Alto Ingredients, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS. PACIFIC ETHANOL, INC. CONSOLIDATED BALANCE SHEETS (in thousands) September 30, December 31, 2020 2019 (unaudited) * ASSETS Current Assets: Cash and cash equivalents $ 38,730 $ 18,997 Accounts receivable, net (net of allowance for doubtful accounts of $16 and $39, respectively) 44,465 74,307 Inventories 37,706 60,600 Prepaid inventory 1,215 1,528 Assets held-for-sale 6,920 69,764 Derivative instruments 5,792 2,438 Other current assets 2,887 4,430 Total current assets 137,715 232,064 Property and equipment, net 306,251 332,526 Other Assets: Right of use operating lease assets, net 21,710 24,346 Notes receivable 15,624 — Assets held-for-sale — 16,500 Intangible assets 2,678 2,678 Other assets 5,484 4,381 Total other assets 45,496 47,905 Total Assets $ 489,462 $ 612,495 * Amounts derived from the audited consolidated financial statements for the year ended December 31, 2019. See accompanying notes to consolidated financial statements. 1 PACIFIC ETHANOL, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) (in thousands, except par value) September 30, December 31, 2020 2019 (unaudited) * LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable – trade $ 17,582 $ 29,277 Accrued liabilities 11,721 22,331 Current portion – operating leases 2,541 3,457 Current portion – long-term debt 74,900 63,000 Liabilities held-for-sale — 34,413 Derivative instruments — 1,860 Other current liabilities 8,361 6,060 Total current liabilities 115,105 160,398 Long-term debt, net of current portion 87,989 180,795 Operating leases, net of current portion 19,659 21,171 Other liabilities 21,493 23,086 Total Liabilities 244,246 385,450 Commitments and Contingencies (Note 7) Stockholders’ Equity: Pacific Ethanol, Inc. Stockholders’ Equity: Preferred stock, $0.001 par value; 10,000 shares authorized; Series A: 1,684 shares authorized; no shares issued and outstanding as of September 30, 2020 and December 31, 2019; Series B: 1,581 shares authorized; 927 shares issued and outstanding as of September 30, 2020 and December 31, 2019; liquidation preference of $19,344 as of September 30, 2020 1 1 Common stock, $0.001 par value; 300,000 shares authorized; 63,483 and 55,508 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively 63 56 Non-voting common stock, $0.001 par value; 3,553 shares authorized; 1 share issued and outstanding as of September 30, 2020 and December 31, 2019 — — Additional paid-in capital 963,606 942,307 Accumulated other comprehensive loss (2,370 ) (2,370 ) Accumulated deficit (716,084 ) (720,214 ) Total Pacific Ethanol, Inc. Stockholders’ Equity 245,216 219,780 Noncontrolling interests — 7,265 Total Stockholders’ Equity 245,216 227,045 Total Liabilities and Stockholders’ Equity $ 489,462 $ 612,495 * Amounts derived from the audited consolidated financial statements for the year ended December 31, 2019. See accompanying notes to consolidated financial statements. 2 PACIFIC ETHANOL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net sales $ 204,727 $ 365,160 $ 728,205 $ 1,067,264 Cost of goods sold 183,797 379,976 688,983 1,080,398 Gross profit (loss) 20,930 (14,816 ) 39,222 (13,134 ) Selling, general and administrative expenses (6,404 ) (8,687 ) (25,245 ) (23,630 ) Gain on litigation settlement 11,750 — 11,750 — Income (loss) from operations 26,276 (23,503 ) 25,727 (36,764 ) Interest expense, net (4,199 ) (5,163 ) (14,153 ) (15,014 ) Fair value adjustments (6,856 ) — (7,497 ) Other income (expense), net (6 ) (407 ) (1,164 ) 254 Income (loss) before benefit for income taxes 15,215 (29,073 ) 2,913 (51,524 ) Benefit for income taxes — — — — Consolidated net income (loss) 15,215 (29,073 ) 2,913 (51,524 ) Net loss attributed to noncontrolling interests — 1,747 2,166 3,662 Net income (loss) attributed to Pacific Ethanol, Inc. $ 15,215 $ (27,326 ) $ 5,079 $ (47,862 ) Preferred stock dividends $ (319 ) $ (319 ) $ (949 ) $ (946 ) Net income (loss) available to common stockholders $ 14,896 $ (27,645 ) $ 4,130 $ (48,808 ) Net income (loss) per share, basic $ 0.25 $ (0.58 ) $ 0.07 $ (1.04 ) Net income (loss) per share, diluted $ 0.24 $ (0.58 ) $ 0.07 $ (1.04 ) Weighted-average shares outstanding, basic 58,503 47,777 55,620 47,030 Weighted-average shares outstanding, diluted 61,699 47,777 57,958 47,030 See accompanying notes to consolidated financial statements. 3 PACIFIC ETHANOL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands) Nine Months Ended September 30, 2020 2019 Operating Activities: Consolidated net income (loss) $ 2,913 $ (51,524 ) Adjustments to reconcile consolidated net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization of intangibles 26,855 35,944 Amortization of deferred financing fees 587 1,105 Fair value adjustments 7,497 — Interest added to debt 133 — Non-cash compensation 2,012 2,103 Gain on derivative instruments (1,582 ) (1,565 ) Bad debt expense 1 27 Changes in operating assets and liabilities: Accounts receivable 29,841 (370 ) Inventories 22,863 (4,689 ) Other assets 1,348 5,836 Prepaid inventory 313 (101 ) Operating leases (2,348 ) (7,646 ) Assets held-for-sale 1,012 — Liabilities held-for-sale 9,345 — Accounts payable and accrued expenses (25,097 ) (6,323 ) Net cash provided by (used in) operating activities 75,693 (27,203 ) Investing Activities: Proceeds from PAL Sale 19,896 — Additions to property and equipment (4,864 ) (2,144 ) Net cash provided by (used in) investing activities 15,032 (2,144 ) Financing Activities: Net (payments on) proceeds from Kinergy’s line of credit (39,548 ) 22,629 Proceeds from warrant exercises 5,500 — Proceeds from issuance of common stock 5,296 3,670 Proceeds from CoGen contract amendment — 8,036 Proceeds from borrowings 9,860 — Principal payments on borrowings (52,100 ) (11,748 ) Preferred stock dividends paid — (946 ) Net cash provided by (used in) financing activities (70,992 ) 21,641 Net change in cash and cash equivalents 19,733 (7,706 ) Cash and cash equivalents at beginning of period 18,997 26,627 Cash and cash equivalents at end of period $ 38,730 $ 18,921 Supplemental Cash Flow Information: Interest paid $ 13,746 $ 13,877 Accrued preferred stock dividends $ 949 $ — See accompanying notes to consolidated financial statements. 4 PACIFIC ETHANOL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited, in thousands) Preferred Stock Common Stock Additional Paid-In Accumulated Accum. Other Comprehensive Non- Controlling Shares Amount Shares Amount Capital Deficit Income (Loss) Interests Total Balances, January 1, 2020 927 $ 1 55,508 $ 56 $ 942,307 $ (720,214 ) $ (2,370 ) $ 7,265 $ 227,045 Stock-based compensation expense – restricted stock issued to employees and directors, net of cancellations and tax — — (38 ) (4 ) 868 — — — 864 Issuances of common stock — — 421 4 278 — — — 282 Preferred stock dividends — — — — — (315 ) — — (315 ) Net loss — — — — — (25,100 ) — (2,056 ) (27,156 ) Balances, March 31, 2020 927 $ 1 55,891 $ 56 $ 943,453 $ (745,629 ) $ (2,370 ) $ 5,209 $ 200,720 Stock-based compensation expense – restricted stock issued to employees and directors, net of cancellations and tax — — (409 ) (1 ) 582 — — — 581 Preferred stock dividends — — — — — (315 ) — — (315 ) Sale of interests in PAL — — — — — — — (5,099 ) (5,099 ) Net income (loss) — — — — — 14,964 — (110 ) 14,854 Balances, June 30, 2020 927 $ 1 55,482 $ 55 $ 944,035 $ (730,980 ) $ (2,370 ) $ — $ 210,741 Stock-based compensation expense – restricted stock issued to employees and directors, net of cancellations and tax — — 1,501 1 589 — — — 590 Issuance of common stock — — 1,000 1 5,013 — — — 5,014 Warrant exercise — — 5,500 6 13,969 — — — 13,975 Preferred stock dividends — — — — — (319 ) — — (319 ) Net income — — — — — 15,215 — — 15,215 Balances, September 30, 2020 927 $ 1 63,483 $ 63 $ 963,606 $ (716,084 ) $ (2,370 ) $ — $ 245,216 See accompanying notes to consolidated financial statements. 5 PACIFIC ETHANOL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED) (unaudited, in thousands) Preferred Stock Common Stock Additional Paid-In Accumulated Accum. Other Comprehensive Non- Controlling Shares Amount Shares Amount Capital Deficit Income (Loss) Interests Total Balances, January 1, 2019 927 $ 1 45,771 $ 46 $ 932,179 $ (630,000 ) $ (2,459 ) $ 19,598 $ 319,365 Stock-based compensation expense – restricted stock issued to employees and directors, net of cancellations and tax — — (24 ) — 797 — — — 797 Issuances of common stock — — 3,137 3 3,667 — — — 3,670 Preferred stock dividends — — — — — (312 ) — — (312 ) Net loss — — — — — (12,890 ) — (1,271 ) (14,161 ) Balances, March 31, 2019 927 $ 1 48,884 $ 49 $ 936,643 $ (643,202 ) $ (2,459 ) $ 18,327 $ 309,359 Stock-based compensation expense – restricted stock issued to employees and directors, net of cancellations and tax — — 954 1 565 — — — 566 Preferred stock dividends — — — — — (315 ) — — (315 ) Net loss — — — — — (7,646 ) — (644 ) (8,290 ) Balances, June 30, 2019 927 $ 1 49,838 $ 50 $ 937,208 $ (651,163 ) $ (2,459 ) $ 17,683 $ 301,320 Stock-based compensation expense – restricted stock issued to employees and directors, net of cancellations and tax — — (54 ) — 587 — — — 587 Preferred stock dividends — — — — — (319 ) — — (319 ) Net loss — — — — — (27,326 ) — (1,747 ) (29,073 ) Balances, September 30, 2019 927 $ 1 49,784 $ 50 $ 937,795 $ (678,808 ) $ (2,459 ) $ 15,936 $ 272,515 See accompanying notes to consolidated financial statements. 6 PACIFIC ETHANOL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND BASIS OF PRESENTATION. Organization and Business – The consolidated financial statements include, for all periods presented, the accounts of Pacific Ethanol, Inc., a Delaware corporation (“Pacific Ethanol”), and its direct and indirect subsidiaries (collectively, the “Company”), including its subsidiaries, Kinergy Marketing LLC, an Oregon limited liability company (“Kinergy”), Pacific Ag. Products, LLC, a California limited liability company (“PAP”), PE Op Co., a Delaware corporation (“PE Op Co.”) and all nine of the Company’s production distilleries through April 15, 2020. As discussed in Note 2, on April 15, 2020, the Company completed the sale of its ownership interests in Pacific Aurora, LLC (“Pacific Aurora”), thereby divesting the Company’s two production distilleries located in Nebraska. The Company is a leading producer and marketer of specialty alcohols and essential ingredients in the United States. The Company’s production distilleries in Illinois are located in the heart of the Corn Belt, benefit from low-cost and abundant feedstock and allow for access to many additional domestic markets. In addition, the Company’s ability to load unit trains and barges from these distilleries in the Midwest allows for greater access to international markets. The Company’s four distilleries in California, Oregon and Idaho (together with their respective holding companies, the “Pacific Ethanol West Plants”) are located in close proximity to both feed and fuel-grade ethanol customers and thus enjoy unique advantages in efficiency, logistics and product pricing. Following the Company’s sale of its interest in Pacific Aurora, the Company has a combined production capacity of 450 million gallons per year. In 2019, the Company marketed nearly 1.0 billion gallons combined of specialty alcohols and fuel-grade ethanol, and nearly 3.0 million tons of essential ingredients on a dry matter basis. The Company focuses on four key markets: Health, Home & Beauty; Food & Beverage; Essential Ingredients; and Renewable Fuels . Products for the Health, Home & Beauty market include specialty alcohols used in mouthwash, cosmetics, pharmaceuticals, hand sanitizers, disinfectants and cleaners. Products for the Food & Beverage markets include grain neutral spirits used in alcoholic beverages and vinegar as well as corn germ used for corn oils. Products for Essential Ingredients markets include yeast, corn gluten and distillers grains used in commercial animal feed and pet foods. Renewable Fuels includes fuel-grade ethanol and distillers corn oil used as a feedstock for renewable diesel fuel. As of September 30, 2020, the Company was operating at approximately 51% of its 450 million gallon annual production capacity. As market conditions change, the Company may increase, decrease or idle production at one or more operating distilleries or resume operations at any idled distillery. Basis of Presentation – Interim Financial Statements – The accompanying unaudited consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Results for interim periods should not be considered indicative of results for a full year. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The accounting policies used in preparing these consolidated financial statements are the same as those described in Note 1 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included. All significant intercompany accounts and transactions have been eliminated in consolidation. Liquidity – The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. During the nine months ended September 30, 2020, the Company continued to experience significant adverse conditions in the fuel-grade ethanol market as demand and pricing were at record lows due to reduced domestic transportation and resulting lower gasoline demand. In response, the Company reduced fuel-grade ethanol production at its distilleries by more than 50% in an effort to conserve capital as a result of the substantial reduction in fuel-grade ethanol demand due to stay-at-home orders issued in response to the coronavirus pandemic. The Company, however, has not only continued producing and selling its specialty alcohols, but also converted a portion of its fuel-grade ethanol production to specialty alcohol production to respond to increased demand from the sanitizer and disinfectant markets. These sales of specialty alcohols were at a mix of fixed and spot prices, both of which resulted in positive net income and cash flows from operations during the quarter. The Company expects current demand for its specialty alcohols to continue for at least the next twelve months as the Company continues to enter fixed-price contracts and hedge corn input costs, locking in profit margins on sales of specialty alcohols. 