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.

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.

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.

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.

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.