Item 1. Financial Statements
Item 1. Financial Statements
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at September 30, 2020 is unaudited)
September 30,
December 31,
2020
2019
(In Thousands)
Assets
Current assets:
Cash and cash equivalents
$
42,094
$
22,791
Accounts receivable
39,945
40,203
Allowance for doubtful accounts
( 392
)
( 261
)
Accounts receivable, net
39,553
39,942
Inventories:
Finished goods
17,637
21,738
Raw materials
1,565
1,573
Total inventories
19,202
23,311
Supplies, prepaid items and other:
Prepaid insurance
1,478
11,837
Precious metals
7,179
5,568
Supplies
25,174
24,689
Other
3,349
2,735
Total supplies, prepaid items and other
37,180
44,829
Total current assets
138,029
130,873
Property, plant and equipment, net
899,613
936,474
Other assets:
Operating lease assets
25,356
15,330
Intangible and other assets, net
6,927
5,812
32,283
21,142
$
1,069,925
$
1,088,489
(Continued on following page)
3
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Information at September 30, 2020 is unaudited )
September 30,
December 31,
2020
2019
(In Thousands)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
$
41,192
$
58,477
Short-term financing
751
9,929
Accrued and other liabilities
40,957
25,484
Current portion of long-term debt
15,203
9,410
Total current liabilities
98,103
103,300
Long-term debt, net
470,751
449,634
Noncurrent operating lease liabilities
19,249
11,404
Other noncurrent accrued and other liabilities
5,596
6,214
Deferred income taxes
32,663
35,717
Commitments and contingencies (Note 5)
Redeemable preferred stocks:
Series E 14 % cumulative, redeemable Class C preferred stock, no par value,
210,000 shares issued; 139,768 outstanding; aggregate liquidation preference
of $ 268,685,000 ($ 242,800,000 at December 31, 2019)
262,295
234,893
Series F redeemable Class C preferred stock, no par value, 1 share issued and
outstanding; aggregate liquidation preference of $ 100
—
—
Stockholders' equity:
Series B 12 % cumulative, convertible preferred stock, $ 100 par value; 20,000
shares issued and outstanding; aggregate liquidation preference
of $ 3,205,000 ($ 3,025,000 at December 31, 2019)
2,000
2,000
Series D 6 % cumulative, convertible Class C preferred stock, no par value;
1,000,000 shares issued and outstanding; aggregate liquidation preference
of $ 1,297,000 ($ 1,252,000 at December 31, 2019)
1,000
1,000
Common stock, $ .10 par value; 75,000,000 shares authorized,
31,283,210 shares issued
3,128
3,128
Capital in excess of par value
198,013
196,833
Retained earnings (accumulated deficit)
( 9,989
)
57,632
194,152
260,593
Less treasury stock, at cost:
Common stock, 1,966,042 shares ( 2,009,566 shares at December 31, 2019)
12,884
13,266
Total stockholders' equity
181,268
247,327
$
1,069,925
$
1,088,489
See accompanying notes.
4
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
(In Thousands, Except Per Share Amounts)
Net sales
$
73,969
$
75,495
$
262,413
$
291,174
Cost of sales
75,028
85,228
241,900
273,912
Gross profit (loss)
( 1,059
)
( 9,733
)
20,513
17,262
Selling, general and administrative expense
7,068
9,115
25,578
24,705
Other expense, net
875
383
240
372
Operating loss
( 9,002
)
( 19,231
)
( 5,305
)
( 7,815
)
Interest expense, net
12,554
12,007
38,509
34,309
Non-operating other expense (income), net
216
39
( 587
)
( 605
)
Loss before benefit for income taxes
( 21,772
)
( 31,277
)
( 43,227
)
( 41,519
)
Benefit for income taxes
( 1,370
)
( 483
)
( 3,008
)
( 5,816
)
Net loss
( 20,402
)
( 30,794
)
( 40,219
)
( 35,703
)
Dividends on convertible preferred stocks
75
75
225
225
Dividends on Series E redeemable preferred stock
8,889
7,764
25,885
22,609
Accretion of Series E redeemable preferred stock
508
500
1,517
1,493
Net loss attributable to common stockholders
$
( 29,874
)
$
( 39,133
)
$
( 67,846
)
$
( 60,030
)
Basic and dilutive net loss per common share
$
( 1.06
)
$
( 1.39
)
$
( 2.41
)
$
( 2.14
)
See accompanying notes.
5
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
Common
Stock
Shares
Treasury
Stock-
Common
Shares
Non-
Redeemable
Preferred
Stock
Common
Stock
Par
Value
Capital in
Excess of
Par
Value
Retained
Earnings (Accumulated Deficit)
Treasury
Stock-
Common
Total
(In Thousands)
Balance at December 31, 2019
31,283
( 2,010
)
$
3,000
$
3,128
$
196,833
$
57,632
$
( 13,266
)
$
247,327
Net loss
( 19,452
)
( 19,452
)
Dividend accrued on redeemable
preferred stock
( 8,307
)
( 8,307
)
Accretion of redeemable preferred stock
( 504
)
( 504
)
Stock-based compensation
495
495
Other
30
( 356
)
292
( 64
)
Balance at March 31, 2020
31,283
( 1,980
)
3,000
3,128
196,972
29,369
( 12,974
)
219,495
Net loss
( 365
)
( 365
)
Dividend accrued on redeemable
preferred stock
( 8,689
)
( 8,689
)
Accretion of redeemable preferred stock
( 505
)
( 505
)
Stock-based compensation
684
684
Other
14
( 90
)
90
—
Balance at June 30, 2020
31,283
( 1,966
)
3,000
3,128
197,566
19,810
( 12,884
)
210,620
Net loss
( 20,402
)
( 20,402
)
Dividend accrued on redeemable
preferred stock
( 8,889
)
( 8,889
)
Accretion of redeemable preferred stock
( 508
)
( 508
)
Stock-based compensation
447
447
Balance at September 30, 2020
31,283
( 1,966
)
$
3,000
$
3,128
$
198,013
$
( 9,989
)
$
( 12,884
)
$
181,268
Balance at December 31, 2018
31,283
( 2,438
)
$
3,000
$
3,128
$
198,482
$
153,773
$
( 16,186
)
$
342,197
Net loss
( 11,540
)
( 11,540
)
Dividend accrued on redeemable
preferred stock
( 7,256
)
( 7,256
)
Accretion of redeemable preferred stock
( 496
)
( 496
)
Stock-based compensation
612
612
Other
( 76
)
( 144
)
( 546
)
( 690
)
Balance at March 31, 2019
31,283
( 2,514
)
3,000
3,128
198,950
134,481
( 16,732
)
322,827
Net income
6,631
6,631
Dividend accrued on redeemable
preferred stock
( 7,589
)
( 7,589
)
Accretion of redeemable preferred stock
( 497
)
( 497
)
Stock-based compensation
686
686
Balance at June 30, 2019
31,283
( 2,514
)
3,000
3,128
199,636
133,026
( 16,732
)
322,058
Net loss
( 30,794
)
( 30,794
)
Dividend accrued on redeemable
preferred stock
( 7,764
)
( 7,764
)
Accretion of redeemable preferred stock
( 500
)
( 500
)
Stock-based compensation
501
501
Other
13
( 92
)
87
( 5
)
Balance at September 30, 2019
31,283
( 2,501
)
$
3,000
$
3,128
$
200,045
$
93,968
$
( 16,645
)
$
283,496
See accompanying notes.
