What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-07-31 · 208 added, 197 removed, 313 unchanged (56% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with a review of the other Items included in this Form 10-Q and our June 30, 2020 condensed consolidated financial statements included elsewhere in this report.

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with a review of the other Items included in this Form 10-Q and our September 30, 2020 condensed consolidated financial statements included elsewhere in this report.

A reference to a “Note” relates to a note in the accompanying notes to the condensed consolidated financial statements.

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We believe our future results of operations and financial condition will depend significantly on our ability to successfully implement the following key initiatives:

Continued Focus on Becoming a “Best in Class” Chemical plant operator with respect to safe, reliable operations that produce the highest quality product.

Continue Focusing on Becoming a “Best in Class” Chemical Plant Operator with respect to Safe, Reliable Operations that Produce the Highest Quality Product.

We believe that high safety standards are critical and a precursor to improved plant performance.

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Those initiatives are focused on building internal expertise to improve oversight of external contractors, operating behavior and procedure enhancements including operator training, leadership training, shift change enhancements and operating and maintenance procedures and developing systems to advance the use of process data to identify and correct anomalies in the manufacturing processes and asset performance.

Continue Broadening of the Distribution of our Products.

Continue Broadening the Distribution of our Products.

To further leverage our plants current production capacity, we are continuing to expand the distribution of our industrial and mining products by partnering with customers to take product into different markets within the U.S.

as well as markets outside the U.S.

Additionally, we developed a pipeline of margin enhancement projects including product loading and unloading improvements, tank storage and capital to facilitate guest plant opportunities which, we expect will result in improved margins on the sales of our products.

We expect to complete these projects over the next 12 to 18 months.

In October 2020, we announced a new long- term nitric acid supply contract with a customer.

Under the agreement, we will supply between 70,000 to 100,000 tons of nitric acid per year, with sales beginning in the first quarter of 2021.

This contract advances our focus to leverage underutilized nitric acid production capacity at our El Dorado Facility.

We also executed a new contract to capture and sell carbon dioxide out of our El Dorado Facility, where our customer is building a guest plant.

We expect to begin sales under this agreement in the fourth quarter of 2021.

Additionally, early in the second quarter, we completed a key storage project that will allow us to further maximize our production of HDAN at our El Dorado Facility, which we expect to enable us to achieve higher production, a lower cost per ton and increased sales of that product during periods of more attractive pricing.

Improve Our Capital Structure and Overall Cost of Capital.

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All of the facilities we operate have been designated as essential critical infrastructure based on guidelines issued by the United States Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency.

Since we produce fertilizer products used by the agriculture industry, as well as chemical products required in a variety of industrial manufacturing processes, LSB has been determined to be a critical service, and therefore, our facilities are remaining in operation despite the evolving global health crisis resulting from the COVID-19 pandemic.

Since we produce fertilizer products used by the agriculture industry, as well as chemical products required in a variety of industrial manufacturing processes, LSB has been determined to be a critical service provider, and therefore, our facilities have remained operational despite the government mandated operational limitations or business closings resulting from the federal, state and local government responses to the evolving global

health crisis resulting from the COVID-19 pandemic .

Management has taken significant measures to ensure the health and safety of our employees and our business continuity during this challenging situation.

Specific to our personnel at our manufacturing facilities and retail agricultural centers, we have developed plans and procedures that allow them to operate in the safest manner possible in order to protect them, their families, our vendors and customers.

distancing, working from home where appropriate and quarantining of employees according to specific protocols.

Thus far, our efforts have been successful as we have had no employees known to contract COVID-19.

W e will maintain our discipline in this regard for however lo ng the current health risk persists.

The nitrogen chemical industry continued to be pressured during the second quarter of 2020.

For our personnel at our manufacturing facilities and retail agricultural center s , we have develop ed plans and procedures that have allow ed them to operate in a safe manner in order to protect them , their families , our vendors and our customers .

These include daily health screenings, including temperature checks and questionnaires, use of proper personal protection equipment, regular disinfection and cleaning of equipment and workspaces, social distancing, working from home where appropriate and quarantining of employees according to specific protocols .

O ur efforts have been successful to date as we have had only a small number of employees known to contract COVID-19.

We intend to maintain our discipline in this regard for however lo ng the current health risk persists.

The nitrogen chemical industry continued to be pressured during the third quarter of 2020.

As a result of the COVID-19 global economic downturn and the resultant decline in energy prices, industry operating rates globally have risen, resulting in greater supply and lower fertilizer pricing.

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Industrial and mining sales volume declined as a result of pandemic-related weakness in demand in several of our end markets.

Looking ahead to the second half of 2020, while much of the U.S.

Looking ahead to the fourth quarter of 2020, while much of the U.S.

economy has a least partially reopened, substantial uncertainty remains for the balance of the year with respect to our various end markets.

On the agricultural side, corn acres planted for the 2020 planting season are now expected to be approximately 92 million, which is below the USDA’s previous forecast of 97 million acres, but up from 2019 plants of 89 million.

However, while lower expected corn acres planted is a positive for expected ending corn inventory, reduced demand from ethanol-related consumption due to the stay-at-home orders we experienced in the U.S.

combined with strong yields projected from the 2020 planting season, all point to expected higher ending corn inventory.

Higher expected corn inventory is likely to impact crop pricing and challenge fertilizer pricing for the balance of 2020.

With respect to industrial and mining sales volume, we are seeing pockets of recovery and expected continued improvement in the second half of 2020.

On the liquidity front, as of June 30, 2020, we had approximately $69.1 million of combined cash and borrowing capacity, which , we believe, provides us with ample liquidity to fund our operations and meet our obligations.

In April 2020, we received a $10 million loan through the PPP within the CARES Act stimulus package.

The funds from this loan, along with the decisive action we have taken to defer expenses and capital expenditures, have enabled us to avoid the need to furlough or terminate employees to counteract the lost volume and pricing impacts we have seen or expect as a result of the COVID-19 p andemic.

We are also evaluating additional funding options that may be available through the CARES Act stimulus package for mid-sized companies.

On the agricultural side, the fall harvest is currently picking up momentum after some delay resulting from warm weather throughout much of the country in recent weeks .

Also, the corn market has recently experienced some positive indicators.

The corn acres planted for the 2020 planting season are now expected to be approximately 91 million, which is up from 2019 plantings of 89 million.

Also, the U.S.

Department of Agriculture (the “USDA”) revised downward its estimates on U.S.

ending corn inventory to 55 million metric tons compared to approximately 67 million metric tons estimated in July.

In addition, demand from ethanol-related consumption has increased since the second quarter, although overall demand continues to be lower compared to 2019 due to the stay-at-home orders, we experienced in the U.S.

Lower expected corn inventory is currently improving crop pricing and may translate into higher fertilizer pricing for the balance of 2020.

However, improvements in fertilizer pricing could be tempered from additional imported fertilizers.

With respect to industrial and mining sales volume, we are seeing gradual improvement in demand for nitric acid, industrial ammonia and ammonium nitrate as sectors such as automotive manufacturing, home building, and copper mining have increased activity.

Also see discussion below concerning a new long-term nitric acid supply contract with a customer .

On the liquidity front, as of September 30 , 2020, we had approximately $78.4 million of combined cash and borrowing capacity, which, we believe, provides us with ample liquidity to fund our operations and meet our obligations .

As discussed in footnote (G) of Note 4, in August 2020, EDA entered into a $30 million secured financing arrangement with an affiliate of LSB Funding with an interest rate of 8.75%.

Beginning in September 2020, principal and interest are payable in 60 equal monthly installments with a final balloon payment of approximately $5 million due in August 2025.

This $30 million financing arrangement is secured by an ammonia storage tank and is guaranteed by LSB.

A portion of the proceeds from this secured financing arrangement was used to pay off the Secured Promissory Note that was scheduled to mature in May 2023.

Also see discussions below under “Liquidity and Capital Resources.”

Settlements with Certain Vendors

As discussed in Note 1, in June 2020, EDC, one of our subsidiaries, and certain vendors mediated settlements totaling $7.6 million for EDC to recover certain costs associated with our new nitric acid plant at our El Dorado Facility.

The construction of this plant was completed and began production in 2016.

Of the $7.6 million, approximately $5.7 million is classified as a reduction to cost of sales and approximately $1.9 million is classified as a reduction to PP&E.

The recovery amount was applied against the original classification of the underlying costs.

NOL Rights Agreement

As discussed in Note 12, on July 6, 2020, our Board took certain actions to facilitate our ability to preserve our net NOLs and certain other tax attributes.

The Board declared a dividend of one Right, which was distributed on July 16, 2020 for each share of our then outstanding Common Shares.

In connection with the distribution of the Rights, we entered into the NOL Rights Agreement with our rights agent.

The purpose of the NOL Rights Agreement is to facilitate our ability to preserve our NOLs and other tax attributes in order to be able to offset potential future income taxes for federal income tax purposes.

Our ability to use these NOLs and other tax attributes would be substantially limited if we experience an “ownership change,” as defined in Section 382 of the Code.

A company generally experiences an ownership change if the percentage of the value of its stock owned by certain 5% shareholders, as defined in Section 382 of the Code, increases by more than 50% points over a rolling three-year period.

The NOL Rights Agreement is intended to reduce the likelihood of an ownership change under Section 382 of the Code by deterring any person (as defined in the NOL Rights Agreement) or Group from acquiring beneficial ownership of 4.9% or more of our outstanding common shares.

Certain Regulations Released by U.S.

Treasury Department

On July 28, 2020, the U.S.

Treasury Department released final regulations and proposed regulations with guidance on the business interest expense limitation under IRC Section 163(j).

The Section 163(j) business interest expense limitation was modified in December 2017 by the Tax Cuts and Jobs Act, and in March 2020 by the CARES Act.

Currently, we are in the process of evaluating the effect of these regulations on our consolidated financial statements and related disclosures.

Long-Term Nitric Acid Supply Contract

During October 2020, EDC entered into a new long-term nitric acid supply contract with a customer.

Under the agreement, EDC will supply between 70,000 to 100,000 tons of nitric acid annually.

The initial contract term extends through 2027 but includes automatic one-year renewal terms unless terminated by either party pursuant to the terms of the contract.

Sales are expected to begin in the first quarter of 2021.

Key Industry Factors

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See discussion above concerning the COVID-19 pandemic under “Recent Business Developments.”

Sales of our agricultural products were approximately 62% of our total net sales for the second quarter of 2020.

The price at which our agricultural products are ultimately sold depends on numerous factors, including the supply and demand for nitrogen fertilizers

which, in turn, depends upon world grain demand and production levels, the cost and availability of transportation and storage, weather conditions, competitive pricing and the availability of imports.

Sales of our agricultural products were approximately 43% of our total net sales for the third quarter of 2020.

The price at which our agricultural products are ultimately sold depends on numerous factors, including the supply and demand for nitrogen fertilizers which, in turn, depends upon world grain demand and production levels, the cost and availability of transportation and storage, weather conditions, competitive pricing and the availability of imports.

Additionally, expansions or upgrades of competitors’ facilities and international and domestic political and economic developments continue to play an important role in the global nitrogen fertilizer industry economics.

These factors can affect, in addition to selling prices, the level of inventories in the market which can cause price volatility and a ffect product margins.

These factors can affect, in addition to selling prices, the level of inventories in the market which can cause price volatility and affect product margins.

From a farmers’ perspective, the demand for fertilizer is affected by the aggregate crop planting decisions and fertilizer application rate decisions of individual farmers.

Individual farmers make planting decisions based largely on prospective profitability of a harvest, while the specific varieties and amounts of fertilizer they apply depend on factors such as their financial resources, soil conditions, weather patterns and the types of crops planted.

Individual farmers make planting decisions based largely on prospective profitability of a

harvest, while the specific varieties and amounts of fertilizer they apply depend on factors such as their financial resources, soil conditions, weather patterns and the types of crops planted.

Additionally, changes in corn prices and those of soybean, cotton and wheat prices, can affect the number of acres of corn planted in a given year, and the number of acres planted will drive the level of nitrogen fertilizer consumption, likely effecting prices.

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is estimated at 178.4 bushels per acre, 10.9 bushels above the 2019 harvest yield of 167.5 bushels per acre.

The following July estimates are associated with the corn market:

The following October estimates are associated with the corn market:

(2020 Harvest)

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(2018 Harvest)

July Report (1)

October Report (1)

Area Planted (Million acres)

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World Ending Stocks (Million metric tons)

Information obtained from WASDE reports dated July 10, 2020 (“July Report ”) for the 2020/2021 (“2021 Crop”), 2019/2020 (“2020 Crop”) and 2018/2019 (“2019 Crop”) corn marketing years.

Information obtained from WASDE reports dated October 9, 2020 (“October Report”) for the 2020/2021 (“2021 Crop”), 2019/2020 (“2020 Crop”) and 2018/2019 (“2019 Crop”) corn marketing years.

The marketing year is the twelve-month period during which a crop normally is marketed.

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corn farmers, a lower 2019 harvest and a decline in the stock-to-use ratio for corn, the USDA is estimating an increase in planted corn acres for the 2020 planting season representing an approximate 1.4% increase in corn acres year over year.

However, with the national restrictions and stay at home orders placed on traveling earlier this year, in an attempt to slow the spread of the COVID-19 pandemic, gasoline usage had been significantly curtailed causing a slowdown in production across many U.S.

However, with continuing national restrictions and stay at home orders placed on traveling earlier this year, in an attempt to slow the spread of the COVID-19 pandemic, gasoline usage had been significantly curtailed causing a slowdown in production across many U.S.

ethanol facilities.

With the easing of restrictions and summer driving season ramping up, demand for ethanol has somewhat improved over the last several months after bottoming out in April, however, and is expected to average well below 2019 U.S.

e thanol production.

With the easing of the pandemic-related restrictions and the onset of summer driving season in the third quarter, demand for ethanol improved after bottoming out in April, however, it is expected to average well below 2019 U.S.

ethanol production.

Most gasoline has 10% ethanol content.

Ethanol is commonly made from corn and e thanol production is the largest user of U.S.

Ethanol is commonly made from corn and ethanol production is the largest user of U.S.

corn, representing roughly 40% of total U.S.

