Sales Commitments – At September 30, 2016, the Company had entered into sales contracts with its major customers to sell certain quantities of ethanol and co-products. The Company had open indexed-price ethanol sales contracts for 236,324,000 gallons as of September 30, 2016 and open fixed-price ethanol sales contracts valued at $9,540,000 as of September 30, 2016. The Company had open fixed-price co-product sales contracts valued at $30,797,000 as of September 30, 2016 and open indexed-price co-product sales contracts for 142,000 tons as of September 30, 2016. These sales contracts are scheduled to be completed throughout 2017.

Purchase Commitments – At September 30, 2016, the Company had indexed-price purchase contracts to purchase 20,670,000 gallons of ethanol and fixed-price purchase contracts to purchase $10,536,000 of ethanol from its suppliers. The Company had fixed-price purchase contracts to purchase $32,022,000 of corn from its suppliers. These purchase commitments are scheduled to be satisfied throughout 2016. In addition, in September 2016, the Company signed an agreement to finance and construct a 5 megawatt solar project at its Madera facility. The amount financed is up to $10.0 million, to be amortized over twenty years as part of the facility’s property tax assessments. As of September 30, 2016, the Company had incurred $1.1 million in project costs, which is recorded in other liabilities in the accompanying balance sheet.

Litigation – General – The Company is subject to various claims and contingencies in the ordinary course of its business, including those related to litigation, business transactions, employee-related matters, and others. When the Company is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the Company will record a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the claim if the likelihood of a potential loss is reasonably possible and the amount involved could be material. While there can be no assurances, the Company does not expect that any of its pending legal proceedings will have a material financial impact on the Company’s operating results.

The Company has evaluated all outstanding cases, including the following pending cases, and has recorded an aggregate of $3.3 million as a litigation contingency liability with respect to its outstanding cases for amounts that are probable and estimable.

Western Sugar Cooperative

Pacific Ethanol, Inc., through a subsidiary acquired in its acquisition of Aventine, became involved in a pending lawsuit with Western Sugar Cooperative (“Western Sugar”) that pre-dated the Aventine acquisition.

On February 27, 2015, Western Sugar filed a complaint in the United States District Court for the District of Colorado (Case No. 1:15-cv-00415) naming Aventine Renewable Energy, Inc. (“ARE, Inc.”), one of Aventine’s subsidiaries, as defendant. Western Sugar amended its complaint on April 21, 2015. ARE, Inc. purchased surplus sugar through a United States Department of Agriculture (“USDA”) program. Western Sugar was one of the entities that warehoused this sugar for ARE, Inc. The suit alleges that ARE, Inc. breached a contract with Western Sugar by failing to pay increased rates that it demanded for the storage of ARE, Inc.’s sugar, or alternatively is due additional payment under Western Sugar’s equitable claims. Western Sugar alleges that its higher rates apply because ARE, Inc. failed to timely order the sugar for immediate delivery, thereby allowing Western Sugar to set its own storage rates and avoid the lower USDA contract rate that ARE, Inc. paid. Western Sugar claims damages in the amount of approximately $8.6 million. ARE, Inc. filed answers to Western Sugar’s complaint and amended the complaint generally denying Western Sugar’s allegations and asserting various defenses, including that ARE Inc. never entered into a storage contract with Western Sugar, that ARE, Inc. paid the rate that Western Sugar was due under the governing USDA contract documents, or alternatively that ARE, Inc. paid a reasonable rate and that Western Sugar’s claimed rates constitute an impermissible penalty. The Company filed a motion for summary judgment seeking a determination that Western Sugar’s four claims fail as a matter of law. The court granted the motion in part and dismissed one claim, while finding that disputed factual matters remain for trial on Western Sugar’s other three claims. A trial date has not yet been scheduled, but is expected in the first half of 2017.

GS CleanTech Corporation

On May 24, 2013, GS CleanTech Corporation (“GS CleanTech”), filed a suit in the United States District Court for the Eastern District of California, Sacramento Division (Case No.: 2:13-CV-01042-JAM-AC), naming Pacific Ethanol, Inc. as a defendant. On August 29, 2013, the case was transferred to the United States District Court for the Southern District of Indiana and made part of the pre-existing multi-district litigation involving GS CleanTech and multiple defendants. The suit alleged infringement of a patent assigned to GS CleanTech by virtue of certain corn oil separation technology in use at one or more of the ethanol production facilities in which the Company has an interest, including Pacific Ethanol Stockton LLC (“PE Stockton”), located in Stockton, California. The complaint sought preliminary and permanent injunctions against the Company, prohibiting future infringement on the patent owned by GS CleanTech and damages in an unspecified amount adequate to compensate GS CleanTech for the alleged patent infringement, but in any event no less than a reasonable royalty for the use made of the inventions of the patent, plus attorneys’ fees. The Company answered the complaint, counterclaimed that the patent claims at issue, as well as the claims in several related patents, are invalid and unenforceable and that the Company is not infringing. Pacific Ethanol, Inc. does not itself use any corn oil separation technology and may seek a dismissal on those grounds.

On March 17 and March 18, 2014, GS CleanTech filed suit naming as defendants two Company subsidiaries: PE Stockton and Pacific Ethanol Magic Valley, LLC (“PE Magic Valley”). The claims were similar to those filed against Pacific Ethanol, Inc. in May 2013. These two cases were transferred to the multi-district litigation division in United States District Court for the Southern District of Indiana, where the case against Pacific Ethanol, Inc. was pending. Although PE Stockton and PE Magic Valley do separate and market corn oil, Pacific Ethanol, Inc., PE Stockton and PE Magic Valley strongly disagree that either of the subsidiaries use corn oil separation technology that infringes the patent owned by GS CleanTech. In a January 16, 2015 decision, the District Court for the Southern District of Indiana ruled in favor of a stipulated motion for partial summary judgment for Pacific Ethanol, Inc., PE Stockton and PE Magic Valley finding that all of the GS CleanTech patents in the suit are invalid and, therefore, not infringed. GS CleanTech said it would appeal this decision when the remaining claim in the suit has been decided. The only remaining claim alleged that GS CleanTech inequitably conducted itself before the United States Patent and Trademark Office when obtaining the patents at issue.

A trial in the District Court for the Southern District of Indiana was conducted in October 2015 on that single issue as well as whether GS CleanTech’s behavior during prosecution of the patents renders this an “exceptional case” which would allow the District Court to award the Defendants reimbursement of their attorneys’ fees expended for defense of the case.

On September 15, 2016, the District Court issued an Order finding that GS CleanTech, the inventors and GS CleanTech’s counsel committed inequitable conduct in the prosecution of the GS CleanTech patents before the United States Patent and Trademark Office. As a result, the District Court issued a Final Judgment on September 15, 2016 dismissing with prejudice all of GS CleanTech’s cases against the Defendants, including Pacific Ethanol, Inc., PE Stockton and PE Magic Valley. The District Court’s ruling of inequitable conduct results in the unenforceability of the GS CleanTech patents against third parties, and also enables the Defendants to pursue reimbursement of their costs and attorneys’ fees from GS CleanTech and its counsel. The Company believes that GS CleanTech may appeal the District Court’s rulings as well as its earlier decision that the GS CleanTech patents are invalid.

The Company did not record a provision for these matters as of December 31, 2015 as the District Court had ruled that all of the GS CleanTech patents in the suit are invalid and, therefore, not infringed. Further, the Company believes a material adverse ruling on appeal against Pacific Ethanol, Inc., PE Stockton and/or PE Magic Valley is not probable.