What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-02-25 compared with 2020-02-25 · 248 added, 212 removed, 248 unchanged (65% of the section changed)

7 unchanged sentences

El Dorado, Arkansas;

and Pryor, Oklahoma, and operate a facility for Covestro in Baytown, Texas.

and Pryor, Oklahoma, and operate a facility on behalf of a global chemical company in Baytown, Texas.

Our products are sold through distributors and directly to end customers throughout the U.S.

and parts of Mexico and Canada.

Key Operating Initiatives for 2021

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.

With that in mind, we implemented and are currently managing enhanced safety programs at our facilities that focus on improving our safety culture that will reduce risks and continuously improve our safety performance.

Additionally, over the last several years, our focus has been on upgrading our existing maintenance management system through technology enhancements and work processes to improve our predictive and preventative maintenance programs at our facilities.

We have several initiatives underway that we believe will improve the overall reliability of our plants and allow us to produce more products for sale while lowering our cost of production.

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.

Continue Broadening of 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, during 2019, 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.

Improve Our Capital Structure and Overall Cost of Capital.

Those initiatives are focused on, operations excellence through enhancements in the operating procedure program, asset health monitoring optimization and asset care excellence maintenance programs, and product quality programs focused on providing products to the customer that meet the highest quality standards.

Continue Broadening the Distribution of our Products.

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

Under the agreement, we agreed to supply between 70,000 to 100,000 tons of nitric acid per year, with sales beginning 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 of 2020, 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.

Development of a Strategy to Capitalize on Ammonia Opportunities in a Renewable Energy Focused Economy .

As there is a heightened global focus on significantly increasing the use of renewable energy to reduce carbon emissions, we are currently developing a strategy to enter the market for low-carbon or no carbon ammonia, a rapidly emerging trend referred to as “blue-green ammonia.” Many studies have shown that ammonia is the best carrier for hydrogen, given higher energy content and relative ease of storage via hydrogen gas.

Ammonia can also be used as zero carbon fuel in the maritime sector, a carbon free fertilizer and as a coal substitute in energy constrained countries.

If ammonia were to be used for energy consumption globally, this would equate to 5 times the amount of current global annual production of ammonia, or approximately 50 times of the current seaborne trade.

We believe we are well-placed to partake in this opportunity given the ability to retrofit our existing plants rather than the need to invest in greenfield projects thereby reducing the time to market and the upfront capital expenditures which will help the overall economics.

Improving Our Capital Structure and Overall Cost of Capital.

We are actively seeking ways to improve our capital structure and reduce our overall cost of capital.

We believe that our improved operating performance will be a benefit in achieving those efforts.

We believe that continued improvement in operating performance combined with improving fundamentals in the agriculture market and the continued economic recovery from the COVID-19 pandemic will be a benefit in achieving those efforts.

Evaluate A cquisitions of S trategic A ssets or C ompanies.

We are evaluating opportunities to acquire strategic assets or companies, mergers with other companies and investment in additional production capacity where we believe those acquisitions, mergers or expansion of production capacity will enhance the value of the Company and provide appropriate returns.

We may not successfully implement any or all of these initiatives.

1 unchanged sentence

Business Developments-2020

Financing Transaction

As discussed in Note 7, in June 2019, we completed the issuance and sale of $35 million of the New Notes.

The New Notes were issued at a price equal to 102.125% of their face value.

We expect to use the net proceeds from the New Notes to fund approximately $20 million in anticipated capital expenditures over a 12 to 18-month period that are intended to enhance our margins as discussed above under “Key Operating Initiatives for 2020”.

The remaining net proceeds have been used for general corporate purposes.

Completion of Turnarounds at our El Dorado and Pryor Facilities

During August 2019, we completed an 18-day Turnaround on our ammonia plant at our El Dorado Facility.

Additionally, during November 2019, t he ammonia plant at our El Dorado Facility was taken out of service for 16 days in order to make adjustments that improved the ammonia plant reliability and production volume.

Also, during November 2019, we completed a 28-day Turnaround on our sulfuric acid plant at our El Dorado Facility, which included the installation of a new sulfuric acid converter which will increase reliability and production volume.

During November 2019, we completed an extensive 67-day Turnaround at our Pryor Facility including the installation of a new, larger urea reactor.

The next Turnarounds for these facilities are scheduled in 2021 for our Pryor Facility and 2022 for our El Dorado Facility .

See additional discussion below under “Items Affecting Comparability of Results.”

Amended Ammonia Agreement

During October 2019, the ammonia purchase and sale agreement between El Dorado Chemical Company (“EDC”) and Koch Fertilizer LLC (“Koch Fertilizer”) was amended, pursuant to which Koch Fertilizer agrees to purchase, with minimum purchase requirements, a portion of the ammonia that (a) will be produced at the El Dorado Facility and (b) that is in excess of EDC’s needs.

As amended, the term of the agreement expires in June 2022 but automatically continues for additional one-year terms unless termin ated by either party by delivering a notice of termination at least nine months prior to the end of term in effect.

Assets Held for Sale

During November 2019, in conjunction with management’s review of our long-range strategy, development of the 2020 budget and the completion of the 2019 Turnarounds, certain long-lived assets were identified for sale and a plan to sell such assets was finalized by management.

Based on information obtained from various potential buyers and vendors to dissemble the assets, the carrying amount of these assets held for sale was written down to a de minimis amount and the corresponding non-cash charge of $9.7 million was recognized and included in other expense.

Costs to disassemble these assets, in conjunction with disposals, will be recognized as incurred.

We expect the sales of these assets, which will be sold primarily for scrap value, to be completed within one year.

COVID-19 Pandemic

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 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.

For our personnel at our manufacturing facilities and retail agricultural centers, we have developed plans and procedures that have allowed 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.

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

The nitrogen chemical industry was under pressure during most 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.

Pricing for all major agricultural product categories was impacted by the continued oversupply of ammonia in our primary end markets, along with increased imports of some of our downstream products.