6
LSB INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
2020
2019
(In Thousands)
Cash flows from operating activities
Net loss
$
( 40,219
)
$
( 35,703
)
Adjustments to reconcile net loss to net cash provided by operating activities:
Deferred income taxes
( 3,054
)
( 5,797
)
Depreciation and amortization of property, plant and equipment
51,957
51,575
Amortization of intangible and other assets
946
936
Stock-based compensation
1,626
1,799
Other
3,630
2,951
Cash provided (used) by changes in assets and liabilities:
Accounts receivable
( 1,860
)
15,511
Inventories
3,661
8,852
Prepaid insurance
10,359
9,446
Accounts payable
( 11,269
)
( 15,257
)
Accrued interest
12,083
10,886
Other assets and other liabilities
( 3,145
)
( 4,227
)
Net cash provided by operating activities
24,715
40,972
Cash flows from investing activities
Expenditures for property, plant and equipment
( 22,230
)
( 20,455
)
Proceeds from vendor settlements associated with
property, plant and equipment
1,647
—
Other investing activities
364
97
Net cash used by investing activities
( 20,219
)
( 20,358
)
Cash flows from financing activities
Proceeds from revolving debt facility
30,000
5,000
Payments on revolving debt facility
( 30,000
)
( 15,000
)
Net proceeds from 9.625 % senior secured notes
—
35,086
Proceeds from other long-term debt
42,570
16,830
Payments on other long-term debt
( 18,397
)
( 12,065
)
Payments of debt-related costs
( 124
)
( 1,065
)
Payments on short-term financing
( 9,178
)
( 7,970
)
Taxes paid on equity awards
( 64
)
( 695
)
Net cash provided by financing activities
14,807
20,121
Net increase in cash and cash equivalents
19,303
40,735
Cash and cash equivalents at beginning of period
22,791
26,048
Cash and cash equivalents at end of period
$
42,094
$
66,783
See accompanying notes.
7
1. Summary of Significant Accounting Policies
For a complete discussion of our significant accounting policies, refer to the notes to our audited consolidated financial statements included in our Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”), filed with the Securities and Exchange Commission (“SEC”) on February 25, 2020.
Basis of Consolidation – LSB Industries, Inc. (“LSB”) and its subsidiaries (the “Company”, “We”, “Us”, or “Our”) are consolidated in the accompanying consolidated financial statements. LSB is a holding company with no significant operations or assets other than cash, cash equivalents, and investments in its subsidiaries. All material intercompany accounts and transactions have been eliminated. Certain prior period amounts reported in our consolidated financial statements and notes thereto have been reclassified to conform to current period presentation.
Nature of Business – We are engaged in the manufacture and sale of chemical products. The chemical products we primarily manufacture, market and sell are ammonia, fertilizer grade AN (“HDAN”) and UAN for agricultural applications, high purity and commercial grade ammonia, high purity AN, sulfuric acids, concentrated, blended and regular nitric acid, mixed nitrating acids, carbon dioxide, and diesel exhaust fluid for industrial applications, and industrial grade AN (“LDAN”) and solutions for the mining industry. We manufacture and distribute our products in four facilities; three of which we own and are located in El Dorado, Arkansas (the “El Dorado Facility”); Cherokee, Alabama (the “Cherokee Facility”); and Pryor, Oklahoma (the “Pryor Facility”); and one of which we operate on behalf of a global chemical company in Baytown, Texas (the “Baytown Facility”).
Sales to customers include farmers, ranchers, fertilizer dealers and distributors primarily in the ranch land and grain production markets in the United States (“U.S.”); industrial users of acids throughout the U.S. and parts of Canada; and explosive manufacturers in the U.S. and parts of Mexico.
In our opinion, the unaudited condensed consolidated financial statements of the Company as of September 30, 2020 and for the three and nine months ended September 30, 2020 and 2019 include all adjustments and accruals, consisting of normal, recurring accrual adjustments, which are necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year due, in part, to the seasonality of our sales of agricultural products and the timing of performing our major plant maintenance activities. Our selling seasons for agricultural products are primarily during the spring and fall planting seasons, which typically extend from March through June and from September through November.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the SEC. These condensed consolidated financial statements should be read in connection with our audited consolidated financial statements and notes thereto included in our 2019 Form 10-K.
Use of Estimates – The preparation of condensed 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. Actual results could differ from those estimates.
Income Taxes – Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of operations in the period that includes the enactment date. We establish valuation allowances if we believe it is more-likely-than-not that some or all of deferred tax assets will not be realized. Significant judgment is applied in evaluating the need for and the magnitude of appropriate valuation allowances against deferred tax assets.
In addition, we do not recognize a tax benefit unless we conclude that it is more likely than not that the benefit will be sustained on audit by the relevant taxing authorities based solely on the technical merits of the associated tax position. If the recognition threshold is met, we recognize a tax benefit measured at the largest amount of the tax benefit that, in our judgment, is greater than 50% likely to be realized.
Income tax benefits associated with amounts that are deductible for income tax purposes are recorded through the statement of operations. These benefits are principally generated from exercises of restricted stock. We reduce income tax expense for investment tax credits in the period the credit arises and is earned.
See Note 7 regarding the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.
8
1. Summary of Significant Accounting Policies (continued)
Contingencies – Certain conditions may exist which may result in a loss, but which will only be resolved when future events occur. We and our legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. If the assessment of a contingency indicates that it is probable that a loss has been incurred, we would accrue for such contingent losses when such losses can be reasonably estimated. If the assessment indicates that a potentially material loss contingency is not probable but reasonably possible, or is probable but cannot be estimated, the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed. Estimates of potential legal fees and other directly related costs associated with contingencies are not accrued but rather are expensed as incurred. Loss contingency liabilities are included in current and noncurrent accrued and other liabilities and are based on current estimates that may be revised in the near term. In addition, 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).
In June 2020, one of our subsidiaries, El Dorado Chemical Company (“EDC”), and certain vendors mediated settlements for EDC to recover certain costs associated with a nitric acid plant at our El Dorado Facility. The construction of this plant was completed and the plant began production in 2016. As a result of the settlements, the vendors paid EDC $ 4.3 million and will provide services and parts totaling $ 2.8 million, which amount, or portion thereof, may be paid in cash at the option of the vendo rs (amount included in noncurrent accounts receivable, which is classified as a noncurrent other asset at September 30, 2020). As part of the settlements, EDC paid the vendors $ 2.7 million to settle $ 3.2 million of invoices that were held in our accounts payable. As a result, the recovery from these settlements recognized during the nine months ended September 30, 2020 includes approximately $ 5.7 million classified as a reduction to cost of sales and approximately $ 1.9 million classified as a reduction to property, plant and equipment (“PP&E”).
Redeemable Preferred Stocks – Our redeemable preferred stocks that are redeemable outside of our control are classified as temporary/mezzanine equity. The redeemable preferred stocks were recorded at fair value upon issuance, net of issuance costs or discounts. In addition, certain embedded features included in the Series E Redeemable Preferred required bifurcation and are classified as derivative liabilities. The carrying values of the redeemable preferred stocks are being increased by periodic accretions (including the amount for dividends earned but not yet declared or paid) 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. The accretion was recorded to retained earnings. However, this accretion will change if the expected redemption date changes.
Derivatives, Hedges and Financial Instruments – Derivatives are recognized in the balance sheet and are measured at fair value. Changes in fair value of derivatives are recorded in results of operations unless the normal purchase or sale exceptions apply, or hedge accounting is elected.
Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date:
Level 1 - Valuations of contracts classified as Level 1 are based on quoted prices in active markets for identical contracts.
Level 2 - Valuations of contracts classified as Level 2 are based on quoted prices for similar contracts and valuation inputs other than quoted prices that are observable for these contracts
Level 3 - Valuations of assets and liabilities classified as Level 3 are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement
Revenue Recognition
We determine revenue recognition through the following steps:
•
Identification of the performance obligations in the contract;
•
Determination of the transaction price;
•
Allocation of the transaction price to the performance obligations in the contract; and
•
Recognition of revenue when, or as, we satisfy a performance obligation.
9
1. Summary of Significant Accounting Policies (continued)
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Generally, satisfaction occurs when control of the promised goods is transferred to the customer or as services are rendered or completed in exchange for consideration in an amount for which we expect to be entitled. Generally, control is transferred when the preparation for shipment of the product to a customer has been completed. Most of our contracts contain a single performance obligation with the promise to transfer a specific product.
Most of our revenue is recognized from performance obligations satisfied at a point in time, however, we have a performance obligation to perform certain services that are satisfied over a period of time. Revenue is recognized from this type of performance obligation as services are rendered and are based on the amount for which we have a right to invoice, which reflects the amount of expected consideration that corresponds directly with the value of the services performed.
For most of our contracts with customers, the transaction price from the inception of a contract is constrained to a short period of time (generally one month) as these contracts contain terms with variable consideration related to both price and quantity. These contract prices are often based on commodity indexes (such as NYMEX natural gas index) published monthly and the contract quantities are typically based on estimated ranges. The quantities become fixed and determinable over a period of time as each sale order is received from the customer.
The nature of our contracts also gives rise to other types of variable consideration, including volume discounts and rebates, make-whole provisions, other pricing concessions, and short-fall charges. We estimate these amounts based on the expected amount to be provided to customers, which result in a transaction price adjustment reducing revenue (net sales) with the offset increasing contract or refund liabilities. These estimates are based on historical experience, anticipated performance, and our best judgment at the time. We reassess these estimates on a quarterly basis.
The aforementioned constraints over transaction prices in conjunction with the variable consideration included in our material contracts prevent a practical assignment of a specific dollar amount to performance obligations at the beginning and end of the period. Therefore, we have applied the variable consideration allocation exception.
Future revenues to be earned from the satisfaction of performance obligations will be recognized when control transfers as goods are loaded and weighed or services are performed over the remaining duration of our contracts.
Recently Issued Accounting Pronouncements
ASU 2020-06 - In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s own Equity (Subtopic 815-40) . This ASU addresses the complexity associated with applying GAAP to certain financial instruments with characteristics of liabilities and equity. The ASU includes amendments to the guidance on convertible instruments and the derivative scope exception for contracts in an entity’s own equity and simplifies the accounting for convertible instruments which include beneficial conversion features or cash conversion features by removing certain separation models. Additionally, the ASU requires entities to use the “if-converted” method when calculating diluted earnings per share for convertible instruments. This ASU will be effective for us on January 1, 2024, however early adoption is permitted beginning January 1, 2021. We are evaluating the timing and the effect of our pending adoption of this ASU on our consolidated financial statements and related disclosures at this time.
ASU 2020-04 – In March 2020, the FASB issued ASU 2020-04 , Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited time to ease the potential accounting burden associated with transitioning away from reference rates such as LIBOR that are expected to be discontinued. This ASU provides exceptions and optional expedients for applying GAAP to contract modifications, hedging relationships, and other transactions that reference LIBOR or other reference rates to be discontinued as a result of reference rate reform. They do not apply to modifications made or hedges entered into or evaluated after December 31, 2022, unless the hedging relationships existed as of that date and optional expedients for them were elected and retained through the end of the hedging relationship. This ASU became effective upon issuance. We continue to evaluate the effect of this ASU and plan to utilize this relief for our debt agreements that include LIBOR rates.
ASU 2019-12 – In December 2019, the FASB issued ASU 2019-12 , Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes which affects general principles within Topic 740, Income Taxes. The amendments of ASU 2019-12 are meant to simplify and reduce the cost of accounting for income taxes. The ASU removes certain exceptions to the general framework and also seeks to simplify and/or clarify accounting for income taxes by adding certain requirements that would simplify GAAP for financial statement preparers. We plan to adopt this new standard on January 1, 2021, which is not expected to have a material impact on our consolidated financial statements or related disclosures.