As a result of overall lower expected e thanol demand, the USDA decreased corn demand from ethanol production by 575 million bushels for 2020 (compared to 2019) in their July report, an additional decrease of 200 million bushels since the April report.

This change also increases the USDA ending corn stocks forecast from the 2020 harvest compared to their previous report estimates.

This increase in ending corn stocks has added pressure on current and projected corn prices and on the number of corn acres planted this Spring and, in the Spring of 2021, which may impact fertilizer demand as early as this Fall .

As compared to the USDA July report, the USDA decreased corn demand from ethanol production by 150 million bushels for 2020 as a result of overall lower expected ethanol demand.

However, the USDA also lowered expected planted acres by 1 million acres and slight decline in yield per acre.

As a result, the USDA significantly decreased the ending corn stocks forecast from the 2020 harvest to 55 million metric tons from approximately 67 million metric tons.

This decrease in ending corn stocks has elevated current and projected corn prices, which may positively impact fertilizer demand and prices for the 2020 fall and 2021 spring planting seasons.

On the supply side, given the low price of natural gas in North America over the last several years, North American fertilizer producers have become the global low-cost producers for delivered fertilizer products to the Midwest U.S.

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In addition, the new domestic supply of ammonia and other fertilizer products changed the physical flow of ammonia in North America placing pressure on nitrogen fertilizer selling prices as the new capacity was absorbed by the market.

More recently, ammonia pricing has been under pressure as a result of inordinately inclement weather in late 2018 and 2019, which led to limited fertilizer applicati on and resultant elevated ammonia inventory levels in the domestic distribution channel.

More recently, ammonia pricing has been under pressure as a result of inordinately inclement weather in late 2018 and 2019, which led to limited fertilizer application and resultant elevated ammonia inventory levels in the domestic distribution channel.

Additionally, UAN prices have pulled back in part, due to European anti-dumping duties that were imposed on imports from certain countries, including the U.S., which has caused increased imports of UAN into the U.S.

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Also, ammonia prices in the Southern Plains market have been under additional pricing pressure relating to the closure of the Magellan ammonia pipeline discussed below under “Transportation Costs.”

Industrial and Mining

I ndustrial and Mining

See discussion above concerning the COVID-19 pandemic under “Recent Business Developments.”

Sales of our industrial products were approximately 28% of our total net sales for the second quarter of 2020.

Sales of our industrial products were approximately 44% of our total net sales for the third quarter of 2020.

Our industrial products sales volumes are dependent upon general economic conditions primarily in the housing, automotive, and paper industries.

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Our sales prices generally vary with the market price of ammonia or natural gas, as applicable, in our pricing arrangements with customers.

Sales of our mining products were approximately 10% of our total net sales for the second quarter of 2020.

See discussion above concerning a new long-term nitric acid supply contract under “Recent Business Developments.”

Sales of our mining products were approximately 13% of our total net sales for the third quarter of 2020.

Our mining products are LDAN and AN solution, which are primary used as AN fuel oil and specialty emulsions for usage in the quarry and the construction industries, for metals mining, and to a lesser extent, for coal.

In our mining markets, our sales volumes are typically driven by changes in the overall North American consumption levels of mining products that can be impacted by weather.

Additionally, reduction in coal mining activities, due in part, to the shift from coal to natural gas in the electrical generation sector, is increasing competition within the other sectors of this market.

While we believe our plants are well located to support the more stable quarry and construction industries and the metals mining industries, our mining sales volumes for the second quarter of 2020 were affected by overall lower customer demand in our mining markets due to COVID-19’s impact on our customer base resulting in mine closures or reductions in mining operating rates.

Over the last month, we have seen a reopening of some of the closed mining operations and an increase in other mine operating rates.

Additionally, reduction in coal mining activities, due in part, to the shift from coal to natural gas and renewable power sources such as wind and solar in the electrical generation sector, is increasing competition within the other sectors of this market.

We believe our plants are well located to support the more stable quarry and construction industries and the metals mining industries.

Although our mining sales volumes for the third quarter of 2020 improved compared to the same period of 2019, customer demand for the quarter was impacted due to COVID-19’s impact on our customer base which resulted in mine closures or reductions in mining operating rates.

Natural Gas Prices

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These forward purchase contracts are generally either fixed-price or index-price, short-term in nature and for a fixed supply quantity.

During the second quarter of 2020, we also have certain forward natural gas contracts as discussed in Note 6 .

As noted in Note 6 , we also have certain forward natural gas contracts.

We are able to purchase natural gas at competitive prices due to our connections to large distribution systems and their proximity to interstate pipeline systems.

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Three Months Ended

September 30,

Natural gas volumes (MMBtu in millions)

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Without the pipeline in place for ammonia transport, producers that relied on the pipeline to transport their ammonia now have to rely on other transportation modes, primarily trucks, but will also include rail and barge transport of ammonia.

Due to the increase in demand for ammonia trucks, during the second quarter of 2020, higher transportation costs impacted our margins since we were unable to fully pass through these costs to our customers.

Due to increases in demand for ammonia trucks during the spring and fall planting seasons, higher transportation costs have and could continue to impact our margins, if we were unable to fully pass through these costs to our customers.

As a result, we continue to evaluate supply chain efficiencies to reduce or counter the impact of higher logistics costs.

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Our Cherokee Facility is currently on a three-year Turnaround cycle with t he next Turnaround planned in the third quarter o f 2021.

Prepay Contracts

Forward Sales Contracts

We use forward sales of our fertilizer products to optimize our asset utilization, planning process and production scheduling.

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Fixing the selling prices of our products months in advance of their ultimate delivery to customers typically causes our reported selling prices and margins to differ from spot market prices and margins available at the time of shipment.

Consolidated Results of the Second Quarter of 2020

Our consolidated net sales for the second quarter of 2020 were $105.0 million compared to $121.5 million for the same period in 2019.

Our consolidated operating income was $10.7 million compared to $11.3 million for the same period in 2019.

Consolidated Results of the Third Quarter of 2020

Our consolidated net sales for the third quarter of 2020 were $74.0 million compared to $75.5 million for the same period in 2019.

Our consolidated operating loss was $9.0 million compared to $19.2 million for the same period in 2019.

The items impacting our operating results are discussed in more detail below and under “Results of Operations.”

Items Affecting Comparability of Results of the Second Quarter

Items Affecting Comparability of Results of the Third Quarter

Selling Prices

During the second quarter of 2020, average agricultural selling prices for our ammonia, UAN and HDAN decreased 32%, 23% and 5%, respectively, compared to the same period in 2019.

During the third quarter of 2020, average agricultural selling prices for our ammonia, UAN and HDAN decreased 26%, 22% and 18%, respectively, compared to the same period in 2019.

As discussed above under “Key Industry Factors ,” the COVID-19 economic downturn and the resultant decline in energy prices has led to lower natural gas prices globally.

This has led to an increase in operating rates for nitrogen producers around the globe, resulting in greater supply of nitrogen products and lower fertilizer pricing.

These factors have led to an increase in operating rates for nitrogen producers around the globe, resulting in greater supply of nitrogen products and lower fertilizer pricing.

This, combined with elevated ammonia inventory levels from the inordinately inclement weather throughout the Midwest in 2019 and the closure of the Magellan ammonia pipeline in September 2019, has led to excess ammonia supply in the Southern Plains market.

Also pricing pressures were driven by the impact of ammonia producers selling ammonia that would otherwise have been sold into the industrial market but was instead sold into the agricultural market due to the pandemic-related slowdown of the industrial market .

UAN prices were negatively impacted by European anti-dumping duties, which resulted in less exports of UAN from the U.S.

and more imports of UAN from Russia and Trinidad into the United States.

HDAN prices are being impacted by the decline in the overall agricultural commodity prices.

Our second quarter 2020 average industrial selling prices for our products were lower compared to the same period of 2019 as a result of the aforementioned negative impact on the markets we serve from the COVID-19 pandemic and the elevated ammonia inventory levels.

The Tampa Ammonia pricing has leveled as the second quarter 2020 Tampa Ammonia pricing declined slightly compared to the same period in 2019, which led to a slight decrease in industrial selling prices as many of our industrial contracts are indexed to the Tampa Ammonia benchmark price.

Our second quarter 2020 average mining selling prices were lower compared to the same period of 2019 primarily as a result of a large portion of our mining sales contracts are linked to natural gas indexes and as the cost of natural gas declines, the pricing for these products declines accordingly.

Settlements with Certain Vendors (2020 only)

As discussed above under “Recent Business Developments”, in June 2020, EDC and certain vendors mediated settlements for EDC to recover certain costs associated with a nitric acid plant at our El Dorado Facility.

As a result, a recovery from these settlements was recognized during the second quarter of 2020, which includes approximately $5.7 million classified as a reduction to cost of sales.

For the second quarters of 2020 and 2019, legal fees were approximately $1.4 million and $2.1 million, respectively.

and more imports of UAN from Russia and Trinidad into the U.S.

HDAN prices were impacted by the overall decline in agricultural commodity prices.

Our third quarter 2020 average industrial selling prices for our products were lower compared to the same period of 2019 as a result of the aforementioned negative impact on the markets we serve from the COVID-19 pandemic and the elevated ammonia inventory levels.

The Tampa Ammonia pricing has declined 6% compared to the same period in 2019, which led to a decrease in industrial selling prices as many of our industrial contracts are indexed to the Tampa Ammonia benchmark price.

Our third quarter 2020 average mining selling prices were lower compared to the same period of 2019 primarily as a result of certain mining sales contracts are linked to natural gas indexes and as the cost of natural gas declines, the pricing for these products declines accordingly.

For the third quarters of 2020 and 2019, legal fees were approximately $1.3 million and $3.6 million, respectively.

The change primarily relates to fees incurred as we pursue our claims against Leidos to recover damages and losses associated with the construction of the ammonia plant at the El Dorado Facility as discussed in footnote B of Note 5.

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Once a new trial date is set, we expect these costs will increase as we restart preparations for the trial.

Deferred Taxes (2019 only)

For the second quarter of 2019, the benefit for income taxes was $5.7 million and the resulting increase in the effective benefit rate was primarily due to changes to the state deferred tax assets and liabilities resulting from state tax law changes enacted and due to federal and state indefinite lived carryforward benefits that can be realized through the reversal of deferred tax liabilities.

Turnaround Expense (2019 only)

During the third quarter of 2019, we incurred Turnaround costs totaling approximately $7.2 million relating to a Turnaround at our Pryor Facility of which 24 days occurred during the third quarter of 2019, and an 18-day Turnaround performed at our El Dorado Facility.

Turnaround costs are included in cost of sales.

These Turnaround costs discussed above do not include the impact on operating results relating to lost absorption of fixed costs or the reduced margins due to the lost production and subsequent sales of product from our plants being shut down during the Turnaround.

Results of Operations

The following Results of Operations should be read in conjunction with our condensed consolidated financial statements for the three months ended June 30, 2020 and 2019 and accompanying notes and the discussions under “Overview” and “Liquidity and Capital Resources” included in this MD&A.

The following Results of Operations should be read in conjunction with our condensed consolidated financial statements for the three and nine months ended September 30, 2020 and 2019 and accompanying notes and the discussions under “Overview” and “Liquidity and Capital Resources” included in this MD&A.

We present the following information about our results of operations.

Net sales to unaffiliated customers are reported in the condensed consolidated financial statements and gross profit represents net sales less cost of sales.

Net sales to unaffiliated customers are reported in the condensed consolidated financial statements and gross profit (loss) represents net sales less cost of sales.

Net sales are reported on a gross basis with the cost of freight being recorded in cost of sales.

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

The following table contains certain financial information:

Three Months Ended

September 30,

(Dollars In Thousands)

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Total net sales

Gross profit:

Gross profit (loss):

Agricultural products (1)

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Turnaround expense

Recovery from settlements with certain vendors (3)

Total gross profit

Total gross loss

Selling, general and administrative expense

Other income, net

Operating income

Other expense, net

Operating loss

Interest expense, net

Non-operating other income, net

Non-operating other expense, net

Benefit for income taxes

Net income (loss)

Other information:

Gross profit percentage (4)

Gross profit (loss) percentage (3)

Property, plant and equipment expenditures

Represents a non-GAAP measure since the amount excludes unallocated depreciation, amortization and Turnaround expenses and a recovery from settlements.

Represents a non-GAAP measure since the amount excludes unallocated depreciation, amortization and Turnaround expenses.

Represents amount classified as cost of sales.

See discussion above under “Items Affecting Comparability of Results of the Second Quarter.”

As a percentage of the total net sales.

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Three Months Ended

September 30,

Adjusted gross profit by market (1)

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by market (2)

Represents a non-GAAP measure since the amount excludes unallocated depreciation, amortization, Turnaround expenses and a recovery from settlements.

Represents a non-GAAP measure since the amount excludes unallocated depreciation, amortization and Turnaround expenses.

See reconciliation included in the financial information table above.

As a percentage of the respective net sales.

The following tables provide key operating metrics for the a gricultural p roducts:

The following tables provide key operating metrics for the agricultural products:

Three Months Ended

September 30,

Product (tons sold)

Three Months Ended

September 30,

Gross Average Selling Prices (price per ton)

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Three Months Ended

September 30,

Product (tons sold)

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Three Months Ended

September 30,

Product (tons sold)

LDAN/HDAN/AN Solution

Agricultural product sales decreased driven by lower selling prices for all of our agricultural products as discussed above under “Items Affecting Comparability of Results of the Second Quarter.” The impact from the decline in selling prices was partially offset by an increase in sales volume of UAN primarily as a result of higher production from the Pryor Facility as a result of the new Urea reactor which was installed in the fourth quarter of 2019.

Industrial acids and other industrial chemical product sales decreased primarily from lower sales volumes into end markets affected by the COVID-19 pandemic.

The automotive industry, a significant consumer of products that are provided by a number of our nitric acid customers were shut down during the first six weeks of the second quarter.

Although, plants returned to service in mid-May they are still not operating at full capacity.

The slowdown in the housing sector has also impacted nitric acid demand where nitric acid is used in paints, coatings and a variety of other building materials.

Additionally, the slowdown of industrial manufacturing in general has diminished consumption of power throughout the U.S., which has reduced the demand for industrial ammonia.

Further, water treatment for industrial manufacturers and municipalities has impacted our sulfuric acid volumes.

Mining products sales decreased primarily as the result of overall lower sales volume and selling prices for our mining products.

Sales volumes were impacted by reduced production or complete closures of gold, copper, iron ore and vanadium ore mines which impacted overall demand for mining products.

Additionally, a large portion of our mining sales contracts are linked to natural gas indexes and as the cost of natural gas declines, the pricing for these products declines accordingly.

As noted in the tables above, we recognized a gross profit of $19.0 million for the second quarter of 2020 compared to $19.7 million for the same period in 2019, or a decrease of $0.7 million.

Overall, our gross profit percentage increased to 18.1% compared to a gross profit of 16.2% for the same period in 2019.

Our agricultural products adjusted gross profit percentage decreased to 22.4% for the second quarter of 2020 from 26.7% for the second quarter of 2019 due primarily to decline in selling prices for all of our agricultural products, partially offset by higher sales volumes for UAN and other our major products as discussed above.

Industrial and mining products adjusted gross profit percentage increased to 39.3% for the second quarter of 2020 from 36.8% for the same period in 2019 primarily driven by a shift of product mix and by lower production costs partially offset by lower sales volumes for all of our major products as discussed above.

The net negative effect on gross profit from activity discussed above was partially offset by the result of settlements with certain vendors resulting in a recovery of approximately $5.7 million (as discussed above under “ Recent Business Developments ”) and approximately $4.6 million in lower natural gas costs per MMBtu.

Interest Expense, net

Interest expense for the second quarter of 2020 was $12.5 million compared to $11.3 million for the same period in 2019.

The increase relates primarily to the interest expense incurred associated with the issuance of the New Notes in 2019 as discussed in Note 4.

Agricultural product sales decreased driven by lower selling prices for all of our agricultural products as discussed above under “Items Affecting Comparability of Results of the Third Quarter.” Additionally, hot and very dry weather across the Southern Plains delayed the shipment of HDAN fill tons during the quarter resulting in lower overall sales volumes during the 2020 third quarter.

The impact from the decline in selling prices and lower HDAN volume was partially offset by an increase in sales volume of UAN from higher production from our Pryor Facility as a result of a new Urea reactor, which was installed in the fourth quarter of 2019 and the resultant improvement in production rates.

Industrial acids and other industrial product sales increased primarily from higher sales volumes of ammonia and other industrial products despite the affect from the COVID-19 pandemic on the end markets we serve.

Offsetting this volume increase were lower selling prices due primarily to lower Tampa Ammonia benchmark pricing.

The average Tampa ammonia pricing was approximately $14 per ton lower compared to the same period in 2019.

Additionally, nitric acid sales volumes continue to be impacted by pandemic related market weakness in polyurethane end markets.

Mining products sales improved slightly driven by increased sales volumes partially offset by lower selling prices.

Certain mining sales contracts are linked to natural gas indexes and as the cost of natural gas declines, the pricing for these products declines accordingly.

Gross Profit (Loss)

As noted in the tables above, we recognized a gross loss of $1.1 million for the third quarter of 2020 compared to $9.7 million for the same period in 2019, or an $8.7 million improvement.

Overall, our gross loss percentage was (1.4)% compared to (12.9)% for the same period in 2019.

Our agricultural products adjusted gross profit percentage increased slightly to 9.1% for the third quarter of 2020 from 8.9% for the third quarter of 2019 due primarily to higher sales volumes of UAN and lower production costs partially offset by declines in selling prices for all of our agricultural products, as discussed above.

Industrial and mining products adjusted gross profit percentage increased to 32% for the third quarter of 2020 from 30% for the same period in 2019 primarily driven by a shift of product mix, higher sales volumes of ammonia, and lower production costs partially offset by lower selling prices as discussed above.

In addition to the items discussed above, the decline in our gross loss was also impacted by approximately $2.7 million in lower natural gas costs per MMBtu.

Also, during the third quarter of 2019, we incurred Turnaround costs totaling approximately $7.2 million (no Turnarounds were performed during the same period of 2020).

Selling, General and Administrative

Our SG&A expenses were $7.1 million for the third quarter of 2020, a decrease of $2.0 million compared to the same period in 2019.

The decrease was primarily driven by lower professional fees including legal fees associated with the legal matter discussed above under “Items Affecting Comparability of Results of the Third Quarter.”

Benefit for Income Taxes

The benefit for income taxes for the second quarter of 2020 was $1.3 million compared to $5.7 million for the same period in 2019.

For the second quarter of 2020, the effective tax rate was impacted by adjustments made to our valuation allowances.

For the second quarter of 2019, the effective tax rate was impacted by adjustments made to our valuation allowances and enacted state tax law changes.

Also see discussion above under “Items Affecting Comparability of Results of the Second Quarter-Deferred Taxes” and in Note 7.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

The benefit for income taxes for the third quarter of 2020 was $1.4 million compared to $0.5 million for the same period in 2019.

For the third quarter of 2020, the effective tax rate was impacted by adjustments made to our valuation allowances.

For the third quarter of 2019, the effective tax rate was impacted by adjustments made to our valuation allowances and enacted state tax law changes.

The resulting effective tax rate for the third quarters of 2020 and 2019 was 7% and 2% (benefit on pre-tax loss ), respectively.

Also see discussion in Note 7.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

The following table contains certain financial information:

Six Months Ended

Nine Months Ended

September 30,

(Dollars In Thousands)

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Selling, general and administrative expense

Other income, net

Operating income

Other expense, net

Operating loss

Interest expense, net (4)

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Represents amount classified as cost of sales.

See discussion above under “Items Affecting Comparability of Results of the Second Quarter.”

Includes interest expense of $1.4 million associated with a litigation judgment issued during the first six months of 2020 as discussed in footnote (B) of Note 5.

See discussion in “Contingencies” of Note 1.

Includes interest expense of $1.5 million associated with a litigation judgment issued during the first nine months of 2020 as discussed in footnote (B) of Note 5.

As a percentage of the total net sales.

The following table provides certain financial information by market (dollars in thousands):

Six Months Ended

Nine Months Ended

September 30,

Adjusted gross profit by market (1)

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The following tables provide key operating metrics for the agricultural products:

Six Months Ended

Nine Months Ended

September 30,

Product (tons sold)

Six Months Ended

Nine Months Ended

September 30,

Gross Average Selling Prices (price per ton)

With respect to sales of industrial products, the following tables indicate key operating metrics of our major products:

Six Months Ended

Nine Months Ended

September 30,

Product (tons sold)

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With respect to sales of mining products, the following table indicates the volumes sold of our major products:

Six Months Ended

Nine Months Ended

September 30,

Product (tons sold)

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Agricultural product sales decreased driven by lower selling prices for all of our agricultural products.

The impact from the decline in selling prices was partially offset by an increase in sales volume of UAN as a result of higher production from the Pryor facility as a result of the new Urea reactor which was installed in the fourth quarter of 2019 and to a lesser extent increased sales volume of HDAN and ammonia compared to the spring season of 2019.

Industrial acids and other industrial chemical product sales decreased primarily from lower selling prices due primarily to lower Tampa Ammonia benchmark pricing.

Industrial acids and other industrial product sales decreased primarily from lower selling prices due primarily to lower Tampa Ammonia benchmark pricing.

