Item 1A. Risk Factors
ITEM
1A. RISK FACTORS.
Before
deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the
other information contained in this Report and in our other filings with the Securities and Exchange Commission, including subsequent
reports on Forms 10-Q and 8-K. The risks and uncertainties described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known
or unknown risks or uncertainties actually occurs with material adverse effects on Pacific Ethanol, our business, financial condition,
results of operations and/or liquidity could be seriously harmed. In that event, the market price for our common stock will likely
decline, and you may lose all or part of your investment.
Risks
Related to our Business
The
effects of the coronavirus pandemic, or its abatement, may materially and adversely affect our business, results of operations
and liquidity.
The
coronavirus pandemic has resulted in businesses suspending or substantially curtailing global operations and travel, quarantines,
and an overall substantial slowdown of economic activity. Federal, state and foreign governments have implemented measures to
contain the virus, including social distancing requirements, travel restrictions, border closures, limitations on public gatherings,
work-from-home orders, and closure of non-essential businesses. Transportation fuels in particular, including fuel-grade ethanol,
have experienced significant price declines and reduced demand. A further or extended ongoing downturn in global economic activity,
or recessionary conditions in major geographic regions, will lead to poor demand for, and negatively affect the prices of, fuel-grade
ethanol, materially and adversely affecting our business, results of operations and liquidity.
Furthermore,
to protect the health and well-being of our employees and customers, we have implemented work-from-home requirements, made substantial
modifications to employee travel policies, and cancelled or shifted marketing and other corporate events to virtual-only formats
for the foreseeable future. While we continue to monitor our circumstances and may adjust our current policies as more information
and public health guidance become available, these precautionary measures could negatively affect our sales and marketing efforts,
delay and lengthen our sales cycles, or create operational or other challenges, any of which could harm our business and results
of operations.
In
addition, if one or more of our employees or customers becomes ill from coronavirus and attributes their infection to us, including
through exposure at one of our offices or distilleries, we could be subject to allegations of failure to adequately mitigate the
risk of exposure. Such allegations could harm our reputation and expose us to the risks of litigation and liability.
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Our
specialty alcohols business has benefitted significantly from the coronavirus pandemic due to a substantial increase in demand
for alcohol-based sanitizers and disinfectants. As the coronavirus pandemic abates, demand for alcohol-based sanitizers and disinfectants
may decline, ultimately exerting downward pressure on prices for our specialty alcohols used in those products. In addition, higher
industry production levels in response to the coronavirus pandemic and any resulting oversupply of specialty alcohols for sanitizers
and disinfectants will also exert downward pressure on prices. Reduced demand and prices for our specialty alcohols used in sanitizers
and disinfectants, or industry oversupply of those specialty alcohols, may materially and adversely affect our business, results
of operations and liquidity.
Our
indebtedness exposes us to many risks that could negatively impact our business, our business prospects, our liquidity and our
cash flows and results of operations.
Our
distilleries located in the Midwest have significant indebtedness. In addition, we have significant indebtedness under our senior
secured notes issued at the parent-company level. The terms of our loans require amortizing payments of principal over the lives
of the loans and our borrowing availability under our revolving credit facilities periodically and automatically declines through
the maturity dates of those facilities. Our indebtedness could:
● make
it more difficult to pay or refinance our debts as they become due during adverse economic
and industry conditions because any decrease in revenues could cause us to not have sufficient
cash flows from operations to make our scheduled debt payments;
● limit
our flexibility to pursue strategic opportunities or react to changes in our business
and the industry in which we operate and, consequently, place us at a competitive disadvantage
to our competitors who have less debt;
● require
a substantial portion of our cash flows from operations to be used for debt service payments,
thereby reducing the availability of our cash flows to fund working capital, capital
expenditures, acquisitions, dividend payments and other general corporate purposes; and/or
● limit
our ability to procure additional financing for working capital or other purposes.
Our
term loans and credit facilities also require compliance with numerous financial and other covenants.
We
are not in compliance with our obligation to obtain lender approval of a comprehensive plan to restructure our assets and liabilities,
which could result in their acceleration of our debt. In addition, although we paid an aggregate of $40.0
million to our Pekin and ICP lenders by September 30, 2020, a portion of that amount is disputed as originating from an approved
source of funds. A failure to timely pay the required amount from an approved source of funds could be a default under the terms
of our debt obligations to our lenders, which could result in their acceleration of our debt. We do not have sufficient liquidity or capital resources to immediately
repay our debt if accelerated.
Our distillery indebtedness
bears interest at variable rates. An increase in prevailing interest rates would likewise increase our debt service obligations
and could materially and adversely affect our cash flows and results of operations.
Our
ability to generate sufficient cash to make all principal and interest payments when due depends on our business performance,
which is subject to a variety of factors beyond our control, including the supply of and demand for our alcohols and other products,
product prices, the cost of key production inputs, and many other factors incident to the alcohol production and marketing industry.
We cannot provide any assurance that we will be able to timely satisfy such obligations. Our failure to timely satisfy our debt
obligations could have a material adverse effect on our business, business prospects, liquidity, cash flows and results of operations,
and could force us to seek protection under the U.S. Bankruptcy Code.
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We
have incurred significant losses and negative operating cash flow in the past and we may incur losses and negative operating cash
flow in the future, which may hamper our operations and impede us from expanding our business.
We
have incurred significant losses and negative operating cash flow in the past. For the nine months ended September 30, 2019, we
incurred consolidated net losses of $51.5 million. For the years ended December 31, 2019 and 2018, we incurred consolidated net
losses of approximately $101.3 million and $68.0 million, respectively. For the year ended December 31, 2019, we incurred negative
operating cash flow of approximately $23.4 million. We may incur losses and negative operating cash flow in the future. We expect
to rely on cash on hand, cash, if any, generated from our operations, borrowing availability under our lines of credit and proceeds
from our future financing activities, if any, to fund all of the cash requirements of our business. Additional losses and negative
operating cash flow may hamper our operations and impede us from expanding our business.
Our
results of operations and our ability to operate at a profit are largely dependent on our ability to manage the costs of corn,
natural gas and other production inputs, with the prices of our alcohols and essential ingredients, all of which are subject to
volatility and uncertainty.
Our
results of operations are highly impacted by commodity prices, including the cost of corn, natural gas and other production inputs
that we must purchase, and the prices of alcohols and essential ingredients that we sell. Prices and supplies are subject to and
determined by market and other forces over which we have no control, such as weather, domestic and global demand, supply shortages,
export prices and various governmental policies in the United States and throughout the world.
Price
volatility of corn, natural gas and other production inputs, and alcohols and essential ingredients, may cause our results of
operations to fluctuate substantially. We may fail to generate expected levels of net sales and profits even under fixed-price
and other contracts for the sale of specialty alcohols used in consumer products. Our customers may not pay us timely or at all,
even under longer-term, fixed-price contracts for our specialty alcohols, and may seek to renegotiate prices under those contracts
during periods of falling prices or high price volatility.
Over the past several
years, for example, the spread between corn and fuel-grade ethanol prices has fluctuated significantly. Fluctuations are likely
to continue to occur. A sustained narrow spread, whether as a result of sustained high or increased corn prices or sustained low
or decreased alcohol or essential ingredient prices, would adversely affect our results of operations and financial position.
Revenues from sales of alcohols, particularly fuel-grade ethanol, and essential ingredients could decline below the marginal cost
of production, which may force us to suspend production, particularly fuel-grade ethanol production, at some or all of our distilleries.
In
addition, some of our fuel-grade ethanol marketing activities will likely be unprofitable in a market of generally declining prices
due to the nature of our business. For example, to satisfy customer demands, we maintain certain quantities of fuel-grade ethanol
inventory for subsequent resale. Moreover, we procure much of our fuel-grade ethanol inventory outside the context of a marketing
arrangement and therefore must buy fuel-grade ethanol at a price established at the time of purchase and sell fuel-grade ethanol
at an index price established later at the time of sale that is generally reflective of movements in the market price of fuel-grade
ethanol. As a result, our margins for fuel-grade ethanol sold in these transactions generally decline and may turn negative as
the market price of fuel-grade ethanol declines.
We
can provide no assurance that corn, natural gas or other production inputs can be purchased at or near current or any particular
prices, or that our alcohols or essential ingredients will sell at, or near current or any particular prices. Consequently, our
results of operations and financial position may be adversely affected by increases in the prices of corn, natural gas and other
production inputs or decreases in the prices of our alcohols and essential ingredients.
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Increased
alcohol or essential ingredient production or higher inventory levels may cause a decline in prices for those products, and may
have other negative effects, adversely impacting our results of operations, cash flows and financial condition.
The
prices of our alcohols, in particular fuel-grade ethanol, and essential ingredients are impacted by competing third-party supplies
of those products. For example, we believe that the most significant factor influencing the price of fuel-grade ethanol has been
the substantial increase in production. According to the Renewable Fuels Association, domestic fuel-grade ethanol production capacity
increased from an annualized rate of 1.5 billion gallons per year in January 1999 to a record 16.1 billion gallons in 2018. In
addition, if fuel-grade ethanol production margins improve, we anticipate that owners of production distilleries
operating at below capacity, or owners of idled distilleries, will increase production levels, thereby resulting
in more abundant fuel-grade ethanol supplies and inventories. Increases in the supply of fuel-grade ethanol may not be commensurate
with increases in demand for fuel-grade ethanol, thus leading to lower fuel-grade ethanol prices. Also, higher industry production
levels in response to the coronavirus pandemic and any resulting oversupply of specialty alcohols for sanitizers and disinfectants
will also exert downward pressure on prices. Any of these outcomes could have a material adverse effect on our results of operations,
cash flows and financial condition.
The
prices of our products are volatile and subject to large fluctuations, which may cause our results of operations to fluctuate
significantly.
The
prices of our products are volatile and subject to large fluctuations. For example, the market price of fuel-grade ethanol is
dependent upon many factors, including the supply of fuel-grade ethanol and the price of gasoline, which is in turn dependent
upon the price of petroleum which is highly volatile and difficult to forecast. For instance, fuel-grade ethanol prices, as reported
by the Chicago Board of Trade, ranged from $0.81 to $1.61 per gallon for the nine months ended September 30, 2020, from $1.25
to $1.70 per gallon in 2019 and from $1.20 to $1.53 per gallon in 2018. In addition, even under longer-term, fixed-price contracts
for our specialty alcohols, our customers may seek to renegotiate prices under those contracts during periods of falling prices
or high price volatility. Fluctuations in the prices of our products may cause our results of operations to fluctuate significantly.
Disruptions
in our production or distribution may adversely affect our business, results of operations and financial condition.
Our
business depends on the continuing availability of rail, road, port, storage and distribution infrastructure. In particular, due
to limited storage capacity at our distilleries and other considerations related to production efficiencies, our distilleries
depend on just-in-time delivery of corn. The production of alcohols also requires a significant and uninterrupted supply of other
raw materials and energy, primarily water, electricity and natural gas. Local water, electricity and gas utilities may not be
able to reliably supply the water, electricity and natural gas that our distilleries need or may not be able to supply those resources
on acceptable terms. In the past, poor weather has caused disruptions in rail transportation, which slowed the delivery of fuel-grade
ethanol by rail, the principle manner by which fuel-grade ethanol from our distilleries located in the Midwest is transported
to market. In addition, we recently experienced closure of the Illinois
River for lock repairs which required greater use of less cost-effective modes of product transport such as via rail and truck,
which resulted in higher costs and negatively affected our results of operations.
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Disruptions
in production or distribution, whether caused by labor difficulties, unscheduled downtimes and other operational hazards inherent
in the alcohol production industry, including equipment failures, fires, explosions, abnormal pressures, blowouts, pipeline ruptures,
transportation accidents and natural disasters such as earthquakes, floods and storms, or human error or malfeasance or other
reasons, could prevent timely deliveries of corn or other raw materials and energy, and could delay transport of our products
to market, and may require us to halt production at one or more distilleries, any of which could have a material adverse effect
on our business, results of operations and financial condition.
Some
of these operational hazards may also cause personal injury or loss of life, severe damage to or destruction of property and equipment
or environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. Our insurance
may not be adequate to fully cover the potential hazards described above or we may not be able to renew this insurance on commercially
reasonable terms or at all.
Cyberattacks
through security vulnerabilities could lead to disruption of business, reduced revenue, increased costs, liability claims, or
harm to our reputation or competitive position.
Security
vulnerabilities may arise from our hardware, software, employees, contractors or policies we have deployed, which may result in
external parties gaining access to our networks, datacenters, cloud datacenters, corporate computers, manufacturing systems, and/or
access to accounts we have at our suppliers, vendors, and customers. They may gain access to our data or our customers’
data, or attack the networks causing denial of service or attempt to hold our data or systems in ransom. The vulnerability
could be caused by inadequate account security practices such as failure to timely remove employee access when terminated. To
mitigate these security issues, we have implemented measures throughout our organization, including firewalls, backups, encryption,
employee information technology policies and user account policies. However, there can be no assurance these measures will be
sufficient to avoid cyberattacks. If any of these types of security breaches were to occur and we were unable to protect sensitive
data, our relationships with our business partners and customers could be materially damaged, our reputation could be materially
harmed, and we could be exposed to a risk of litigation and possible significant liability.
Further,
if we fail to adequately maintain our infrastructure, we may have outages and data loss. Excessive outages may affect our ability
to timely and efficiently deliver products to customers or develop new products and solutions. Such disruptions and data loss
may adversely impact our ability to fulfill orders and interrupt other processes. Delayed sales or lost customers resulting from
these disruptions could adversely affect our financial results, stock price and reputation.
The
State of California enacted the California Consumer Privacy Act of 2018, or CCPA, effective on January 1, 2020. Our and our
business partners’ or contractors’ failure to fully comply with the CCPA and other laws could lead to significant
fines and require onerous corrective action. In addition, data security breaches experienced by us or our business partners or contractors could result in the loss of trade secrets or other intellectual property, public disclosure of sensitive
commercial data, and the exposure of personally identifiable information (including sensitive personal information) of our
employees, customers, suppliers, contractors and others.
Unauthorized
use or disclosure of, or access to, any personal information maintained by us or on our behalf, whether through breach of our
systems, breach of the systems of our suppliers or vendors by an unauthorized party, or through employee or contractor error,
theft or misuse, or otherwise, could harm our business. If any such unauthorized use or disclosure of, or access to, such personal
information was to occur, our operations could be seriously disrupted, and we could be subject to demands, claims and litigation
by private parties, and investigations, related actions, and penalties by regulatory authorities. In addition, we could incur
significant costs in notifying affected persons and entities and otherwise complying with the multitude of foreign, federal, state
and local laws and regulations relating to the unauthorized access to, or use or disclosure of, personal information. Finally,
any perceived or actual unauthorized access to, or use or disclosure of, such information could harm our reputation, substantially
impair our ability to attract and retain customers and have an adverse impact on our business, financial condition and results
of operations.
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We
may engage in hedging transactions and other risk mitigation strategies that could harm our results of operations and financial
condition.
In
an attempt to partially offset the effects of volatility of our product prices, in particular fuel-grade ethanol, and corn and
natural gas costs, we may enter into contracts to fix the price of a portion of our production or purchase a portion of our corn
or natural gas requirements on a forward basis. In addition, we may engage in other hedging transactions involving exchange-traded
futures contracts for corn, natural gas and unleaded gasoline from time to time. The financial statement impact of these activities
is dependent upon, among other things, the prices involved and our ability to sell sufficient products to use all of the corn
and natural gas for which forward commitments have been made. Hedging arrangements also expose us to the risk of financial loss
in situations where the other party to the hedging contract defaults on its contract or, in the case of exchange-traded contracts,
where there is a change in the expected differential between the underlying price in the hedging agreement and the actual prices
paid or received by us. In addition, our open contract positions may require cash deposits to cover margin calls, negatively impacting
our liquidity. As a result, our hedging activities and fluctuations in the price of corn, natural gas, fuel-grade ethanol and
unleaded gasoline may adversely affect our results of operations, financial condition and liquidity.
Future
demand for fuel-grade ethanol is uncertain and may be affected by changes to federal mandates, public perception, consumer acceptance
and overall consumer demand for transportation fuel, any of which could negatively affect demand for fuel-grade ethanol and our
results of operations.
Although
many trade groups, academics and governmental agencies have supported fuel-grade ethanol as a fuel additive that promotes a cleaner
environment, others have criticized fuel-grade ethanol production as consuming considerably more energy and emitting more greenhouse
gases than other biofuels and potentially depleting water resources. Some studies have suggested that corn-based ethanol is less
efficient than ethanol produced from other feedstock and that it negatively impacts consumers by causing increased prices for
dairy, meat and other food generated from livestock that consume corn. Additionally, critics of fuel-grade ethanol contend that
corn supplies are redirected from international food markets to domestic fuel markets. If negative views of corn-based ethanol
production gain acceptance, support for existing measures promoting use and domestic production of corn-based ethanol could decline,
leading to reduction or repeal of federal mandates, which could adversely affect the demand for fuel-grade ethanol. These views
could also negatively impact public perception of the fuel-grade ethanol industry and acceptance of fuel-grade ethanol as an alternative
fuel.
There
are limited markets for fuel-grade ethanol beyond those established by federal mandates. Discretionary blending and E85 blending
are important secondary markets. Discretionary blending is often determined by the price of fuel-grade ethanol versus the price
of gasoline. In periods when discretionary blending is financially unattractive, the demand for fuel-grade ethanol may be reduced.
Also, the demand for fuel-grade ethanol is affected by the overall demand for transportation fuel. Demand for transportation fuel
is affected by the number of miles traveled by consumers and the fuel economy of vehicles. A reduction in the demand for fuel-grade
ethanol and co-products depress the value of our fuel-grade ethanol and related products, erode our overall margins and reduce
our ability to generate revenue or to operate profitably. In addition, consumer acceptance of E15 and E85 fuels is needed before
fuel-grade ethanol can achieve any significant growth in market share relative to other transportation fuels.
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The
United States fuel-grade ethanol industry is highly dependent upon certain federal and state legislation and regulation and any
changes in legislation or regulation could have a material adverse effect on our results of operations, cash flows and financial
condition.
The
Environmental Protection Agency, or EPA, has implemented the Renewable Fuel Standard, or RFS, pursuant to the Energy Policy Act
of 2005 and the Energy Independence and Security Act of 2007. The RFS program sets annual quotas for the quantity of renewable
fuels (such as fuel-grade ethanol) that must be blended into motor fuels consumed in the United States. The domestic market for
fuel-grade ethanol is significantly impacted by federal mandates under the RFS program for volumes of renewable fuels (such as
fuel-grade ethanol) required to be blended with gasoline. Future demand for fuel-grade ethanol will be largely dependent upon
incentives to blend fuel-grade ethanol into motor fuels, including the price of fuel-grade ethanol relative to the price of gasoline,
the relative octane value of fuel-grade ethanol, constraints in the ability of vehicles to use higher fuel-grade ethanol blends,
the RFS, and other applicable environmental requirements. Any significant increase in production capacity above the RFS minimum
requirements may have an adverse impact on fuel-grade ethanol prices.
Legislation
aimed at reducing or limiting the renewable fuel use required by the RFS has been introduced in the United States Congress. On
January 3, 2019, a bill (H.R. 104) was introduced into the House of Representatives aiming to repeal certain amendments to the
Clean Air Act relating to the expansion of the renewable fuel program, and for other purposes. This bill revises the renewable
fuel program, including the RFS. Under current law, the RFS specifies the minimum volume of renewable fuel, such as fuel-grade
ethanol, that must be contained in gasoline sold in the United States, except in noncontiguous states or territories. The RFS
annually increases until 2022 when a minimum of 36 billion gallons of renewable fuel must be blended into gasoline. This bill
decreases the volume of renewable fuel that must be contained in gasoline to 7.5 billion gallons each year. The bill also revises
the RFS to eliminate separate volume requirements for the following renewable fuel categories: advanced biofuels, cellulosic biofuel,
and biomass-based diesel. The bill was referred to a congressional subcommittee where it awaits further consideration. On May
7, 2019, the Food and Fuel Consumer Protection Act of 2019 (H.R. 2540), was introduced in the House of Representatives. The bill
aims to prevent RFS blending obligations from requiring fuel-grade ethanol to make up more than 9.7 percent of the total volume
of gasoline projected to be sold or introduced into commerce in the United States for a given calendar year. The bill was referred
to a congressional committee, which will consider it before possibly sending the bill to the House of Representatives as a whole.
On June 21, 2019, a bill (H.R. 3427) was introduced in the House of Representatives aiming to repeal the EPA’s Renewable
Fuel Standard program, which requires transportation fuel to contain a minimum volume of renewable fuel. The bill was referred
to a congressional committee, which will consider it before possibly sending the bill to the House of Representatives as a whole.
On July 25, 2019, a bill (S.2298) was introduced in the United States Senate, to amend the Clean Air Act to eliminate the corn
ethanol mandate for renewable fuel. The bill was read twice and referred to the Committee on Environment and Public Works. Our
results of operations, cash flows and financial condition could be adversely impacted if any legislation is enacted that reduces
or limits the RFS volume requirements.
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Under
the provisions of the Clean Air Act, as amended by the Energy Independence and Security Act of 2007, the EPA has limited authority
to waive or reduce the mandated RFS requirements, which authority is subject to consultation with the Secretaries of Agriculture
and Energy, and based on a determination that there is inadequate domestic renewable fuel supply or implementation of the applicable
requirements would severely harm the economy or environment of a state, region or the United States. Our results of operations,
cash flows and financial condition could be adversely impacted if the EPA reduces the RFS requirements from the statutory levels
specified in the RFS.
The
industries in which we operate are extremely competitive. Many of our significant competitors have greater production and financial
resources and any of them could use their greater resources to gain market share at our expense.
The
industries in which we operate are extremely competitive. Many of our significant competitors have substantially greater production
and financial resources than we do. As a result, our competitors may be able to compete more aggressively and sustain that competition
over a longer period of time. Successful competition will require a continued high level of investment in production facility
maintenance. Our limited resources relative to many significant competitors may cause us to fail to anticipate or respond adequately
to new developments and other competitive pressures. This failure could reduce our competitiveness and cause a decline in market
share, sales and profitability. Even if sufficient funds are available, we may not be able to make the modifications and improvements
necessary to compete successfully.
We
also face competition from international suppliers, many of whom have cost structures that are substantially lower than our cost
structure. An increase in domestic or foreign competition could force us to reduce our prices and take other steps to compete
effectively, which could adversely affect our business, financial condition and results of operations.
Our
ability to utilize net operating loss carryforwards and certain other tax attributes may be limited.
Federal
and state income tax laws impose restrictions on the utilization of net operating loss, or NOL, and tax credit carryforwards in
the event that an “ownership change” occurs for tax purposes, as defined by Section 382 of the Internal Revenue Code,
or Code. In general, an ownership change occurs when stockholders owning 5% or more of a “loss corporation” (a corporation
entitled to use NOL or other loss carryovers) have increased their ownership of stock in such corporation by more than 50 percentage
points during any three-year period. The annual base limitation under Section 382 of the Code is calculated by multiplying the
loss corporation’s value at the time of the ownership change by the greater of the long-term tax-exempt rate determined
by the Internal Revenue Service in the month of the ownership change or the two preceding months.
As
of December 31, 2019, of our $228.8 million of federal NOLs, we had $82.1 million of federal NOLs that are limited in their annual
use under Section 382 of the Code beyond 2019. Accordingly, our ability to utilize these NOL carryforwards may be substantially
limited. These limitations could in turn result in increased future tax obligations, which could have a material adverse effect
on our business, financial condition and results of operations.
We
may be adversely affected by environmental, health and safety laws, regulations and liabilities .
We
are subject to various federal, state and local environmental laws and regulations, including those relating to the discharge
of materials into the air, water and ground, the generation, storage, handling, use, transportation and disposal of hazardous
materials and wastes, and the health and safety of our employees. In addition, some of these laws and regulations require us to
operate under permits that are subject to renewal or modification. These laws, regulations and permits can often require expensive
pollution control equipment or operational changes to limit actual or potential impacts to the environment. A violation of these
laws and regulations or permit conditions can result in substantial fines, natural resource damages, criminal sanctions, permit
revocations and/or distillery shutdowns. In addition, we have made, and expect to make, significant capital expenditures on an
ongoing basis to comply with increasingly stringent environmental laws, regulations and permits.
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We
may be liable for the investigation and cleanup of environmental contamination at each of our distilleries and at off-site locations
where we arrange for the disposal of hazardous substances or wastes. If these substances or wastes have been or are disposed of
or released at sites that undergo investigation and/or remediation by regulatory agencies, we may be responsible under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, or other environmental laws for all or part of the costs of investigation
and/or remediation, and for damages to natural resources. We may also be subject to related claims by private parties alleging
property damage and personal injury due to exposure to hazardous or other materials at or from those properties. Some of these
matters may require us to expend significant amounts for investigation, cleanup or other costs.
In
addition, new laws, new interpretations of existing laws, increased governmental enforcement of environmental laws or other developments
could require us to make significant additional expenditures. Continued government and public emphasis on environmental issues
can be expected to result in increased future investments for environmental controls at our distilleries. Present and future environmental
laws and regulations, and interpretations of those laws and regulations, applicable to our operations, more vigorous enforcement
policies and discovery of currently unknown conditions may require substantial expenditures that could have a material adverse
effect on our results of operations and financial condition.
The
hazards and risks associated with producing and transporting our products (including fires, natural disasters, explosions and
abnormal pressures and blowouts) may also result in personal injury claims or damage to property and third parties. As protection
against operating hazards, we maintain insurance coverage against some, but not all, potential losses. However, we could sustain
losses for uninsurable or uninsured risks, or in amounts in excess of existing insurance coverage. Events that result in significant
personal injury or damage to our property or third parties or other losses that are not fully covered by insurance could have
a material adverse effect on our results of operations and financial condition.
We
depend on a small number of customers for the majority of our fuel-grade ethanol sales. A reduction in business from any of these
customers could cause a significant decline in our overall sales and profitability.
The
majority of our fuel-grade ethanol sales are generated from a small number of customers. During 2019 and 2018, two customers accounted
for an aggregate of approximately $336 million and $367 million in net sales of our fuel-grade ethanol, representing 24% and 25%
of our total net sales, respectively, for those periods. Our agreements with these customers generally do not require them to
purchase any specified volume or dollar value of fuel-grade ethanol, or to make any purchases whatsoever. Therefore, in any future
period, our sales generated from these customers, individually or in the aggregate, may not equal or exceed historical levels.
If sales to any of these customers cease or decline, we may be unable to replace these sales with sales to either existing or
new customers in a timely manner, or at all. A cessation or reduction of sales to one or more of these customers could cause a
significant decline in our overall sales and profitability.
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We
incur significant expenses to maintain and upgrade our distilleries and operating equipment, and any interruption in our operations
would harm our operating performance.
We
regularly incur significant expenses to maintain and upgrade our distilleries and operating equipment. The machines and equipment
we use to produce our products are complex, have many parts and some are run on a continuous basis. We must perform routine maintenance
on our equipment and will have to periodically replace a variety of parts such as motors, pumps, pipes and electrical parts. In
addition, our distilleries require periodic shutdowns to perform major maintenance and upgrades. These scheduled distillery shutdowns
result in decreased sales and increased costs in the periods in which a shutdown occurs and could result in unexpected operational
issues in future periods as a result of changes to equipment and operational and mechanical processes made during the shutdown
period.
Our
lack of long-term orders for fuel-grade ethanol and commitments by our customers could lead to a rapid decline in our sales and
profitability.
We
cannot rely on long-term orders for fuel-grade ethanol or commitments by our customers for protection from the negative financial
effects of a decline in the demand for fuel-grade ethanol or a decline in the demand for our marketing services. The limited certainty
of fuel-grade ethanol orders can make it difficult for us to forecast our sales and allocate our resources in a manner consistent
with our actual sales. Moreover, our expense levels are based in part on our expectations of future sales and, if our expectations
regarding future sales are inaccurate, we may be unable to reduce costs in a timely manner to adjust for sales shortfalls. Furthermore,
because we depend on a small number of fuel-grade ethanol customers for a significant portion of our sales, the ramifications
of these risks are greater in magnitude than if our sales of fuel-grade ethanol were less concentrated. As a result of our lack
of long-term orders for fuel-grade ethanol and customer commitments, we may experience a rapid decline in our sales and profitability.
Our
independent registered public accounting firm’s report for the year ended December 31, 2019 includes an explanatory note
describing a substantial doubt as to our ability to continue as a going concern.
As
a result of fuel-grade ethanol industry conditions that negatively affected our business, our independent registered public accounting
firm included in its report on our audited consolidated financial statements as of and for the year ended December 31, 2019 an
explanatory note describing a substantial doubt as to our ability to continue as a going concern. A “going concern”
opinion indicates that the financial statements have been prepared assuming we will continue as a going concern, and do not include
any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and
classification of liabilities, that may result if we do not continue as a going concern. The presence of a going concern note
to our financial statements may have an adverse impact on our business relationships with third parties, and could make it more
difficult for us to raise additional financing, all of which could have a material adverse impact on our business and prospects.
Risks
Related to Ownership of our Common Stock
Future
sales of substantial amounts of our common stock could adversely affect the market price of our common stock.
Future
sales of substantial amounts of our common stock, or securities convertible or exchangeable into shares of our common stock, into
the public market, including shares of our common stock issued upon exercise of options and warrants, or perceptions that those
sales could occur, could adversely affect the prevailing market price of our common stock and our ability to raise capital in
the future.
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Our
stock price is highly volatile, which could result in substantial losses for investors purchasing shares of our common stock and
in litigation against us.
The
market price of our common stock has fluctuated significantly in the past and may continue to fluctuate significantly in the future.
The market price of our common stock may continue to fluctuate in response to one or more of the following factors, many of which
are beyond our control:
● our
ability to effectively transition from a predominantly fuel-grade ethanol company to
a company focused on the production and sale of specialty alcohols and essential ingredients;
● fluctuations
in the market prices of our products;
● fluctuations
in the costs of key production input commodities such as corn and natural gas;
● the
volume and timing of the receipt of orders for our products from major customers;
● competitive
pricing pressures;
● anticipated
trends in our financial condition and results of operations;
● changes
in market valuations of companies similar to us;
● stock
market price and volume fluctuations generally;
● regulatory
developments or increased enforcement;
● fluctuations
in our quarterly or annual operating results;
● additions
or departures of key personnel;
● our
ability to obtain any necessary financing;
● our
financing activities and future sales of our common stock or other securities; and
● our
ability to maintain contracts that are critical to our operations.
Demand
for fuel-grade ethanol could be adversely affected by a slow-down in the overall demand for oxygenate and gasoline additive products.
The levels of our fuel-grade ethanol production and purchases for resale will be based upon forecasted demand. Accordingly, any
inaccuracy in forecasting anticipated revenues and expenses could adversely affect our business. The failure to receive anticipated
orders or to complete delivery in any quarterly period could adversely affect our results of operations for that period. Quarterly
and annual results are not necessarily indicative of future performance for any particular period, and we may not experience revenue
growth or profitability on a quarterly or an annual basis.
The
price at which you purchase shares of our common stock may not be indicative of the price that will prevail in the trading market.
You may be unable to sell your shares of common stock at or above your purchase price, which may result in substantial losses
to you and which may include the complete loss of your investment. In the past, securities class action litigation has often been
brought against a company following periods of high stock price volatility. We may be the target of similar litigation in the
future. Securities litigation could result in substantial costs and divert management’s attention and our resources away
from our business.
Any
of the risks described above could have a material adverse effect on our results of operations, the price of our common stock,
or both.
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Because
we do not intend to pay any cash dividends on our shares of common stock in the near future, our stockholders will not be able
to receive a return on their shares unless and until they sell them.
We
intend to retain a significant portion of any future earnings to finance the development, operation and expansion of our business.
We do not anticipate paying any cash dividends on our common stock in the near future. The declaration, payment, and amount of
any future dividends will be made at the discretion of our board of directors, and will depend upon, among other things, the results
of operations, cash flows, and financial condition, operating and capital requirements, and other factors as our board of directors
considers relevant. There is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance
with respect to the amount of any such dividend. Unless our board of directors determines to pay dividends, our stockholders will
be required to look to appreciation of our common stock to realize a gain on their investment. There can be no assurance that
this appreciation will occur.
Our
bylaws contain an exclusive forum provision, which could limit our stockholders’ ability to obtain a favorable judicial
forum for disputes with us or our directors, officers, employees or agents.
Our
bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery shall be the
sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of us, (b) any action asserting a claim
of breach of a fiduciary duty owed by any director, officer or other employee of us to us or our stockholders, (c) any action
asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or (d) any action asserting a claim
governed by the internal affairs doctrine.
For
the avoidance of doubt, the exclusive forum provision described above does not apply to any claims arising under the Securities
Act of 1933, as amended, or Securities Act, or the Securities Exchange Act of 1934, as amended, or Exchange Act. Section 27 of
the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the
Exchange Act or the rules and regulations thereunder, and Section 22 of the Securities Act creates concurrent jurisdiction for
federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and
regulations thereunder.
The
choice of forum provision in our bylaws may limit our stockholders’ ability to bring a claim in a judicial forum that they
find favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against
us and our directors, officers, employees and agents even though an action, if successful, might benefit our stockholders. The
applicable courts may also reach different judgments or results than would other courts, including courts where a stockholder
considering an action may be located or would otherwise choose to bring the action, and such judgments or results may be more
favorable to us than to our stockholders. With respect to the provision making the Court of Chancery the sole and exclusive forum
for certain types of actions, stockholders who do bring a claim in the Court of Chancery could face additional litigation costs
in pursuing any such claim, particularly if they do not reside in or near Delaware. Finally, if a court were to find this provision
of our bylaws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we
may incur additional costs associated with resolving such matters in other jurisdictions, which could have a material adverse
effect on us.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.