10
2. Loss Per Common Share
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
(Dollars In Thousands, Except Per Share Amounts)
Numerator:
Net loss
$
( 20,402
)
$
( 30,794
)
$
( 40,219
)
$
( 35,703
)
Adjustments for basic net loss per common share:
Dividend requirements on Series E Redeemable
Preferred
( 8,889
)
( 7,764
)
( 25,885
)
( 22,609
)
Dividend requirements on Series B Preferred
( 60
)
( 60
)
( 180
)
( 180
)
Dividend requirements on Series D Preferred
( 15
)
( 15
)
( 45
)
( 45
)
Accretion of Series E Redeemable Preferred
( 508
)
( 500
)
( 1,517
)
( 1,493
)
Numerator for basic and dilutive net loss per common
share - net loss attributable to common stockholders
$
( 29,874
)
$
( 39,133
)
$
( 67,846
)
$
( 60,030
)
Denominator:
Denominator for basic and dilutive net loss per
common share - adjusted weighted-average
shares (1)
28,211,905
28,065,519
28,195,691
28,025,130
Basic and dilutive net loss per common share
$
( 1.06
)
$
( 1.39
)
$
( 2.41
)
$
( 2.14
)
(1)
Excludes the weighted-average shares of unvested restricted stock that are contingently issuable.
The following weighted-average shares of securities were not included in the computation of diluted net loss per common share as their effect would have been antidilutive:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Restricted stock and stock units
1,404,423
803,611
1,306,720
846,902
Convertible preferred stocks
916,666
916,666
916,666
916,666
Series E Redeemable Preferred - embedded derivative
303,646
303,646
303,646
303,646
Stock options
124,000
124,000
124,000
124,000
2,748,735
2,147,923
2,651,032
2,191,214
3. Current and Noncurrent Accrued and Other Liabilities
September 30,
December 31,
2020
2019
(In Thousands)
Accrued interest
$
19,174
$
7,091
Accrued payroll and benefits
6,819
5,385
Current portion of operating lease liabilities
6,265
4,066
Accrued death and other executive benefits
2,545
2,564
Deferred revenue
2,080
3,443
Other
9,670
9,149
46,553
31,698
Less noncurrent portion
5,596
6,214
Current portion of accrued and other liabilities
$
40,957
$
25,484
11
4. Long-Term Debt
Our long-term debt consists of the following:
September 30,
December 31,
2020
2019
(In Thousands)
Working Capital Revolver Loan, with a current interest
rate of 4.00 % (A)
$
—
$
—
Senior Secured Notes due 2023 (B)
435,000
435,000
Secured Promissory Note due 2021, with an interest
rate of 5.25 % (C)
2,119
4,746
Unsecured Loan Agreement due 2022, with an interest
rate of 1.00 % (D)
10,000
—
Secured Financing due 2023, with an interest
rate of 8.32 % (E)
11,425
13,476
Secured Loan Agreement due 2025, with an interest
rate of 8.75 % (F)
7,162
5,219
Secured Financing due 2025, with an interest
rate of 8.75 % (G)
29,642
—
Secured Promissory Note due 2023 (G)
—
12,705
Other
172
159
Unamortized discount, net of premium and debt issuance
costs
( 9,566
)
( 12,261
)
485,954
459,044
Less current portion of long-term debt
15,203
9,410
Long-term debt due after one year, net
$
470,751
$
449,634
(A) O ur revolving credit facility, as amended (the “Working Capital Revolver Loan”), provides for advances up to $ 65 million (the “Maximum Revolver Amount”), based on specific percentages of eligible accounts receivable and inventories and up to $ 10 million of letters of credit, the outstanding amount of which reduces the available for borrowing under the Working Capital Revolver Loan. At September 30, 2020 , our available borrowings under our Working Capital Revolver Loan were approximately $ 36.3 million , based on our eligible collateral, less outstanding letters of credit and loan balance. The maturity date of the Working Capital Revolver Loan is on the earlier of (i) the date that is 90 days prior to the earliest stated maturity date of the Senior Secured Notes (unless refinanced or repaid) and (ii) February 26, 2024 . Subject to certain conditions and subject to lender approval, the Maximum Revolver Amount may increase up to an additional $ 10 million, less the outstanding aggregate principal amount of the unforgiven portion (as defined in the agreement) of the PPP loan discussed below within footnote (D). The Working Capital Revolver Loan also provides for a springing financial covenant (the “Financial Covenant”), which requires that, if the borrowing availability is less than 10.0 % of the total revolver commitments , then the borrowers must maintain a minimum fixed charge coverage ratio of not less than 1.00 to 1.00. The Financial Covenant, if triggered, is tested monthl y.
(B) On April 25, 2018, LSB completed the issuance and sale of $ 400 million aggregate principal amount of its 9.625 % Senior Secured Notes due 2023 (the “Notes”), pursuant to an indenture (the “Indenture”), dated as of April 25, 2018. The Notes were issued at a price equal to 99.509 % of their face value.
On June 21, 2019, LSB completed the issuance and sale of $ 35 million aggregate principal amount of its 9.625 % Senior Secured Notes due 2023 (the “New Notes”). The New Notes were issued pursuant to the Indenture (the Notes together with the New Notes, the “Senior Secured Notes”). The New Notes were issued at a price equal to 102.125 % of their face value, plus accrued interest from May 1, 2019 to June 21, 2019.
The Senior Secured Notes mature on May 1, 2023 . Interest is to be paid semiannually in arrears on May 1 st and November 1 st .
(C) EDC is party to a secured promissory note due in March 2021 . Principal and interest are payable in monthly installments.
12
4. Long-Term Debt (continued)
(D) In April 2020, LSB entered into a federally guaranteed loan agreement (“PPP loan”) for $ 10 million with a lender pursuant to a new loan program through the U.S. Small Business Administration (“SBA”) as the result of the Paycheck Protection Program (“PPP”) established by the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and amended by the Paycheck Protection Program Flexibility Act of 2020. We applied ASC 470, Debt, to account for the PPP loan. 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 which has been 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.
(E) EDC is party to a secured financing arrangement with an affiliate of LSB Funding L.L.C. (“LSB Funding”). Principal and interest are payable in 48 equal monthly installments with a final balloon payment of approximately $ 3 million due in June 2023 .
(F) EDC is party to a secured loan agreement with an affiliate of LSB Funding, which provided for available borrowings (the “Interim Loan”) during the construction of certain equipment (the “Interim Loan Period”), subject to certain conditions. During the Interim Loan Period, interest only was payable in monthly installments. Effective February 28, 2020, the Interim Loan Period ended, and the Interim Loan was replaced by a secured promissory note due in March 2025. Under the terms of the note, principal and interest are payable in 60 equal monthly installments.
(G) In August 2020, El Dorado Ammonia L.L.C. (“EDA”), one of our subsidiaries, entered into a $ 30 million secured financing arrangement with an affiliate of LSB Funding. 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 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 .
5. Commitments and Contingencies
Natural Gas Purchase Commitments – At September 30, 2020, certain of our natural gas contracts qualify as normal purchases under GAAP and thus are not mark-to-market, which contracts included volume purchase commitments with fixed costs of approximately 4.3 million MMBtus of natural gas. These contracts extend through February 2021 at a weighted-average cost of $ 2.46 per MMBtu ($ 10.6 million) and a weighted-average market value of $ 2.48 per MMBtu ($ 10.7 million).
Legal Matters - Following is a summary of certain legal matters involving the Company:
A. Environmental Matters
Our facilities and operations are subject to numerous federal, state and local environmental laws and to other laws regarding health and safety matters (collectively, the “Environmental and Health Laws”), many of which provide for certain performance obligations, substantial fines and criminal sanctions for violations. Certain Environmental and Health Laws impose strict liability as well as joint and several liability for costs required to remediate and restore sites where hazardous substances, hydrocarbons or solid wastes have been stored or released. We may be required to remediate contaminated properties currently or formerly owned or operated by us or facilities of third parties that received waste generated by our operations regardless of whether such contamination resulted from the conduct of others or from consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken.
In addition, claims for damages to persons or property, including natural resources, may result from the environmental, health and safety effects of our operations.
There can be no assurance that we will not incur material costs or liabilities in complying with such laws or in paying fines or penalties for violation of such laws. Our insurance may not cover all environmental risks and costs or may not provide sufficient coverage if an environmental claim is made against us. The Environmental and Health Laws and related enforcement policies have in the past resulted, and could in the future result, in significant compliance expenses, cleanup costs (for our sites or third-party sites where our wastes were disposed of), penalties or other liabilities relating to the handling, manufacture, use, emission, discharge or disposal of hazardous or toxic materials at or from our facilities or the use or disposal of certain of its chemical products. Further, a number of our facilities are dependent on environmental permits to operate, the loss or modification of which could have a material adverse effect on their operations and our financial condition.
13
5. Commitments and Contingencies (continued)
Historically, significant capital expenditures have been incurred by our subsidiaries in order to comply with the Environmental and Health Laws, and significant capital expenditures are expected to be incurred in the future. We will also be obligated to manage certain discharge water outlets and monitor groundwater contaminants at our facilities should we discontinue the operations of a facility.
As of September 30, 2020, our accrued liabilities for environmental matters totaled $ 183,000 relating primarily to the matters discussed below. It is reasonably possible that a change in the estimate of our liability could occur in the near term.
1. Discharge Water Matters
Each of our manufacturing facilities generates process wastewater, which may include cooling tower and boiler water quality control streams, contact storm water and miscellaneous spills and leaks from process equipment. The process water discharge, storm-water runoff and miscellaneous spills and leaks are governed by various permits generally issued by the respective state environmental agencies as authorized and overseen by the U.S. Environmental Protection Agency. These permits limit the type and amount of effluents that can be discharged and control the method of such discharge.
In October 2017, PCC filed a Permit Renewal Application for its Non-Hazardous Injection Well Permit at the Pryor Facility. Although the Injection Well Permit expired in 2018, PCC continues to operate the injection well pending the Oklahoma Department of Environmental Quality (“ODEQ”) action on the Permit Renewal Application. PCC and ODEQ are engaged in ongoing discussions related to the renewal of the injection well to address the wastewater stream.
Our El Dorado Facility is subject to a National Pollutant Discharge Elimination System (“NPDES”) permit issued by the Arkansas Department of Environmental Quality (“ADEQ”) in 2004. In 2010, the ADEQ issued a draft NPDES permit renewal for the El Dorado Facility, which contained more restrictive discharge limits than the previous 2004 permit. In August 2017, ADEQ issued a final NPDES permit with new dissolved mineral limits. EDC filed an appeal in September 2017 and a Permit Appeal Resolution (“PAR”) was signed in July 2018. EDC is in compliance with the revised permit limits agreed upon in the PAR.
In November 2006, the El Dorado Facility entered into a Consent Administrative Order (“CAO”) that recognizes the presence of nitrate contamination in the shallow groundwater. The CAO required EDC to perform semi-annual groundwater monitoring, continue operation of a groundwater recovery system, submit a human health and ecological risk assessment, and submit a remedial action plan.
The risk assessment was submitted in August 2007. In February 2015, the ADEQ stated that El Dorado Chemical was meeting the requirements of the CAO and should continue semi-annual monitoring. Subsequent to the PAR mentioned previously, a new CAO was signed in October 2018, which required an Evaluation Report of the data and effectiveness of the groundwater remedy for nitrate contamination. In February 2019, the Evaluation Report was submitted to the ADEQ and the ADEQ approved the report in August 2019. No liability has been established at September 30, 2020 , in connection with this ADEQ matter.
2. Other Environmental Matters
In 2002, certain of our subsidiaries sold substantially all of their operating assets relating to a Kansas chemical facility (the “Hallowell Facility”) but retained ownership of the real property where the facility is located. Our subsidiary retained the obligation to be responsible for, and perform the activities under, a previously executed consent order to investigate the surface and subsurface contamination at the real property and develop a corrective action strategy based on the investigation. In addition, certain of our subsidiaries agreed to indemnify the buyer of such assets for these environmental matters.
As the successor to a prior owner of the Hallowell Facility, Chevron Environmental Management Company (“Chevron”) has agreed in writing, within certain limitations, to pay and has been paying one-half of the costs of the investigation and interim measures relating to this matter as approved by the Kansas Department of Health and Environment (the “KDHE”), subject to reallocation.
Our subsidiary and Chevron have retained an environmental consultant to prepare and perform a corrective action study work plan as to the appropriate method to remediate the Hallowell Facility. The proposed strategy includes long-term surface and groundwater monitoring to track the natural decline in contamination. The KDHE selected a remedy of annual monitoring and the implementation of an Environmental Use Control (“EUC”). The final remedy, including the EUC, the finalization of the cost estimates and any required financial assurances remains under negotiation. Additionally, the current operator of the site recently closed its operations at the site. The change in the use of the site, from active manufacturing to a closed facility, may impact the selected remedy and remains an open item to be discussed with the KDHE. Pending the negotiation of the final remedy and any impact based on operational changes at the site, we continue to accrue our allocable portion of costs primarily for the additional testing, monitoring and risk assessments that could be reasonably estimated, which is included in our accrued liabilities for environmental matters discussed above.
14
5. Commitments and Contingencies (continued)
The estimated amount is not discounted to its present value. As more information becomes available, our estimated accrual will be refined, as necessary.
B. Other Pending, Threatened or Settled Litigation
In 2013, an explosion and fire occurred at the West Fertilizer Co. (“West Fertilizer”) located in West, Texas, causing death, bodily injury and substantial property damage. West Fertilizer is not owned or controlled by us, but West Fertilizer was a customer of EDC, and purchased AN from EDC from time to time. LSB and EDC received letters from counsel purporting to represent subrogated insurance carriers, personal injury claimants and persons who suffered property damages informing LSB and EDC that their clients are conducting investigations into the cause of the explosion and fire to determine, among other things, whether AN manufactured by EDC and supplied to West Fertilizer was stored at West Fertilizer at the time of the explosion and, if so, whether such AN may have been one of the contributing factors of the explosion. Initial lawsuits filed named West Fertilizer and another supplier of AN as defendants.
In 2014, EDC and LSB were named as defendants, together with other AN manufacturers and brokers that arranged the transport and delivery of AN to West Fertilizer, in the case styled City of West, Texas vs. CF Industries, Inc., et al. , in the District Court of McLennan County, Texas. The plaintiffs allege, among other things, that LSB and EDC were negligent in the production and marketing of fertilizer products sold to West Fertilizer, resulting in death, personal injury and property damage. EDC retained a firm specializing in cause and origin investigations with particular experience with fertilizer facilities, to assist EDC in its own investigation. LSB and EDC placed its liability insurance carrier on notice, and the carrier is handling the defense for LSB and EDC concerning this matter.
Our product liability insurance policies have aggregate limits of general liability totaling $ 100 million, with a self-insured retention of $ 250,000 , which retention limit has been met relating to the West Fertilizer matter. In August 2015, the trial court dismissed plaintiff’s negligenc e claims against us, and EDC based on a duty to inspect but allowed the plaintiffs to proceed on claims for design defect and failure to warn.
Subsequently, we and EDC have entered into confidential settlement agreements (with approval of our insurance carriers) with several plaintiffs that had claimed wrongful death and bodily injury and insurance companies asserting subrogation claims for damages from the explosion. While these settlements resolve the claims of a number of the claimants in this matter, we continue to be party to litigation related to the explosion. We continue to defend these lawsuits vigorously and we are unable to estimate a possible range of loss at this time if there is an adverse outcome in this matter as to EDC. As of September 30, 2020 , no liability reserve has been established in connection with this matter.
In 2015, we and EDA received formal written notice from Global Industrial, Inc. (“Global”) of Global’s intention to assert mechanic liens for labor, service, or materials furnished under certain subcontract agreements for the improvement of the new ammonia plant (“Ammonia Plant”) at our El Dorado Facility. Global was a subcontractor of Leidos Constructors, LLC (“Leidos”), the general contractor for EDA for the construction for the Ammonia Plant. Leidos terminated the services of Global with respect to their work performed at our El Dorado Facility.
LSB and EDA intend to pursue recovery of any damage or loss caused by Global’s work performed through their contract with Leidos at our El Dorado Facility. In March 2016, EDC and LSB were served a summons in a case styled Global Industrial, Inc. d/b/a Global Turnaround vs. Leidos Constructors, LLC et al., in the Circuit court of Union County, Arkansas, wherein Global seeks damages under breach of contract and other claims. At the time of the summons, our accounts payable included invoices totaling approximately $ 3.5 million related to the claims asserted by Global but such invoices were not approved by Leidos for payment. We have requested indemnification from Leidos under the terms of our contracts, which they have denied. As a result, we are seeking reimbursement of legal expenses from Leidos under our contracts. We also seek damages from Leidos for their wrongdoing during the expansion, including breach of contract, fraud, gross negligence, professional negligence and gross negligence.
15
5. Commitments and Contingencies (continued)
On September 25, 2018, the Court bifurcated the case into: (1) Global’s claims against Leidos and LSB, and (2) the cross-claims between Leidos and LSB. Part (1) of the case was tried in the Court during the fall of 2018 and the Court rendered an interim judgment in March 2020 and issued its final judgment on April 23, 2020. In summary, the judgment awarded Global (i) approximately $ 7.4 million (amount includes the $ 3.5 million discussed above) for labor, service, and materials furnished relating to the Ammonia Plant, (ii) approximately $ 1.3 million for prejudgment interest, and (iii) a claim of lien on certain property and the foreclosure of the lien to satisfy these obligations. In addition, post-judgment interest will accrue at the annual rate of 4.25 % until paid. As a result of the judgment during the first quarter of 2020, we accounted for the following:
•
accrued an additional $ 3.9 million in accounts payable, which offset amount was capitalized as PP&E, since such costs directly related to the construction of the Ammonia Plant ;
•
recognized additional depreciation expense of $ 0.5 million associated with the amount above capitalized to PP&E, which offset amount was a credit to PP&E (accumulated depreciation) ;
•
accrued prejudgment and post- judgment interest totaling $ 1.4 million in accrued interest, which offset amount was classified as interest expense .
We have filed a notice of intent to appeal and the Court entered a stay of the judgment pending appeal.
LSB intends to vigorously prosecute its claims against Leidos in Part (2) of the matter. Due to the impact from the coronavirus disease (“COVID-19”) pandemic, the Trial date for Part (2) of the matter has been delayed and we are awaiting a new trial date.
We are also involved in various other claims and legal actions (including matters involving gain contingencies). It is possible that the actual future development of claims could be different from our estimates but, after consultation with legal counsel, we believe that changes in our estimates will not have a material effect on our business, financial condition, results of operations or cash flows.
6. Derivatives, Hedges and Financial Instruments
For the periods presented, th e following significant instruments are accounted for on a fair value basis:
Natural Gas Contracts
During the first nine months of 2020, we entered into certain forward natural gas contracts (“natural gas contracts”), which are accounted for on a mark-to-market basis. We are utilizing these natural gas contracts as economic hedges for risk management purposes but are not designated as hedging instruments. At September 30, 2020, our natural gas contracts included 1.0 million MMBtu of natural gas and extend through January 2021 (there were none at December 31, 2019). The valuations of the natural gas contracts are classified as Level 2. At September 30, 2020, the valuation inputs included the contractual weighted-average cost of $ 2.01 per MMBtu and the weighted-average market value of $ 2.53 per MMBtu.
For the three and nine months ended September 30, 2020, we recognized a $ 0.5 million gain and a $ 0.2 million loss (classified as cost of sales), respectively (none for the three and nine months ended September 30, 2019), which includes an unrealized gain of $ 0.8 million and $ 0.6 million, respectively, attributed to natural gas contracts still held at the reporting date.
Embedded Derivative
As discussed in Note 8, certain embedded features (“embedded derivative”) relating to the redemption of the Series E Redeemable Preferred, which includes certain contingent redemption features and the participation rights value have been bifurcated from the Series E Redeemable Preferred and recorded as a liability. At September 30, 2020 and December 31, 2019, we estimate that the contingent redemption features have fair value since we estimate that it is probable that a portion of the shares of this preferred stock would be redeemed prior to October 25, 2023. For certain other embedded features, we estimated no fair value based on our assessment that there is a remote probability that these features will be exercised.
The fair value of the embedded derivative was valued using discounted cash flow models and primarily based on the difference in the present value of estimated future cash flows with no redemptions prior to October 25, 2023 compared to certain redemptions deemed probable during the same period and applying the effective dividend rate of the Series E Redeemable Preferred. In addition, at September 30, 2020 and December 31, 2019, the fair value of the embedded derivative included the valuation of the participation rights, which was based on the equivalent of 303,646 shares of our common stock at $ 1.61 and $ 4.20 per share, respectively.
The valuations of the embedded derivative are classified as Level 3. This derivative is valued using market information, management’s redemption assumptions, the underlying number of shares as defined in the terms of the Series E Redeemable Preferred, and the market price of our common stock.
16
6. Derivatives, Hedges and Financial Instruments (continued)
For the three months ended September 30, 2020 and 2019, we recognized an unrealized gain and unrealized loss of approximately $ 0.1 million and $ 0.4 million, respectively, due to the change in fair value of the embedded derivative. For the nine months ended September 30, 202 0 and 2019, we recognized an unrealized gain of approximately $ 0.6 million and $ 0.1 million, respectively, due to the change in fair value of the embedded derivative. These unrealized gains are included in non-operating other income.
The following details our assets and liabilities that are measured at fair value on a recurring basis at September 30, 2020 and December 31, 2019 :
Fair Value Measurements at
September 30, 2020 Using
Description
Total Fair
Value at
September 30,
2020
Quoted Prices
in Active
Markets for
Identical
Contracts
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3) (1)
Total Fair
Value at
December 31,
2019
(In Thousands)
Assets - Supplies, prepaid items and other:
Natural gas contracts
$
623
$
—
$
623
$
—
$
—
Total
$
623
$
—
$
623
$
—
$
—
Liabilities - Current and noncurrent accrued and
other liabilities:
Embedded derivative
$
468
$
—
$
—
$
468
$
1,084
Total
$
468
$
—
$
—
$
468
$
1,084
(1)
There was no Level 3 transfer activity for the nine months ended September 30, 2020.
Other Financial Instruments
At September 30, 2020 and December 31, 2019, we did not have any financial instruments with fair values significantly different from their carrying amounts (which excludes issuance costs, if applicable), except for the Senior Secured Notes as shown below.
September 30, 2020
December 31, 2019
Carrying
Estimated
Carrying
Estimated
Amount
Fair Value
Amount
Fair Value
(In Millions)
Senior Secured Notes (1)
$
435
$
426
$
435
$
449
(1) Based on a quoted price of 98.0 at September 30, 2020 and 103.25 at December 31, 2019 .
The Senior Secured Notes valuations are classified as Level 2. The fair value of financial instruments is not indicative of the overall fair value of our assets and liabilities since financial instruments do not include all assets, including intangibles, and all liabilities.
7. Income Taxes
On March 27, 2020, the President of the U.S. signed into law the CARES Act. The CARES Act provides relief to corporate taxpayers by permitting a five year carryback of 2018-2020 net operating losses (“NOLs”), removing the 80% limitation on the carryback of those NOLs, increasing the Section 163(j) 30% limitation on interest expense deductibility to 50% of adjusted taxable income for 2019 and 2020, and accelerates refunds for minimum tax credit carryforwards, along with a few other provisions. During the three and nine months ended September 30, 2020, no material adjustments were required to the income tax benefit as a result of the enactment of the CARES Act. On July 28, 2020, the U.S. Treasury Department released final regulations, which are effective January 1, 2021, and proposed regulations with guidance on the business interest expense limitation under Section 163(j). Currently, we are in the process of evaluating the effect of these regulations on our consolidated financial statements and related disclosures.
17
7 . Income Taxes (continued)
Benefit for income taxes is as follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
(In Thousands)
Current:
Federal
$
( 4
)
$
—
$
( 4
)
$
—
State
27
24
50
( 19
)
Total Current
$
23
$
24
$
46
$
( 19
)
Deferred:
Federal
$
( 1,188
)
$
( 668
)
$
( 3,079
)
$
( 501
)
State
( 205
)
161
25
( 5,296
)
Total Deferred
$
( 1,393
)
$
( 507
)
$
( 3,054
)
$
( 5,797
)
Benefit for income taxes
$
( 1,370
)
$
( 483
)
$
( 3,008
)
$
( 5,816
)
For the three and nine months ended September 30, 2020 and 2019, the current provision (benefit) for state income taxes shown above includes regular state income tax, provisions for uncertain state income tax positions, the impact of state tax law changes and other similar adjustments.
Our estimated annual effective rate for 2020 includes the impact of permanent tax differences, limits on deductible compensation, valuation allowances and other permanent items.
We considered both positive and negative evidence in our determination of the need for valuation allowances for deferred tax assets. Information evaluated includes our financial position and results of operations for the current and preceding years, the availability of deferred tax liabilities and tax carrybacks, as well as an evaluation of currently available information about future years. Valuation allowances are reflective of our quarterly analysis of the four sources of taxable income, including the calculation of the reversal of existing tax assets and liabilities, the impact of financing activities and our quarterly results. Based on our analysis, we currently believe that it is more-likely-than-not that a portion of our federal deferred tax assets will not be able to be utilized and we estimate the valuation allowance to be recorded during 2020 to be approximately $ 7.0 million. We have also determined it was more-likely-than-not that a portion of our state deferred tax assets would not be able to be utilized and we estimate the valuation allowance associated with these state deferred tax assets to be recorded during 2020 will be approximately $ 3.7 million.
We will continue to evaluate both the positive and negative evidence on a quarterly basis in determining the need for a valuation allowance with respect to our deferred tax assets. Changes in positive and negative evidence, including differences between estimated and actual results and additional guidance for various provisions of the CARES Act, could result in changes in the valuation of our deferred tax assets that could have a material impact on our consolidated financial statements. Changes in existing tax laws could also affect actual tax results and the realization of deferred tax assets over time.
The tax benefit for the nine months ended September 30, 2020 was $ 3.0 million ( 7 % benefit on pre-tax loss) and the tax benefit for the nine months ended September 30, 2019 was $ 5.8 million ( 14 % benefit on pre-tax loss). For the nine months ended September 30, 2020 and 2019, the effective tax rate is less than the statutory tax rate primarily due to the impact of the valuation allowances.
LSB and certain of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the 2016-2019 years remain open for all purposes of examination by the U.S. Internal Revenue Service and other major tax jurisdictions.
18
8. Redeemable Preferred Stocks
Series E and Series F Redeemable Preferred
As of September 30, 2020, the Series E Redeemable Preferred has a 14 % annual dividend rate and a participating right in dividends and liquidating distributions equal to 303,646 shares of common stock (participation rights value). Dividends accrue semi-annually in arrears and are compounded. Pursuant to the terms of the Series E Redeemable Preferred, the annual dividend rate will increase (a) by 0.50 % in April 2021 (b) by an additional 0.50 % in April 2022 and (c) by an additional 1.0 % in April 2023. The Series E Redeemable Preferred contains redemption features and a participation rights value that are being accounted for as derivative instruments and have been bifurcated from the Series E Redeemable Preferred as discussed in Note 6.
As of September 30, 2020 , the Series F Redeemable Preferred has voting rights to vote as a single class on all matters which the common stock have the right to vote and is entitled to a number of votes equal to 456,225 shares of our common stock.
Changes in our Series E and Series F Redeemable Preferred are as follows:
Series E Redeemable Preferred
Shares
Amount
(Dollars In Thousands)
Balance at December 31, 2019
139,768
$
234,893
Accretion relating to liquidation preference on
preferred stock
—
811
Accretion for discount and issuance costs on
preferred stock
—
706
Accumulated dividends
—
25,885
Balance at September 30, 2020
139,768
$
262,295
9. Net Sales
Disaggregated Net Sales
As discussed in Note 1, we primarily derive our revenues from the sales of various chemical products. The following table presents our net sales disaggregated by our principal markets, which disaggregation is consistent with other financial information utilized or provided outside of our consolidated financial statements:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
(Dollars In Thousands)
Net sales:
Agricultural products
$
31,986
$
35,494
$
138,441
$
154,790
Industrial acids and other chemical products
32,372
30,552
97,137
105,579
Mining products
9,611
9,449
26,835
30,805
Total net sales
$
73,969
$
75,495
$
262,413
$
291,174
Other Information
Although most of our contracts have an original expected duration of one year or less, for our contracts with a duration greater than one year at contract inception, the average remaining expected duration was approximately 10 months at September 30, 2020 .
Liabilities associated with contracts with customers (contract liabilities) primarily relate to deferred revenue and customer deposits associated with cash payments received in advance from customers for volume shortfall charges and product shipments. We had approximately $ 2.1 million and $ 3.6 million of contract liabilities as of September 30, 2020 and December 31, 2019, respectively. For the three and nine months ended September 30, 2020 revenues of $ 0.6 million and $ 1.5 million, respectively, were recognized and included in the balance at the beginning of the respective period. For the three and nine months ended September 30, 2019, revenues of $ 1.2 million and $ 3.2 million, respectively, were recognized and included in the balance at the beginning of the respective period.
19
10. Related Party Transactions
As of September 30, 2020, we have three separate outstanding financing arrangements with an affiliate of LSB Funding as discussed in footnotes (E), (F) and (G) of Note 4. Also, an affiliate of LSB Funding holds $ 50 million of our Senior Secured Notes discussed in footnote (B) of Note 4. In addition, LSB Funding holds all outstanding shares of the Series E and Series F Redeemable Preferred discussed in Note 8.
The Golsen Holders hold all outstanding shares of the Series B Preferred and Series D Preferred, which accumulated dividends on such shares totaled approxim ately $ 1.5 million at September 30, 2020 .
11. Supplemental Cash Flow Information
The following provides additional information relating to cash flow activities:
Nine Months Ended
September 30,
2020
2019
(In Thousands)
Cash refunds for:
Income taxes, net
$
( 319
)
$
( 66
)
Noncash continuing investing and financing activities:
Supplies and accounts payable associated with
additions of property, plant and equipment
$
12,974
$
21,251
Dividends accrued on Series E Redeemable Preferred
$
25,885
$
22,609
Accretion of Series E Redeemable Preferred
$
1,517
$
1,493
12. NOL Rights Agreement
On July 6, 2020, we entered into the Section 382 Rights Agreement (the “NOL Rights Agreement”), dated as of July 6, 2020, between LSB and Computershare Trust Company, N.A., as 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 Internal Revenue Code of 1986, as amended (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 of affiliated or associated persons (“Group”) from acquiring beneficial ownership of 4.9 % or more of our outstanding common shares.
The rights issued under the NOL Rights Agreement will expire on the earliest to occur of (i) the close of business on the day following the certification of the voting results of our 2021 annual meeting of stockholders, or other duly held stockholders’ meeting, (ii) the date on which our Board of Directors (the “Board”) determines in its sole discretion that (x) the NOL Rights Agreement is no longer necessary for the preservation of material valuable NOLs or tax attributes or (y) the NOLs and tax attributes have been fully utilized and may no longer be carried forward and (iii) the close of business on July 6, 2023.
Our Board may, in its discretion, determine that a person, entity or a certain transaction is exempt from the operation of the NOL Rights Agreement or amend the terms of the rights.
This summary description of the NOL Rights Agreement does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement filed as an exhibit to our Current Report on Form 8-K filed on July 6, 2020.
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