The average Tampa ammonia pricing was approximately $14 per ton lower compared to the same period in 2019.

Additionally, sales volumes were lower into markets we serve from the COVID-19 pandemic.

Additionally, overall sales volumes were slightly lower into markets we serve due to the COVID-19 pandemic.

Mining products sales decreased primarily as the result of overall lower sales volume and selling prices for our mining products.

Sales volumes were impacted by reduced production or complete closures of gold, copper, iron ore and vanadium ore mines which impacted overall demand for mining products.

A large portion of our mining sales contracts are linked to natural gas indexes and as the cost of natural gas declines, the pricing for these products declines accordingly.

As noted in the tables above, we recognized a gross profit $21.6 million in the first six months of 2020 compared to $27.0 million for the same period of 2019, or a decrease of approximately $5.4 million.

Our agricultural products adjusted gross profit percentage decreased to 17% during the first six months of 2020 from 22% for the first six months of 2019 due primarily to lower selling prices for all of our agricultural products, partially offset by increased sales volumes for all of our major products as discussed above.

Industrial and mining products adjusted gross profit percentage increased in the first six months of 2020 to 40% from 37% in first six months of 2019 primarily driven by a shift of product mix and lower production costs partially offset by lower overall Tampa Ammonia pricing, which averaged approximately $242 per metric ton during 2020 compared to approximately $258 per metric ton for the same period in 2019 and from the lower sales volumes for all of our major products as discussed above.

The net negative effect on gross profit from activity discussed above was partially offset by approximately $10.7 million in lower natural gas costs per MMBtu and the result of settlements with certain vendors resulting in a recovery of approximately $5.7 million (as discussed above under “ Recent Business Developments ”).

Certain mining sales contracts are linked to natural gas indexes and as the cost of natural gas declines, the pricing for these products declines accordingly.

As noted in the tables above, we recognized a gross profit $20.5 million in the first nine months of 2020 compared to $17.3 million for the same period of 2019, or an increase of approximately $3.2 million.

Overall, our gross profit percentage was 7.8% compared to 5.9% for the same period in 2019.

Our agricultural products adjusted gross profit percentage decreased to 15% during the first nine months of 2020 from 18.7% for the first nine months of 2019 due primarily to lower selling prices for all of our agricultural products, partially offset by increased sales volumes for all of our major products as discussed above.

Industrial and mining products adjusted gross profit percentage increased in the first nine months of 2020 to 37.1% from 35% in first nine months of 2019 primarily driven by a shift of product mix and lower production costs partially offset by lower overall Tampa Ammonia pricing, which averaged approximately $231 per metric ton during 2020 compared to approximately $245 per metric ton for the same period in 2019 and from the lower sales volumes for all of our major products as discussed above.

The net negative effect on gross profit from activity discussed above was partially offset by approximately $13.7 million in lower natural gas costs per MMBtu and the result of settlements with certain vendors resulting in a recovery of approximately $5.7 million as discussed in Note 1.

Also, during the third quarter of 2019, we incurred Turnaround costs totaling approximately $7.2 million (no Turnarounds were performed during the same period of 2020).

Selling, General and Administrative

Our SG&A expenses were $18.5 million for the first six months of 2020, an increase of $2.9 million compared to the same period in 2019.

The increase was primarily driven by professional fees including legal fees associated with the legal matter discussed above under “Items Affecting Comparability of Results of the Second Quarter.”

Our SG&A expenses were $25.6 million for the first nine months of 2020, an increase of $0.9 million compared to the same period in 2019.

This net increase was primarily driven by an increase in compensation-related costs and marketing fees partially offset by lower legal fees.

Interest Expense, net

Interest expense for the first half of 2020 was $26.0 million compared to $22.3 million for the same period in 2019.

The net increase relates primarily to interest expense incurred associated with the issuance of the New Notes in 2019 as discussed in Note 4 and a litigation judgment discussed in footnote (B) of Note 5.

Interest expense for the first nine months of 2020 was $38.5 million compared to $34.3 million for the same period in 2019.

The net increase relates primarily to interest expense incurred associated with the issuance of the New Notes in 2019, the Secured Financing due 2023 and the Secured Financing Agreement due 2025 as discussed in Note 4 in addition to a litigation judgment discussed in footnote (B) of Note 5.

Benefit for Income Taxes

The benefit for income taxes for the first six months of 2020 was $1.6 million compared to $5.3 million for the same period in 2019.

For the first six months of 2020, the effective tax rate was impacted by adjustments made to our valuation allowances.

For the first six months of 2019, the effective tax rate was impacted by adjustments made to our valuation allowances and enacted state tax law changes.

Also see discussion above under “Items Affecting Comparability of Results of the Second Quarter-Deferred Taxes” and in Note 7.

The benefit for income taxes for the first nine months of 2020 was $3.0 million compared to $5.8 million for the same period in 2019.

For the first nine months of 2020, the effective tax rate was impacted by adjustments made to our valuation allowances.

For the first nine months of 2019, the effective tax rate was impacted by adjustments made to our valuation allowances and enacted state tax law changes.

The resulting effective tax rate for the first nine months of 2020 and 2019 was 7% and 14% (benefit on pre-tax loss), respectively.

LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes our cash flow activities for the six months ended June 30:

The following table summarizes our cash flow activities for the nine months ended September 30:

(In Thousands)

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Net Cash Flow from Operating Activities

Net cas h provided by operating activities was $19.4 million for the first half of 2020 compared to $20.3 million for the same period of 2019, a change of approximately $0.9 million.

For the first half of 2020, the net cash provided is the result of a net loss of $19.8 million plus adjustments of $34.6 million for depreciation and amortization of PP&E and other adjustments of $2.1 million and net cash provided of $2.5 million primarily from our working capital.

For the first half of 2019, the net cash provided is the result of a net loss of $4.9 million plus adjustments of $33.9 million for depreciation and amortization of PP&E and other adjustments of $3.1 million less an adjustment of $5.3 million for deferred taxes and net cash used of approximately $6.5 million primarily from our working capital .

Net cash provided by operating activities was $24.7 million for the nine months of 2020 compared to $41.0 million for the same period of 2019, a change of $16.3 million.

For the first nine months of 2020, the net cash provided is the result of a net loss of $40.2 million plus adjustments of $52 million for depreciation and amortization of PP&E and other adjustments of $6.2 million less an adjustment of $3.1 million for deferred taxes and net cash provided of $9.8 million primarily from our working capital.

For the first nine months of 2019, the net cash provided is the result of a net loss of $35.7 million plus adjustments of $51.6 million for depreciation and amortization of PP&E and other adjustments of $5.7 million less an adjustment of $5.8 million for deferred taxes and net cash provided of approximately $25.2 million primarily from our working capital.

Net Cash Flow from Investing Activities

Net cash used by investing activities was $17.7 million for the first half of 2020 compared to $12.8 million for the same period of 2019, a change of $4.9 million.

For the first half of 2020 and 2019, the net cash used relates primarily to expenditures for PP&E.

Net cash used by investing activities was $20.2 million for the nine months of 2020 compared to $20.4 million for the same period of 2019, a change of approximately $0.2 million.

For the first nine months of 2020 and 2019, the net cash used relates primarily to expenditures for PP&E.

Net Cash Flow from Financing Activities

Net cash provided by financing activities was $32.0 million for the first half of 2020 compared to $24.5 million for the same period of 2019, a change of $7.5 million.

For the first half of 2020, the net cash provided primarily consists of proceeds of $30 million from our Working Capital Revolver Loan and proceeds of $12.6 million from other long-term debt partially offset by payments on other long-term debt and short-term financing of $10.5 million and payments of $0.1 million for other financing activities.

For the first half of 2019, the net cash provided primarily consists of net proceeds of $35.1 million from the New Notes, proceeds of $15.8 million from other long-term debt partially offset by payments on other long-term debt and short-term financing of $15.4 million, net payments of $10 million on the Working Capital Revolver Loan, and payments of $1.0 million for other financing activities.

Net cash provided by financing activities was $14.8 million for the nine months of 2020 compared to $20.1 million for the same period of 2019, a change of $5.3 million.

For the first nine months of 2020, the net cash provided primarily consists of proceeds of $42.6 million from other long-term debt partially offset by payments on other long-term debt and short-term financing of $27.6 million and payments of $0.2 million for other financing activities.

For the first nine months of 2019, the net cash provided primarily consists of net proceeds of $35.1 million from the New Notes, proceeds of $16.8 million from other long-term debt partially offset by payments on other long-term debt and short-term financing of $20.0 million, net payments of $10 million on the Working Capital Revolver Loan, and payments of $1.8 million for other financing activities.

Capitalization

The following is our total current cash, long-term debt, redeemable preferred stock and stockholders’ equity:

September 30,

(In Millions)

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Unsecured Loan Agreement due 2022

Secured Promissory Note due 2023

Secured Financing due 2023

Secured Loan Agreement due 2025

Secured Promissory Note due 2023

Unamortized discount and debt issuance costs

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Total stockholders' equity

Liquidation preference of $259.8 million as of June 30, 2020 .

Liquidation preference of $268.7 million as of September 30, 2020 .

See discussion above concerning the COVID-19 pandemic under “Recent Business Developments.”

As of June 30, 2020, we have a revolving credit facility, our Working Capital Revolver Loan, with a borrowing base of $65 million.

As of June 30, 2020 , our Working Capital Revolver Loan had outstanding borrowings of $30.0 million and approximately $12.6 million of availability.

We preemptively borrowed on the Working Capital Revolver Loan to ensure access to liquidity given the uncertainty surrounding the COVID-19 pandemic.

In April 2020, LSB entered into a $10 million loan under the PPP within the CARES Act stimulus package and amended by the Paycheck Protection Program Flexibility Act of 2020.

Under the terms of the PPP, an amount up to the full principal amount and any accrued interest of the loan may be forgiven based on the proceeds from the loan being spent primarily on payroll costs.

We plan to use most, if not all, of the proceeds from the PPP loan for payroll, rent, utilities, and other specified costs that qualify for loan forgiveness.

Under the current terms of the PPP loan, the loan bears an annual interest rate of 1.00%.

Also, loan forgiveness applications are due within 10 months after the end of the loan forgiveness covered period, which period began on the date the PPP loan was disbursed and ends either 8-weeks or 24-weeks after disbursement of the loan.

Once the SBA notifies the lender the amount of approved loan forgiveness, the lender will determine the date that the equal monthly principal and interest payments will begin for the remaining loan balance, if any.

Currently the loan matures in April 2022, which term may be extended to April 2025 if mutually agreed to by the parties.

As for the potential loan forgiveness, once the PPP loan is, in part or wholly, forgiven and a legal release is received, the liability would be reduced by the amount forgiven and a gain on extinguishment would be recorded.

As discussed in footnote (G) of Note 4, in August 2020, EDA entered into a $30 million secured financing arrangement with an affiliate of LSB Funding that matures in August 2025.

A portion of the proceeds from this secured financing arrangement was used to pay off the Secured Promissory Note that was scheduled to mature in May 2023.

As of September 30, 2020, we have a revolving credit facility, our Working Capital Revolver Loan, with a borrowing base of $65 million.

As of September 30, 2020 , our Working Capital Revolver Loan was undrawn and had approximately $36.3 million of availability.

For the full year of 2020, we expect capital expenditures to be approximately $25 million to $30 million, which includes approximately $5 million to $10 million for margin enhancement projects.

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The Working Capital Revolver Loan does not include financial covenant requirements unless a defined covenant trigger event has occurred and is continuing.

As of June 30, 2020, no trigger event had occurred.

As of September 30, 2020, no trigger event had occurred.

Loan Agreements and Redeemable Preferred Stock

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Principal and interest are payable in monthly installments.

This promissory note is secured by a natural gas pipeline at the El Dorado Facility and is guaranteed by LSB.

Unsecured Loan Agreement due 2022 – As discussed above and in footnote (D) of Note 4, LSB is a party to an unsecured PPP loan with a lender pursuant to a new loan program through the SBA as the result of the PPP established by the CARES Act and amended by the Paycheck Protection Program Flexibility Act of 2020.

Secured Promissory Note due 2023 – EDA is party to a secured promissory note due in May 2023.

Principal and interest are payable in equal monthly installments with a final balloon payment of approximately $6.1 million.

This promissory note bears interest at a rate that is based on the monthly LIBOR rate plus a base rate for a total of 4.43%.

This promissory note is secured by the ammonia storage tank and related systems and is guaranteed by LSB.

Unsecured Loan Agreement due 2022 – As discussed in footnote (D) of Note 4, LSB is a party to an unsecured PPP loan with a lender pursuant to a new loan program through the SBA as the result of the PPP established by the CARES Act and amended by the Paycheck Protection Program Flexibility Act of 2020.

We have used all or substantially all of the proceeds from the PPP loan for payroll, rent, utilities, and other specified costs that qualify for loan forgiveness.

Under the current terms of the PPP loan, loan forgiveness applications are due within 10 months after the end of the loan forgiveness covered period, which period began on the date the PPP loan was disbursed and ends either 8-weeks or 24-weeks after disbursement of the loan.

Once the SBA notifies the lender the

amount of the loan that is approved for forgiveness, the lender will determine the date that the equal monthly principal and interest payments will begin for the remaining loan balance, if any.

Currently the loan matures in April 2022 , which term may be extended to April 2025 if mutually agreed to by the parties.

As for the potential loan forgiveness, once the PPP loan is , wholly or partially , forgiven and a legal release is received, the liability would be reduced by the amount forgiven and a gain on extinguishment would be recorded.

Secured Financing due 2023 – EDC is party to a secured financing arrangement with an affiliate of LSB Funding.

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Under the terms of the note, principal and interest are payable in 60 equal monthly installments.

Working Capital Revolver Loan – At June 30, 2020 , our Working Capital Revolver Loan had outstanding borrowings of $30 million and approximately $12.6 million of availability , based on our eligible collateral, less outstanding letters of credit as of that date.

Secured Financing due 2025 – As discussed in footnote (G) of Note 4 , EDA is party to a $30 million secured financing arrangement with an affiliate of LSB Funding.

Principal and interest are payable in 60 equal monthly installments with a final balloon payment of approximately $5 million due in August 2025.

Working Capital Revolver Loan – At September 30, 2020 , our Working Capital Revolver Loan was undrawn and had approximately $36.3 million of availability , based on our eligible collateral, less outstanding letters of credit as of that date.

Also see discussion above under “Compliance with Long-Term Debt Covenants .”

Redemption of Series E Redeemable Preferred – At June 30, 2020 , there were 139,768 outstanding shares of Series E Redeemable Preferred and the aggregate liquidation preference (par value plus accrued dividends) was $259.8 million.

Redemption of Series E Redeemable Preferred – At September 30, 2020 , there were 139,768 outstanding shares of Series E Redeemable Preferred and the aggregate liquidation preference (par value plus accrued dividends) was $268.7 million.

A t any time on or after October 25, 2023 , each Series E holder has the right to elect to have such holder’s shares redeemed by us at a redemption price per share equal to the liquidation preference per share of $1,000 plus accrued and unpaid dividends plus the participation rights value (the “Liquidation Preference”).

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However, this accretion will change if the expected redemption date changes.

Capital Expenditures – First Six Months of 2020

For the first half of 2020, capital expenditures relating to PP& E were $18.0 million.

Capital Expenditures – First Nine Months of 2020

For the first nine months of 2020, capital expenditures relating to PP&E were $22.2 million.

The capital expenditures were funded primarily from cash and working capital.

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We are subject to specific federal and state environmental compliance laws, regulations and guidelines.

As a result, we incurred expenses of $2.1 million during the first six months of 2020 in connection with environmental projects.

For the remainder of 2020, we expect to incur expenses ranging from $2.0 million to $2.3 million in connection with additional environmental projects.

As a result, we incurred expenses of $2.9 million during the first nine months of 2020 in connection with environmental projects.

For the fourth quarter of 2020, we expect to incur expenses ranging from $0.9 million to $1.1 million in connection with additional environmental projects.

However, it is possible that the actual costs could be significantly different than our estimates.

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Dividends on the Series E Redeemable Preferred are cumulative and payable semi-annually (May 1 and November 1) in arrears at the current annual rate of 14% of the liquidation value of $1,000 per share, but such annual rate will increase beginning on April 25, 2021 as discussed in Note 8.

Each share of Series E Redeemable Preferred is entitled to receive a semi-annual dividend, only when declared by our Board.

Each share of Series E Redeemable Preferred is entitled to receive a semi-annual dividend, only when declared

by our Board .

In addition, dividends in arrears at the dividend date, until paid, shall compound additional dividends at the current annual rate of 14%, but such annual rate will increase beginning on April 25, 2021 .

The current semi-annual compounded dividend is approximately $127.20 per share for the current aggregate semi-annual dividend of $17.8 million.

The current semi-annual compounded dividend is approximately $1 27.20 per share for the current aggregate semi-annual dividend of $ 1 7 .

We also must declare a dividend on the Series E Redeemable Preferred on a pro rata basis with our common stock .

As long as the Purchaser holds at least 10% of the Series E Redeemable Preferred, we may not declare dividends on our common stock and other preferred stocks unless and until dividends have been declared and paid on the Series E Redeemable Preferred for the then current dividend period in cash.

As of June 30, 2020, the amount of accumulated dividends on the Series E Redeemable Preferred was approximately $120.0 million.

As of September 30, 2020 , the amount of accumulated dividends on the Series E Redeemable Preferred was approximately $ 1 2 8.9 million.

Dividends on the Series D 6% cumulative convertible Class C preferred stock (the “Series D Preferred”) and Series B 12% cumulative convertible Class C Preferred Stock (the “Series B Preferred”) are payable annually, only when declared by our Board, as follows:

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$12.00 per share on our outstanding non-redeemable Series B Preferred for an aggregate dividend of $240,000.

As of June 30, 2020, the amount of accumulated dividends on the Series D Preferred and Series B Preferred totaled approximately $1.4 million.

As of September 30, 2020, the amount of accumulated dividends on the Series D Preferred and Series B Preferred totaled approximately $1.5 million.

All shares of the Series D Preferred and Series B Preferred are owned by the Golsen Holders.

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These insurance bonds primarily represent guarantees of future performance of our subsidiaries.

As of June 30, 2020, we have agreed to indemnify the sureties for payments , up to $9.7 million, made by them in respect of such bonds.

As of September 30, 2020, we have agreed to indemnify the sureties for payments , up to $9.7 million , made by them in respect of such bonds.

These insurance bonds are expected to expire or be renewed later in 2020.

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Also, we recognize contingent gains when such gains are realized or when the contingencies have been resolved (generally at the time a settlement has been reached).

As a result, a recovery from settlements with certain vendors was recognized during the second quarter of 2020 discussed under Contingencies of Note 1.

As a result, a recovery from settlements with certain vendors was recognized during the first nine month s of 2020 dis cussed under Contingencies of Note 1.

Income taxes are accounted for under the asset and liability method.

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The carrying values of the redeemable preferred stocks discussed in Note 8 are being increased by periodic accretions (recorded to retained earnings and included in determining income or loss per share) using the interest method so that the carrying amount will equal the redemption value as of October 25, 2023, the earliest possible redemption date by the holder.

It is also reasonably possible that the estimates and assumptions utilized as of June 30, 2020 could change in the near term.

It is also reasonably possible that the estimates and assumptions utilized as of September 30, 2020 could change in the near term.

Actual results could differ materially from these estimates and judgments, as additional information becomes known.

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Periodically, we enter into forward firm sales commitments for products to be delivered in future periods.

As a result, at June 30, 2020 we could be exposed to embedded losses should our product costs exceed the firm sales prices.

At June 30, 2020, we had no embedded losses associated with sales commitments with firm sales prices.

As a result, we could be exposed to embedded losses should our product costs exceed the firm sales prices as of September 30, 2020.

At September 30, 2020, we had no embedded losses associated with sales commitments with firm sales prices.

Commodity Price Risk

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Generally, these contracts are considered normal purchases because they provide for the purchase of natural gas that will be delivered in quantities expected to be used over a reasonable period of time in the normal course of business, these contracts are exempt from the accounting and reporting requirements relating to derivatives.

As discussed in Note 6, during the first six months of 2020, we entered into certain natural gas contracts, which are accounted for on a mark-to-market basis.

At June 30, 2020, these natural gas contracts included 1.8 million MMBtus of natural gas and therefore a $0.10 change in natural gas price would impact pre-tax operating results by approximately $0.2 million.

As discussed in Note 6, during the first nine months of 2020, we entered into certain natural gas contracts, which are accounted for on a mark-to-market basis.

At September 30, 2020, these natural gas contracts included 1.0 million MMBtus of natural gas and therefore a $0.10 change in natural gas price would impact pre-tax operating results by approximately $0.1 million.

Interest Rate Risk

Generally, we are exposed to variable interest rate risk with respect to our revolving credit facility .

As of June 30, 2020, w e had $30 million outstanding borrowings on this credit facility.

We are also exposed to interest rate risk on variable rate borrowings for certain commercial loans in the amount of approximately $11.7 million.

As of September 30, 2020, we had no outstanding borrowings on this credit facility.

We do not have any variable rate borrowings a s of September 30, 2020.

We currently do not hedge our interest rate risk associated with these variable interest loans.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis