal, state and local income taxes and the Excise Tax, results in the receipt by Employee on an after-tax basis, of the greatest
amount of benefits, notwithstanding that all or some portion of such benefits may be taxable under Section 4999 of the Code. If a reduction in
payments or benefits constituting "parachute payments" is necessary pursuant to the foregoing provision, reduction shall occur in the
following order: reduction of cash payments; cancellation of accelerated vesting of stock awards; reduction of employee benefits. If
acceleration of vesting of stock award compensation is to be reduced, such acceleration of vesting shall be cancelled in the reverse order of the
date of grant of the Employee's stock awards.
5.7 No Mitigation. Employee shall not be required to mitigate damages or the amount of any payment provided for under this
Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by
any compensation earned by Employee as the result of employment by another employer after the date of termination, or otherwise.
5.8 Definitions.
(a) For purposes of this Agreement, "Cause" shall mean any one or more of the following:
(i) Employee's indictment or conviction of any felony or of any crime involving dishonesty;
breach of Company policy that causes or reasonably could cause harm to the Company);
(ii) Employee's participation in any fraud or other act of willful misconduct against the Company (including any material
(iii) Employee's refusal to comply with any lawful directive of the Company;
6
(including any material breach of this Agreement or the Confidential Information and Inventions Agreement); or
(iv) Employee's material breach of Employee's fiduciary, statutory, contractual, or common law duties to the Company
to serve.
(v) Conduct by Employee which in the good faith and reasonable determination of the Board demonstrates gross unfitness
Provided, however, that in the event that any of the foregoing events is reasonably capable of being cured, the Company shall, within twenty
(20) days after the discovery of such event, provide written notice to the Employee describing the nature of such event and Employee shall
thereafter have ten (10) business days to cure such event.
(b) For purposes of this Agreement, Employee shall have "Good Reason" for Employee's resignation if: (w) any of the
following occurs without Employee's consent; (x) Employee notifies the Company in writing, within twenty (20) days after the occurrence of
one of the following events that Employee intends to terminate his employment no earlier than thirty (30) days after providing such notice; (y)
the Company does not cure such condition within thirty (30) days following its receipt of such notice or states unequivocally in writing that it
does not intend to attempt to cure such condition, and (z) the Employee resigns from employment within thirty (30) days following the end of
the period within which the Company was entitled to remedy the condition constituting Good Reason but failed to do so:
(i) the assignment to Employee of any duties or responsibilities which result in the material diminution of Employee's
authority, duties or responsibility; provided, however, that the acquisition of the Company and subsequent conversion of the Company to a
division or unit of the acquiring corporation will not by itself result in a material diminution of Employee's authority, duties or responsibility;
other executive officers of the Company are accordingly reduced;
(ii) a material reduction by the Company in Employee's annual base salary, except to the extent the base salaries of all
is at such offices, to a location that increases Employee's daily one-way commute by more than thirty-five (35) miles; or
(iii) a relocation of Employee's place of work, or the Company's principal executive offices if Employee's principal office
(iv) any material breach by the Company of any material provision of this Agreement, including but not limited to Section
7.7.
6. ARBITRATION.
7
To ensure the timely and economical resolution of disputes that may arise in connection with Employee's employment with the Company,
Employee and the Company agree that any and all disputes, claims, or causes of action arising from or relating to the enforcement, breach,
performance, negotiation, execution, or interpretation of this Agreement, Employee's employment, or the termination of Employee's
employment, shall be resolved to the fullest extent permitted by law by final, binding and confidential arbitration, by a single arbitrator, in
Sacramento, California, conducted by JAMS under the then applicable JAMS rules. By agreeing to this arbitration procedure, both
Employee and the Company waive the right to resolve any such dispute through a trial by jury or judge or administrative
proceeding. The arbitrator shall: (a) have the authority to compel adequate discovery for the resolution of the dispute and to award such relief
as would otherwise be permitted by law; and (b) issue a written arbitration decision, to include the arbitrator's essential findings and
conclusions and a statement of the award. The arbitrator shall be authorized to award any or all remedies that Employee or the Company would
be entitled to seek in a court of law. The Company shall pay all JAMS' arbitration fees in excess of the amount of court fees that would be
required if the dispute were decided in a court of law. Nothing in this Agreement is intended to prevent either Employee or the Company from
obtaining injunctive relief in court to prevent irreparable harm pending the conclusion of any such arbitration.
7. GENERAL PROVISIONS.
7.1 Notices. Any notices provided hereunder must be in writing and shall be deemed effective upon the earlier of personal delivery
(including personal delivery by fax) or the next day after sending by overnight carrier, to the Company at its primary office location and to
Employee at his address as listed on the Company payroll.
7.2 Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any
applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other
jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction to the extent possible in keeping with the intent
of the parties.
7.3 Waiver. Any waiver of any breach of any provisions of this Agreement must be in writing to be effective, and it shall not
thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement.
7.4 Complete Agreement. This Agreement, including Exhibit A, constitutes the entire agreement between Employee and the
Company and it is the complete, final, and exclusive embodiment of their agreement with regard to this subject matter. This Agreement
supersedes and replaces the Offer Letter in its entirety and the Offer Letter shall have no further force or effect. It is entered into without
reliance on any promise or representation other than those expressly contained herein, and it cannot be modified or amended except in a
writing signed by the Employee and a duly authorized officer of the Company.
7.5 Counterparts. This Agreement may be executed in separate counterparts, any one of which need not contain signatures of more
than one party, but all of which taken together will constitute one and the same Agreement.
8
7.6 Headings. The headings of the sections hereof are inserted for convenience only and shall not be deemed to constitute a part
hereof nor to affect the meaning thereof.
7.7 Successors and Assigns. This Agreement is intended to bind and inure to the benefit of and be enforceable by Employee and
the Company, and their respective successors, assigns, heirs, executors and administrators, except that Employee may not assign any of his
duties hereunder and he may not assign any of his rights hereunder without the written consent of the Company, which shall not be withheld
unreasonably. The Company shall obtain the assumption of this Agreement by any successor or assign of the Company.
7.8 Choice of Law. All questions concerning the construction, validity and interpretation of this Agreement will be governed by the
law of the State of California.
IN WITNESS WHEREOF, the parties have executed this Agreement.
Pacific Ethanol, Inc.
By: /s/ Neil M. Koehler
Neil M. Koehler
President and Chief Executive Officer
Date: 11-12-2012
Understood and Agreed:
Employee
By: /s/ James Sneed
James Sneed
Date: 11-12-2012
9
EXHIBIT A
CONFIDENTIAL INFORMATION AND INVENTIONS AGREEMENT
10
EMPLOYEE CONFIDENTIAL INFORMATION AND INVENTIONS ASSIGNMENT AGREEMENT
In consideration of my employment or continued employment by Pacific Ethanol, Inc. ("Company"), and the compensation paid to
me now and during my employment with the Company, 1 agree to the terms of this Agreement as follows:
EMPLOYEE CONFIDENTIAL INFORMATION AND INVENTIONS ASSIGNMENT AGREEMENT
In consideration of my employment or continued employment by Pacific Ethanol, Inc. ("Company"), and the compensation paid to me now
and during my employment with the Company, 1 agree to the terms of this Agreement as follows:
1. CONFIDENTIAL INFORMATION PROTECTIONS.
1.1 Nondisclosure; Recognition of Company's Rights. At all times during and after my employment, I will hold in confidence and
will not disclose, use, lecture upon, or publish any of Company's Confidential Information (defined below) except as may be required in
connection with my work for Company, or as expressly authorized by the Chief Executive Officer (the "CEO") of Company. I will obtain the
CEO's written approval before publishing or submitting for publication any material (written, oral, or otherwise) that relates to my work at
Company and/or incorporates any Confidential Information. I hereby assign to Company any rights I may have or acquire in any and all
Confidential Information and recognize that all Confidential information shall be the sole and exclusive property of Company and its assigns.
1.2 Confidential Information. The term "Confidential Information" shall mean any and all confidential knowledge, data or information
related to Company's business or its actual or demonstrably anticipated research or development, including without limitation (a) trade secrets,
inventions, ideas, processes, computer source and object code, data, formulae, programs, other works of authorship, know-how,
improvements, discoveries, developments, designs, and techniques; (b) information products, services, plans for research and development,
marketing and business plans, budgets, financial statements, contracts, prices, suppliers, and customers; (c) information regarding the skills
and compensation of Company's employees, contractors, and any other service providers of Company; and (d) the existence of any business
discussions, negotiations, or agreements between Company and any third party.
1.3 Third Party Information. I understand that Company has received and in the future will receive from third parties confidential or
proprietary information ("Third Party') subject to a duty on Company's part to maintain the confidentiality of such information and to use it
only for certain limited purposes. During and after the term of my employment, I will hold Third Party Information in strict confidence and
will not disclose to anyone (other than Company personnel who need to know such information in connection with their work for Company)
or use, Third Party Information, except in connection with my work for Company or unless expressly authorized by an officer of Company in
writing.
1.4 No Improper Use of Information of Prior Employers and Others. I represent that my employment by Company does not and
will not breach any agreement with any former employer, including any noncompete agreement or any agreement to keep in confidence or
refrain from using information acquired by me prior to my employment by Company. I further represent that I have not entered into, and will
not enter into, any agreement, either written or oral, in conflict with my obligations under this Agreement. During my employment by
Company, I will not improperly make use of, or disclose, any information or trade secrets of any former employer or other third party, nor will
I bring onto the premises of Company or use any unpublished documents or any property belonging to any former employer or other third
party, in violation of any lawful agreements with that former employer or third party. I will use in the performance of my duties only
information that is generally known and used by persons with training and experience comparable to my own, is common knowledge in the
industry or otherwise legally in the public domain, or is otherwise provided or developed by Company.
2. INVENTIONS.
2.1 Inventions and Intellectual Property Rights. As used in this Agreement, the term "Invention" means any ideas, concepts,
information, materials, processes, data, programs, know-how, improvements, discoveries, developments, designs, artwork, formulae, other
copyrightable works, and techniques and all Intellectual Property Rights in any of the items listed above. The term "Intellectual Property
Rights" means all trade secrets, copyrights, trademarks, mask work rights, patents and other intellectual property rights recognized by the laws
of any jurisdiction or country.
2.2 Prior inventions. I have disclosed on Exhibit A a complete list of all Inventions that (a) I have, or I have caused to be, alone or
jointly with others, conceived, developed, or reduced to practice prior to the commencement of my employment by Company; (b) in which I
have an ownership interest or which I have a license to use; (c) and that I wish to have excluded from the scope of this Agreement (collectively
referred to as "Prior Inventions"). If no Prior Inventions are listed in Exhibit A, I warrant that there are no Prior Inventions. I agree at I will
not incorporate, or permit to be incorporated, Prior inventions in any Company Inventions (defined below) without Company's prior written
consent. If, in the course of my employment with Company, I incorporate a Prior Invention into a Company process, machine or other work, I
hereby grant Company a non-exclusive, perpetual, fully-paid and royalty-free, irrevocable and worldwide license, with rights to sublicense
through multiple levels of sublicensees, to reproduce, make derivative works of, distribute, publicly perform, and publicly display in any form
or medium, whether now known or later developed, make, have made, use, sell, import, offer for sale, and exercise any and all present or
future rights in, such Prior Invention.
1
2.3 Assignment of Company Inventions. Inventions assigned to the Company or to a third party as directed by the Company pursuant
to the section titled "Government or Third Party" are referred to in this Agreement as "Company Inventions." Subject to the section titled
"Government or Third Party" and except for Inventions that I can prove qualify fully under the provisions of California Labor Code section
2870 and I have set forth in Exhibit A, I hereby assign and agree to assign in the future (when any such Inventions or Intellectual Property
Rights are first reduced to practice or first fixed in a tangible medium, as applicable) to Company all my right, title, and interest in and to any
and all Inventions (and all Intellectual Property Rights with respect thereto) made, conceived, reduced to practice, or learned by me, either
alone or with others, during the period of my employment by Company.
2.4 Obligation to Keep Company Informed. During the period of my employment and for one (1) year after my employment ends, I
will promptly and fully disclose to Company in writing (a) all Inventions authored, conceived, or reduced to practice by me, either alone or
with others, including any that might be covered under California Labor Code section 2870, and (b) all patent applications filed by me or in
which I am named as an inventor or co-inventor.
2.5 Government or Third Party. I agree that, as directed by the Company, I will assign to a third party, including without limitation the
United States, all my right, title, and interest in and to any particular Company Invention.
2.6 Enforcement of Intellectual Property Rights and Assistance. During and after the period of my employment, I will assist
Company in every proper way to obtain and enforce United States and foreign Intellectual Property Rights relating to Company Inventions in
all countries. If the Company is unable to secure my signature on any document needed in connection with such purposes, I hereby
irrevocably designate and appoint Company and its duly authorized officers and agents as my agent and attorney in fact, which appointment is
coupled with an interest, to act on my behalf to execute and file any such documents and to do all other lawfully permitted acts to further such
purposes with the same legal force and effect as if executed by me.
2.7 Incorporation of Software Code. I agree that I will not incorporate into any Company software or otherwise deliver to Company
any software code licensed under the GNU General Public License or Lesser General Public License or any other license that, by its terms,
requires or conditions the use or distribution of such code on the disclosure, licensing, or distribution of any source code owned or licensed by
Company.
3. RECORDS. I agree to keep and maintain adequate and current records (in the form of notes, sketches, drawings and in any other form that
is required by the Company) of all Inventions made by me during the period of my employment by the Company, which records shall be
available to, and remain the sole property of, the Company at all times.
4. ADDITIONAL ACTIVITIES. I agree that (a) during the term of my employment by Company, I will not, without Company's express
written consent, engage in any employment or business activity that is competitive with, or would otherwise conflict with my employment by,
Company, and (b) for the period of my employment by Company and for one (1) year thereafter, I will not, either directly or indirectly, solicit
or attempt to solicit any employee, independent contractor, or consultant of Company to terminate his, her or its relationship with Company in
order to become an employee, consultant, or independent contractor to or for any other person or entity.
5. RETURN OF COMPANY PROPERTY. Upon termination of my employment or upon Company’s request at any other time, I will
deliver to Company all of Company's property, equipment, and` documents, together with all copies thereof, and any other material containing
or disclosing any Inventions, Third Party Information or Confidential Information and certify in writing that I have fully complied with the
foregoing obligation. I agree that I will not copy, delete, or alter any information contained upon my Company computer or Company
equipment before I return it to Company. In addition, if I have used any personal computer, server, or e-mail system to receive, store, review,
prepare or transmit any Company information, including but not limited to, Confidential Information, I agree to provide the Company with a
computer-useable copy of all such Confidential Information and then permanently delete and expunge such Confidential Information from
those systems; and I agree to provide the Company access to my system as reasonably requested to verify that the necessary copying and/or
deletion is completed. I further agree that any property situated on Company's premises and owned by Company is subject to inspection by
Company's personnel at any time with or without notice. Prior to the termination of my employment or promptly after termination of my
employment, I will cooperate with Company in attending an exit interview and certify in writing that I have complied with the requirements of
this section.
6. NOTIFICATION OF NEW EMPLOYER. If I leave the employ of Company, I consent to the notification of my new employer of my
rights and obligations under this Agreement, by Company providing a copy of this Agreement or otherwise.
7. GENERAL PROVISIONS.
7.1 Governing Law and Venue. This Agreement and any action related thereto will be governed and interpreted by and under the laws
of the State of California, without giving effect to any conflicts of laws principles that require the application of the law of a different state. I
expressly consent to personal jurisdiction and venue in the state and federal courts for the county in which Company's principal place of
business is located for any lawsuit filed there against me by Company arising from or related to this Agreement.
7.2 Severability. If any provision of this Agreement is, for any reason, held to be invalid or unenforceable, the other provisions of this
Agreement will remain enforceable and the invalid or unenforceable provision will be deemed modified so that it is valid and enforceable to the
maximum extent permitted by law.
2
7.3 Survival. This Agreement shall survive the termination of my employment and the assignment of this Agreement by Company to any
successor or other assignee and be binding upon my heirs and legal representatives.
7.4 Employment. I agree and understand that nothing in this agreement shall give me any right to continued employment by Company, it
will not interfere in any way with my right or Company’s right to terminate my employment at any time, with or without cause and with or
without advance notice.
7.5 Notices. Each party must deliver all notices or other communications required or permitted under this Agreement in writing to the
other party at the address listed on the signature page, by courier, by certified or registered mail (postage prepaid and return receipt requested),
or by a nationally-recognized express mail service. Notice will be effective upon receipt or refusal of delivery. If delivered by certified or
registered mail, notice will be considered to have been given five (5) business days after it was mailed, as evidenced by the postmark. If
delivered by courier or express mail service, notice will be considered to have been given on the delivery date reflected by the courier or
express mail service receipt. Each party may change its address for receipt of notice by giving notice of the change to the other party.
7.6 Injunctive Relief. I acknowledge that, because my services are personal and unique and because I will have access to the
Confidential Information of Company, any breach of this Agreement by me would cause irreparable injury to Company for which monetary
damages would not be an adequate remedy and, therefore, will entitle Company to injunctive relief (including specific performance). The rights
and remedies provided to each party in this Agreement are cumulative and in addition to any other rights and remedies available to such party
at law or in equity.
7.7 Waiver. Any waiver or failure to enforce any provision of this Agreement on one occasion will not be deemed a waiver of that
provision or any other provision on any other occasion.
7.8 Export. I agree not to export, directly or indirectly any U.S. technical data acquired from Company or any products utilizing such
data, to countries outside the United States, because such export could be in violation of the United States export laws or regulations.
7.9 Entire Agreement. If no other agreement governs nondisclosure and assignment of inventions during any period in which I was
previously employed or am in the future employed by Company as an independent contractor, the obligations pursuant to sections of this
Agreement titled "Confidential Information Protections" and "Inventions" shall apply. This Agreement is the final, complete and exclusive
agreement of the parties with respect to the subject matter hereof and supersedes and merges all prior communications between us with respect
to such matters. No modification of or amendment to this Agreement, or any waiver of any rights under this Agreement, will be effective
unless in writing and signed by me and the CEO of Company. Any subsequent change or changes in my duties, salary or compensation will
not affect the validity or scope of this Agreement.
3
EXHIBIT A
INVENTIONS
1. Prior Inventions Disclosure. The following is a complete list of all Prior Inventions (as provided in Section 2.2 of the attached Employee
Confidential Information and Inventions Assignment Agreement, defined herein as the "Agreement"):
x None
o See immediately below:
2. Limited Exclusion Notification.
THIS IS TO NOTIFY you in accordance with Section 2872 of the California Labor Code that the foregoing Agreement between
you and Company does not require you to assign or offer to assign to Company any Invention that you develop entirely on your own time
without using Company's equipment, supplies, facilities or trade secret information, except for those Inventions that either:
a. Relate at the time of conception or reduction to practice to Company's business, or actual or demonstrably anticipated research or
development;
b. Result from any work performed by you for Company.
To the extent a provision in the foregoing Agreement purports to require you to assign an Invention otherwise excluded from the
preceding paragraph, the provision is against the public policy of this state and is unenforceable.
This limited exclusion does not apply to any patent or invention covered by a contract between Company and the United States or
any of its agencies requiring full title to such patent or Invention to be in the United States.
A-1
EXHIBIT B
SEPARATION DATE RELEASE
(To be signed on or within 21 days after the employment termination date.)
In exchange for the severance benefits to be provided to me by Pacific Ethanol, Inc. (the "Company") pursuant to the terms of my
Employment Agreement (the "Agreement"), I hereby provide the following General Release of Claims (the "Release"). I understand that, on
the last date of my employment with the Company, the Company will pay me any accrued salary to which I am entitled by law, regardless of
whether I sign this Release, but I am not entitled to any severance benefits unless I sign and return this Release to the Company and I allow it
to become effective.
I hereby generally and completely release the Company and its directors, officers, employees, shareholders, partners, agents, attorneys,
predecessors, successors, parent and subsidiary entities, insurers, affiliates, and assigns (collectively the "Released Parties") of and from any
and all claims, liabilities and obligations, both known and unknown, arising out of or in any way related to events, acts, conduct, or omissions
occurring at any time prior to or at the time that I sign this Release.
This general release includes, but is not limited to: (1) all claims arising out of or in any way related to my employment with the Company or
the termination of that employment;
(2) all claims related to my compensation or benefits from the Company, including salary, bonuses, commissions, vacation pay, expense
reimbursements, severance pay, fringe benefits, stock, stock options, or any other ownership or equity interests in the Company;
(3) all claims for breach of contract, wrongful termination, and breach of the implied covenant of good faith and fair dealing (including claims
based on or arising under the Agreement); (4) all tort claims, including claims for fraud, defamation, emotional distress, and discharge in
violation of public policy; and (5) all federal, state, and local statutory claims, including claims for discrimination, harassment, retaliation,
attorneys' fees, or other claims arising under the federal Civil Rights Act of 1964 (as amended), the federal Americans with Disabilities Act of
1990, the federal Age Discrimination in Employment Act (as amended) ("ADEA"), the federal Family and Medical Leave Act, the California
Labor Code (as amended), the California Family Rights Act, and the California Fair Employment and Housing Act (as amended).
I understand that notwithstanding the foregoing, the following are not included in the Released Claims (the "Excluded Claims"): (i) any rights
or claims for indemnification I may have pursuant to any written indemnification agreement to which I am a party, the charter, bylaws, or
operating agreements of any of the Released Parties, or under applicable law; or (ii) any rights which are not waivable as a matter of law. In
addition, I understand that nothing in this release prevents me from filing, cooperating with, or participating in any proceeding before the Equal
Employment Opportunity Commission, the Department of Labor, or the California Department of Fair Employment and Housing, except that I
acknowledge and agree that I shall not recover any monetary benefits in connection with any such claim, charge or proceeding with regard to
any claim released herein. I hereby represent and warrant that, other than the Excluded Claims, I am not aware of any claims I have or might
have against any of the Released Parties that are not included in the Released Claims.
B-2
I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the ADEA, and that the consideration
given for the waiver and release in the preceding paragraph is in addition to anything of value to which I am already entitled. I further
acknowledge that I have been advised by this writing that: (1) my waiver and release do not apply to any rights or claims that may arise after
the date I sign this Release; (2) I should consult with an attorney prior to signing this Release (although I may choose voluntarily not to do so);
(3) I have twenty-one (21) days to consider this Release (although I may choose voluntarily to sign it earlier); (4) I have seven (7) days
following the date I sign this Release to revoke it by providing written notice of revocation to the Company's Chief Executive Officer; and (5)
this Release will not be effective until the date upon which the revocation period has expired, which will be the eighth calendar day after the
date I sign it provided that I do not revoke it (the "Effective Date").
I UNDERSTAND THAT THIS AGREEMENT INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS. I
acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: "A general release does not
extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if
known by him or her must have materially affected his or her settlement with the debtor." I hereby expressly waive and relinquish all
rights and benefits under that section and any law or legal principle of similar effect in any jurisdiction with respect to my release of claims
herein, including but not limited to the release of unknown and unsuspected claims.
I hereby represent that I have been paid all compensation owed and for all hours worked, I have received all the leave and leave benefits and
protections for which I am eligible, pursuant to the Family and Medical Leave Act, the California Family Rights Act, or otherwise, and I have
not suffered any on-the-job injury for which I have not already filed a workers' compensation claim.
I further agree: (1) not to disparage the Company, its parent, or its or their officers, directors, employees, shareholders, affiliates and agents, in
any manner likely to be harmful to its or their business, business reputation, or personal reputation (although I may respond accurately and
fully to any question, inquiry or request for information as required by legal process); (2) not to voluntarily (except in response to legal
compulsion) assist any third party in bringing or pursuing any proposed or pending litigation, arbitration, administrative claim or other formal
proceeding against the Company, its parent or subsidiary entities, affiliates, officers, directors, employees or agents; and (3) to reasonably
cooperate with the Company, by voluntarily (without legal compulsion) providing accurate and complete information, in connection with the
Company's actual or contemplated defense, prosecution, or investigation of any claims or demands by or against third parties, or other matters,
arising from events, acts, or failures to act that occurred during the period of my employment by the Company.
By:
James Sneed
Date
B-3
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Subsidiary Name*
Kinergy Marketing, LLC
Pacific Ag. Products, LLC
PEMS Corp.
Pacific Ethanol Development, LLC
New PE Holdco LLC(1)
Pacific Ethanol Holding Co LLC(1)
Pacific Ethanol Columbia, LLC(1)
Pacific Ethanol Madera LLC(1)
Pacific Ethanol Magic Valley, LLC(1)
Pacific Ethanol Stockton LLC(1)
Name(s) Under Which
Subsidiary Does Business**
State or Jurisdiction of
Incorporation or Organization
Kinergy Marketing
Pacific Ag Products / PAP
−
−
−
−
−
−
−
−
Oregon
California
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
*
**
(1)
All subsidiaries are wholly-owned by the Registrant unless otherwise specified by footnote.
If different from the name of the subsidiary.
The Registrant holds a 91% ownership interest in New PE Holdco LLC. Pacific Ethanol Holding Co LLC is wholly-owned by New
PE Holdco LLC. Pacific Ethanol Columbia, LLC, Pacific Ethanol Madera LLC, Pacific Ethanol Magic Valley, LLC and Pacific
Ethanol Stockton LLC are wholly-owned by Pacific Ethanol Holding Co LLC.
EXHIBIT 23.1
To the Board of Directors
Pacific Ethanol, Inc.
Sacramento, California
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements (Nos. 333-137663, 333-123538, 333-169002, 333-176540, 333-
185884 and 333-189478) on Form S-8 and (Nos. 333-178685 and 333-180731) on Form S-3 of Pacific Ethanol, Inc. of our report dated
March 31, 2014 relating to our audits of the consolidated financial statements, which appear in this Annual Report on Form 10-K of Pacific
Ethanol, Inc. for the year ended December 31, 2013.
/s/ HEIN & ASSOCIATES LLP
Irvine, California
March 31, 2014
EXHIBIT 31.1
CERTIFICATION
I, Neil M. Koehler, certify that:
1. I have reviewed this Annual Report on Form 10-K 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 officers 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.
Date: March 31, 2014
/s/ NEIL M. KOEHLER
Neil M. Koehler
President and Chief Executive Officer (Principal Executive Officer)
EXHIBIT 31.2
CERTIFICATION
I, Bryon T. McGregor, certify that:
1. I have reviewed this Annual Report on Form 10-K 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 officers 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.
Date: March 31, 2014
/s/ BRYON T. MCGREGOR
Bryon T. McGregor
Chief Financial Officer (Principal Financial and Accounting Officer)
EXHIBIT 32.1
CERTIFICATIONS 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 Annual Report on Form 10-K of Pacific Ethanol, Inc. (the “Company”) for the year ended December 31, 2013
(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.
Date: March 31, 2014
Date: March 31, 2014
By:
/s/ NEIL M. KOEHLER
Neil M. Koehler
Chief Executive Officer
(Principal Executive Officer)
By:
/s/ BRYON T. MCGREGOR
Bryon T. McGregor
Chief Financial Officer (Principal Financial and Accounting
Officer)
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.