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

Looking ahead to 2021, while much of the U.S.

economy has a least partially reopened and we have seen a healthy recovery of the economy, we are not yet back to pre-pandemic operating levels and uncertainty still remains for some of our end markets.

With respect to our agricultural business, the corn market has experienced positive indicators beginning during the latter part of 2020.

According to certain industry sources, the estimated corn acres to be planted in 2021 ranges between 92 to 94 million.

Also, the U.S.

Department of Agriculture (the “USDA”) currently estimates the U.S.

ending corn stocks to be approximately 38.2 million metric tons, compared to 48.8 million metric tons relating to the 2020 crop.

In addition, demand from ethanol-related consumption has increased since the second quarter of 2020, although overall demand continues to be lower compared to 2019 due to the stay-at-home orders, we experienced in the U.S.

Increased Chinese import of corn and lower than expected ending corn inventory is currently improving corn pricing and is driving higher fertilizer pricing thus far for the 2021 spring season.

However, improvements in fertilizer pricing could be tempered higher natural gas costs and from additional imported fertilizers.

With respect to our industrial and mining business, 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 December 31 , 2020, we had approximately $58.1 million of combined cash and borrowing capacity, which, we believe, provides us with ample liquidity to fund our operations and meet our current obligations .

As discussed in footnotes (D) and (G) of Note 6, 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 implemented 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.

Also, during 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.”

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 agreed to supply between 70,000 to 100,000 tons of nitric acid annually, with sales beginning in the first quarter of 2021.

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

Settlements with Certain Vendors

As discussed in Note 8, in June 2020, EDC 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.

Business Development-February 2021

On February 21, 2021, we began the phased restart of our Pryor Facility, which was taken out of service on February 12, 2021 after extreme cold weather caused a surge in natural gas prices in the region, along with the curtailment of gas distribution by the operator of the pipeline that supplies natural gas to the facility.

As weather across the middle of the country has improved and temperatures have warmed, natural gas prices have normalized and supply volumes have been restored to levels required for full operation of our facilities.

The Pryor Facility is in the process of restarting and we expect the facility to return to pre-shutdown production volume levels as safely and as soon as practicable.

Also, as a result of unprecedented cold weather conditions, on February 17, 2021, the primary natural gas supplier to our El Dorado Facility asserted a claim of force majeure and materially restricted the supply of gas to the facility.

However, effective February 23, 2021, the force majeure was lifted and the facility’s ammonia plant is currently in production.

Notably, our Cherokee Facility was not materially impacted by the extreme cold weather and related natural gas price and supply issues and operated at targeted levels throughout February.

Key Industry Factors

Supply and Demand

Sales of our agricultural products were approximately 52% of our total net sales for 2019.

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

4 unchanged sentences

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.

The USDA estimates corn production for the 2020 Crop at approximately 13.7 billion bushels, down 5 percent from the 2019 Crop.

The average yield in the U.S.

was estimated at 168.0 bushels per acre, 8.4 bushels below the 2019 Crop yield of 176.4 bushels per acre.

For 2020 as noted in the table below, the USDA estimates the number of acres of corn planted in the U.S.

was approximately 91 million acres and U.S ending stocks to be approximately 38 million metric tons, a 22% decrease from a year ago.

The following February estimates are associated with the corn market:

2 unchanged sentences

(2018 Harvest)

January Report (1)

February Report (1)

Area Planted (Million acres)

3 unchanged sentences

World Ending Stocks (Million metric tons)

Information obtained from WASDE reports dated February 11, 2020 (February Report) for the 2019/2020 (“2020 Crop”), 2018/2019 (“2019 Crop”) and 2017/2018 (“2018 Crop”) corn marketing years.

Information obtained from WASDE report dated February 9, 2021 (“February 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.

For example, the marketing year for a corn crop is from September 1 of the current year to August 31 of the next year.

The marketing year begins at the harvest and continues until just before harvest of the following year.

For example, the marketing year for the current corn crop is from September 1 of the current year to August 31 of the next year.

The year begins at the harvest and continues until just before harvest of the following year.

Represents the percentage change between the 2021 Crop amounts compared to the 2020 Crop amounts.

Represents the percentage change between the 2021 Crop amounts compared to the 2019 Crop amounts.

After a challenging 2019 for U.S.

corn farmers, the number of planted corn acres in 2020 increased slightly and corn production increased 4% year over year.

Despite the national restrictions and stay at home orders placed on traveling during 2020, in an attempt to slow the spread of the COVID-19 pandemic, the USDA estimates a slight demand increase in corn for ethanol production compared to last year.

Most gasoline has 10% ethanol content.

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

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

Lastly, due to the overall demand for corn, the USDA significantly decreased the U.S.

ending corn stocks to approximately 38 million metric tons, compared to 49 million metric tons relating to the 2020 crop.

For 2021, this decrease in ending corn stocks has elevated current and projected corn prices not seen in seven years, which may positively impact fertilizer demand and prices for the spring planting season.

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.

Several years ago, the market believed that low natural gas prices would continue.

That belief, combined with favorable fertilizer pricing, stimulated invest ment in numerous expansions of existing nitrogen chemical facilities and the construction of new nitrogen chemical facilities.

That belief, combined with favorable fertilizer pricing, stimulated investment in numerous expansions of existing nitrogen chemical facilities and the construction of new nitrogen chemical facilities.

Following the expansions, global nitrogen fertilizer supply outpaced global nitrogen fertilizer demand causing oversupply in the global and North American markets.

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 s elling 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.

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

to increase and exports from the U.S.

to decrease increa sing UAN supply in the U.S.

After a challenging 2019 for U.S.

corn farmers, it is expected that final harvested acres and yields for the 2019 harvest year will be lower than expected.

These factors have already impacted the price of corn, which has risen to its highest level since 2014.

A likely decline in the stock-to-use ratio for corn should lead to an increase in planted acres in the spring 2020 planting season.

Assuming normal weather conditions, industry reports currently estimate a 5% increase in corn acres to be planted during 2020 compared to 2019.

Therefore, for 2020, we expect overall stronger demand for our products somewhat tempered by continued pricing pressures on these products.

Sales of our industrial products were approximately 38% of our total net sales for 2019.

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

According to the American Chemistry Council, the U.S.

economic indicators point to modest growth in 2020 in the U.S market we serve and export weakness due to the softening global economy and trade tensions.

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 2019.

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.

Beginning in late 2019 and into 2020, ammonia pricing was under pressure due to inordinately inclement weather, followed by sluggish industrial demand throughout 2020, as a result of pandemic related weakness, which led to increased supply and resultant lower overall pricing for ammonia.

Also, in 2020, ammonia prices in the Southern Plains market were under additional pricing pressure relating to the closure of the Magellan ammonia pipeline during 2019, which also led to a build-up in ammonia supply in this market.

Beginning in the latter half of 2019 and throughout 2020, UAN prices traded at a discount to urea on a nitrogen equivalent basis, due in part to European anti-dumping duties that were imposed on imports from certain countries, including the U.S., which resulted in increased imports of UAN into the U.S.

primarily from Trinidad and Russia and decreased exports from the U.S., resulting in increased overall supply in the U.S market.

Looking forward to 2021, favorable dynamics for U.S.

agriculture have translated into higher prices to date for a variety of crops, including corn, which has prompted an increase in demand for fertilizers by farmers seeking to maximize yields in the coming spring planting season.

Favorable grower income in 2020, coupled with significant increase in Chinese imports of agricultural commodities, lower ending U.S.

corn inventory levels, and drought conditions in South America have pushed commodity prices, including corn, to their highest level in over seven years.

According to certain industry sources, the estimated corn acres to be planted in 2021 is between 92 to 94 million.

These factors have resulted in a price rally for fertilizers over the last several months, which we expect will continue through the spring planting season.

Industrial and Mining

See discussion above concerning the COVID-19 pandemic under “Business Developments-2020.”

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

According to the A merican Chemistry Council, the U.S.

economic indicators are improving and pointing towards continued improvement despite continuing COVID-19 pandemic related difficulties in the market s we serve.

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

See discussion above concerning a new long-term nitric acid supply contract under “Business Developments-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, recent reduction in coal mining activities 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 2019 mining sales volumes were affected by overall lower customer demand in our mining markets.

Metals mining prices have seen strong pricing during 2020 which in turn we expect will drive strong demand for our mining products for 2021 as producers push to extract as much as possible.

Also, although U.S.

coal production decreased by 24% during 2020, the EIA is projecting a 12% increase in 2021 because of a forecast 41% increase in natural gas prices for electricity generators, making coal more competitive in the electric power sector.

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

Farmer Economics

20 unchanged sentences

However, we continue to evaluate the recent rising costs of rail and truck freight domestically.

Additionally, the Magellan ammonia pipeline, which had an annual capacity to transport approximately 900,000 tons per year, most of which was produced in Oklahoma and Texas and delivered via the pipeline in the Midwest, is in the process of being permanently shut down.

Pipeline closure began at the southern end of the pipeline in September of 2019 and is expected to continue on the northern end of the pipeline in early 2020.

Without the pipeline in place for ammonia transport, producers will have to rely on other transportation venues, primarily by truck but will also include rail and barge transport of ammonia.

Higher transportation costs may impact our margins if we are not able to pass through these costs.

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 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 .

2 unchanged sentences

Consistent, reliable and safe operations at our chemical plants are critical to our financial performance and results of operations.

The financial effects of planned downtime at our plants, including Turnarounds, is mitigated through a diligent planning process that considers the availability of resources to perform the needed maintenance and other factors.

The financial effects of planned downtime at our plants, including Turnarounds (primarily associated with our ammonia plants), is mitigated through a diligent planning process that considers the availability of resources to perform the needed maintenance and other factors.

Unplanned downtime of our plants typically results in lost contribution margin from lost sales of our products, lost fixed cost absorption from lower production of our products and increased costs related to repairs and maintenance.

All Turnarounds result in lost contribution margin from lost sales of our products, lost fixed cost absorption from lower production of our products, and increased costs related to repairs and maintenance, which repair and maintenance costs are expensed as incurred.

Our Pryor Facility completed an extensive Turnaround during 2019.

The Pryor Facility will continue on a two-year Turnaround cycle with the next Turnaround planned for the third quarter of 2021.

At that time, we will seek to move to a three-year Turnaround cycle.

In addition, our El Dorado Facility completed a partial Turnaround during 2018.

The remaining portion of this Turnaround was completed during 2019.

The El Dorado Facility has moved to a three-year Turnaround cycle with the next Turnaround planned in the third quarter of 2022.

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

Prepay Contracts

All Turnarounds result in

lost contribution margin from lost sales of our products, lost fixed cost absorption from lower production of our products, and increased costs related to repairs and maintenance, which repair and maintenance costs are expensed as incurred.

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

Our El Dorado and Pryor Facilities are currently on a three-year ammonia plant Turnaround cycle with the next ammonia plant Turnaround planned in the third quarter of 2022.

Ammonia Production

Ammonia is the basic product used to produce all of our upgraded products.

The ammonia production rates of our plants affect the total cost per ton of each product produced and the overall sales of our products.

Total ammonia production in 2020 was 827,000 tons.

For 2021, we are targeting total ammonia production of approximately 830,000 tons to 850,000 tons despite a 30-day Turnaround at our Cherokee Facility, which will lower ammonia production during the third quarter by approximately 15,000 tons.

We believe that our focus on continuous improvement in reliability as discussed in key operating initiatives will result in year over year improvement in ammonia production for 2021.

Forward Sales Contracts

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

These sales are made by offering customers the opportunity to purchase product on a forward basis at prices and delivery dates that are agreed upon.

These sales are made by offering customers the opportunity to purchase product on a forward basis at prices and delivery dates that are agreed upon, with dates typically occurring within 12 months.

We use this program to varying degrees during the year depending on market conditions and our view of changing price environments.

5 unchanged sentences

Items Affecting Comparability of Results

On-Stream Rates

The on-stream rates of our plants affect our production, the absorption of fixed costs of each plant and sales of our products.

It is a key operating metric that we use to manage our business.

In particular, we closely monitor the on-stream rates of our ammonia plants as ammonia is the basic product as used to produce all upgraded products.

The on-stream rates noted below exclude Turnaround days, when applicable.

Our average overall on-stream rate of our ammonia plants was 91% for 2019 compared to 89% for 2018.

For 2020, we are targeting an average overall on-stream rate of 94%.

We believe that our focus on improving on-stream rates as discussed in key operating initiatives will continue to improve our overall on-stream rate for 2020.

Turnaround Expense

During 2019, we incurred Turnaround costs totaling approximately $13.2 million associated with a 67-day Turnaround performed on our plants at our Pryor Facility and a total of 46 days associated with Turnaround activity performed on our plants at our El Dorado Facility which consisted of an 18-day Turnaround on the ammonia plant and a 28-day Turnaround on the sulfuric acid plant.

During 2018, we incurred Turnaround costs totaling approximately $9.8 million associated with a 35-day Turnaround performed on our plants at our Cherokee Facility and a total of 12 days associated with Turnaround activity at our El Dorado Facility.

Selling Prices

During 2019, we experienced improved selling prices for our agricultural products compared to 2018.

Average selling prices for our UAN, ammonia, and HDAN increased 14%, 2% and 1%, respectively compared to 2018 average selling prices.

During the back half of 2019 selling prices began to decline reflecting a lowering in the Southern Plains benchmark price for ammonia resulting from elevated inventory levels from the inordinately inclement weather throughout the Midwest over the past year and the closure of the Magellan ammonia pipeline.

In addition, UAN selling prices also deteriorated in the second half of 2019, as import volumes increased while export volumes declined due, in part, to European anti-dumping duties.

Our 2019 average industrial selling prices for our ammonia decreased compared to the same period of 2018 as a result of the aforementioned elevated ammonia inventory levels.

The 2019 average Tampa Ammonia price declined approximately 21% as compared to the same period in 2018, which led to a decrease in industrial selling prices as many of our industrial contracts are indexed to the Tampa Ammonia benchmark price.

With respect to our outlook for 2020, we expect that agricultural and industrial pricing will continue to be impacted by the aforementioned factors, impacting the agricultural market coupled with excess ammonia inventories weighing on the industrial market, as was the case in the second half of 2019.

For 2019 and 2018, legal fees were approximately $12.8 million and $8.3 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 and other assets at our El Dorado Facility as discussed in footnote B of Note 9.

We expect to continue to incur legal fees associated with this matter through March 2020, the scheduled date of the trial.

Depreciation Expense

During 2019 and 2018, depreciation expense was $68.3 million and $70.3 million, respectively.

For 2018, approximately $2.0 million relates to accelerated depreciation at the El Dorado Facility due to the boiler tube failures caused by a power outage.

For 2020, average agricultural selling prices for our ammonia, UAN, and HDAN decreased 29%, 25% and 11%, respectively, compared to 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.

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 U.S.

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

Our 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 declined 6% compared to 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 2020 average mining selling prices were lower compared to 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.

Legal Fees-Leidos

For 2020 and 2019, certain legal fees were approximately $5.7 million and $9.6 million, respectively.

These fees relate to claims we are pursuing 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 8.

Due to the impact from the COVID-19 pandemic, the trial date has been delayed, which resulted in reduced costs in 2020.

We are awaiting a new trial date.

Settlements with Certain Vendors (2020 only)

As discussed above under “Business Developments-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 which includes approximately $5.7 million classified as a reduction to cost of sales.

Ammonia Plant Turnaround Activities (2019 only)

When an ammonia plant Turnaround is performed, overall results are negatively impacted.

This impact includes lost contribution margin from lost sales, lost fixed cost absorption from lower production, and increased costs associated with repairs and maintenance.

The effects of our ammonia plant Turnarounds, exclusive of the impacts due to lost production during the downtime, are shown below:

Turnaround Expense

Estimated Lost Production

2019 Related Period

(In Thousands)

Pryor Facility

3 rd /4 th Quarter

El Dorado Facility

Charge Associated with Assets Held for Sale (2019 only)

As discussed above under “Business Developments – 2019”, we recognized a non-cash charge of $9.7 million associated with assets held for sale, which amount is included in other expense.

Interest Expense

During 2019 and 2018, interest expense was $46.4 million and $43.1 million, respectively.

The change primarily relates to our Senior Secured Notes as discussed in Note 7.

Provision (benefit) for Income Taxes

For 2019, the benefit for income taxes was $20.9 million compared to a provision of $1.7 million for 2018.

The resulting benefit rate for 2019 was 24.8% compared to an effective tax rate of 2.5% for 2018, which includes the impact from tax reform adjustments.

The increase in the benefit rate is primarily due to changes to the state deferred tax assets and liabilities resulting from state tax law changes enacted during 2019 and due to federal and state indefinite lived carryforward benefits that can be realized through the reversal of deferred tax liabilities .

The 2018 effective tax rate was impacted by adjustments made to our valuation allowances including a reversal of approximately $2.3 million of state valuation allowance related to tax law changes.

Loss on Extinguishment of Debt (2018 only)

As the result of the financing transactions relating to the Senior Sec ured Notes and repurchase of the senior secured notes due 2019, we incurred a loss on extinguishment of debt of $6.0 million in 2018.

Severance Benefits and Accelerated Stock-based Compensation (2018 only)

During 2018, we incurred $5.3 million associated with certain severance benefits and accelerated stock-based compensation relating to Daniel D.

Greenwell, our former Chief Executive Officer (“CEO”), electing not to renew his employment agreement in December 2018.

Reco very from a Settlement with a Vendor (2018 only)

During 2018, we and a vendor mediated a settlement relating primarily to a business interruption claim caused by defective work performed by the vendor at our Pryor Facility.

As a result of the settlement, the vendor paid us $4.0 million.

As part of the settlement, we paid the vendor $0.5 million to settle $1.1 million of invoices that were held in our accounts payable.

As a result, we recognized a recovery from this settlement totaling $4.6 million of which $4.4 million was classified as a reduction to cost of sales (primarily relating to our business interruption claim) and the remaining balance of $0.2 million as a reduction to PP&E.

In 2019, we recognized a non-cash charge of $9.7 million associated with assets held for sale, which amount is included in other expense.

Benefit for Income Taxes

For 2020, the benefit for income taxes was $4.7 million, with an effective benefit rate of 7.1%.

The effective tax rate was impacted by adjustments made to our valuation allowances.

For 2019, the benefit for income taxes was $20.9 million and the resulting increase in the effective benefit rate for 2019 was 24.8%, which includes 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.

Results of Operations

16 unchanged sentences

Turnaround expense

Recovery from settlements with certain vendors (3)

Total gross profit

Selling, general and administrative expense

Other expense (income), net

Other expense, net

Operating loss

Interest expense, net (4)

Loss on extinguishment of debt

Non-operating other income, net

Provision (benefit) for income taxes

Non-operating other expense (income), net

Benefit for income taxes

Other information:

1 unchanged sentence

Property, plant and equipment expenditures

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

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

Represents amount classified as cost of sales.

See discussion above under “Business Developments - 2020.”

Includes interest expense of $1.6 million associated with a litigation judgment issued during 2020 as discussed in footnote (B) of Note 8.

As a percentage of total net sales.

3 unchanged sentences

by market (2)

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

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

See reconciliation included in the financial information table above.

10 unchanged sentences

LDAN/HDAN/AN Solution

Agricultural products sales were slightly higher primarily from improved selling prices for all of our agricultural products in conjunction with improved sales volumes for ammonia.

This improvement was partially offset by lower sales volumes of UAN and HDAN resulting from unfavorable weather conditions in the markets we serve compared to 2018, as well as an extensive 67-day turnaround at our Pryor Facility which was completed in November of 2019.

Industrial acids and other industrial chemical products sales decreased primarily from lower selling prices due to lower Tampa ammonia benchmark pricing along with lower sales volumes for nitric acid due to certain spot sales made to a customer during 2018 to meet their demand caused by a disruption of their plant operations.

This decline was partially offset by improved sales volumes for ammonia from improved on-stream rates during 2019 allowing for the sale of more product.

The average Tampa ammonia pricing was approximately $65 per ton lower compared to 2018 as discussed below.

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

This decline is primarily driven by lower customer demand as the overall coal market conditions remain suppressed in conju n ction with competitive pressures in our marketing region .

As noted in the tables above, we recognized a gross profit $5.0 million for 2019 compared to $15.8 million for 2018, or a decrease of approximately $10.8 million.

Overall, our gross profit percentage decreased to 1.4% for 2019 compared to 4.2% for 2018.

Our agricultural products adjusted gross profit percentage increased to 15% for 2019 from 11% for 2018 due primarily to increased selling prices for all of our agricultural products along with improved production and sales volumes for ammonia, partially offset by lower UAN and HDAN sales volumes as discussed above.

Industrial and mining products adjusted gross profit percentage declined for 2019 to 33% from 39% for 2018 primarily driven by lower overall Tampa ammonia pricing, which averaged approximately $248 per metric ton during 2019 compared to approximately $313 per metric ton for 2018 driven by a poor weather negatively impacting the 2018 fall and the 2019 spring and fall application seasons in the U.S.

agricultural markets, combined with weather impacting the movement of ammonia from the Gulf region, which caused a build-up of ammonia inventory across the distribution channel, resulting in downward pressure on Tampa ammonia benchmark pricing and Gulf ammonia in general.

The net negative effect on gross profit from sales activity discussed above was partially offset by approximately $9.9 million in lower natural gas costs per MMBtu, approximately $1.9 million decline in depreciation expense, and improved cost absorption from higher overall plant on-stream rates partially offset by approximately $3.4 million increase in turnaround costs and approximately $1.0 million of higher freight costs incurred to move product for storage as a result of the delay in the spring application season.

Also, as discussed above under “Items Affecting Comparability of Results-Recovery from a Settlement with a Vendor”, our 2018 gross profit included a recovery from a settlement with a vendor of $4.4 million classified as a reduction to cost of sales (primarily relating to our business interruption claim).

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 all our major agricultural products, including 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.

Industrial products sales decreased primarily from lower selling prices due primarily to lower Tampa Ammonia benchmark pricing.

The average Tampa ammonia pricing was approximately $15 per ton lower compared to 2019.

Additionally, overall sales volumes were slightly higher into markets we serve, as a result of higher production, despite the impact from the COVID-19 pandemic.

Mining products sales increase slightly primarily as the result of overall higher sales volumes as customer demand has recently improved in certain markets we serve 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.

As noted in the tables above, we recognized a gross profit of $17 million for 2020 compared to $5 million for 2019, or an increase of approximately $12 million.

Overall, our gross profit percentage increased to 4.9% for 2020 compared to 1.4% for 2019.

Our agricultural products adjusted gross profit percentage decreased to 11% for 2020 from 15% for 2019 due primarily to decreased 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 for 2020 to 36% from 33% for 2019 primarily driven by a shift of product mix, lower production costs and higher sales volumes of our mining products and certain industrial products partially offset by lower overall Tampa Ammonia pricing, which averaged approximately $233 per metric ton during 2020 compared to approximately $248 per metric ton for 2019 as discussed above.

The net negative effect on gross profit from activity discussed above was offset by approximately $13.9 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 8.

Also, during 2019, we incurred Turnaround costs totaling approximately $13.2 million (no Turnarounds were performed during 2020).

Selling, General and Administrative

Our SG&A expenses were $34.2 million for 2019, a decrease of $6.6 million compared to 2018, of which $5.3 million was associated with severance benefits and accelerated stock-based compensation recognized in 2018 relating to our former CEO electing not to renew his employment agreement in December 2018.

Excluding this impact, SG&A expenses decreased $1.3 million primarily driven by a $5.0 million reduction in compensation-related costs and $0.9 million reduction in insurance and other miscellaneous items partially offset by a $4.6 million increase in professional fees, including legal fees associated with the legal matter discussed above under “Items Affecting Comparability of Results-Legal”.

Other Expense (Income), net

Other expense for 2019 was $9.9 million primarily relating to a non-cash charge associated with assets held for sale discussed above under “Business Developments-2019.” Other income for 2018 was $2.0 million primarily relating to the sales of certain non-core assets (primarily consisting of real estate).

Our SG&A expenses were $32.1 million for 2020, a decrease of $2.1 million compared to 2019.

This net decrease was primarily driven by lower professional fees of $3.3 million, including legal fees discussed above under “Items Affecting Comparability”, partially offset by an increase in compensation-related and other miscellaneous costs of $1.2 million.

Other Expense, net

Other expense for 2019 was $9.9 million primarily relating to a non-cash charge associated with assets held for sale (minimal for 2020).

Interest Expense, net

Interest expense for 2020 was $51.1 million compared to $46.4 million for 2019.

The net increase relates primarily to interest expense associated with the Notes issued in April 2018 and the New Notes issued in June 2019 partially offset by $0.9 million of debt modification fees incurred in 2018.

Loss on Extinguishment of Debt

During 2018, we incurred a loss on extinguishment of debt of approximately $6.0 million relating to the repurchase of the senior secured notes that were scheduled to mature in 2019.

Provision (benefit) for Income Taxes

The benefit for income taxes for 2019 was $20.9 million compared to a provision of $1.7 million for 2018.

The resulting benefit rate for 2019 was 24.8% compared to an effective tax rate of 2.5% for 2018 including the impact of tax reform adjustments.

The 2018 effective tax rate was impacted by adjustments made to our valuation allowances during 2018 including a reversal of approximately $2.3 million of state valuation allowance related to tax law changes.

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 6 in addition to a litigation judgment discussed in footnote (B) of Note 8.

Benefit for Income Taxes

The benefit for income taxes for 2020 was $4.7 million compared to $20.9 million for 2019.

The resulting benefit rate for 2020 was 7.1% compared to 24.8% for 2019.

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

The 2019 effective tax rate was impacted primarily due to changes to the state deferred tax assets and liabilities resulting from state tax law changes enacted during 2019 and due to federal and state indefinite lived carryforward benefits that can be realized through the reversal of deferred tax liabilities.

Also, see discussion in Note 7.

LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes our continuing cash flow activities for 2019 and 2018:

The following table summarizes our cash flow activities for 2020 and 2019:

(In Thousands)

3 unchanged sentences

Net Cash Flow from Operating Activities

Net cas h provided by operating activities was $2.1 million for 2019 compared to $17.6 million for 2018, a decrease of $15.5 million.

Net cash used by operating activities was $2.5 million for 2020 compared net cash provided of $2.1 million for 2019, a decrease of $4.6 million.

For 2020, net cash used is the result of a net loss of $61.9 million plus adjustments of $69.6 million for depreciation and amortization of PP&E, and other adjustments of $9.4 million less an adjustment of $4.8 million for deferred taxes and net cash used of approximately $14.8 million primarily from our working capital, including accounts payable, accounts receivable and prepaid deposits.

For 2019, net cash provided is the result of a net loss of $63.4 million plus adjustments of $68.3 million for depreciation and amortization of PP&E, non-cash charge of $9.7 million associated assets held for sale, and other adjustments of $7.0 million less an adjustment of $20.9 million for deferred taxes and net cash provided of approximately $1.4 million primarily from our working capital.

For 2018, net cash provided is the result of a net loss of $72.2 million plus adjustments of $70.3 million for depreciation, depletion and amortization of PP&E, $8.4 million for stock-based compensation, $6.0 million for a loss on extinguishment of debt, $1.8 million for deferred taxes and other adjustments totaling approximately $2.8 million and net cash provided of approximately $0.5 million primarily from our working capital including an increase in inventories and accounts payables and a decrease in accrued interest.

Net Cash Flow from Investing Activities

Net cash used by investing activities was $28.4 million for 2020 compared to $35.9 million for 2019, a change of $7.5 million.

For 2019, net cash used relates primarily to expenditures for PP&E.

For 2018, net cash used is the result of $37.1 million on expenditures for PP&E partially offset by $6.7 million from net proceeds from the sale of PP&E, $2.7 million representing the remaining proceeds from an indemnity escrow account associated with the sale of our former Climate Control business in 2016 and approximately $2.0 million relating to a recovery from a property insurance claim and other investing activities.

Net Cash Flow from Financing Act ivities

Net c ash provided by financing activities was $30.6 million for 2019 compared to $0.5 million for 2018, a change of approximately $30.0 million.

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

Net Cash Flow from Financing Activities

Net cash provided by financing activities was $24.4 million for 2020 compared to $30.6 million for 2019, a change of $6.2 million.

For 2020, net cash provided primarily consists of proceeds of $57.2 million from other long-term debt and insurance premium short-term financing partially offset by payments on other long-term debt and short-term financing of $32.3 million and payments of $0.5 million for other financing activities.

For 2019, net cash provided primarily consists of net proceeds of $35.1 million from the New Notes, net proceeds of $7.5 million, net of payments, from other long-term debt and insurance premium short-term financing partially offset by net payments of $10 million on the Working Capital Revolver Loan, and payments of $2.0 million for other financing activities.

For 2018, net cash provided consists of net proceeds of $390.5 million from the Notes, $10.9 million from insurance premium short-term financing, and $10.0 million from our Working Capital Revolver Loan partially offset by $375 million repayment of the senior secured notes due 2019, payments of $20.0 million on other long-term debt and short-term financing, payments of $11.0 million for debt related costs, payments of $2.8 million of fees associated with the modification of terms of our Series E Redeemable Preferred and approximately $2.1 million of other financing activities.

Capitalizatio n

Capitalization

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

5 unchanged sentences

Secured Promissory Note due 2021

Unsecured Loan Agreement due 2022 (1)

Secured Financing due 2023

Secured Loan Agreement due 2025

Secured Financing due 2025 (1)

Secured Promissory Note due 2023 (1)

Secured Financing (1)

Secured Loan Agreement

Unamortized discount and debt issuance costs

2 unchanged sentences

Total stockholders' equity

A portion of the proceeds from the Secured Financing due in 2023 was used to pay off the secured financing due in 2019.

See discussions below under “Loan Agreements and Redeemable Preferred Stock” concerning these financing transactions during 2020.

Liquidation preference of $278.0 million as of December 31, 2020.

See discussion above concerning the COVID-19 pandemic under “Business Developments - 2020.”

We currently have a revolving credit facility, our Working Capital Revolver Loan, with a borrowing base of $65 million.

As of December 31, 2020, our Working Capital Revolver Loan was undrawn and had approximately $41.8 million of availability.

We expect capital expenditures to be approximately $25 million to $30 million for 2020, which includes approximately $5 million to $10 million for margin enhancement projects.

We expect capital expenditures to be approximately $30 million for 2021, which includes approximately $5 million for margin enhancement projects.

The remaining capital spending is planned for reliability and maintenance capital projects.

5 unchanged sentences

Loan Agreements and Redeemable Preferred Stock

Senior Secured Notes due 2023 - LSB has $435 million aggregate principal amount of the 9.625% Senior Secured Notes currently outstanding, including the $35 million associated with the New Notes as discussed in footnote (B) of Note 7.

Senior Secured Notes due 2023 – LSB has $435 million aggregate principal amount of the 9.625% Senior Secured Notes currently outstanding, as discussed in footnote (B) of Note 6.

Interest is to be paid semiannually on May 1 st and November 1 st , maturing May 1, 2023 .

As a result of the financing transactions, our interest expense has increased as compared to 2018.

Secured Promissory Note due 2021 – EDC is party to a secured promissory note due in March 2021.

1 unchanged sentence

Principal and interest are payable in monthly installments.

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 current total rate of 6.03 %.

Secured Loan Agreement - EDC entered into a $15 million secured financing arrangement with an affiliate of LSB Funding L.L.C.

(“LSB Funding”) in May 2019 with a current interest rate of 8.76%.

Beginning in June 2019, principal and interest are payable in 48 equal monthly installments with a final balloon payment of approximately $3 million due on June 1, 2023.

This financing arrangement is secured by the cogeneration facility equipment and is guaranteed by LSB.

During 2019, EDC entered into a secured loan agreement with an affiliate of LSB Funding.

Under the terms of the agreement, EDC has up to $7.5 million of available borrowings (the “Interim Loan”) during the construction of a new sulfuric acid converter (the “Interim Loan Period), subject to certain conditions.

During the Interim Loan Period, interest only is payable in monthly installments.

The Interim Loan will be replaced by a term loan in 2020.

Principal and interest will be payable in 60 equal monthly installments under the term loan.

Working Capital Revolver Loan - At December 31, 2019, t he Working Capital Revolver Loan was undrawn and the net credit available for borrowings under our Working Capital Revolver Loan was approximately $ 42.1 million, based on our eligible collateral, less outstanding standby letters of credit as of that date.

Unsecured Loan Agreement due 2022 – As discussed in footnote (D) of Note 6, 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 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.

As of December 31, 2020, 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.

Principal and interest are payable in 48 equal monthly installments with a final balloon payment of approximately $3 million due in June 2023.

Secured Loan Agreement due 2025 - 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.

Secured Financing due 2025 – As discussed in footnote (G) of Note 6, 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 December 31, 2020, the Working Capital Revolver Loan was undrawn and the net credit available for borrowings under our Working Capital Revolver Loan was approximately $41.8 million, based on our eligible collateral, less outstanding standby letters of credit as of that date.

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

Red emption of Series E Redeemable Preferred – At December 31, 2019, there were 139,768 outstanding shares of Series E Redeemable Preferred and the aggregate liquidation preference (par value plus accrued dividends) was $242.8 million .

Redemption of Series E Redeemable Preferred – At December 31, 2020, there were 139,768 outstanding shares of Series E Redeemable Preferred and the aggregate liquidation preference (par value plus accrued dividends) was $278.0 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”).

8 unchanged sentences

Capital Expenditures – 2020

For 2019, capital expenditures relating to PP&E we re $36.1 million, which expenditures include approximately $2.0 million associated with maintaining compliance with environmental laws, regulations and guidelines.

Approximately $5.2 million related to the new sulfuric acid converter, which was financed, and the remaining capital expenditure s were primarily funded with cash.

For 2020, capital expenditures relating to PP&E were $30.5 million, which expenditures include approximately $1.8 million associated with maintaining compliance with environmental laws, regulations and guidelines.

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

See discussion above under “Capitalization” for our expected annual capital expenditures for 2021.

Expenses Associated with Environmental Regulatory Compliance

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

We are subject to numerous federal, state and local laws and regulations, including matters regarding environmental, health and safety matters .

As a result, we incurred expenses of $4.0 million in 2020 in connection with environmental projects.

For 2021, we expect to incur expenses ranging from $4.1 million to $4.6 million in connection with additional environmental projects.

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

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

We have not paid cash dividends on our outstanding common stock in many years, and we do not currently anticipate paying cash dividends on our outstanding common stock in the near future.

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 10.

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 $118.87 per share for the current aggregate semi-annual dividend of $16.6 million.

The current semi-annual compounded dividend is approximately $ 136.29 per share for the current aggregate semi-annual dividend of $1 9 .

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

4 unchanged sentences

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

As of December 31, 201 9 , the amount of accumulated dividends on the Series D Preferred and Series B Preferred totaled approximately $ 1.

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

There are no optional or mandatory redemption right s with respect to the Series B Preferred or Series D Preferred.

As of December 31, 2020, the amount of accumulated dividends on the Series D Preferred and Series B Preferred totaled approximately $1.6 million.

All shares of the Series D Preferred and Series B Preferred are owned by the Golsen Holders and an immediate family member.

There are no optional or mandatory redemption rights with respect to the Series B Preferred or Series D Preferred.

We believe fertilizer products sold to the agricultural industry are seasonal while sales into the industrial and mining sectors generally are less susceptible.

27 unchanged sentences

noncurrent accrued and other liabilities (5)

The estimated interest payments relating to variable interest rate debt are based on interest rates at December 31, 2019.

The estimated interest payments are based on interest rates at December 31, 2020 which debt is all fixed interest rate debt.

The Series E redeemable preferred stock (including dividends) are assumed to be redeemed and paid on the earliest possible redemption date by the holder (October 25, 2023) and that dividends are accrued until that date.

Capital expenditures include only the estimated committed amounts (high end of range) at December 31, 2019 .

Capital expenditures include only the budgeted amounts at December 31, 2020.

Our proportionate share of the minimum costs to ensure capacity relating to a gathering and pipeline system.

1 unchanged sentence

The participation rights value associated with embedded derivative of our Series E redeemable preferred stock is based on the value of our common stock at December 31, 2020 and is based on the earliest possible redemption date by the holder, October 25, 2023.

New Accoun ting Pronouncements

Refer to Notes 1 and 2 for recently adopted and issued accounting standards.

New Accounting Pronouncements

Refer to Note 1 for recently issued accounting standards.

Critical Accounting Policies and Estimates

11 unchanged sentences

It is reasonably possible that the actual costs could be significantly different than our estimates.

Regulatory Compliance – As discussed under “Environmental, Health and Safety Matters” in Item 1 of this report, we are subject to specific federal and state regulatory compliance laws and guidelines.

Regulatory Compliance – As discussed under “Government Laws and Regulations” in Item 1 of this report, we are subject to numerous federal, state, and local laws and regulations, including matters regarding environmental, health and safety matters.

We have developed policies and procedures related to regulatory compliance.

2 unchanged sentences

However, certain conditions exist which may result in a loss, but which will only be resolved when future events occur relating to these matters.

We are involved in various environmental matters that require management to make estimates and assumptions, including our current inability to develop a meaningful and reliable estimate (or range of estimate) as to the costs relating to a corrective action study work plan approved by the Kansas Department of Health and Environment (“KDHE”) discussed under footnote 3 – Other Environmental Matters of Note 9.

At December 31, 2019 and 2018, liabilities totaling $0.2 million for both periods have been accrued relating to these issues as discussed.

This liability is included in current accrued and other liabilities and is based on current estimates that may be revised in the near term.

At the time that cost estimates for any corrective action are received, we will adjust our accrual accordingly.

It is reasonably possible that the adjustment to the accrual and the actual costs could be significantly different than our current estimates.

Charge Associated with Assets Held for Sale – As discussed in Note 1, assets held for sale are generally reported at the lower of the carrying amounts of the assets or fair values less costs to sell.

During 2019, in conjunction with management’s review of our long-range strategy, development of the 2020 budget and the completion of the 2019 Turnarounds, certain non-core long-lived assets were identified and authorized to be sold.

As a result, these assets were classified as assets held for sale.

Because the estimated costs to sell these assets (primarily to dismantle) exceeds the estimated fair values, the carrying amount of these assets were written down to a de minimis amount and a non-cash charge of approximately $9.7 million was recognized and classified as other expense.

We expect these assets to be sold in 2020.

At December 31, 2018, we had no long-lived assets classified as held for sale.

Income Tax – As discussed under “Income Taxes” in Note 1 and in Note 8, i ncome taxes are accounted for under the asset and liability method.

We are involved in various environmental matters that require management to make estimates and assumptions, including matters discussed under footnote A of Note 8.

At December 31, 2020 and 2019, liabilities totaling $0.5 million and $0.2 million, respectively, have been accrued relating to these matters.

It is also reasonably possible that the estimates and assumptions utilized as of December 31, 2020 could change in the near term.

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

Income Tax – As discussed under “Income Taxes” in Note 1 and in Note 7, 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.

2 unchanged sentences

At December 31, 2020 and 2019, our valuation allowance on deferred tax assets was $64.7 million and $51.6 million, respectively.

Redeemable Preferred Stocks – In December 2015, we issued the Series E and F Redeemable Preferred.

The redeemable preferred stocks are redeemable outside of our control and are classified as temporary/mezzanine equity on our consolidated balance sheet.

Redeemable Preferred Stocks – Our outstanding Series E and F Redeemable Preferred are redeemable outside of our control and are classified as temporary/mezzanine equity on our consolidated balance sheet.

In addition, certain embedded features (the “embedded derivative”) included in the Series E Redeemable Preferred required bifurcation and are classified as derivative liabilities.

Currently, the carrying values of the redeemable preferred stocks 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 equ al the redemption value as of October 25, 2023 , the earliest possible redemption date by the holder.

Currently, the carrying values of the redeemable preferred stocks 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.

Approximately $37 million of accretion (including the amount for earned dividends) was recorded to retained earnings in 2020.

At December 31, 201 9 , the c arrying value of these redeemable preferred stocks was $ 2 34 .

At December 31, 2020, the carrying value of these redeemable preferred stocks was $272.1 million.

For the embedded derivative, changes in fair value are recorded in our statement of operations.

At December 31, 2019 and 2018, we estimated that the embedded 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.

At December 31, 2020 and 2019, we had estimated that the contingent redemption features had fair value since we had assessed that it was probable that a portion of the shares of this preferred stock would have been redeemed prior to October 25, 2023.

At December 31, 2020 and 2019, the fair value of the embedded derivative was $1.0 million and $1.1 million, respectively, primarily relating to the participation rights based on the equivalent of 303,646 shares of our common stock at $3.39 and $4.20 per share, respectively.

No valuation i nput adjustments were considered necessary relating to nonperformance risk for the embedded derivative based on our current forecast.

The valuation is classified as Level 3.

2 unchanged sentences

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-K

Item 7. Management’s Discussion and Analysis