7 At September 30, 2020, the Company had $38.7 million in cash and $9.2 million available under Kinergy’s operating line of credit. During the first nine months of 2020, the Company generated $75.7 million in cash from its operations and realized $19.9 million in net cash proceeds from the sale of its interest in Pacific Aurora. These positive cash flows have allowed the Company to make net payments totaling $91.6 million on its debt during the first nine months of 2020. Further, subsequent to September 30, 2020, the Company made an additional $25.3 million in payments on its term debt from proceeds of its offerings of common stock and warrants that generated net proceeds of approximately $70.0 million. The Company believes that as of the date of this report, it is in compliance with all debt covenants contained in its credit facilities, except the Company’s obligation to obtain lender approval of a comprehensive plan to restructure its assets and liabilities with respect to its Pekin and ICP debt and a dispute over whether a portion of the Company’s principal payments originated from an approved source of funds. The Company has appointed a chief restructuring officer to facilitate the development of such a plan and has presented and continues to negotiate the plan with its lenders. As a result, the Company is not in compliance with its obligations to its lenders, which could result in their acceleration of the Company’s debt. Even though the Company doesn’t believe acceleration is probable, it has classified its related debt as current on the Company’s consolidated balance sheets. In addition to the Company’s projected cash flows from operations, the Company recently raised net proceeds of $70.0 million in offerings of common stock and warrants, and has recently announced the sale of certain assets for $10.0 million, which is expected to close by November 30, 2020. In addition, the Company continues to evaluate its Western fuel-grade ethanol distilleries for either repurposing or sale, which may provide additional proceeds to repay debt. Given these factors, the Company believes it has alleviated substantial doubt about its ability to continue as a going concern and has sufficient liquidity to meet its anticipated working capital, debt service and other liquidity needs for the next twelve months from the date of this report. 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 fuel-grade ethanol to gasoline refining and distribution companies, sells distillers grains and other feed co-products to dairy operators and animal feedlots and sells corn oil to poultry and biodiesel customers generally without requiring collateral. The Company maintains an allowance for doubtful accounts for balances that appear to have specific collection issues. The collection process is based on the age of the invoice and requires attempted contacts with the customer at specified intervals. If, after a specified number of days, the Company has been unsuccessful in its collection efforts, a bad debt allowance is recorded for the balance in question. Delinquent accounts receivable are charged against the allowance for doubtful accounts once uncollectibility has been determined. The factors considered in reaching this determination are the apparent financial condition of the customer and the Company’s success in contacting and negotiating with the customer. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of ability to make payments, additional allowances may be required. Of the accounts receivable balance, approximately $35,872,000 and $63,736,000 at September 30, 2020 and December 31, 2019, respectively, were used as collateral under Kinergy’s operating line of credit. The allowance for doubtful accounts was $16,000 and $39,000 as of September 30, 2020 and December 31, 2019, respectively. The Company recorded no bad debt expense for the three months ended September 30, 2020 and 2019. The Company recorded a bad debt expense of $1,000 and $27,000 for the nine months ended September 30, 2020 and 2019, respectively. Financial Instruments – The carrying values of cash and cash equivalents, accounts receivable, derivative assets, accounts payable, accrued liabilities and derivative liabilities are reasonable estimates of their fair values because of the short maturity of these items. The carrying value of the Company’s senior secured notes were recorded at fair value at December 31, 2019 and are considered Level 2 fair value measurements. The Company believes their carrying value approximates fair value at September 30, 2020. The Company believes the carrying value of its notes receivable are not considered materially different than fair value due to their recent issuances, and other long-term debt instruments are not considered materially different than fair value because the interest rates on these instruments are variable, and are considered Level 2 fair value measurements. 8 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 group is expected to generate plus the net proceeds expected from the sale of the asset group. If this amount is less than the carrying value of the asset, the Company will then determine the fair value of the asset group. An impairment loss would be recognized when the fair value is less than the related asset group’s net book value, and an impairment expense would be recorded in the amount of the difference. An impairment loss may also occur to the extent that the Company determines long-lived assets as held-for-sale and sales prices are less than carrying value. 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. The Company performed an undiscounted cash flow analysis for its long-lived assets held-for-use, as of September 30, 2020, resulting in amounts in excess of carrying values. 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 allowance for doubtful accounts, net realizable value of inventory, estimated lives of property and equipment, 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, and the valuation of assets acquired and liabilities assumed as a result of business combinations. Actual results and outcomes may materially differ from management’s estimates and assumptions. 2. ASSET SALES. Pacific Aurora On December 19, 2019, Pacific Ethanol Central, LLC (“PE Central”) entered into a term sheet covering the proposed sale of its 73.93% ownership interest in Pacific Aurora to Aurora Cooperative Elevator Company (“ACEC”) for $52.8 million, and as a result, the Company determined that as of December 31, 2019, the long-lived assets of Pacific Aurora should be classified as held-for-sale. On April 15, 2020, the Company closed the sale of its ownership interest in Pacific Aurora and preliminarily received total consideration of $52.8 million, subject to working capital adjustments of approximately $35.3 million, resulting in cash proceeds of $19.9 million and the balance of $16.5 million in long-term ACEC promissory notes, resulting in a net loss on sale of approximately $1.4 million, recorded as other income (expense) in the Company’s consolidated statements of operations. Approximately $14.5 million of the cash proceeds were used to repay a portion of the Company’s term debt. In September 2020, the Company and ACEC agreed to certain post-closing adjustments to the purchase price, resulting in a decrease of $0.9 million, and a corresponding reduction in the aggregate principal amount owed under the long-term ACEC promissory notes. The Company received two promissory notes, as adjusted, in the amounts of $8.6 million and $7.0 million as part consideration for the sale, both maturing on April 15, 2025. The $8.6 million note accrues interest at an annual rate of 5.00%. Interest payments are due quarterly beginning July 1, 2020 and principal payments of $0.4 million are due quarterly beginning July 1, 2021. The $7.0 million note accrues interest at an annual rate of 4.50%. Interest payments are due quarterly beginning July 1, 2020 and principal payments of $0.4 million are due quarterly beginning January 3, 2022. In addition, upon the sale, the Company no longer had noncontrolling interests on its balance sheet and no longer records income (loss) of noncontrolling interests for future periods. For the three months ended September 30, 2019, Pacific Aurora contributed approximately $40.1 million in net sales, $6.7 million in pre-tax loss and $1.7 million in net loss attributed to noncontrolling interests, respectively. For the nine months ended September 30, 2020 and 2019, Pacific Aurora contributed $39.6 million and $112.0 million in net sales, $8.4 million and $14.0 million in pre-tax loss, and $2.2 million and $3.7 million in net loss attributed to noncontrolling interests, respectively. Pacific Ethanol Magic Valley On July 28, 2020, the Company entered into a term sheet with Liberty Basin, LLC (“Liberty”) to sell 134 acres, the rail loop and grain handling assets at its Magic Valley plant in Burley, Idaho for $10.0 million in cash. The Company will retain the fuel-grade ethanol production facility and terminal on the remaining 25 acres and will enter into certain agreements with Liberty for delivery of grain to the plant, and as a result, the Company determined that as of September 30, 2020, these long-lived assets should be classified as held-for-sale. On November 9, 2020, the Company announced a definitive sales agreement with Liberty had been signed. The sale is expected to close on or before November 30, 2020, subject to customary and other closing conditions. 9 3. SEGMENTS. The Company reports its financial and operating performance in two segments: (1) production, which includes the production and sale of alcohols and essential ingredients, with all of the Company’s production distilleries aggregated, and (2) marketing and distribution, which includes marketing and merchant trading for Company-produced products as well as third-party fuel-grade ethanol. The following tables set forth certain financial data for the Company’s operating segments (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net Sales Production, recorded as gross: Alcohol sales $ 89,796 $ 212,897 $ 379,785 $ 586,680 Other product sales 30,549 65,693 134,678 199,177 Intersegment sales 451 403 1,548 1,187 Total production sales 120,796 278,993 516,011 787,044 Marketing and distribution: Alcohol sales, gross $ 84,000 $ 86,124 $ 212,625 $ 280,032 Alcohol sales, net 382 446 1,117 1,375 Intersegment sales 698 2,079 3,483 5,839 Total marketing and distribution sales 85,080 88,649 217,225 287,246 Intersegment eliminations (1,149 ) (2,482 ) (5,031 ) (7,026 ) Net sales as reported $ 204,727 $ 365,160 $ 728,205 $ 1,067,264 Cost of goods sold: Production $ 100,365 $ 294,888 $ 483,223 $ 810,670 Marketing and distribution 84,581 87,976 210,792 277,545 Intersegment eliminations (1,149 ) (2,888 ) (5,032 ) (7,817 ) Cost of goods sold as reported $ 183,797 $ 379,976 $ 688,983 $ 1,080,398 Income (loss) before benefit for income taxes: Production $ 24,976 $ (25,999 ) $ 17,757 $ (50,682 ) Marketing and distribution (865 ) (998 ) 1,740 4,991 Corporate activities (8,896 ) (2,076 ) (16,584 ) (5,833 ) $ 15,215 $ (29,073 ) $ 2,913 $ (51,524 ) Depreciation and amortization: Production $ 8,620 $ 11,833 $ 26,558 $ 35,390 Corporate activities 76 195 297 554 $ 8,696 $ 12,028 $ 26,855 $ 35,944 Interest expense: Production $ 1,383 $ 1,969 $ 5,121 $ 5,724 Marketing and distribution 335 929 1,275 2,291 Corporate activities 2,481 2,265 7,757 6,999 $ 4,199 $ 5,163 $ 14,153 $ 15,014 The following table sets forth the Company’s total assets by operating segment (in thousands): September 30, 2020 December 31, 2019 Total assets: Production $ 403,358 $ 492,060 Marketing and distribution 69,174 106,863 Corporate assets 16,930 13,572 $ 489,462 $ 612,495 10 4. INVENTORIES. Inventories consisted primarily of bulk specialty alcohols, fuel-grade ethanol, corn, co-products, low-carbon and Renewable Identification Number (“RIN”) credits and unleaded fuel, and are valued at the lower-of-cost-or-net realizable value, with cost determined on a first-in, first-out basis. Inventory is net of a $32,000 and $1,290,000 valuation adjustment as of September 30, 2020 and December 31, 2019, respectively. Inventory balances consisted of the following (in thousands): September 30, 2020 December 31, 2019 Finished goods $ 23,179 $ 38,194 Work in progress 2,503 7,426 Raw materials 6,873 7,890 Low-carbon and RIN credits 3,751 5,690 Other 1,400 1,400 Total $ 37,706 $ 60,600 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 fuel-grade 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 fuel-grade ethanol. In addition, the Company hedges anticipated sales of fuel-grade ethanol to minimize its exposure to the potentially adverse effects of price volatility. These derivatives may be designated and documented as cash flow hedges and effectiveness is evaluated by assessing the probability of the anticipated transactions and regressing commodity futures prices against the Company’s purchase and sales prices. Ineffectiveness, which is defined as the degree to which the derivative does not offset the underlying exposure, is recognized immediately in cost of goods sold. For the three and nine months ended September 30, 2020 and 2019, the Company did not designate any of its derivatives as cash flow hedges. Commodity Risk – Non-Designated Hedges – The Company uses derivative instruments to lock in prices for certain amounts of corn and fuel-grade ethanol by entering into exchange-traded forward contracts for those commodities. These derivatives are not designated for 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 gains of $1,582,000 and losses of $3,320,000 as the changes in the fair values of these contracts for the three months ended September 30, 2020 and 2019, respectively. The Company recognized gains of $1,582,000 and $1,565,000 as the changes in the fair values of these contracts for the nine months ended September 30, 2020 and 2019, respectively. 11 Non Designated Derivative Instruments – The classification and amounts of the Company’s derivatives not designated as hedging instruments, and related cash collateral balances, are as follows (in thousands): As of September 30, 2020 Assets Liabilities Balance Sheet Fair Balance Sheet Fair Type of Instrument Location Value Location Value Cash collateral balance Other current assets $ 15 Commodity contracts Derivative instruments $ 5,792 Derivative instruments $ — As of December 31, 2019 Assets Liabilities Balance Sheet Fair Balance Sheet Fair Type of Instrument Location Value Location Value Cash collateral balance Other current assets $ 615 Commodity contracts Derivative instruments $ 2,438 Derivative instruments $ 1,860 The classification and amounts of the Company’s recognized gains (losses) for its derivatives not designated as hedging instruments are as follows (in thousands): Realized Gains (Losses) Three Months Ended September 30, Type of Instrument Statements of Operations Location 2020 2019 Commodity contracts Cost of goods sold $ (531 ) $ 2,262 Unrealized Gains (Losses) Three Months Ended September 30, Type of Instrument Statements of Operations Location 2020 2019 Commodity contracts Cost of goods sold $ 2,113 $ (5,582 ) Realized Gains (Losses) Nine Months Ended September 30, Type of Instrument Statements of Operations Location 2020 2019 Commodity contracts Cost of goods sold $ 47 $ (2,150 ) Unrealized Gains (Losses) Nine Months Ended September 30, Type of Instrument Statements of Operations Location 2020 2019 Commodity contracts Cost of goods sold $ 1,535 $ 3,715 12 6. DEBT. Long-term borrowings are summarized as follows (in thousands): September 30, 2020 December 31, 2019 Kinergy line of credit $ 38,790 $ 78,338 Pekin term loan 8,500 39,500 Pekin revolving loan 32,000 32,000 ICP term loan — 12,000 ICP revolving loan 14,400 18,000 CARES Act loans 9,860 — Parent notes payable 60,282 65,649 163,832 245,487 Less unamortized debt premium 288 461 Less unamortized debt financing costs (1,231 ) (2,153 ) Less short-term portion (74,900 ) (63,000 ) Long-term debt $ 87,989 $ 180,795 PE Pekin Credit Facilities – On March 20, 2020, Pacific Ethanol Pekin, LLC (“PE Pekin”) and its lender agreed to defer $1.0 million in aggregate interest payments due March 20, 2020 and April 20, 2020 until May 20, 2020. On that same date, the Company granted to the lender a security interest in all of the Company’s equity interests in PE Op Co., which indirectly owns the Company’s distilleries located on the West Coast. The Company and certain subsidiaries also entered into intercreditor agreements with the PE Pekin and Illinois Corn Processing, LLC (“ICP”) lenders, and the agent for the Company’s senior secured noteholders, to address issues of priority and the allocation of proceeds from asset sales. In July 2020, the Company reached a confidential settlement of an outstanding dispute resulting in a gain and cash proceeds of approximately $11.8 million. The Company used a portion of these funds to make approximately $7.4 million in additional principal payments on PE Pekin’s term debt. ICP Credit Facilities – On March 20, 2020, ICP and its lender agreed to defer a $1.5 million principal payment due March 20, 2020 and $0.3 million in aggregate interest payments due March 20, 2020 and April 20, 2020 until May 20, 2020. On that same date, the Company granted to the lender a security interest in all of the Company’s equity interests in PE Op Co. The Company and certain of its subsidiaries also entered into intercreditor agreements with the PE Pekin and ICP lenders, and the agent for the Company’s senior secured noteholders, to address issues of priority and the allocation of proceeds from asset sales. The Company used a portion of the proceeds from the settlement noted above, in July 2020, to make approximately $1.8 million in additional principal payments on ICP’s term debt. Parent Notes Payable – On November 10, 2020, the Company repaid an additional $25.3 million in principal on its parent notes payable from the net proceeds of its recent offerings of common stock and warrants. CARES Act Loans – On May 4, 2020, Pacific Ethanol, Inc. and PE Pekin received loan proceeds from Bank of America, NA under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), through the Paycheck Protection Program administered by the U.S. Small Business Administration. Pacific Ethanol, Inc. received $6.0 million and PE Pekin received $3.9 million in loan proceeds. The loans mature in two years and bear interest at a rate of 1.00% per annum. Under the terms of the loans, certain amounts may be forgiven if they are used for qualifying expenses as described in the CARES Act, but the Company can provide no assurance that it will be able to obtain forgiveness of all or any portion of the loans. Restrictions – At September 30, 2020, there were approximately $291.3 million of net assets at the Company’s subsidiaries that were not available to be transferred to Pacific Ethanol, Inc. in the form of dividends, loans or advances due to restrictions contained in the credit facilities of the Company’s subsidiaries. 13 7. COMMITMENTS AND CONTINGENCIES. Sales Commitments – At September 30, 2020, the Company had entered into sales contracts with its major customers to sell certain quantities of fuel-grade ethanol and co-products. The Company had open fuel-grade ethanol indexed-price contracts for 54,750,000 gallons of fuel-grade ethanol as of September 30, 2020 and open fixed-price fuel-grade ethanol and specialty alcohol sales contracts totaling $327,244,000 as of September 30, 2020. The Company had open fixed-price co-product sales contracts totaling $18,120,000 and open indexed-price co-product sales contracts for 165,000 tons as of September 30, 2020. These sales contracts are scheduled to be completed throughout 2020 and 2021. Purchase Commitments – At September 30, 2020, the Company had indexed-price purchase contracts to purchase 4,890,000 gallons of fuel-grade ethanol and fixed-price purchase contracts to purchase $3,341,000 of fuel-grade ethanol from its suppliers. The Company had fixed-price purchase contracts to purchase $9,525,000 of corn from its suppliers as of September 30, 2020. These purchase commitments are scheduled to be satisfied throughout 2020. 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, environmental regulations, 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 impact on the Company’s financial condition or results of operations. 8. PENSION AND RETIREMENT BENEFIT PLANS. The Company sponsors a defined benefit pension plan (the “Retirement Plan”) and a health care and life insurance plan (the “Postretirement Plan”). The Company assumed the Retirement Plan and the Postretirement Plan as part of its acquisition of PE Central on July 1, 2015. The Retirement Plan is noncontributory, and covers only “grandfathered” unionized employees at the Company’s Pekin, Illinois distillery who fulfill minimum age and service requirements. Benefits are based on a prescribed formula based upon the employee’s years of service. The Retirement Plan, which is part of a collective bargaining agreement, covers only union employees hired prior to November 1, 2010. The Company uses a December 31 measurement date for its Retirement Plan. The Company’s funding policy is to make the minimum annual contribution required by applicable regulations. As of December 31, 2019, the Retirement Plan’s accumulated projected benefit obligation was $21.6 million, with a fair value of plan assets of $15.7 million. The underfunded amount of $5.9 million is recorded on the Company’s consolidated balance sheet in other liabilities. 14 The Postretirement Plan provides postretirement medical benefits and life insurance to certain “grandfathered” unionized employees. Employees hired after December 31, 2000 are not eligible to participate in the Postretirement Plan. The Postretirement Plan is contributory, with contributions required at the same rate as active employees. Benefit eligibility under the plan reduces at age 65 from a defined benefit to a defined dollar cap based upon years of service. As of December 31, 2019, the Postretirement Plan’s accumulated projected benefit obligation was $5.3 million and is recorded on the Company’s consolidated balance sheet in other liabilities. The Company’s funding policy is to make the minimum annual contribution required by applicable regulations. 9. FAIR VALUE MEASUREMENTS. The fair value hierarchy prioritizes the inputs used in valuation techniques into three levels, as follows: ● Level 1 – Observable inputs – unadjusted quoted prices in active markets for identical assets and liabilities; ● Level 2 – Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data; and ● Level 3 – Unobservable inputs – includes amounts derived from valuation models where one or more significant inputs are unobservable. For fair value measurements using significant unobservable inputs, a description of the inputs and the information used to develop the inputs is required along with a reconciliation of Level 3 values from the prior reporting period. Pooled separate accounts – Pooled separate accounts invest primarily in domestic and international stocks, commercial paper or single mutual funds. The net asset value is used as a practical expedient to determine fair value for these accounts. Each pooled separate account provides for redemptions by the Retirement Plan at reported net asset values per share, with little to no advance notice requirement, therefore these funds are classified within Level 2 of the valuation hierarchy. Warrants – The Company’s warrants issued December 22, 2019, were valued using the Black-Scholes Valuation Model. Significant assumptions used and related fair value for the warrants as of August 5, 2020, the day on which they were fully exercised, were as follows: Original Issuance Exercise Price Volatility Risk Free Interest Rate Term (years) Warrants Outstanding Fair Value 12/22/19 $ 1.00 178.0 % 0.08 % 0.10 5,500,000 $ 8,474,000 Significant assumptions used and related fair value for the warrants as of December 31, 2019 were as follows: Original Issuance Exercise Price Volatility Risk Free Interest Rate Term (years) Warrants Outstanding Fair Value 12/22/19 $ 1.00 76.0 % 1.66 % 3.00 5,500,000 $ 977,000 The fair values of the warrants are based on unobservable inputs and are designated as Level 3 inputs. 15 Other Derivative Instruments – The Company’s other derivative instruments consist of commodity positions. The fair values of the commodity positions are based on quoted prices on the commodity exchanges and are designated as Level 1 inputs. The following table summarizes recurring and nonrecurring fair value measurements by level at September 30, 2020 (in thousands): Fair Value Level 1 Level 2 Level 3 Assets: Derivative financial instruments $ 5,792 $ 5,792 $ — $ — The following table summarizes recurring and nonrecurring fair value measurements by level at December 31, 2019 (in thousands): Benefit Plan Fair Percentage Value Level 1 Level 2 Level 3 Allocation Assets: Derivative financial instruments $ 2,438 $ 2,438 $ — $ — Long-lived assets held-for-sale 70,400 — — 70,400 Defined benefit plan assets(1) (pooled separate accounts): Large U.S. Equity(2) 4,654 — 4,654 — 30 % Small/Mid U.S. Equity(3) 2,348 — 2,348 — 15 % International Equity(4) 2,596 — 2,596 — 17 % Fixed Income(5) 6,056 — 6,056 — 38 % $ 88,492 $ 2,438 $ 15,654 $ 70,400 Liabilities: Derivative financial instruments $ (1,860 ) $ (1,860 ) $ — $ — Warrants (977 ) — — (977 ) $ (2,837 ) $ (1,860 ) $ — $ (977 ) (1) Included in derivative instruments in the consolidated balance sheets. (2) This category includes investments in funds comprised of equity securities of large U.S. companies. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. (3) This category includes investments in funds comprised of equity securities of small- and medium-sized U.S. companies. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. (4) This category includes investments in funds comprised of equity securities of foreign companies including emerging markets. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. (5) This category includes investments in funds comprised of U.S. and foreign investment-grade fixed income securities, high-yield fixed income securities that are rated below investment-grade, U.S. treasury securities, mortgage-backed securities, and other asset-backed securities. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. 16 10. EARNINGS PER SHARE. The following tables compute basic and diluted earnings per share (in thousands, except per share data): Three Months Ended September 30, 2020 Income Numerator Shares Denominator Per-Share Amount Net income attributed to Pacific Ethanol, Inc. $ 15,215 Less: Preferred stock dividends (319 ) Basic income per share: Income available to common stockholders $ 14,896 58,503 $ 0.25 Add: Dilutive securities — 3,196 Diluted income per share: Income available to common stockholders $ 14,896 61,699 $ 0.24 Three Months Ended September 30, 2019 Loss Numerator Shares Denominator Per-Share Amount Net loss attributed to Pacific Ethanol, Inc. $ (27,326 ) Less: Preferred stock dividends (319 ) Basic and diluted loss per share: Loss available to common stockholders $ (27,645 ) 47,777 $ (0.58 ) Nine Months Ended September 30, 2020 Income Numerator Shares Denominator Per-Share Amount Net income attributed to Pacific Ethanol, Inc. $ 5,079 Less: Preferred stock dividends (949 ) Basic income per share: Income available to common stockholders $ 4,130 55,620 $ 0.07 Add: Dilutive securities — 2,338 Diluted income per share: Income available to common stockholders $ 4,130 57,958 $ 0.07 Nine Months Ended September 30, 2019 Loss Numerator Shares Denominator Per-Share Amount Net loss attributed to Pacific Ethanol, Inc. $ (47,862 ) Less: Preferred stock dividends (946 ) Basic and diluted loss per share: Loss available to common stockholders $ (48,808 ) 47,030 $ (1.04 ) There were an aggregate of 844,000 and 634,000 potentially dilutive weighted-average shares from convertible securities outstanding for the three and nine months ended September 30, 2020 and 2019, respectively. These convertible securities were not considered in calculating diluted net income (loss) per share for the periods presented, as their effect would have been anti-dilutive. On October 28, 2020, the Company closed an underwritten public offering of 5,075,000 shares of its common stock at a public offering price of $8.42 per share and 5-year pre-funded warrants to purchase 3,825,493 shares of common stock at a public offering price of $8.42 per pre-funded warrant. In addition, in a concurrent private placement, the Company also issued to the investor, for a nominal price, warrants to purchase an additional 8,900,493 shares of common stock at an exercise price of $9.757 per share. The warrants will become exercisable after the six-month anniversary of the offering and will expire on the 18-month anniversary of the offering. The aggregate gross proceeds from the offerings of common stock, pre-funded warrants and warrants was approximately $75.0 million. The net offering proceeds were approximately $70.0 million after deducting underwriting discounts and commissions and other estimated offering expenses. 17 11. PARENT COMPANY FINANCIALS. Restricted Net Assets – At September 30, 2020, the Company had approximately $291,300,000 of net assets at its subsidiaries that were not available to be transferred to Pacific Ethanol in the form of dividends, distributions, loans or advances due to restrictions contained in the credit facilities of these subsidiaries. Parent company financial statements for the periods covered in this report are set forth below (in thousands): September 30, 2020 December 31, 2019 Current Assets: Cash and cash equivalents $ 13,816 $ 4,985 Receivables from subsidiaries 13,345 13,057 Other current assets 1,285 2,349 Total current assets 28,446 20,391 Property and equipment, net 172 269 Other Assets: Investments in subsidiaries 237,918 218,464 Pacific Ethanol West plant receivable 49,937 55,750 Right of use operating lease assets, net 3,053 3,253 Other assets 1,344 1,452 Total other assets 292,252 278,919 Total Assets $ 320,870 $ 299,579 Current Liabilities: Accounts payable and accrued liabilities $ 2,577 $ 5,907 Accrued PE Op Co. purchase 3,829 3,829 Current portion of long-term debt 20,000 10,000 Other current liabilities 668 659 Total current liabilities 27,074 20,395 Long-term debt, net of current portion 45,743 56,110 Other liabilities 2,837 3,294 Total Liabilities 75,654 79,799 Stockholders’ Equity: Preferred stock 1 1 Common and non-voting common stock 63 56 Additional paid-in capital 963,606 942,307 Accumulated other comprehensive loss (2,370 ) (2,370 ) Accumulated deficit (716,084 ) (720,214 ) Total Pacific Ethanol, Inc. stockholders’ equity 245,216 219,780 Total Liabilities and Stockholders’ Equity $ 320,870 $ 299,579 18 Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Management fees from subsidiaries $ 2,802 $ 3,330 $ 8,928 $ 9,660 Selling, general and administrative expenses 3,305 3,827 12,990 11,374 Loss from operations (503 ) (497 ) (4,062 ) (1,714 ) Interest income from subsidiaries 1,007 1,145 3,053 3,486 Interest expense (2,497 ) (2,276 ) (7,840 ) (7,039 ) Fair value adjustments (6,856 ) — (7,497 ) — Other expense (41 ) (4 ) (203 ) (86 ) Loss before benefit for income taxes (8,890 ) (1,632 ) (16,549 ) (5,353 ) Benefit for income taxes — — — — Loss before benefit for income taxes (8,890 ) (1,632 ) (16,549 ) (5,353 ) Equity in income (losses) of subsidiaries 24,105 (25,694 ) 21,628 (42,509 ) Consolidated net income (loss) $ 15,215 $ (27,326 ) $ 5,079 $ (47,862 ) For the Nine Months Ended September 30, 2020 2019 Operating Activities: Net income (loss) $ 5,079 $ (47,862 ) Adjustments to reconcile net income (loss) to cash used in operating activities: Equity in (income) losses of subsidiaries (21,628 ) 42,509 Fair value adjustments 7,497 — Depreciation 97 227 Amortization of debt discounts (173 ) 539 Changes in operating assets and liabilities: Accounts receivable (288 ) (114 ) Other assets 1,184 173 Accounts payable and accrued expenses (19 ) 1,950 Accounts payable with subsidiaries — (502 ) Net cash used in operating activities $ (8,251 ) $ (3,080 ) Investing Activities: Additions to property and equipment $ — $ (13 ) Net cash used in investing activities $ — $ (13 ) Financing Activities: Proceeds from issuances of common stock $ 5,296 $ 3,670 Proceeds from warrant exercises 5,500 — Proceeds from long-term debt 5,973 — Proceeds from Pacific Ethanol West 5,813 3,016 Payments on senior notes (5,500 ) (3,748 ) Preferred stock dividend payments — (946 ) Net cash provided by financing activities $ 17,082 $ 1,992 Net increase (decrease) in cash and cash equivalents 8,831 (1,101 ) Cash and cash equivalents at beginning of period 4,985 6,759 Cash and cash equivalents at end of period $ 13,816 $ 5,658 19 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report. This report and our consolidated financial statements and notes to consolidated financial statements contain forward-looking statements, which generally include the plans and objectives of management for future operations, including plans and objectives relating to our future economic performance and our current beliefs regarding revenues we might generate and profits we might earn if we are successful in implementing our business and growth strategies. The forward-looking statements and associated risks may include, relate to or be qualified by other important factors, including: ● fluctuations in the market prices of our products; ● fluctuations in the costs of key production input commodities such as corn and natural gas; ● the projected growth or contraction in the markets in which we operate; ● our strategies for expanding, maintaining or contracting our presence in these markets; ● anticipated trends in our financial condition and results of operations; and ● our ability to distinguish ourselves from our current and future competitors. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this report, or in the case of a document incorporated by reference, as of the date of that document. We do not undertake to update, revise or correct any forward-looking statements, except as required by law. Any of the factors described immediately above, or referenced from time to time in our filings with the Securities and Exchange Commission or in the “Risk Factors” section below could cause our financial results, including our net income or loss or growth in net income or loss to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially. Overview We are a leading United States producer and marketer of specialty alcohols and essential ingredients. We operate seven strategically located production distilleries. Three of our distilleries are located in the Midwestern state of Illinois and four of our distilleries are located in the Western states of California, Oregon and Idaho. Our distilleries have a combined production capacity of 450 million gallons per year. We market all of the alcohols produced at our distilleries as well as fuel-grade ethanol produced by third parties. In 2019, we marketed nearly 1.0 billion gallons combined of specialty alcohols and fuel-grade ethanol, and nearly 3.0 million tons of essential ingredients on a dry matter basis. Our business consists of two operating segments: a production segment and a marketing segment. Our mission is to be a leading United States producer and marketer of specialty alcohols and essential ingredients. We intend to accomplish this goal in part by investing in our specialized and higher value production and distribution infrastructure, expanding production in high demand essential ingredients, expanding and extending the sale of our products into new regional and international markets, building efficiencies and economies of scale and by capturing a greater portion of the value stream. 20 Production Segment We produce specialty alcohols and essential ingredients, focusing on four key markets: Health, Home & Beauty; Food & Beverage; Essential Ingredients; and Renewable Fuels . Products for the Health, Home & Beauty market include specialty alcohols used in mouthwash, cosmetics, pharmaceuticals, hand sanitizers, disinfectants and cleaners. Products for the Food & Beverage markets include grain neutral spirits used in alcoholic beverages and vinegar as well as corn germ used for corn oils. Products for Essential Ingredients markets include yeast, corn gluten and distillers grains used in commercial animal feed and pet foods. Renewable Fuels includes fuel-grade ethanol and distillers corn oil used as a feedstock for renewable diesel fuel. We produce these products at our distilleries described below. Our distilleries located in the Midwest are in the heart of the Corn Belt, benefit from low-cost and abundant feedstock and enjoy logistical advantages that enable us to provide our products to both domestic and international markets via truck, rail or barge. Our distilleries located on the West Coast are near their respective fuel and feed customers, offering significant timing, transportation cost and logistical advantages. We are currently operating at approximately 51% of production capacity. As market conditions change, we may increase, decrease or idle production at one or more operating distilleries or resume operations at any idled distillery. Distillery Name Location Annual Production Capacity (est. gallons) Operating Status Magic Valley Burley, ID 60,000,000 Idled Columbia Boardman, OR 40,000,000 Operating Stockton Stockton, CA 60,000,000 Idled Madera Madera, CA 40,000,000 Idled Pekin Wet Pekin, IL 100,000,000 Operating Pekin Dry Pekin, IL 60,000,000 Idled* Pekin ICP Pekin, IL 90,000,000 Operating * We anticipate restarting our Pekin dry mill, which was idled due to temporary lock repairs and resultant river closures, during the fourth quarter of 2020. Marketing Segment We market all of the alcohols and essential ingredients we produce at our distilleries. We also market fuel-grade ethanol produced by third parties. We have extensive and long-standing customer relationships, both domestic and international, for our alcohols and essential ingredients. These customers include producers and distributors of ingredients for cosmetics, sanitizers and related products, distilled spirits producers, food products manufacturers, producers of personal health/consumer health and personal care hygiene products, and global trading firms. Our fuel-grade ethanol customers are located throughout the Western and Midwestern United States and consist of integrated oil companies and gasoline marketers who blend fuel-grade ethanol into gasoline. Our customers depend on us to provide a reliable supply of fuel-grade ethanol and manage the logistics and timing of delivery with very little effort on their part. Our customers collectively require fuel-grade ethanol volumes in excess of the supplies we produce at our production distilleries. We secure additional fuel-grade ethanol supplies from third-party fuel-grade ethanol plants in California and other third-party suppliers in the Midwest where a majority of fuel-grade ethanol producers are located. We arrange for transportation, storage and delivery of fuel-grade ethanol purchased by our customers through our agreements with third-party service providers in the Western United States as well as in the Midwest from a variety of sources. 21 We market our essential ingredient feed products to dairies and feedlots, in many cases located near our distilleries. These customers use our feed products for livestock as a substitute for corn and other sources of starch and protein. We sell our corn oil to poultry and biodiesel customers. We do not market essential ingredients from other producers. See “Note 3 – Segments” to our Notes to Consolidated Financial Statements included elsewhere in this report for financial information about our business segments. Current Initiatives and Outlook In the third quarter, we continued to experience an excellent margin environment for our specialty alcohols and essential ingredients. In addition, margins for our fuel-grade ethanol improved, and ethanol spot prices have now largely recovered to pre-pandemic levels. Our positive results for the quarter were mitigated, however, by significant logistical constraints due to closure of the Illinois River for lock repairs. Although we expected this closure, it nevertheless required greater use of less cost-effective modes of product transport such as via rail and truck, which resulted in higher costs. The Illinois River lock repairs are now complete – approximately thirty days past the completion date initially anticipated – and we do not expect similar logistical constraints going forward. We have strategically realigned our business to focus on specialty alcohols and essential ingredients in the three key markets of Health, Home & Beauty , Food & Beverage and Essential Ingredients , in addition to our continued focus on renewable fuel. These three markets have experienced stable growth and represent strong demand for our specialty alcohols and essential ingredients that we sell to blue chip customers and well-known household brands. In the first nine months of 2020, we generated approximately 45% of our net sales from specialty alcohols as compared to only 15% for all of 2019, excluding sales of third-party fuel-grade ethanol. Our focus on specialty alcohols has also reduced our exposure to fuel-grade ethanol markets that have experienced inventory over-supply challenges and demand destruction. Robust demand for specialty alcohols used in sanitizers and disinfectants as a result of the coronavirus pandemic has positively impacted our results thus far in 2020. As demand vastly exceeded available supplies in the first months of the pandemic, spot prices for these specialty alcohols significantly exceeded prices for more premium products. While this market remains highly dynamic, spot demand has declined and spot prices have fallen from the peaks witnessed in the second quarter. Specialty alcohol premiums over fuel-grade ethanol still remain greater than historical averages, contributing to our optimistic outlook for 2021 and beyond. In fact, the majority of our specialty alcohol production for 2021 is already contracted for at fixed prices and for terms of up to one year or more. Our optimistic outlook is also supported by two key market drivers. First, we expect an increase in the use of alcohol-based sanitizers and disinfectants. Demand has increased for specialty alcohols used in sanitizers and disinfectants such as GermX and Lysol for use in hospitals, restaurants, offices and schools. We believe that as the pandemic abates and the population begins to return to typical social and work environs, demand for sanitizers and disinfectants will remain strong as individuals use these products to protect themselves and businesses use these products to protect their customers and employees. Second, we expect continued growth in distilled spirits consumption. Demand for distilled spirits has increased every year for the past decade, and we are working to add 30 million gallons of grain neutral spirits production capacity in the fourth quarter to meet this rising demand. Once completed, we will have increased our annual production capacity of specialty alcohols to 140 million gallons, the majority of which will meet or exceed United States Pharmacopeia (USP) specifications, representing an increase of 65% in annual capacity compared to 85 million gallons in 2019. 22 We are working to broaden our addressable customers and markets by obtaining additional certifications. In October, we obtained our ISO9001 certification, the world’s most widely recognized quality management system certification. We are also pursuing two additional certifications, specifically, ICH Q7, which sets forth good manufacturing practices for active pharmaceutical ingredients, and EXCiPACT, which sets standards for excipient safety and quality. We expect final audits for these additional certifications by the end of 2020. We continue to evaluate many attractive investment opportunities in our asset portfolio. These opportunities are now available given our performance and strengthened balance sheet. For example, we are expanding annual production capacity of our yeast facility by 15%. Our yeast product is a high-value essential ingredient and we anticipate the full return of our investment of $5.5 million in less than two years. We expect to complete this capacity expansion by the third quarter of 2021. We also continue to pursue our strategic realignment plans to sell or repurpose our Western distilleries. We recently announced an agreement to sell our grain handling assets at our Magic Valley distillery in Burley, Idaho, comprising 134 acres of land, the rail loop, and related grain handling assets, for $10.0 million. The sale is expected to close by the end of November and we intend to use the sale proceeds to repay term debt. We will retain our alcohol production distillery, terminal and 25 acres of remaining land in Burley, Idaho. We remain focused on our transformation to a stable, higher-margin business. We have already successfully transitioned production to approximately 50% specialty alcohols and we are focusing on established markets that will continue to see long-term demand. Our initiatives around quality assurance and certifications are directed at expanding our addressable customers and markets. Our financial performance and balance sheet have greatly improved year over year, enabling us to pursue investment opportunities in our asset portfolio. Overall, we are encouraged that we will be able to deliver greater and more consistent profitability for our shareholders. Critical Accounting Policies The preparation of our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, requires us to make judgments and estimates that may have a significant impact upon the portrayal of our financial condition and results of operations. We believe that of our significant accounting policies, the following require estimates and assumptions that require complex, subjective judgments by management that can materially impact the portrayal of our financial condition and results of operations: revenue recognition; impairment of long-lived assets and held-for-sale classification; valuation of allowance for deferred taxes and derivative instruments. These significant accounting principles are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2019. 23 Results of Operations The following selected financial information should be read in conjunction with our consolidated financial statements and notes to our consolidated financial statements included elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report. Certain performance metrics that we believe are important indicators of our results of operations include: Three Months Ended September 30, Percentage Nine Months Ended September 30, Percentage 2020 2019 Variance 2020 2019 Variance Production gallons sold (in millions) 43.5 130.1 (66.6 )% 223.0 365.6 (39.0 )% Third party gallons sold (in millions) 76.7 80.2 (4.4 )% 212.9 258.3 (17.6 )% Total gallons sold (in millions) 120.2 210.3 (42.8 )% 435.9 623.9 (30.1 )% Total gallons produced (in millions) 45.2 124.2 (63.6 )% 209.1 368.0 (43.2 )% Production capacity utilization 40 % 82 % (51.2 )% 54 % 81 % (33.3 )% Average sales price per gallon $ 1.71 $ 1.61 6.2 % $ 1.60 $ 1.59 0.6 % Corn cost per bushel – CBOT equivalent $ 3.29 $ 3.85 (14.5 )% $ 3.49 $ 3.80 (8.2 )% Average basis (1) $ 0.22 $ 0.47 (53.2 )% $ 0.29 $ 0.42 (31.0 )% Delivered cost of corn $ 3.51 $ 4.32 (18.8 )% $ 3.78 $ 4.22 (10.4 )% Total co-product tons sold (in thousands) 255.5 720.4 (64.5 )% 1,177.5 2,096.0 (43.8 )% Co-product revenues as % of delivered cost of corn (2) 50.2 % 30.9 % 62.5 % 44.6 % 35.1 % 27.1 % Average CBOT fuel-grade ethanol price per gallon $ 1.27 $ 1.41 (9.9 )% $ 1.20 $ 1.38 (13.0 )% Average CBOT corn price per bushel $ 3.40 $ 3.89 (12.6 )% $ 3.45 $ 3.84 (10.2 )% (1) Corn basis represents the difference between the immediate cash price of delivered corn and the future price of corn for Chicago delivery. (2) Co-product revenues as a percentage of delivered cost of corn shows our yield based on sales of co-products, including WDG and corn oil, generated from alcohols we produced. Net Sales, Cost of Goods Sold and Gross Profit (Loss) The following table presents our net sales, cost of goods sold and gross profit (loss) in dollars and gross profit (loss) as a percentage of net sales (in thousands, except percentages): Three Months Ended September 30, Variance in Nine Months Ended September 30, Variance in 2020 2019 Dollars Percent 2020 2019 Dollars Percent Net sales $ 204,727 $ 365,160 $ (160,433 ) (43.9 )% $ 728,205 $ 1,067,264 $ (339,059 ) (31.8 )% Cost of goods sold 183,797 379,976 (196,179 ) (51.6 )% 688,983 1,080,398 (391,415 ) (36.2 )% Gross profit (loss) $ 20,930 $ (14,816 ) $ 35,746 NM $ 39,222 $ (13,134 ) $ 52,356 NM Percentage of net sales 10.2 % (4.1 )% 5.4 % (1.2 )% Net Sales The decline in our net sales for the three and nine months ended September 30, 2020 as compared to the same periods in 2019 was primarily due to a significant decline in our fuel-grade ethanol production gallons sold. We sold fewer fuel-grade ethanol production gallons and co-products for the three and nine months ended September 30, 2020 as compared to the same periods in 2019. These declines are primarily due to significantly reduced transportation fuel demand from the effects of stay-at-home orders as a result of the coronavirus pandemic. As a result, we reduced our production capacity utilization to 40% on a consolidated basis in the third quarter. Demand for our specialty alcohols, however, increased significantly in the sanitizer and disinfectant markets. These markets have historically, and even more so in the second and third quarters, provided a premium price over fuel-grade ethanol markets. Our third-party gallons sold declined slightly in the quarter, but significantly less than the decline in overall fuel-grade ethanol demand, as most of our fuel-grade ethanol commitments for the quarter were met through our third party marketing business. 24 Three Months Ended September 30, 2020 and 2019 On a consolidated basis, our average sales price per gallon increased 6.2% to $1.71 for the three months ended September 30, 2020 compared to $1.61 for the same period in 2019. The average Chicago Board of Trade, or CBOT, fuel-grade ethanol price per gallon, decreased 9.9% to $1.27 for the three months ended September 30, 2020 compared to $1.41 for the same period in 2019. The increase in our average sales price per gallon, despite lower fuel-grade ethanol prices, is due to a change in our mix of sales, with a higher percentage of gallons sold of specialty alcohols as compared to fuel-grade ethanol. Production Segment Net sales of alcohols from our production segment declined by $123.1 million, or 58%, to $89.8 million for the three months ended September 30, 2020 as compared to $212.9 million for the same period in 2019. Our total volume of production gallons sold declined by 86.6 million gallons, or 67%, to 43.5 million gallons for the three months ended September 30, 2020 as compared to 130.1 million gallons for the same period in 2019. Our production segment’s average sales price per gallon increased 25% to $2.02 for the three months ended September 30, 2020 compared to our production segment’s average sales price per gallon of $1.62 for the same period in 2019. At our production segment’s average sales price per gallon of $2.02 for the three months ended September 30, 2020, we generated $174.5 million less in net sales from our production segment from the 86.6 million fewer production gallons sold in the three months ended September 30, 2020 as compared to the same period in 2019. This decline was partially offset by the increase of $0.40 in our production segment’s average sales price per gallon for the three months ended September 30, 2020 as compared to the same period in 2019, which increased our net sales of alcohols from our production segment by $51.4 million. Net sales of co-products declined $35.1 million, or 53%, to $30.6 million for the three months ended September 30, 2020 as compared to $65.7 million for the same period in 2019. Our total volume of co-products sold declined by 464.9 thousand tons, or 65%, to 255.5 thousand tons for three months ended September 30, 2020 from 720.4 thousand tons for the same period in 2019, and our average sales price per ton increased to $119.57 for the three months ended September 30, 2020 from $91.19 for the same period in 2019, due to a higher mix of more valuable essential ingredients sold from our wet mill. At our average sales price per ton of $119.57 for the three months ended September 30, 2020, we realized $55.5 million less in net sales from the 464.9 thousand ton decline in co-products sold in the three months ended September 30, 2020 as compared to the same period in 2019. The increase in our average sales price per ton of $28.38, or 31%, for the three months ended September 30, 2020 as compared to the same period in 2019 increased our net sales of co-products by $20.4 million. Marketing Segment Net sales of alcohols from our marketing segment, excluding intersegment sales, declined by $2.3 million, or 3%, to $84.3 million for the three months ended September 30, 2020 as compared to $86.6 million for the same period in 2019. Our total volume of gallons sold by our marketing segment declined by 90.1 million gallons, or 43%, to 120.2 million gallons for the three months ended September 30, 2020 as compared to 210.3 million gallons for the same period in 2019. The 90.1 million decline in gallons sold by our marketing segment is comprised of 86.6 million fewer production gallons sold and 3.5 million fewer third party gallons sold. The 3.5 million gallon decline in third party gallons sold is comprised of 0.3 million fewer gallons sold on a gross basis and 3.2 million fewer gallons sold on a net basis. 25 Our marketing segment’s average sales price per gallon declined 2% to $1.65 for the three months ended September 30, 2020 compared to $1.61 for the same period in 2019. At our marketing segment’s average sales price per gallon of $1.65 for the three months ended September 30, 2020, we generated $5.7 million less in net sales from our marketing segment from the 3.5 million fewer gallons in third party fuel-grade ethanol sold in the three months ended September 30, 2020 as compared to the same period in 2019. The increase of $0.04 in our marketing segment’s average sales price per gallon for the three months ended September 30, 2020 as compared to the same period in 2019 increased our net sales from third party fuel-grade ethanol sold by our marketing segment by $3.4 million. Nine Months Ended September 30, 2020 and 2019 On a consolidated basis, our average sales price per gallon increased 0.6% to $1.60 for the nine months ended September 30, 2020 compared to $1.59 for the same period in 2019. The average CBOT fuel-grade ethanol price per gallon declined 13.0% to $1.20 for the nine months ended September 30, 2020 compared to $1.38 for the same period in 2019. The increase in our average sales price per gallon, despite lower fuel-grade ethanol production, is due to a change in our mix of sales, with a higher percentage of gallons sold of specialty alcohols as compared to fuel-grade ethanol. Production Segment Net sales of alcohols from our production segment declined by $206.9 million, or 35%, to $379.8 million for the nine months ended September 30, 2020 as compared to $586.7 million for the same period in 2019. Our total volume of production gallons sold declined by 142.6 million gallons, or 39%, to 223.0 million gallons for the nine months ended September 30, 2020 as compared to 365.6 million gallons for the same period in 2019. Our production segment’s average sales price per gallon increased 6% to $1.68 for the nine months ended September 30, 2020 compared to $1.59 for the same period in 2019. At our production segment’s average sales price per gallon of $1.68 for the nine months ended September 30, 2020, we generated $239.4 million less in net sales from our production segment from the 142.6 million fewer production gallons sold in the nine months ended September 30, 2020 as compared to the same period in 2019. The increase of $0.09 in our production segment’s average sales price per gallon for the nine months ended September 30, 2020 as compared to the same period in 2019 increased our net sales of alcohols from our production segment by $32.5 million. Net sales of co-products declined $64.5 million, or 32%, to $134.7 million for the nine months ended September 30, 2020 as compared to $199.2 million for the same period in 2019. Our total volume of co-products sold decreased by 918.5 thousand tons, or 44%, to 1,177.5 thousand tons for nine months ended September 30, 2020 from 2,096.0 thousand tons for the same period in 2019. Our average sales price per ton increased to $114.38 for the nine months ended September 30, 2020 from $95.03 for the same period in 2019 due to a higher mix of more valuable essential ingredients. At our average sales price per ton of $114.38 for the nine months ended September 30, 2020, we generated $105.0 million less in net sales from the 918.5 thousand tons of fewer co-products sold in the nine months ended September 30, 2020 as compared to the same period in 2019. The increase of $19.35, or 20%, in our average sales price per ton for the nine months ended September 30, 2020 as compared to the same period in 2019 increased net sales of co-products by $40.5 million. Marketing Segment Net sales of alcohols from our marketing segment, excluding intersegment sales, declined by $67.7 million, or 24%, to $213.7 million for the nine months ended September 30, 2020 as compared to $281.4 million for the same period in 2019. Our total volume of gallons sold by our marketing segment declined by 188.0 million gallons, or 30%, to 435.9 million gallons for the nine months ended September 30, 2020 as compared to 623.9 million gallons for the same period in 2019. The 188.0 million decline in gallons sold by our marketing segment is comprised of 142.6 million fewer production gallons sold and 45.4 million fewer third party gallons sold. The 45.4 million decline in third party gallons sold is comprised of 32.2 million fewer gallons sold on a gross basis and 13.2 million fewer gallons sold on a net basis. 26 Our marketing segment’s average sales price per gallon increased less than 1% to $1.53 for the nine months ended September 30, 2020 as compared to $1.52 for the same period in 2019. At our marketing segment’s average sales price per gallon of $1.53 for the nine months ended September 30, 2020, we generated $69.3 million less in net sales from our marketing segment from the 45.4 million fewer gallons in third party fuel-grade ethanol sold in the nine months ended September 30, 2020 as compared to the same period in 2019. The increase of $0.01 in our marketing segment’s average sales price per gallon for the nine months ended September 30, 2020 as compared to the same period in 2019 increased our net sales from third party fuel-grade ethanol sold by our marketing segment by $1.6 million. Cost of Goods Sold and Gross Profit (Loss) Our consolidated gross profit improved to $20.9 million, representing a gross profit margin of 10.2%, for the three months ended September 30, 2020 compared to a gross loss of $14.8 million, representing a gross profit margin of negative 4.1% for the same period in 2019. Our consolidated gross profit improved to $39.2 million, representing a gross profit margin of 5.4%, for the nine months ended September 30, 2020 compared to a gross loss of $13.1 million, representing a gross profit margin of negative 1.2%, for the same period in 2019. Our gross profit and gross profit margin improved primarily due to significantly higher margins from sales of our specialty alcohols. Three Months Ended September 30, 2020 and 2019 Production Segment Our production segment’s gross profit from external sales improved by $36.3 million to $20.4 million for the three months ended September 30, 2020 as compared to a loss of $15.9 million for the same period in 2019. Of this improvement, $77.0 million is attributable to our production segment’s higher production volumes and margins of specialty alcohols for the three months ended September 30, 2020 as compared to the same period in 2019, partially offset by $40.7 million in lower gross profit attributable to lower production volumes and margins of fuel-grade ethanol for the three months ended September 30, 2020 as compared to the same period in 2019. Marketing Segment Our marketing segment’s gross profit declined by $0.6 million to $0.5 million for the three months ended September 30, 2020 as compared to $1.1 million for the same period in 2019. This decline primarily relates to our marketing segment’s lower margins per gallon for fuel-grade ethanol for the three months ended September 30, 2020 as compared to the same period in 2019. Nine Months Ended September 30, 2020 and 2019 Production Segment Our production segment’s gross profit from external sales improved by $56.4 million to $32.8 million for the nine months ended September 30, 2020 as compared to a gross loss of $23.6 million for the same period in 2019. Of this improvement, $77.4 million is attributable to our production segment’s higher production volumes and margins of specialty alcohols for the nine months ended September 30, 2020 as compared to the same period in 2019, partially offset by $21.0 million in lower gross profit attributable to production volumes and margins of fuel-grade ethanol for the nine months ended September 30, 2020 as compared to the same period in 2019. 27 Marketing Segment Our marketing segment’s gross profit declined by $4.1 million to $6.4 million for the nine months ended September 30, 2020 as compared to $10.5 million for the same period in 2019. Of this decline, $2.7 million is attributable to our marketing segment’s lower margins per gallon for fuel-grade ethanol and $1.4 million is attributable to lower third-party marketing volumes for the nine months ended September 30, 2020 as compared to the same period in 2019. Selling, General and Administrative Expenses The following table presents our selling, general and administrative, or SG&A, expenses in dollars and as a percentage of net sales (in thousands, except percentages): Three Months Ended September 30, Variance in Nine Months Ended September 30, Variance in 2020 2019 Dollars Percent 2020 2019 Dollars Percent Selling, general and administrative expenses $ 6,404 $ 8,687 $ (2,283 ) (26.3 )% $ 25,245 $ 23,630 $ 1,615 6.8 % Percentage of net sales 3.1 % 2.4 % 3.5 % 2.2 % Our SG&A expenses decreased for the three months ended September 30, 2020 as compared to the same period in 2019. The decrease in SG&A expenses is primarily due to reduced legal and consulting expenses. Our SG&A expenses increased for the nine months ended September 30, 2020 as compared to the same period in 2019. The increase in SG&A expenses is primarily due to increases in professional fees associated with the sale of our interest in Pacific Aurora, LLC, or Pacific Aurora, and our other strategic initiatives. Net Income (Loss) Available to Common Stockholders The following table presents our net income (loss) available to common stockholders in dollars and as a percentage of net sales (in thousands, except percentages): Three Months Ended September 30, Variance in Nine Months Ended September 30, Variance in 2020 2019 Dollars Percent 2020 2019 Dollars Percent Net income (loss) available to common stockholders $ 14,896 $ (27,645 ) $ 42,541 NM $ 4,130 $ (48,808 ) $ 52,938 NM Percentage of net sales 7.3 % (7.6 )% 0.6 % (4.6 )% The improvement in net income (loss) available to common stockholders is primarily due to significantly higher margins from our specialty alcohol sales for the three and nine months ended September 30, 2020 as compared to the same periods in 2019 and a gain on settlement of litigation of $11.8 million, partially offset by higher fair value adjustments resulting from higher market prices of our common stock. 28 Liquidity and Capital Resources During the nine months ended September 30, 2020, we funded our operations primarily from cash generated by our operations and cash on hand. These funds were used to make payments on our term debt and under our other credit facilities, and for capital expenditures and to make lease payments. Our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. During the nine months ended September 30, 2020, we continued to experience significant adverse conditions in the fuel-grade ethanol market as demand and pricing were at record lows due to reduced domestic transportation and resulting lower gasoline demand. In response, we reduced production at our distilleries by more than 50% in an effort to conserve capital as a result of a substantial reduction in demand due to stay-at-home orders issued in response to the coronavirus pandemic. We have, however, not only continued producing and selling specialty alcohols, but also converted a portion of our fuel-grade ethanol production to specialty alcohol production to respond to increased demand from the sanitizer and disinfectant markets. These sales of specialty alcohols were at a mix of fixed and spot pricing, both of which resulted in positive net income and cash flows from operations during the second and third quarters. We expect robust demand for our specialty alcohols to continue for at least the next twelve months as we continue to enter fixed price contracts and hedge corn input costs, locking in profit margins on sales of specialty alcohols. At September 30, 2020, we had $38.7 million in cash and $9.2 million available under our operating line of credit for our marketing subsidiary, Kinergy Marketing LLC, or Kinergy. During the nine months ended September 30, 2020, we generated $75.7 million in cash from our operations and realized $19.9 million in net cash from the sale of our interest in Pacific Aurora. These positive cash flows have allowed us to make net payments totaling $91.6 million on our debt. Further, subsequent to September 30, 2020, we made an additional $25.3 million in payments on our term debt using the proceeds of an equity offering described below. On October 28, 2020, we closed an underwritten public offering of 5,075,000 shares of our common stock at a public offering price of $8.42 per share and 5-year pre-funded warrants to purchase 3,825,493 shares of common stock at a public offering price of $8.42 per pre-funded warrant. In addition, in a concurrent private placement, we also issued to the investor, for a nominal price, warrants to purchase an additional 8,900,493 shares of common stock at an exercise price of $9.757 per share. The warrants will become exercisable after the six-month anniversary of the offering and will expire on the 18-month anniversary of the offering. The aggregate gross proceeds from the offerings of common stock, pre-funded warrants and warrants was approximately $75.0 million. The net offering proceeds to us were approximately $70.0 million after deducting underwriting discounts and commissions and other estimated offering expenses. Our current available capital resources consist of cash on hand and amounts available for borrowing under our credit facilities. We expect that our future available capital resources will consist primarily of any cash generated from our operations, cash balances, any availability under our lines of credit and net cash proceeds from any sale of our production assets. We believe that as of the date of this report, we are in compliance with all debt covenants contained in our credit facilities, except our obligation to obtain lender approval of a comprehensive plan to restructure our assets and liabilities with respect to our Pekin and ICP debt and a dispute over whether a portion of our principal payments originated from an approved source of funds. As noted above, we appointed a chief restructuring officer to facilitate the development of such a plan and we have presented and continue to negotiate the plan with our lenders. As a result, we are not in compliance with our obligations to our lenders, which could result in their acceleration of our debt. Even though we do not believe acceleration is probable, we have classified our related debt as current on our consolidated balance sheets. 29 In addition to our projected cash flows from operations, we recently raised net proceeds of $70.0 million in offerings of common stock and warrants, and have recently announced the sale of certain assets for $10.0 million, which is expected to close by November 30, 2020. We continue to evaluate our Western fuel-grade ethanol distilleries for either repurposing or sale, which may provide additional proceeds to repay debt. Given these factors, we believe we have alleviated substantial doubt about our ability to continue as a going concern and we will have sufficient liquidity to meet our anticipated working capital, debt service and other liquidity needs for the next twelve months from the date of this report. Quantitative Quarter-End Liquidity Status We believe that the following amounts provide insight into our liquidity and capital resources. The following selected financial information should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report, and the other sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report (dollars in thousands): September 30, 2020 December 31, 2019 Change Cash and cash equivalents $ 38,730 $ 18,997 103.9 % Current assets $ 137,715 $ 232,064 (40.7 )% Property and equipment, net $ 306,251 $ 332,526 (7.9 )% Current liabilities $ 115,105 $ 160,398 (28.2 )% Long-term debt, net of current portion $ 87,989 $ 180,795 (51.3 )% Working capital $ 22,610 $ 71,666 (68.5 )% Working capital ratio 1.20 1.45 (17.2 )% Restricted Net Assets At September 30, 2020, we had approximately $291.3 million of net assets at our subsidiaries that were not available to be transferred to Pacific Ethanol, Inc. in the form of dividends, loans or advances due to restrictions contained in the credit facilities of our subsidiaries. Changes in Working Capital and Cash Flows Our working capital declined to $22.6 million at September 30, 2020 from $71.7 million at December 31, 2019 as a result of a decrease of $94.3 million in current assets, partially offset by a decrease of $45.3 million in current liabilities. Current assets decreased primarily due to a decrease in assets held-for-sale associated with the completed sale of our interest in Pacific Aurora, and decreases in accounts receivable and inventories, due to the timing of collections, and lower fuel-grade ethanol production and sales. Our current liabilities decreased primarily due to a decrease in liabilities held-for-sale associated with the completed sale of our interest in Pacific Aurora, partially offset by an increase in the current portion of our long-term debt primarily due to our failure to obtain lender approval of a comprehensive plan to restructure our assets and liabilities. Our cash and cash equivalents increased by $19.7 million at September 30, 2020 as compared to December 31, 2019 primarily due to $75.7 million in cash provided by our operating activities and $15.0 million in cash provided by our investing activities, partially offset by $71.0 million in cash used in our financing activities. 30 Cash provided by our Operating Activities Cash provided by our operating activities increased by $102.9 million for the nine months ended September 30, 2020, as compared to the same period in 2019. We generated $75.7 million in cash from our operating activities during the nine months ended September 30, 2020. Specific factors that contributed to the increase in cash provided by our operating activities include: ● an increase of $54.4 million in our consolidated net income due to higher margins from our sales of specialty alcohols; ● a decrease of $30.2 million related to accounts receivable primarily due to the timing of collections and reduced volumes; ● a decrease of $27.6 million related to inventories as we reduced fuel-grade ethanol production during the period; and ● an increase of $9.4 million related to liabilities held-for-sale in connection with the sale of our interests in Pacific Aurora. These amounts were partially offset by: ● a decrease of $18.8 million in accounts payable and accrued expenses, primarily due to increased payments of past due amounts; ● a decrease of $9.1 million in depreciation expense resulting from the sale of Pacific Aurora; and ● a decrease of $4.5 million related to other assets due to the timing of payments. Cash provided by our Investing Activities Cash provided by our investing activities was $15.0 million for the nine months ended September 30, 2020, which included $19.9 million in net proceeds from the sale of Pacific Aurora, partially offset by $4.9 million of additions to property and equipment. Cash used in our Financing Activities Cash used in our financing activities was $71.0 million for the nine months ended September 30, 2020. The increase in cash used in our financing activities was primarily due to $39.5 million in net payments under Kinergy’s line of credit and $52.1 million in principal payments on our other borrowings, partially offset by $9.9 million in proceeds under our CARES Act loans, $5.5 million in proceeds from warrant exercises and $5.3 million from the issuance of common stock. Kinergy Operating Line of Credit Kinergy maintains an operating line of credit for an aggregate amount of up to $100.0 million. The credit facility matures on August 2, 2022. Interest accrues under the credit facility at a rate equal to (i) the three-month London Interbank Offered Rate (“LIBOR”), plus (ii) a specified applicable margin ranging from 1.50% to 2.00%. The credit facility’s monthly unused line fee is 0.25% to 0.375% of the amount by which the maximum credit under the facility exceeds the average daily principal balance during the immediately preceding month. Payments that may be made by Kinergy to Pacific Ethanol as reimbursement for management and other services provided by Pacific Ethanol to Kinergy are limited under the terms of the credit facility to $1.5 million per fiscal quarter. The credit facility also includes the accounts receivable of Pacific Ag. Products, LLC, or 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 $0.5 million per fiscal quarter. PAP, one of our indirect wholly-owned subsidiaries, markets our co-products and also provides raw material procurement services to our subsidiaries. 31 For all monthly periods in which excess borrowing availability falls below a specified level, Kinergy and PAP must collectively maintain a fixed-charge coverage ratio (calculated as a twelve-month rolling earnings before interest, taxes, depreciation and amortization (EBITDA) divided by the sum of interest expense, capital expenditures, principal payments of indebtedness, indebtedness from capital leases and taxes paid during such twelve-month rolling period) of at least 2.0 and are prohibited from incurring certain additional indebtedness (other than specific intercompany indebtedness). Kinergy’s and PAP’s obligations under the credit facility are secured by a first-priority security interest in all of their assets in favor of the lender. We believe Kinergy and PAP are in compliance with this covenant. The following table summarizes Kinergy’s financial covenants and actual results for the periods presented: Three Months Ended September 30, Years Ended December 31, 2020 2019 2019 2018 Fixed-Charge Coverage Ratio Requirement 2.00 2.00 2.00 2.00 Actual 5.66 5.62 5.71 19.06 Excess 3.66 3.62 3.71 17.06 Pacific Ethanol has guaranteed all of Kinergy’s obligations under the credit facility. As of September 30, 2020, Kinergy had an outstanding balance of $41.4 million with additional borrowing availability under the credit facility of $9.2 million. Pekin Credit Facilities On December 15, 2016, Pacific Ethanol Pekin, LLC, or PE Pekin, entered into term and revolving credit facilities. PE Pekin borrowed $64.0 million under a term loan facility that matures on August 20, 2021 and $32.0 million under a revolving credit facility that matures on February 1, 2022. The PE Pekin credit facilities are secured by a first-priority security interest in all of PE Pekin’s assets. Interest initially accrued under the PE Pekin credit facilities at an annual rate equal to the 30-day LIBOR plus 3.75%, payable monthly. PE Pekin is required to make quarterly principal payments in the amount of $3.5 million on the term loan beginning on May 20, 2017, with the remaining principal balance payable at maturity on August 20, 2021. PE Pekin is required to pay monthly in arrears a fee on any unused portion of the revolving credit facility at a rate of 0.75% per annum. Prepayment of these facilities is subject to a prepayment penalty. Under the initial terms of the credit facilities, PE Pekin was required to maintain not less than $20.0 million in working capital and an annual debt service coverage ratio of not less than 1.25 to 1.0. On August 7, 2017, PE Pekin amended its term and revolving credit facilities by agreeing to increase the interest rate under the facilities by 25 basis points to an annual rate equal to the 30-day LIBOR plus 4.00%. PE Pekin and its lender also agreed that PE Pekin is required to maintain working capital of not less than $17.5 million from August 31, 2017 through December 31, 2017 and working capital of not less than $20.0 million from January 1, 2018 and continuing at all times thereafter. In addition, the required debt service coverage ratio was reduced to 0.15 to 1.00 for the fiscal year ended December 31, 2017. PE Pekin’s actual debt service coverage ratio was 0.17 to 1.00 for the fiscal year ended December 31, 2017, 0.02 in excess of the required 0.15 to 1.00. For the month ended January 31, 2018, PE Pekin was not in compliance with its working capital requirement due to larger than anticipated repair and maintenance expenses to replace faulty equipment. PE Pekin received a waiver from its lender for this noncompliance. Further, the lender decreased PE Pekin’s working capital covenant requirement to $13.0 million for the month ended February 28, 2018, excluding from the calculation a $3.5 million principal payment previously due in May 2018. 32 On March 30, 2018, PE Pekin further amended its term loan facility by reducing the amount of working capital it is required to maintain to not less than $13.0 million from March 31, 2018 through November 30, 2018 and not less than $16.0 million from December 1, 2018 and continuing at all times thereafter. In addition, a principal payment in the amount of $3.5 million due for May 2018 was deferred until the maturity date of the term loan. At December 31, 2018 and January 31, 2019, PE Pekin experienced certain covenant violations under its term and revolving credit facilities. In February 2019, PE Pekin reached an agreement with its lender to forbear until March 11, 2019 and to defer a $3.5 million principal payment until that date. On March 21, 2019, PE Pekin amended its term and revolving credit facilities by agreeing to increase the interest rate under the facilities by 125 basis points to an annual rate equal to the 30-day LIBOR plus 5.00%. PE Pekin and its lender also agreed that it is required to maintain working capital of not less than $15.0 million from March 21, 2019 through July 15, 2019 and working capital of not less than $30.0 million from July 15, 2019 and continuing at all times thereafter. On July 15, 2019, PE Pekin and its lender agreed to a further amendment extending the aforementioned July 15, 2019 dates to November 15, 2019. On August 6, 2019, PE Pekin paid its $3.5 million principal payment scheduled for August 20, 2019. Under these amendments, the lender agreed to temporarily waive financial covenant violations, working capital maintenance violations and intercompany accounts receivable collections violations that occurred with respect to the credit agreement. The lenders also agreed to defer all scheduled principal payments, including further deferral of principal payments in the amount of $3.5 million each due on February 20, 2019 and May 20, 2019. The waivers and principal deferral expired on November 15, 2019, at which time the waivers were to become permanent if PE Pekin’s parent, Pacific Ethanol Central, LLC, or PE Central, made a contribution to PE Pekin in an amount equal to $30.0 million, minus the then-existing amount of PE Pekin’s working capital, plus the amount of any accounts receivable owed by PE Central to PE Pekin, plus $12.0 million, or the Parent Contribution Amount. In addition, if the Parent Contribution Amount was timely received, the lender agreed to waive PE Pekin’s debt service coverage ratio financial covenant for the year ended December 31, 2019. If the Parent Contribution Amount was not timely made, then the temporary waivers would automatically expire. PE Pekin was also required to pay by November 15, 2019 the aggregate amount of $10.5 million representing all deferred and unpaid scheduled principal payments and all additional scheduled principal payments for the remainder of 2019. On November 15, 2019, PE Pekin amended its term and revolving credit facilities by agreeing to extend the temporary waiver of violations of financial and other covenants relating to working capital maintenance, intercompany accounts receivable collections, financial projections, cash flow forecasts, and sales reports. The lender also agreed to extend the deferral of all scheduled principal payments payable on February 20, 2019, May 20, 2019 and November 15, 2019 to December 15, 2019. The amendment also made a payment default of $250,000 or more under Kinergy’s credit facility or the senior secured notes, or any acceleration of indebtedness, or any termination of any commitment to lend or termination of any forbearance or other accommodation, an event of default. 33 The waivers and principal deferral expired on December 15, 2019. On December 15, 2019, the waivers were to become permanent if PE Central made a contribution to PE Pekin in an amount equal to the Parent Contribution Amount. In addition, if the Parent Contribution Amount was timely received, the lender agreed to waive PE Pekin’s debt service coverage ratio financial covenant for the year ended December 31, 2019. If the Parent Contribution Amount was not timely made, then the temporary waivers would automatically expire. On December 16, 2019, PE Pekin amended its term and revolving credit facilities by agreeing to extend the deferral of all scheduled principal payments payable on February 20, 2019, May 20, 2019 and November 20, 2019 to December 20, 2019. On December 20, 2019, PE Pekin’s lender agreed to temporarily waive working capital covenant violations, debt service coverage ratio covenant violations, reporting covenant violations and certain other covenant violations that occurred under the PE Pekin credit agreement, and replaced those covenants with new EBITDA and production volume covenants. PE Pekin’s lender also agreed to defer all scheduled principal installments payable under the term note on February 20, 2019, May 20, 2019 and November 20, 2019 until August 20, 2021. In addition, PE Pekin was not required to make its prior scheduled quarterly principal payments of $3.5 million until September 30, 2020, at which time $3.5 million will be due, with the same amount due quarterly thereafter until maturity. Under the amendment, PE Pekin, collectively with Illinois Corn Processing, LLC, or ICP, agreed to pay the lenders an aggregate of $40.0 million on or before September 30, 2020 to reduce the outstanding balances of the term loans under the PE Pekin credit agreement and the ICP credit agreement. The $40.0 million is an aggregate amount payable to ICP’s lender and PE Pekin’s lender, and allocated between them. The $40.0 million is to be funded through asset sales, proceeds of any award, judgment or settlement of litigation, or, at our election, from funds contributed to PE Pekin by us. Following receipt by the lenders under the ICP credit agreement and the PE Pekin credit agreement, collectively, of $40.0 million in full, and once any loans corresponding to the particular midwestern asset sold are repaid, additional proceeds from the sale of any of our midwestern distillery assets will generally be allocated 33/34/33% among ICP’s lender and PE Pekin’s lender, collectively, the selling security holders, and us, respectively. Proceeds from the sale of any of our western assets will generally be allocated 33/34/33% among PE Pekin’s lender and ICP’s lender, collectively, the selling security holders, and us, respectively. PE Pekin’s lender also imposed cross-default terms such that, until PE Pekin’s lender and ICP’s lender receive $40.0 million, a default under the ICP credit agreement would constitute a default under the PE Pekin credit agreement. PE Pekin agreed to provide additional collateral security to support its obligations under the PE Pekin credit agreement, including second lien positions in our western distilleries, which will terminate and be released upon PE Pekin’s lender’s receipt of $40.0 million. On December 29, 2019, PE Pekin agreed to amend the secured obligations under its security agreement to include PE Pekin’s unconditional guarantee of the payment of up to an aggregate $40.0 million to satisfy the obligations of ICP to ICP’s lender under the ICP credit agreement. On March 20, 2020, PE Pekin and its lender agreed to defer $1.0 million in aggregate interest payments due March 20, 2020 and April 20, 2020 until May 20, 2020. On that same date, we granted to the lender a security interest in all of our equity interests in our wholly-owned subsidiary, PE Op Co., which indirectly owns our distilleries located on the West Coast. We also entered into intercreditor agreements with our PE Pekin and ICP lenders, and the agent for our senior secured noteholders, to address issues of priority and the allocation of proceeds from asset sales. On April 15, 2020, upon the closing of the sale of our interests in Pacific Aurora, we repaid approximately $11.6 million in principal on our PE Pekin term debt. 34 At the end of the second quarter and during the third quarter of 2020, we repaid an aggregate of approximately $19.4 million in additional principal on our PE Pekin term debt. As of the filing of this report, we believe we are in compliance with all debt covenants under our PE Pekin credit facilities, except our obligation to obtain lender approval of a comprehensive plan to restructure our assets and liabilities and a dispute over whether a portion of our principal payments originated from an approved source of funds. See “Risk Factors”. ICP Credit Facilities On September 15, 2017, ICP entered into term and revolving credit facilities. ICP borrowed $24.0 million under a term loan facility that matures on September 20, 2021 and $18.0 million under a revolving credit facility that matures on September 1, 2022. The ICP credit facilities are secured by a first-priority security interest in all of ICP’s assets. Interest accrues under the ICP credit facilities at an annual rate equal to the 30-day LIBOR plus 3.75%, payable monthly. ICP is required to make quarterly consecutive principal payments in the amount of $1.5 million. ICP is required to pay monthly in arrears a fee on any unused portion of the revolving credit facility at a rate of 0.75% per annum. Prepayment of these facilities is subject to a prepayment penalty. Under the terms of the credit facilities, ICP is required to maintain not less than $8.0 million in working capital and an annual debt service coverage ratio of not less than 1.5 to 1.0, beginning for the year ended December 31, 2018. As of September 30, 2019, ICP had no additional borrowing availability under its revolving credit facility. As of September 30, 2019, ICP did not meet its minimum working capital requirement, however, ICP’s lender subsequently waived the minimum working capital deficiency. On December 20, 2019, ICP amended its term and revolving credit facilities under which ICP’s lender granted waivers for certain ICP covenant defaults and replaced those covenants with new EBITDA and production volume covenants. ICP’s lender also imposed cross-default terms such that, until ICP’s lender and PE Pekin’s lender receive an aggregate of $40.0 million, a default under the PE Pekin credit agreement would constitute a default under the ICP credit agreement. ICP agreed to provide additional collateral security to support its obligations under the ICP credit agreement, including second lien positions in our western distilleries, which will terminate and be released upon ICP’s lender’s receipt of an aggregate of $40.0 million. ICP’s prior scheduled principal payment of $1.5 million, originally due on December 20, 2019, was deferred to the maturity date of September 20, 2021. Scheduled quarterly principal payments of $1.5 million will resume March 20, 2020. Under the amendment, ICP, collectively with PE Pekin, agreed to pay the lenders an aggregate of $40.0 million on or before September 30, 2020 to reduce the outstanding balances of the term loans under the ICP credit agreement and the PE Pekin credit agreement. The $40.0 million is an aggregate amount payable to ICP’s lender and PE Pekin’s lender, and allocated between them. The $40.0 million is to be funded through asset sales, proceeds of any award, judgment or settlement of litigation, or, at our election, from funds contributed to ICP by us. Following receipt by the lenders under the ICP credit agreement and the PE Pekin credit agreement, collectively, of $40.0 million in full, and once any loans corresponding to the particular midwestern asset sold are repaid, any additional proceeds from a sale of our midwestern distillery assets will generally be allocated 33/34/33% among ICP’s lender and PE Pekin’s lender, collectively, the selling security holders, and us, respectively. Proceeds from the sale of any of our western assets will generally be allocated 33/34/33% among PE Pekin’s lender and ICP’s lender, collectively, the selling security holders, and us, respectively. On December 29, 2019, ICP agreed to amend the secured obligations under its security agreement to include ICP’s unconditional guarantee of the payment of up to an aggregate $40.0 million to satisfy the obligations of PE Pekin to PE Pekin’s lender under the PE Pekin credit agreement. 35 On March 20, 2020, ICP and its lender agreed to defer a $1.5 million principal payment due March 20, 2020 and $0.3 million in aggregate interest payments due March 20, 2020 and April 20, 2020 until May 20, 2020. On that same date, we granted to the lender a security interest in all of our equity interests in PE Op Co. We also entered into intercreditor agreements with our PE Pekin and ICP lenders, and the agent for our senior secured noteholders, to address issues of priority and the allocation of proceeds from asset sales. On April 15, 2020, upon the closing of the sale of our interests in Pacific Aurora, we repaid approximately $2.9 million in principal on our ICP term debt. At the end of the second quarter and during the third quarter of 2020, we repaid an aggregate of approximately $9.7 million in additional principal on our ICP revolving debt. As of the filing of this report, we believe we are in compliance with all debt covenants under our ICP credit facilities, except our obligation to obtain lender approval of a comprehensive plan to restructure our assets and liabilities and a dispute over whether a portion of our principal payments originated from an approved source of funds. See “Risk Factors”. Pacific Ethanol, Inc. Notes Payable On December 12, 2016, we entered into a Note Purchase Agreement with five accredited investors. On December 15, 2016, under the terms of the Note Purchase Agreement, we sold $55.0 million in aggregate principal amount of our senior secured notes to the investors in a private offering for aggregate gross proceeds of 97% of the principal amount of the notes sold. On June 26, 2017, we entered into a second Note Purchase Agreement with five accredited investors. On June 30, 2017, under the terms of the second Note Purchase Agreement, we sold an additional $13.9 million in aggregate principal amount of our senior secured notes to the investors in a private offering for aggregate gross proceeds of 97% of the principal amount of the notes sold, for a total of $68.9 million in aggregate principal amount of senior secured notes. The notes had an original maturity date of December 15, 2019. Interest on the notes accrued at an annual rate equal to (i) the greater of 1% and the three-month LIBOR, plus 7.0% from the closing through December 14, 2017, (ii) the greater of 1% and three-month LIBOR, plus 9% between December 15, 2017 and December 14, 2018, and (iii) the greater of 1% and three-month LIBOR plus 11% between December 15, 2018 and the maturity date. The interest rate would increase by an additional 2% per annum above the interest rate otherwise applicable upon the occurrence and during the continuance of an event of default until cured. Interest was payable in cash in arrears on the 15th calendar day of each March, June, September and December. We are required to pay all outstanding principal and any accrued and unpaid interest on the notes on the maturity date. We may, at our option, prepay the outstanding principal amount of the notes at any time without premium or penalty. Pacific Ethanol, Inc. issued the notes, which are secured by a first-priority security interest in the equity interest held by Pacific Ethanol, Inc. in PE Op. Co. On December 16, 2019, we amended the notes to extend the maturity date from December 15, 2019 to December 23, 2019 and amended the interest rate from the greater of 1% and the three-month LIBOR, plus 11% between December 15, 2018 through December 14, 2019 to 15% commencing on September 15, 2019. Under the amendment, we also agreed to pay the December 15, 2019 interest payment 50% in cash and 50% in-kind through the issuance of an additional note in the principal amount equal thereto. On December 22, 2019, we amended and restated the notes which extended the maturity date from December 23, 2019 to December 15, 2021. Interest on the Notes accrues at a rate of 15% per annum, payable quarterly. 36 On March 20, 2020, we and the noteholders agreed to defer a $2.5 million aggregate interest payment due March 15, 2020 until May 20, 2020. On that same date, ICP granted a junior lien in certain of its personal property to the noteholders, and PE Central granted a junior lien in certain of its personal property to the noteholders. PE Central also pledged its equity interests in Pacific Aurora, PE Pekin and ICP in favor of the noteholders. In addition, PE Op Co. and Pacific Ethanol West, LLC, which directly owns our distilleries located on the West Coast, granted a security interest in certain of their personal property to the noteholders. We also entered into intercreditor agreements with our PE Pekin and ICP lenders, and the agent for our senior secured noteholders, to address issues of priority and the allocation of proceeds from asset sales. During September 2020, we repaid approximately $5.5 million in additional principal on the notes. On November 10, 2020, we repaid approximately $25.3 million in additional principal on the notes. As of the filing of this report, we believe we are in compliance with all debt covenants under our senior secured notes. CARES Act Loans On May 4, 2020, Pacific Ethanol, Inc. and PE Pekin received loan proceeds from Bank of America, NA under the recently enacted Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, through the Paycheck Protection Program administered by the U.S. Small Business Administration. Pacific Ethanol, Inc. received $6.0 million and PE Pekin received $3.9 million in loan proceeds. The loans mature in two years and bear interest at a rate of 1.00% per annum. Under the terms of the loans, certain amounts may be forgiven if they are used for qualifying expenses as described in the CARES Act, but we can provide no assurance that we will be able to obtain forgiveness of all or any portion of the loans. At-the-Market Program We previously established an “at-the-market” equity distribution program under which we could offer and sell shares of common stock to, or through, sales agents by means of ordinary brokers’ transactions on The NASDAQ Capital Market, in block transactions, or as otherwise agreed to between us and the sales agent at prices we deem appropriate. We were under no obligation to offer and sell shares of common stock under the program. For the three months ended September 30, 2020, we sold 1,000,000 shares of common stock through our “at-the-market” equity program that resulted in net proceeds of $5,013,741 and fees paid to our sales agent of $159,048. We terminated our “at-the-market” equity program on October 22, 2020. Effects of Inflation The impact of inflation was not significant to our financial condition or results of operations for the three and nine months ended September 30, 2020 and 2019. 37 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable.