What changed in this filing

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Item 9A. Controls and Procedures

2021-02-25 compared with 2020-02-25 · 432 added, 456 removed, 1137 unchanged (44% of the section changed)

2 unchanged sentences

Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

These include controls and procedures designed to ensure that this information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

These include

controls and procedures designed to ensure that this information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Based upon that evaluation, our Principal Executive Officer and our Principal Financial Officer have concluded that our disclosure controls and procedures were effective.

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Based on our assessment, we believe that, as of December 31, 2020, our internal control over financial reporting is effective based on those criteria.

Our independent registered public accounting firm has issued an attestation report on our internal control over financial reporting.

This report appears on the following page.

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of LSB Industries, Inc.

Opinion on Internal Control over Financial Reporting

We have audited LSB Industries, Inc.’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).

In our opinion, LSB Industries, Inc.

(the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2019 consolidated financial statements of the Company and our report dated February 25, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Oklahoma City, Oklahoma

February 25, 2020

OTHE R INF ORMATION

OTHER INFORMATION

Item 10, Item 11, Item 12, Item 1 3 and Item 14 are incorporated by reference to our definitive proxy statement which we intend to file with the SEC on or before April 30, 2021.

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Exhibit 3(ii) to the Company’s Form 8-K filed December 29, 2015

Certificate of Designations of Series G Class C Preferred Stock of LSB Industries, Inc., as filed with the Secretary of State of the State of Delaware on July 6, 2020

Exhibit 3.1 to the Company’s Form 8-K filed July 6, 2020

Specimen Certificate for the Company’s Series B Preferred Stock

14 unchanged sentences

Exhibit 4.2 to the Company’s Form 8-K filed October 19, 2018

Renewed Rights Agreement, dated as of December 2, 2008, between the Company and UMB Bank, n.a.

Exhibit 4.1 to the Company’s Form 8-K filed December 5, 2008

Amendment to Renewed Rights Agreement, dated December 3, 2008, between LSB Industries, Inc.

and UMB Bank, n.a.

Exhibit 4.3 to the Company’s Form 8-K filed December 5, 2008

Amendment to Renewed Rights Agreement, dated as of December 4, 2015, by and between LSB Industries, Inc.

and UMB Bank, n.a., dated as of December 4, 2015

Exhibit 4.3 to the Company’s Form 8-K filed December 8, 2015

Section 382 Rights Agreement, dated as of July 6, 2020, between LSB Industries, Inc.

and Computershare Trust Company, N.A., as rights agent

Exhibit 4.1 to the Company’s Form 8-K filed July 6, 2020

Indenture, dated August 7, 2013, among LSB Industries, Inc., the guarantors named therein and UMB Bank, n.a., as trustee

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Exhibit 4.1 to the Company’s Form 8-K filed October 4, 2016.

Exhibit Number

Exhibit Title

Incorporated by Reference to the Following

Intercreditor Agreement, dated August 7, 2013, by and among Wells Fargo Capital Finance, Inc., as agent and UMB Bank, n.a., as collateral agent, and acknowledged and agreed to by LSB Industries, Inc.

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Exhibit 4.1 to the Company’s Form 8-K filed April 25, 2018

Exhibit Number

Exhibit Title

Incorporated by Reference to the Following

Form of 9.625% Senior Secured Notes due 2023 (included in Exhibit 4.1).

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Exhibit 10.3 to the Company’s Form 10-Q filed October 24, 2018

Exhibit Number

Exhibit Title

Incorporated by Reference to the Following

Notice Period Extension Regarding Employment Agreement by and between LSB Industries, Inc.

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Exhibit 10.3 to the Company’s Form 8-K filed January 3, 2019

Exhibit Number

Exhibit Title

Incorporated by Reference to the Following

Restricted Stock Agreement by and between LSB Industries, Inc.

1 unchanged sentence

Exhibit 10.26 to the Company’s Form 10-K filed February 29, 2016

Separation and Release Agreement by and between LSB Industries, Inc.

Shelby, dated as of February 22, 2016

Exhibit 10.1 to the Company’s Form 8-K filed February 25, 2016

Employment Agreement by and between LSB Industries, Inc.

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and John Burns

Exhibit 10.30 to the Company’s Form 10-K filed February 25, 2019

Severance and Change in Control Agreement, dated April 6, 2020, between LSB Industries, Inc.

and Kristy Carver

Exhibit 10.1 to the Company’s Form 10-Q filed May 7, 2020

Form of Retention Bonus Agreement

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Exhibit 10.5 to the Company’s Form 8-K filed December 8, 2015

Exhibit Number

Exhibit Title

Incorporated by Reference to the Following

Nitric Acid Supply, Operating and Maintenance Agreement, dated October 23, 2008, by and among El Dorado Nitrogen, L.P., El Dorado Chemical Company and Bayer MaterialScience LLC

Exhibit 10.1 to the Company’s Form 10-Q filed November 6, 2008

CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF A COMMISSION ORDER CF #30125, DATED OCTOBER 4, 2013, GRANTING REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION ACT.

Second Amendment to the Nitric Acid Supply, Operating and Maintenance Agreement, dated June 16, 2010, by and among El Dorado Nitrogen, L.P., El Dorado Chemical Company and Bayer MaterialScience LLC

Exhibit 10.2 to the Company’s Form 10-Q filed August 6, 2010

CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF A COMMISSION ORDER CF #30124, DATED OCTOBER 4, 2013, GRANTING REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION ACT.

Third Amendment to the Nitric Acid Supply, Operating and Maintenance Agreement, dated June 25, 2013, by and among El Dorado Nitrogen, L.P., El Dorado Chemical Company and Bayer MaterialScience LLC

Exhibit 10.3 to the Company’s Form 10-Q filed August 9, 2013

CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS SUBJECT OF A COMMISSION ORDER CF #30123, DATED OCTOBER 4, 2013, GRANTING REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION ACT.

Asset Purchase Agreement, dated as of December 6, 2002, by and among Energetic Systems Inc.

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Exhibit 10.1b to the Company’s Form 10-Q filed August 6, 2010

Exhibit Number

Exhibit Title

Incorporated by Reference to the Following

Ammonia Purchase and Sale Agreement by and between El Dorado Chemical Company and Koch Fertilizer, LLC, dated as of November 2, 2015

1 unchanged sentence

CERTAIN INFORMATION WITHIN THIS EXHIBIT HAS BEEN OMITTED AS IT IS THE SUBJECT OF A COMMISSION ORDER CF #33502, DATED APRIL 4, 2016, GRANTING REQUEST BY THE COMPANY FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION UNDER THE FREEDOM OF INFORMATION ACT.

Exhibit Number

Exhibit Title

Incorporated by Reference to the Following

Second Amendment to Ammonia Purchase and Sale Agreement Between Koch Fertilizer, LLC and El Dorado Chemical Company, dated as of September 30, 2019

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The Climate Control Group, Inc., NIBE Energy Systems Inc.

and, solely for purposes of Sections 6.8, 6.19 and 11.15 therein, LSB Industries, Inc., and solely for purposes of Section 11.16 therein, NIBE Indistrier AB (publ), dated as of May 11, 2016.

and, solely for purposes of Sections 6.8, 6.19 and 11.15 therein, LSB Industries, Inc., and solely for purposes of Section 11.16 therein, NIBE Industrier AB (publ), dated as of May 11, 2016.

Exhibit 10.1 to the Company’s Form 8-K filed May 13, 2016

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Exhibit 99.1 to the Company’s Form 8-K filed January 7, 2014

Exhibit Number

Exhibit Title

Incorporated by Reference to the Following

Engineering, Procurement and Construction Contract, Amendment No.

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Exhibit 4.9 to the Company’s Form 10-K filed February 27, 2014

Exhibit Number

Exhibit Title

Incorporated by Reference to the Following

Amendment No.

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Exhibit 4.1 to the Company’s Form 8-K filed February 28, 2019

Third Amendment to Third Amended and Restated Loan and Security Agreement, dated as of April 20, 2020, by and among Wells Fargo Capital Finance, LLC, as the arranger and administrative agent, the lenders party thereto, LSB Industries, Inc.

and its subsidiaries identified on the signature pages thereto as borrowers and the Company’s subsidiaries identified on the signature pages thereto as guarantors

Exhibit 10.3 to the Company’s Form 10-Q filed May 7, 2020

Security Agreement dated as of August 7, 2013, among LSB Industries, Inc.

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Exhibit 10.72 to the Company’s Form 10-K filed February 29, 2016

Exhibit Number

Exhibit Title

Incorporated by Reference to the Following

Supplement No.

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Exhibit 10.4 to the Company’s Form 8-K filed November 16, 2015

Exhibit Number

Exhibit Title

Incorporated by Reference to the Following

Amendment No.

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Exhibit 10.1 to the Company’s Form 8-K filed December 8, 2015

Warrant to Purchase Common Stock issued by LSB Industries, Inc.

to LSB Funding LLC, dated as of December 4, 2015

Exhibit 10.2 to the Company’s Form 8-K filed December 8, 2015

Board Representation and Standstill Agreement by and among LSB Industries, Inc., LSB Funding LLC, Security Benefit Corporation, Todd Boehly and the Golsen Holders (as defined therein), dated as of December 4, 2015

8 unchanged sentences

Exhibit 10.1 to the Company’s Form 8-K filed October 19, 2018

Purchase and Sale Agreement dated May 11, 2017 between Zena Energy L.L.C and BKV Chelsea, LLC

Exhibit 10.1 to the Company’s Form 8-K filed May 11, 2017.

Transition Agreement dated June 30, 2017 by and between Jack E.

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Exhibit 10.2 to the Company’s Form 8-K filed October 19, 2018

Exhibit Number

Exhibit Title

Incorporated by Reference to the Following

Subsidiaries of the Company

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Maguire, Chief Financial Officer, furnished pursuant to Sarbanes-Oxley Act of 2002, Section 906

XBRL Instance Document

XBRL Taxonomy Extension Schema Document

XBRL Taxonomy Extension Calculation Linkbase Document

XBRL Taxonomy Extension Definition Linkbase Document

XBRL Taxonomy Extension Labels Linkbase Document

XBRL Taxonomy Extension Presentation Linkbase Document

Inline XBRL Instance Document

Inline XBRL Taxonomy Extension Schema Document

Inline XBRL Taxonomy Extension Calculation Linkbase Document

Inline XBRL Taxonomy Extension Definition Linkbase Document

Inline XBRL Taxonomy Extension Labels Linkbase Document

Inline XBRL Taxonomy Extension Presentation Linkbase Document

Exhibit Number

Exhibit Title

Incorporated by Reference to the Following

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

Executive Compensation Plan or Arrangement

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February 25, 2021

Golsen, Chairman Emeritus

February 25, 2020

Golsen, Director

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Kanna Kitamura, Director

/s/ Steven L.

February 25, 2021

Packebush, Director

February 25, 2021

Peninger, Director

/s/ Richard S.

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Schedule II – Valuation and Qualifying Accounts

Report of Independent Regist ered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of LSB Industries, Inc .

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generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 25, 2020 expressed an unqualified opinion thereon.

Adoption of ASU No.

2016-02 (Topic 842) and No.

2016-02 (Topic 842)

As discussed in Note 1 and Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in the December 31, 2019 financial statements to reflect the accounting method change due to the adoption of ASU 2016-02 Leases (Topic 842).

Additionally, in the December 31, 2018 financial statements the Company changed its method of accounting for revenue due to the adoption of ASU 2014-09 Revenue from Contracts with Customers (Topic 606).

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases in the December 31, 2019 financial statements to reflect the accounting method change due to the adoption of ASU 2016-02 Leases (Topic 842), and the related amendments.

Basis for Opinion

1 unchanged sentence

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial report.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

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We believe that our audits provide a reasonable basis for our opinion.

Critical audit matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to an account or disclosure that is material to the financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.

Pending, threatened, or settled litigation

Description of the matter

As discussed in Note 8 to the consolidated financial statements, the Company is involved in various claims, legal proceedings, and other disputes that require management to make assessments relating to future outcomes.

Based on the Company’s assessment, contingent losses are accrued when such losses are probable and reasonably estimable.

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, is disclosed.

Auditing management’s accounting for, and disclosure of, pending, threatened, or settled litigation is challenging because management’s evaluation of the likelihood and amount of potential loss is highly subjective and requires significant judgment.

The determination is sensitive to the uncertainties related to the outcome of the contingency, the status and uncertainty of the litigation and/or the appeals process, and the status of any settlement discussions associated with the contingent matter

How we addressed the matter in our audit

To test the Company’s legal contingencies and the related disclosures, our audit procedures included, among others, assessing the completeness of the litigation matters, legal claims and other disputes subject to evaluation by the Company, evaluating the Company’s assessment of the probability of outcome, and disclosure of probable and reasonably possible losses.

As part of these procedures, we read the minutes of the meetings of the committees of the board of directors, read summaries of rulings and/or settlement agreements, evaluated the responses of internal and external legal counsel confirmation letters, inquired of internal legal counsel to understand developments and progression in potential settlement discussions, requested and obtained written representations from executives of the Company related to contingent matters, and evaluated the Company’s disclosures for consistency with our understanding of the Company’s contingent matters.

/s/ Ernst & Young LLP

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Prepaid insurance

Precious metals

Total supplies, prepaid items and other

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75,000,000 shares authorized,

31,283,210 shares issued (31,283,210 shares at December 31, 2018)

31,283,210 shares issued

Capital in excess of par value

Retained earnings

Retained earnings (accumulated deficit)

Less treasury stock, at cost:

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Loss on extinguishment of debt

Non-operating other income, net

Loss from continuing operations before provision (benefit) for income taxes

Non-operating other expense (income), net

Loss before provision (benefit) for income taxes

Provision (benefit) for income taxes

Loss from continuing operations

Income from discontinued operations, net of taxes

Dividends on convertible preferred stocks

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Net loss attributable to common stockholders

Basic and dilutive income (loss) per common share:

Loss from continuing operations

Income from discontinued operations, net of taxes

Basic and diluted net loss per common share

See accompanying notes.

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Consolidated Statements of Stockholders’ Equity

Earnings (Accumulated Deficit)

(In Thousands)

Balance at December 31, 2017

Cumulative effect of change in accounting

Dividend accrued on redeemable preferred

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Stock-based compensation

Issuance of restricted stock, net

Issuance of restricted and unrestricted

Acquisition of shares withheld for

employee taxes

Balance at December 31, 2020

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Cash flows from continuing operating activities

Adjustments to reconcile net loss to net cash provided by

Adjustments to reconcile net loss to net cash provided (used) by

continuing operating activities:

Income from discontinued operations, net of taxes

Deferred income taxes

Charge on extinguishment of debt

Depreciation, depletion and amortization of property, plant and

Depreciation and amortization of property, plant and

Amortization of intangible and other assets

Loss (gain) on sales of property and equipment

Loss associated with assets held for sale

Loss (gain) on sales of businesses and other property and equipment

Stock-based compensation

Loss associated with commodity contracts

Charge on extinguishment of debt

Cash provided (used) by changes in assets and liabilities

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Other current and noncurrent liabilities

Net cash provided by continuing operating activities

Net cash provided (used) by continuing operating activities

Cash flows from continuing investing activities

Expenditures for property, plant and equipment

Proceeds from sales of businesses and other property and equipment

Proceeds from vendor settlements associated with

property, plant and equipment

Proceeds from sales of property and equipment

Proceeds from property insurance recovery associated with property,

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Payments on short-term financing

Taxes paid on equity awards

Payments of preferred stock modification costs

Proceeds from exercises of stock options

Taxes paid on equity awards

Net cash provided (used) by continuing financing activities

Cash flows of discontinued operations:

Net cash used by operating activities

Net cash used by financing activities

Net cash used by discontinued operations

Net cash provided by continuing financing activities

Net decrease in cash and cash equivalents

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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.

industrial users of acids throughout the U.S.

and parts of Canada;

and explosive manufacturers in the U.S.

Other products consisted of natural gas sales from our working interests in certain natural gas properties of our former subsidiary Zena Energy L.L.C.

and sales of industrial machinery and related components, which were sold during 2017.

and parts of Mexico and Canada.

Use of Estimates – The preparation of consolidated financial statements in conformity with U.S.

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Cash and Cash Equivalents – Investments, which consist of highly liquid investments with original maturities of three months or less, are considered cash equivalents.

Accounts Receivable – Our accounts receivable are stated at net realizable value.

Accounts Receivable – Our accounts receivable is stated at net realizable value.

This value includes an appropriate allowance for estimated uncollectible accounts to reflect any loss anticipated on accounts receivable balances.

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Concentrations of credit risk with respect to trade receivables are monitored and this risk is reduced due to short-term payment terms relating to most of our significant custom ers .

Nine customers (including their affiliates) account for approximately 46% of our total net receivables at December 31, 2019.

Ten customers (including their affiliates) account for approximately 52 % of our total net receivables at December 31, 2020 .

Inventories – Inventories are stated at the lower of cost (determined using the first-in, first-out (“FIFO”) basis) or net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, transportation or disposal.

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Inventory reserves associated with cost exceeding net realizable value were not material at December 31, 2020 and 2019.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Summary of Significant Accounting Policies (continued)

Property, Plant and Equipment – Property, plant and equipment (“PP&E”) are stated at cost, net of accumulated depreciation, depletion and amortization (“DD&A”).

Leases meeting finance lease criteria (formerly classified as capital leases) are capitalized in PP&E.

Leases meeting finance lease criteria are capitalized in PP&E.

Major renewals and improvements that increase the life, value, or productive capacity of assets are capitalized in PP&E while maintenance, repairs and minor renewals are expensed as incurred.

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When PP&E is retired, sold, or otherwise disposed, the asset’s carrying amount and related accumulated DD&A is removed from the accounts and any gain or loss is included in other income or expense.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Summary of Significant Accounting Policies (continued)

For financial reporting purposes, depreciation of the costs of PP&E is primarily computed using the straight-line method over the estimated useful lives of the assets.

1 unchanged sentence

In general, assets held for sale are 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.

Impairment of Long-Lived Assets – Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable.

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In addition, if the event or change in circumstance relates to the probable sale of an asset (or group of assets), the specific asset (or group of assets) is reviewed for impairment.

Leases – On January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842) .

We determine if an arrangement is a lease at inception or modification of a contract and classify each lease as either an operating or finance lease based on the terms of the contract.

We reassess lease classification subsequent to commencement upon a change to the expected lease term or a modification to the contract.

A contract contains a lease if the contract conveys the right to control the use of the identified property or equipment, explicitly or implicitly, for a period of time in exchange for consideration.

Control of an underlying asset is conveyed if we obtain the rights to direct the use of and obtain substantially all of the economic benefit from the use of the underlying asset.

An operating lease asset represents our right to use the underlying asset as a lessee for the lease term and an operating lease liability represent our obligation to make lease payments arising from the lease.

Currently, most of our leases are classified as operating leases and primarily relate to railcars, other equipment and office space.

Our leases that are classified as finance leases and other leases under which we are the lessor are not material.

Variable payments are excluded from the present value of lease payments and are recognized in the period in which the payment is made.

Our current leases do not contain residual value guarantees.

Most of our leases do not include options to extend or terminate the lease prior to the end of the term.

Leases with a term of 12 months or less are not recognized in the balance sheet.

Since our leases generally do not provide an implicit rate, we use our incremental borrowing rate based on the lease term and other information available at the commencement date in determining the present value of lease payments.

Lease expense is recognized on a straight-line basis over the applicable lease term.

Concentration of Credit Risks for Cash and Cash Equivalents and Sales – Financial instruments relating to cash and cash equivalents potentially subject us to concentrations of credit risk.

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Net sales to one customer, Koch Fertilizer LLC (“Koch Fertilizer”), represented approximately 10 %, 11 % and 13 % of our total net sales for 2020, 2019 and 2018, respectively.

Net sales to one customer, Coffeyville Resources Nitrogen Fertilizer, LLC (“CVR”), represented approximately 11% of our total net sales for 2018.

Net sales to one customer, Covestro AG (“Covestro”), represented approximately 12% of our total net sales for 2017.

Net sales to one customer, Coffeyville Resources Nitrogen Fertilizer, LLC (“CVR”), represented approximately 13 %, 9 % and 11 % of our total net sales for 2020, 2019 and 2018, respectively.

Accrued Insurance Liabilities – We are self-insured up to certain limits for group health, workers’ compensation and general liability claims.

3 unchanged sentences

Additional pollution liability coverage for our other facilities is provided in our general liability and umbrella policies .

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Summary of Significant Accounting Policies (continued)

Our accrued self-insurance liabilities are based on estimates of claims, which include the reported incurred claims amounts plus the reserves established by our insurance adjustors and/or estimates provided by attorneys handling the claims, if any, up to the amount of our self-insurance limits.

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It is reasonably possible that the actual development of claims could be different than our estimates.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Summary of Significant Accounting Policies (continued)

Executive Benefit Agreements – We are party to certain benefit agreements with certain key current and former executives.

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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 non-qualified stock options and restricted stock.

These benefits are principally generated from the vesting of restricted stock.

We reduce income tax expense for investment tax credits in the period the credit arises and is earned.

See Note 8 – Income Taxes discussing the Tax Cuts and Jobs Act of 2017 and Staff Accounting Bulletin No.

118 ("SAB 118") issued by the SEC.

See Note 7 – Income Taxes discussing the Coronavirus Aid, Relief and Economic Security (“CARES”) Act.

Contingencies – Certain conditions may exist which may result in a loss, but which will only be resolved when future events occur.

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

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Summary of Significant Accounting Policies (continued)

Equity Awards – Equity award transactions with employees are measured based on the estimated fair value of the equity awards issued.

1 unchanged sentence

Forfeitures are accounted for as they occur.

Historically, we issue new shares of common stock upon the exercise of stock options, but treasury shares may be used.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Summary of Signific ant Accounting Policies (continued)

We may issue new shares of common stock or may use treasury shares associated with the equity awards.

Revenue Recognition and Other Information

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Recognition of revenue when, or as, we satisfy a performance obligation.

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 in ASC 606.

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.

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Most of our contracts contain a single performance obligation with the promise to transfer a specific product.

When the terms of a contract include the transfer of multiple products, each distinct product is identified as a separate performance obligation.

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.

We only offer assurance-type warranties for our products to meet specifications defined by our contracts with customers, and do not have any material performance obligations related to warranties, return, or refunds.

Transaction Price Constraints and Variable Consideration

For most of our contracts within the scope of Accounting Standards Codification, Revenue from Contracts with Customers (Topic 606) (“ ASC 606”), 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.

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.

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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.

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, the average remaining expected duration was approximately 15 months at December 31, 2019.

Practical Expedients and Other Information

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The same financial statement classification is used for an incentive tax credit as the associated tax incurred.

During 2017, we received notification from the State of Arkansas that incentive tax credits had been approved associated with certain capital expenditures associated with the El Dorado Facility’s expansion projects completed primarily in the fourth quarter of 2015 and the second quarter of 2016.

As a result, in 2017, we recognized a current and noncurrent receivable totaling approximately $8.1 million associated with these incentive tax credits with the offset reducing PP&E (covered by the tax credit) by approximately $7.4 million and the remaining balance of $0.7 million as a reduction to cost of sales (recovery of previously incurred depreciation expense related to the PP&E).

At December 31, 2020 and 2019, our incentive tax credits receivable totaled $ 1.4 million and $ 2.3 million, respectively.

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An insurance recovery in excess of recoverable costs relating to a business interruption claim, if any, is a reduction to cost of sales.

Cost of Sales – Cost of sales includes materials, labor and overhead costs to manufacture the products sold plus inbound freight, purchasing and receiving costs, inspection costs, internal transfer costs, loading and handling costs, warehousing costs, railcar lease costs and outbound freight.

Cost of Sales – Cost of sales includes materials, labor and overhead costs, including depreciation, to manufacture the products sold plus inbound freight, purchasing and receiving costs, inspection costs, internal transfer costs, loading and handling costs, warehousing costs, railcar lease costs and outbound freight.

Maintenance, repairs and minor renewal costs relating to Turnarounds are included in cost of sales as they are incurred.

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Offsetting the fair values recognized for the derivative contracts outstanding with a single counterparty results in the net fair value of the transactions being reported as an asset or a liability in the balance sheet.

We have chosen to present the fair values of our derivative contracts under master netting agreements using a gross fair value presentation as there were no derivatives with fair values that were eligible to be offset as of December 31, 2019 and 2018.

When applicable, we present the fair values of our derivative contracts under master netting agreements using a gross fair value presentation.

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.

At December 31, 2019 and 2018, we did not have any contracts classified as Level 1.

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.

At December 31, 2019 and 2018, we did not have any significant contracts classified as Level 2.

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.

At December 31, 2020 and 2019, we did not have any financial instruments with fair values materially different from their carrying amounts (which excludes issuance costs, if applicable).

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.

LSB Industries, Inc.

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Summary of Significant Accounting Policies (continued)

See Note 10 for further discussion of our embedded derivative which is classified as Level 3.

At December 31, 2019 and 2018, we did not have any financial instruments with fair values significantly different from their carrying amounts (excluding issuance costs, if applicable).

Income (Loss) per Common Share – Net income (loss) attributable to common stockholders is computed by adjusting net income (loss) by the amount of dividends and dividend requirements on preferred stocks and the accretion of redeemable preferred stocks, if applicable.

Basic loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding, excluding contingently returnable common shares (unvested restricted stock), if applicable.

Basic loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding, excluding contingently issuable common shares (unvested restricted stock), if applicable.

For periods we earn net income, a proportional share of net income is allocated to participating securities, if applicable, determined by dividing total weighted average participating securities by the sum of the total weighted average common shares and participating securities (the “two-class method”).

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Segment Information - We operate in one principal business segment – our chemical business.

Recently Adopted Accounting Pronouncements

ASU 2016-02 and related ASUs – In February 2016, the FASB issued ASU No.

2016-02, Leases (Topic 842) , which supersedes the lease requirements in Topic 840, Leases .

In addition, the FASB issued various other ASUs further amending lease accounting guidance (together “ASC 842”).

On January 1, 2018, we adopted ASC 842 as discussed in Note 2.

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):

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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.

The effective date of ASU 2019-12 is fiscal years (and interim periods within those fiscal years) beginning after Dec.

Early adoption is permitted but requires simultaneous adoption of all provisions of the new standard.

We continue to evaluate the effect of our pending adoption of this ASU on our consolidated financial statements and related disclosures at this time.

Adoption of ASC 842

On January 1, 2019, we adopted ASC 842 using the additional transition method option provided by ASU 2018-11.

Under this transition method, we applied the new accounting guidance on the date of adoption.

Upon adoption, a cumulative effect adjustment was not required;

however, the effect of this guidance on our consolidated financial statements impacted our balance sheet presentation by increasing the amount of our noncurrent assets for the inclusion of right-of-use assets of $15.9 million and increasing the amount of our liabilities for the inclusion of the associated lease obligations of $15.9 million, most of which were classified as noncurrent.

Under the transition option we elected, ASC 842 is applied only to the most current period presented in the financial statements and our reporting for the comparative periods presented in the financial statements continue to be in accordance with Topic 840, including disclosures.

Upon adoption, we elected the following accounting policies or practical expedients related to ASC 842:

not reassess whether any expired or existing contracts are or contain leases, not reassess the lease classification for any expired or existing leases, and not reassess initial direct costs for any existing leases;

apply accounting similar to Topic 840 operating leases accounting to leases that meet the definition of short-term leases;

not evaluate land easements that exist or expired before January 1, 2019 and that were not previously accounted for as leases under Topic 840.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Adoption of ASC 842 (continued)

Subsequent to adoption, w e determine if an arrangement is a lease at inception.

Lease expense is recognized on a straight-line basis over the lease term.

Currently, most of our leases are classified as operating leases under which we are the lessee and primarily relate to railcars, other equipment and office space.

In addition, our leases that are classified as finance leases (previously classified as capital leases) and other leases under which we are the lessor are not material.

Most of our leases do not include options to extend or terminate the lease prior to the end of the term.

As of December 31, 2019, we have executed operating leases with lease terms greater than one year, totaling approximately $10.8 million that have not yet commenced.

(Dollars In Thousands)

Components of lease expense:

Operating lease cost

Short-term lease cost

Other cost (1)

Total lease cost

Supplemental cash flow information related to leases:

Operating cash flows from operating leases

Operating cash flows from finance leases

Financing cash flows from finance leases

Cash paid for amounts included in the measurement of lease liabilities

Right-of-use assets obtained in exchange for new operating lease liabilities

Other lease-related information:

Weighted-average remaining lease term - operating leases (in years)

Weighted-average remaining lease term - finance leases (in years)

Weighted-average discount rate - operating leases

Weighted-average discount rate - finance leases

Includes variable and finance lease costs.

Maturities of operating lease liabilities as of December 31, 2019 are as follows:

Operating Leases

(In thousands)

Total lease payments

Less imputed interest

Present value of lease liabilities

Additionally, under Topic 840, expenses associated with our operating lease agreements, including month-to-month leases, were $10,235,000 in 2018 and $9,813,000 in 2017.

We have adopted this new standard on January 1, 2021, which is not expected to have a material impact on our consolidated financial statements or related disclosures.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Income (loss) per Common Share

The following table sets forth the computation of basic and diluted net income (loss) per common share:

Loss per Common Share

The following table sets forth the computation of basic and diluted net loss per common share:

(Dollars In Thousands, Except Per Share Amounts)

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Accretion of Series E Redeemable Preferred

Numerator for basic and dilutive net loss per common

Numerator for basic and diluted net loss per common

share - net loss attributable to common stockholders

Denominator for basic and dilutive net loss per common

Denominator for basic and diluted net loss per common

share - adjusted weighted-average shares (1)

Basic and dilutive net income (loss) per common share:

Loss from continuing operations

Income from discontinued operations, net of taxes

Basic and diluted net loss per common share

All periods exclude 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 income (loss) per common share as their effect would have been antidilutive:

Convertible preferred stocks

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:

Restricted stock and stock units

Convertible preferred stocks

Series E redeemable preferred stock - embedded derivative

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Capital spare parts

Less accumulated depreciation and

Less accumulated depreciation and amortization

Weighted average useful lives as of December 31, 2020.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Property, Plant and Equipment (continued)

Machinery, equipment and automotive primarily includes the categories of property and equipment and estimated useful lives as follows:

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and trucks, automobiles, trailers, and other rolling stock ( 2 - 7 years ).

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Current and Noncurrent Accrued and Other Liabilities

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Accrued interest

Accrued payroll and benefits (1)

Current portion of operating lease liabilities

Deferred revenue

Accrued payroll and benefits

Accrued death and other executive benefits

Series E redeemable preferred - embedded derivative

Accrued health and worker compensation insurance claims

Customer deposits

Accrued litigation settlement (See Note 9)

Deferred revenue

Less noncurrent portion

Current portion of accrued and other liabilities

At December 31, 2018, the amount includes certain severance benefits as discussed in Note 14.

Asset Retirement Obligations

Currently, we have various legal requirements related to operations at our chemical facilities mainly for the disposal of wastewater generated at certain of these facilities.

We own the land on which our owned plants operate, limiting asset retirement obligations at our owned chemical facilities.

However, we have various legal requirements related to operations at our chemical facilities mainly for the disposal of wastewater generated at certain of these facilities.

At December 31, 2020 and 2019, our accrued liability for AROs was $ 100,000 .

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Senior Secured Notes due 2023 (B)

Secured Promissory Note due 2021, with an interest rate

Secured Promissory Note due 2023, with a current interest rate

Secured Financing due 2023, with an interest rate

Secured Loan Agreement, with an interest rate

Secured Promissory Note due 2019 (E)

Unamortized discount, net of premium, and debt

issuance costs

Less current portion of long-term debt (F)

Long-term debt due after one year, net (F)

Secured Promissory Note due 2021, with an interest

rate of 5.25 % (C)

Unsecured Loan Agreement due 2022, with an interest

rate of 1.00 % (D)

Secured Financing due 2023, with an interest

rate of 8.32 % (E)

Secured Loan Agreement due 2025, with an interest

rate of 8.75 % (F)

Secured Financing due 2025, with an interest

rate of 8.75 % (G)

Secured Promissory Note due 2023 (G)

Unamortized discount, net of premium and debt issuance

Less current portion of long-term debt (H)

Long-term debt due after one year, net (H)

LSB Industries, Inc.

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Long-Term Debt (continued)

(A) As amended in February 2019, o ur revolving credit facility (the “Working Capital Revolver Loan”) provides for advances up to $ 7 5 million, based on specific percentages of eligible accounts receivable and inventories and up to $ 10 million of standby letters of credit, the outstanding amount of which reduces the available for borrowing under the Working Capital Revolver Loan.

At December 31, 2019, our available borrowings under our Working Capital Revolver Loan were approximately $ 42.1 million, based on our eligible collateral, less outstanding letters of credit.

The maturity date of the Working Capital Revolver Loan is February 26, 2024 .

(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 December 31, 2020 , our available borrowings under our Working Capital Revolver Loan were approximately $ 41.8 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 monthly.

The Financial Covenant, if triggered, is tested monthl y.

Interest accrues on outstanding borrowings under the Working Capital Revolver Loan at a rate equal to, at our election, either (a) LIBOR for an interest period selected by us plus an applicable margin equal to 1.50 % per annum or 1.75 % per annum, depending on borrowing availability under the Working Capital Revolver Loan, or (b) Wells Fargo Capital Finance’s prime rate plus an applicable margin equal to 0.50 % per annum or 0.75 % per annum, depending on borrowing availability under the Working Capital Revolver Loan.

Interest is paid monthly, if applicable.

Interest is paid quarterly, if applicable.

The Working Capital Revolver Loan contains customary covenants including limitations on asset sales, liens, debt incurrence, restricted payments, investments, dividends and transactions with affiliates.

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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, in a transaction exempt from the registration requirements under the Securities Act of 1933 (the “Securities Act”) sold to eligible purchasers in reliance on Rule 144A under the Securities Act and to non-U.S.

persons in accordance with Regulation S under the Securities Act.

As it relates to the issuance of the Notes in April 2018, a portion of the net proceeds from the Notes were used to purchase/redeem the $375 million aggregate principal amount of senior secured notes scheduled to mature in 2019.

The remaining net proceeds were primarily used to pay related transaction fees and expenses, redemption premiums, and accrued interest on the senior secured notes purchased/redeemed.

A portion of this transaction was accounted for as an extinguishment of debt and a portion was accounted for as a non-substantial debt modification.

As a result, approximately $15.2 million of the fees/redemption premiums/discount was deferred and included in discount and debt issuance costs and approximately $0.9 million of fees were expensed, as incurred, and are included in interest expense in 2018.

In addition, we recognized a loss on extinguishment of debt of approximately $6.0 million in 2018, primarily consisting of a portion of the redemption premiums paid and the expensing of a portion of debt issuance costs associated with 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 will mature on May 1, 2023 and rank senior in right of payment to all of our debt that is expressly subordinated in right of payment to the notes and will rank pari passu in right of payment with all of our liabilities that are not so subordinated, including the Working Capital Revolver Loan.

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Interest on the Senior Secured Notes accrues at a rate of 9.625 % per annum and is payable semi-annually in arrears on May 1 and November 1 of each year.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Long-Term Debt (continued)

LSB may redeem the Senior Secured Notes at its option, in whole or in part, subject to the payment of a premium ranging from a “make-whole” premium to a premium of 3.609% of the principal amount so redeemed, in the case of any optional redemption prior to May 1, 2022.

LSB may redeem the Senior Secured Notes at its option, in whole or in part, subject to the payment of a premium of 3.609 % of the principal amount so redeemed, in the case of any optional redemption prior to May 1, 2022.

If LSB experiences a change of control, it must offer to purchase the notes at 101 % of their principal amount, plus accrued and unpaid interest, if any, to but excluding the date of purchase.

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and Standard & Poor’s Investors Ratings Services and no Default (as defined in the Indenture) has occurred and is continuing, certain of the covenants will be suspended with respect to the Senior Secured Notes.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Long-Term Debt (continued)

The Indenture provides for customary events of default (subject in certain cases to customary grace and cure periods), which include nonpayment, breach of covenants in the Indenture, payment defaults or acceleration of other indebtedness, a failure to pay certain judgments and certain events of bankruptcy and insolvency.

Obligations in respect of the Senior Secured Notes are secured by a first priority security interest in substantially all of our fixed assets, subject to certain customary exceptions.

As it relates to the issuance of the Notes in April 2018, a portion of the net proceeds from the Notes were used to purchase/redeem the $ 375 million aggregate principal amount of senior secured notes scheduled to mature in 2019 .

A portion of the 2018 transaction was accounted for as an extinguishment of debt and a portion was accounted for as a non-substantial debt modification.

As a result, approximately $ 0.9 million of fees were expensed, as incurred, and are included in interest expense in 2018.

In addition, we recognized a loss on extinguishment of debt of approximately $ 6.0 million in 2018, primarily consisting of a portion of the redemption premiums paid and the expensing of a portion of debt issuance costs associated with the senior secured notes.

(C) El Dorado Chemical Company (“EDC”), one of our subsidiaries, is party to a secured promissory note due in March 2021 .

Principal and interest are payable in monthly installments.

(D) El Dorado Ammonia L.L.C.

(“EDA”), one of our subsidiaries, 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.

(E) On May 28, 2019, EDC entered into a $15 million secured financing arrangement with an affiliate of LSB Funding L.L.C.

(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) During 2019, EDC entered into a secured financing arrangement with an affiliate of LSB Funding L.L.C.

(“LSB Funding”).

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.

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 June 2019.

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 certain equipment (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.

(F) Maturities of long-term debt for each of the five years after December 31, 2019 are as follows (in thousands):

Discount, net of premium, and debt issuance costs

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

A portion of the proceeds from this secured financing arrangement was used to pay off a secured promissory note that was scheduled to mature in 2019.

(F) During 2019, EDC entered into an interim 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 loan agreement due in March 2025.

Under the terms of the loan, principal and interest will be 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 .

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

In December 2017, the President of the United States signed into law the Tax Cuts and Jobs Act of 2017 (the “Tax Cut Act”), making significant changes to the Internal Revenue Code.

Changes include, but are not limited to, a federal corporate tax rate of 21%, additional limitations on executive compensation, and limitations on the deductibility of interest.

The FASB issued ASU 2018-05, Income Taxes (Topic 740):

Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No.

118 to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cut Act.

In 2017 and the first nine months of 2018, we recorded provisional amounts for certain enactment-date effects of the Tax Cut Act by applying the guidance in SAB 118 because we had not yet completed our enactment-date accounting for these effects.

In 2018 and 2017, we recorded tax expense related to these effects including the decrease in the federal corporate tax rate, additional limitations on executive compensation, and limitations on the deductibility of interest.

During the fourth quarter of 2018, we completed the accounting for tax reform and there was no adjustment to provisional amounts recorded.

Provision (benefit) for income taxes from continuing operations are as follows:

Long-Term Debt (continued)

( H) Maturities of long-term debt for each of the five years after December 31, 2020 are as follows (in thousands):

Discount, net of premium, and debt issuance costs

The CARES Act, which was signed into law on March 27, 2020, 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 other provisions.

During 2020, no material adjustments were required to the income tax benefit as a result of the enactment of the CARES Act.

Provision (benefit) for income taxes are as follows:

(In Thousands)

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These credits carryforward for 20 years and begin expiring in 2034 .

The current year deferred benefit 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.

We utilized approximately $3.4 million, which includes the impact of changes in tax law, of state NOL carryforwards to reduce tax liabilities in 2018 (minimal in 2019 and none in 2017).

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Income Taxes (continued)

In 2018, we utilized approximately $ 3.4 million, which includes the impact of changes in tax law, of state NOL carryforwards to reduce tax liabilities (minimal in 2020 and 2019).

At December 31, 2020, we have remaining federal and state tax NOL carryforwards of $ 629.3 million and $ 794.4 million, respectively.

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In the second quarter of 2018, we established a valuation allowance on a portion of our federal deferred tax assets.

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 the recent financing activities and our results of operations.

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 the valuation allowance recorded for 2019 is approximately $2.7 million.

For 2019, 2018 and 2017, we determined it was more-likely-than-not that approximately $698.4 million, $608.9 million and $536.0 million, respectively, of the state deferred tax assets would not be able to be utilized before expiration and a valuation allowance was maintained for the deferred tax assets associated with these carryforwards, net of federal benefit, of approximately $34.2 million and $31.0 million at December 31, 2019 and 2018, respectively.

This includes a reversal of approximately $2.3 million of valuation allowance related to tax law changes in 2018.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Income Taxes (continued)

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 annual utilization limitations of interest expense and net operating losses and our results of operations.

Based on our analysis, we believe that it is more-likely-than-not that a portion of our federal deferred tax assets will not be able to be utilized.

In addition, we believe that it is more-likely-than-not that a portion of our state deferred tax assets will not be able to be utilized.

Information relating to our valuation allowance are included in the two tables below.

In 2018, the provision for income taxes includes a reversal of approximately $ 2.3 million of valuation allowance related to tax law changes in 2018.

Deferred tax assets and liabilities include temporary differences and carryforwards as follows:

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Other accrued liabilities

Right-of-use-assets

Interest expense carryforward

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Property, plant and equipment

Lease liability

Prepaid and other insurance reserves

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All of our loss before taxes relates to domestic operations.

Detailed below are the differences between the amount of the provision (benefit) for income taxes and the amount which would result from the application of the federal statutory rate to “Loss from continuing operations before provision (benefit) for income taxes”.

(In Thousands)

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Provision (benefit) for income taxes

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Income Taxes (continued)

A reconciliation of the beginning and ending amount of uncertain tax positions is as follows:

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For 2020, 2019, and 2018, if recognized, the effect on the effective tax rate from unrecognized tax benefits would be insignificant.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Income Taxes (continued)

We record interest related to unrecognized tax positions in interest expense and penalties in operating other expense.

We recognized $0.1 million of interest and penalties associated with unrecognized tax benefits in 2017 (minimal amounts in 2019 and 2018).

At December 31, 2019 and 2018, approximately $0.3 million and $0.2 million, respectively is accrued for interest and penalties.

For 2020, 2019 and 2018, the amounts for interest and penalties associated with unrecognized tax benefits were minimal.

In addition, the amounts accrued for interest and penalties were minimal at December 31, 2020 and 2019.

LSB and certain of its subsidiaries file income tax returns in the U.S.

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If CVR fails to take delivery of certain tons, PCC pursuant to the terms of the agreement may immediately sell such unpurchased product to a third-party without restriction.

The current term of the agreement expires in May 2020, but includes automatic renewals for one or more additional one-year terms unless terminated by either party.

The current term of the agreement expires in June 2021 , but includes automatic renewals for one or more additional one-year terms unless terminated by either party.

However, CVR may unilaterally terminate the agreement upon 180 days’ advance written notice of termination to PCC;

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

Covestro agreement – El Dorado Nitrogen LLC (“EDN”) and EDC, are party to an agreement (the “Covestro Agreement”) with Covestro.

EDN operates the Baytown Facility located within Covestro’s chemical manufacturing complex located in Baytown, Texas.

Under the terms of the Covestro Agreement, EDN is responsible for the maintenance and operation of the Baytown Facility, which facility produces all of Covestro’s requirements for nitric acid for use in Covestro’s chemical manufacturing complex.

If there is a change in control of EDN, Covestro has the right to terminate the Covestro Agreement upon payment of certain fees to EDN.

The Covestro Agreement expires in June 2021, with options for renewal.

Nitric acid supply agreement – EDC is party to an agreement with a customer to supply nitric acid.

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

The initial contract term began in 2021 and extends through 2027 but includes automatic one-year renewal terms unless terminated by either party in writing 180 days before the current contract expiration date.

Natural Gas Purchase and Other Commitments – Certain of our subsidiaries are parties to contracts to purchase natural gas for anticipated production needs at certain of our facilities.

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

At December 31, 2019, our natural gas contracts, which qualify as normal purchases under GAAP and thus are not mark-to-market, included volume purchase commitments with fixed costs of approximately 7.0 million MMBtus of natural gas.

These contracts extend through December 2020 at a weighted-average cost of $2.23 per MMBtu ($15.7 million) and a weighted-average market value of $2.06 per MMBtu ($14.5 million).

At December 31, 2020, these natural gas contracts, which qualify as normal purchases under GAAP and thus are not mark-to-market, included volume purchase commitments of approximately 3.8 million MMBtus of natural gas.

These contracts extend through March 2021 at a weighted-average cost of $ 2.80 per MMBtu ($ 10.6 million) and a weighted-average market value of $ 2.36 per MMBtu ($ 9.0 million).

In addition, we had standby letters of credit outstanding of approximately $ 2.5 million at December 31, 2020.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Commitments and Contingencies (continued)

Wastewater Pipeline Operating Agreement – EDC is party to an operating agreement for the right to use a pipeline to dispose its wastewater.

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All of these insurance bonds are expected to expire or be renewed in 2021.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Commitments and Contingencies (continued)

Employment and Severance Agreements - We have employment and severance agreements with several of our officers.

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Also see Note 14-Related Party Transactions.

Settlement of a Gain Contingency - 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.

Settlements of Gain Contingencies

During 2020, 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, provided parts totaling $ 0.3 million and have agreed to provide services and parts totaling $ 2.5 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 December 31, 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 2020 includes approximately $ 5.7 million classified as a reduction to cost of sales and approximately $ 1.9 million classified as a reduction to PP&E.

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.

As a result, we recognized during 2018 a recovery from this settlement totaling $ 4.6 million of which $ 4.4 million was classified as a reduction to cost of sales and the remaining balance of $ 0.2 million classified as a reduction to PP&E.

Legal Matters - Following is a summary of certain legal matters involving the Company:

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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.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Commitments and Contingencies (continued)

As of December 31, 2020, our accrued liabilities for environmental matters totaled $ 468,000 relating primarily to the matters discussed below.

Estimates of the most likely costs for our environmental matters are generally based on preliminary or completed assessment studies, preliminary results of studies, or our experience with other similar matters.

It is reasonably possible that a change in the estimate of our liability could occur in the near term.

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These permits limit the type and amount of effluents that can be discharged and control the method of such discharge.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Commitments and Contingencies (continued)

In October 2017, PCC filed a Permit Renewal Application for its Non-Hazardous Injection Well Permit at the Pryor Facility.

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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.

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, develop a corrective action strategy based on the investigation, and implement such strategy.

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 is currently evaluating the corrective action strategy, and, thus, it is unknown what additional work the KDHE may require, if any, at this time.

We accrued 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.

During this process, our subsidiary and Chevron retained an environmental consultant that prepared and performed a corrective action study work plan as to the appropriate method to remediate the Hallowell Facility.

During 2020, the KDHE selected a remedy of annual monitoring and the implementation of an Environmental Use Control (“EUC”).

This remedy primarily relates to long-term surface and groundwater monitoring to track the natural decline in contamination and is subject to a 5-year re-evaluation with the KDHE.

The final remedy, including the EUC, the finalization of the cost estimates and any required financial assurances remains under discussion with the KDHE, but continues to be delayed due to the impact from the COVID-19 pandemic.

Pending the results from our discussions regarding the final remedy, we continue to accrue our allocable portion of costs primarily for the additional testing, monitoring and risk assessments that could be reasonably estimated, which amount is included in our accrued liabilities for environmental matters discussed above.

The estimated amount is not discounted to its present value.

As more information becomes available, our estimated accrual will be refined.

As more information becomes available, our estimated accrual will be refined, as necessary.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Commitments and Contingencies (continued)

Other Pending, Threatened or Settled Litigation

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LSB and EDC placed its liability insurance carrier on notice, and the carrier is handling the defense for LSB and EDC concerning this matter.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Commitments and Contingencies (continued)

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 this matter.

In August 2015, the trial court dismissed plaintiff’s negligence 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.

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.

These settlements have been paid by the insurer as of December 31, 2019.

While these settlements resolve the claims of a number of the claimants in this matter for us, we continue to be party to litigation related to this explosion by other plaintiffs, in addition to indemnification or defense obligations we may have to other defendants.

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.

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 of December 31, 2020, no liability reserve has been established in connection with this matter.

In 2015, a case styled Dennis Wilson vs.

LSB Industries, Inc ., et al., was filed in the United States District Court for the Southern District of New York.

The plaintiff purports to represent a class of our shareholders and asserts that we violated federal securities laws by allegedly making material misstatements and omissions about delays and cost overruns at our El Dorado Chemical Company manufacturing facility and about our financial well-being and prospects.

The lawsuit, which also names certain current and former officers, sought an unspecified amount of damages.

In October 2018, LSB entered into a preliminary, binding term sheet to settle Dennis Wilson vs.

LSB Industries, Inc ., et al., which was subject to approval by the court.

On January 17, 2019, the parties entered into a Stipulation and Agreement of Settlement (the “Wilson Settlement Agreement”), pursuant to which the settlement amount of approximately $18.5 million was paid in March by our insurers on behalf of LSB and certain current and former officers in exchange for, among other things, a release of all claims.

On May 23, 2019, one request for exclusion from the settlement class was made.

On June 28, 2019, the court held a settlement hearing and entered a Judgement Approving Class Action Settlement, which includes a provision whereby the party requesting exclusion may withdraw its exclusion from the settlement and file by July 23, 2019 to rejoin the class.

On July 23, 2019, LSB reached a preliminary settlement and the requesting party withdrew its request for exclusion from the class.

Subsequently, during the third quarter of 2019, this additional settlement was executed, and the settlement amount was paid to the requesting party by our insurers on behalf of LSB and certain current and former officers in exchange for, among other things, an appropriate release of claims.

As a result, no liability in relation to this matter remains outstanding as of December 31, 2019.

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 at our El Dorado Facility.

Global is a subcontractor of Leidos Constructors, LLC (“Leidos”), the general contractor for EDA for the construction for the ammonia plant.

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 at our El Dorado Facility.

In March 2016, EDC and we were served a summons in a case styled Global Industrial, Inc.

LSB and EDA are pursuing the 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.

We have requested indemnifications from Leidos under the terms of our contracts which they have denied, and we intend to vigorously defend against the allegation made by Global and seek reimbursement of legal expenses from Leidos under our contracts.

We are also seeking damages from Leidos for their wrongdoing during the expansion, including breach of contract, fraud, gross negligence, professional negligence and gross negligence.

Except for the invoices totaling approximately $3.5 million that were not approved by Leidos for payment that are included in our accounts payable, no liability has been established in connection with the claims asserted by Global.

Leidos Constructors, LLC et al., in the Circuit court of Union County, Arkansas, wherein Global sought 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, professional negligence, and gross negligence.

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 to the Court during the fall of 2018.

The Court took the matter under advisement, will consider the evidence and render judgment.

LSB intends to vigorously prosecute its claims against Leidos in Part (2) of the matter.

Trial is scheduled for Part (2) of the matter in March of 2020.

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, 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 $ 1.6 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 Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Commitments and Contingencies (continued)

LSB intends to vigorously prosecute its claims against Leidos and vigorously contest the cross-claims in Part (2) of the matter.

Due to the impact from the COVID-19 pandemic, the Trial date for Part (2) of the matter has been delayed and we are awaiting a new trial date.

No liability was established at December 31, 2020 or 2019, in connection with the cross-claims in Part (2) of the matte r, except for certain invoices held in accounts payable.

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.

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 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 these contracts are not designated as hedging instruments.

At December 31, 2020, our natural gas contracts included 7.3 million MMBtu of natural gas and extend through December 2021 (there were none at December 31, 2019).

The valuations of the natural gas contracts are classified as Level 2.

At December 31, 2020, the valuation inputs included the contractual weighted-average cost of $ 2.65 per MMBtu and the weighted-average market value of $ 2.49 per MMBtu.

For 2020, we recognized a $ 1.6 million loss ( none for 2019 or 2018), classified as cost of sales, which amount includes an unrealized loss of $ 1.2 million attributed to natural gas contracts still held at the reporting date.

Embedded Derivative

As discussed in Note 10, 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 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.

For certain other embedded features, we had estimated no fair value.

The fair value of the embedded derivative included 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.

At December 31, 2020 and 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 $ 3.39 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.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Derivatives, Hedges and Financial Instruments (continued)

For 2020, 2019 and 2018, we recognized unrealized gains of approximately $ 0.1 million, $ 0.5 million and $ 1.2 million, respectively, due to the change in fair value of the embedded derivative.

These unrealized gains are included in non-op erating other income and expense.

The following details our assets and liabilities that are measured at fair value on a recurring basis at December 31 , 2020 and 2019:

Fair Value Measurements at

December 31, 2020 Using

Quoted Prices

(Level 3) (1)

(In Thousands)

Assets - Supplies, prepaid items and other:

Natural gas contracts

Liabilities - Current and noncurrent accrued and

other liabilities:

Natural gas contracts

Embedded derivative

There was no Level 3 transfer activity during 2020, 2019 or 2018.

Redeemable Preferred Stocks

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Dividends accrue semi-annually in arrears and are compounded.

Dividends are payable only when and if declared by the Board of Directors (the “Board”).

Dividends are payable only when and if declared by our Board of Directors (the “Board”).

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.

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The letter agreement also provided for the amendment of certain other terms relating to the Series E Redeemable Preferred, including an increase in the per annum dividend rate payable in respect of the Series E Redeemable Preferred as described above.

To reflect the changes stated in the letter agreement, we subsequently entered into a securities exchange agreement by and between LSB and the holder and entered into the Certificate of Designations setting forth the rights, preferences, privileges and restrictions currently applicable to the Series E Redeemable Preferred and Series F Redeemable Preferred, as filed with the Secretary of State of the State of Delaware (the “Series E COD” and “Series F COD”).

To reflect the changes stated in the letter agreement, we subsequently entered into a securities exchange agreement by and between LSB and the holder and entered into the Certificate of Designations (“COD”)setting forth the rights, preferences, privileges and restrictions currently applicable to the Series E Redeemable Preferred and Series F Redeemable Preferred, as filed with the Secretary of State of the State of Delaware (the “Series E COD” and “Series F COD”).

The Series E COD authorizes 139,768 shares of Series E Redeemable Preferred, which is the number of shares outstanding at December 31, 2020 and 2019.

The transaction associated with the letter agreement was determined to be a non-substantial modification.

As a result, a fee of approximately $2.8 million paid to the holder was deferred (reducing the Series E Redeemable Preferred balance) and will be periodically accreted using the interest method through October 25, 2023, the earliest possible redemption date by the holder.

In addition, the letter agreement included a contingent redemption feature, which was bifurcated from the Series E Redeemable Preferred based on the estimated fair value of approximately $0.3 million at the time of bifurcation.

As a result, a fee of approximately $ 2.8 million paid to the holder was deferred (reducing the Series E Redeemable Preferred balance) and is periodically accreted using the interest method through October 25, 2023, the earliest possible redemption date by the holder.

In addition, the letter agreement included a contingent redemption feature, which was bifurcated from the Series E Redeemable Preferred.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Redeemable Preferred Stocks

With respect to the distribution of assets upon liquidation, dissolution or winding up of LSB, whether voluntary or involuntary, the Series E Redeemable Preferred ranks (i) senior to the common stock, the Series B 12 % Cumulative Convertible Preferred Stock, the Series D 6 % Cumulative Convertible Class C Preferred Stock, the Series 4 Junior Participating Class C Preferred Stock and any other class or series of stock of LSB (other than Series E Redeemable Preferred) that ranks junior to the Series E Redeemable Preferred either or both as to the payment of dividends and/or as to the distribution of assets on any liquidation, dissolution or winding up of the Corporation (the “Junior Stock”);

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any amendment that adversely affect the powers, preferences or special rights of the Series E Redeemable Preferred.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Redeemable Preferred Stocks (continued)

At 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 of such share as of the redemption date.

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As a result of an analysis performed on the embedded derivatives within the Series E Redeemable Preferred, certain contingent redemption features were determined to not be clearly and closely related to the debt-like host and also did not meet any other scope exceptions for derivative accounting.

Therefore, these redemption features and participation rights value are being accounted for as derivative instruments and the fair value of these derivative instruments were bifurcated from the Series E Redeemable Preferred and recorded as a liability as discussed below under Embedded Derivative.

See discussion in Note 9.

Series F Redeemable Preferred

The Series F COD authorizes one (1) shares of Series F Redeemable Preferred.

The Series F COD authorizes one (1) share of Series F Redeemable Preferred.

As of December 31, 2020, the Series F Redeemable Preferred has voting rights (the “Series F 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.

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In the event of liquidation, the Series F Redeemable Preferred is entitled to receive its liquidation preference of $ 100 before any such distribution of assets or proceeds is made to or set aside for the holders of our common stock and any other stock junior to the Series F Redeemable Preferred.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Redeemable Preferred Stocks

Changes in our Series E and Series F Redeemable Preferred are as follows:

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Balance at December 31, 2020

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Redeemable Preferred Stocks (continued)

Embedded Derivative

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 December 31, 2019 and 2018, 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 December 31, 2019 and 2018, 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 $4.20 and $5.52 per share, respectively.

The valuations of the embedded derivative are classified as Level 3.

In addition, no valuation input adjustments were considered necessary relating to nonperformance risk for the embedded derivative.

At December 31, 2019 and 2018, the fair value of the embedded derivative was $1.1 million and $1.6 million, respectively, and are included in our noncurrent accrued and other liabilities.

Due to the change in fair value of the embedded derivative, we recognized an unrealized gain of approximately $0.5 million and approximately $1.2 million in 2019 and 2018, respectively (a minimal unrealized loss in 2017).

These unrealized gains and losses are included in non-operating income and expense.

Stockholders’ Equity

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Under the 2016 Plan, awards may be made to employees, directors and consultants (for services rendered) of LSB or our subsidiaries subject to limitations as defined by the 2016 Plan.

The 2016 Plan will be administered by the compensation committee (the “Committee”) of our Board.

The 2016 Plan is administered by the compensation committee (the “Committee”) of our Board.

Our Board or the Committee may amend the 2016 Plan, except that if any applicable statute, rule or regulation requires shareholder approval with respect to any amendment of the 2016 Plan, then to the extent so required, shareholder approval will be obtained.

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Exercise of a SAR issued in tandem with stock options will result in the reduction of the number of shares underlying the related stock option to the extent of the SAR exercise.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Stockholders’ Equity (continued)

Stock Options – The Committee may grant either incentive stock options or non-qualified stock options.

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At the time of grant, the Committee will have sole discretion in determining when stock options are exercisable and when they expire, except that the term of a stock option cannot exceed 10 years subject to certain conditions.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Stockholders’ Equity (continued)

Stock Incentive Plans - The following information relates to our long-term incentive plans:

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Restricted Stock and Restricted Stock Units – During 2020, 2019, and 2018, the Committee approved various grants under the 2016 Plan of shares of restricted stock to certain executives and employees.

Most of these shares vest at the end of each one-year period at the rate of one-third per year for three years while a portion of these grants vest 100% at the end of three years.

These shares have vesting provisions including vesting at the end of each one-year period at the rate of one-third per year for three years, vesting 100 % at the end of three years, and vesting 100% at the end of one year.

The unvested restricted shares carry dividend and voting rights.

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Pursuant to the terms of the underlying restricted stock agreements, unvested restricted shares will immediately vest upon the occurrence of a change in control (as defined by agreement), termination without cause or death.

The unvested shares carry dividend and voting rights.

Sales of these shares are restricted prior to the date of vesting.

On December 31, 2019, the Committee approved the grant of 275,119 shares of performance-based restricted stock (“PBRS”) to certain executives.

However, key information to finalize the performance targets and range of vesting shares are based on projections, which required approval from the Board.

As the approval was obtained in February 2020, the grant date for financial reporting purposes is February 2020.

Therefore, these PBRS shares are not reflected in the information below.

During 2020, the Committee approved the grant of shares of restricted stock and performance based restricted stock (“PBRS”) to a certain executive.

These shares are reflected in the 2020 information below.

On December 31, 2019, the Committee approved the grant of 275,119 shares of performance-based restricted stock to certain executives.

Key information to finalize the performance targets and range of vesting shares was approved by the Board during February 2020, which is the grant date for financial reporting purposes.

The terms of this PBRS grant are discussed below and these PBRS shares are reflected in the 2020 information below.

On December 30, 2018, the Committee approved the grant of 210,602 shares of PBRS to certain executives.

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Vesting occurs upon the earliest to occur:

(i) the director’s separation from service, (ii) the third anniversary of the grant date, or (iii) the occurrence of a change of control as defined by the agreement.

Based on terms of the RSU agreements, the grant date fair value was recognized as stock-based compensation expense (SG&A) on the grant date in 2019, 2018, and 2017 .

(i) the director’s separation from service, (ii) the first anniversary of the grant date (for 2020 grants), (iii) the third anniversary of the grant date (for 2019 and 2018 grants), or (iv) the occurrence of a change of control as defined by the agreement.

Based on terms of the RSU agreements, the grant date fair value was recognized as stock-based compensation expense (SG&A) on the grant date in each respective year.

LSB Industries, Inc.

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Restricted Stock Units

Unvested restricted stock outstanding at

beginning of year

Unvested outstanding beginning of year

Cancelled or forfeited

Unvested restricted stock outstanding at end

Unvested outstanding end of year

Restricted Stock

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Restricted Stock

Performance-Based

Restricted Stock

Shares of PBRS granted

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As it relates to 2018, s ee Note 14-Related Party Transactions .

The PBRS restricted stock grants are tied to our free cash flow, fixed costs per ton of ammonia measured annually over a three-year period and modified based on our ranking relative to total stockholder return (share price appreciation plus dividends reinvested) (“TSR”) versus the companies in our 2019 peer group (“Peer Group”) over a three-year measurement period.

The actual number of shares that will vest at the end of the third year will be based on our performance against the metrics set in the award.

The PBRS restricted stock grants are tied to our free cash flow, fixed costs per ton of ammonia measured annually over a three-year period and modified based on our ranking relative to total stockholder return (share price appreciation plus dividends reinvested) (“TSR”) versus the companies in our 2020 and 2019 peer group (“Peer Group”) for the year of grant over a three-year measurement period.

The actual number of shares that will vest at the end of the third year will be based on our performance against the metrics set in the awards but are subject to reduction to a minimum (or even zero) for recording less than the targeted performance.

The threshold performance for free cash flow is 70 % and for fixed costs per ton of ammonia is 60 % of the targeted improvement with a maximum for each of 120 % of target.

The TSR modifier will adjust the overall actual performance up or down by as much as 25% based on the our TSR versus the Peer Group average TSR.

The TSR modifier will adjust the overall actual performance up or down by as much as 25 % based on our TSR versus the Peer Group average TSR.

We estimate the fair value of each PBRS on the date of grant using a Monte Carlo simulation.

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Stock Options – No stock options have been granted under the 2016 Plan during 2020, 2019 or 2018.

As it relates to stock options granted under the 2008 plan, the exercise price of the outstanding options granted were equal to the market value of our common stock at the date of grant and vest at the end of each one-year period at the rate of 16.5% per year for the first five years and the remaining unvested options will vest at the end of the sixth year.

As it relates to stock options granted under the 2008 plan, the exercise price of the outstanding options granted were equal to the market value of our common stock at the date of grant and vested at the end of each one-year period at the rate of 16.5 % per year for the first five years and the remaining unvested options vested at the end of the sixth year .

The fair value for of the stock options granted under the 2008 Plan were estimated, using an option pricing model, as of the date of the grant, which date was also the service inception date.

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Total weighted-average remaining contractual life period in years (options exercisable)

Stock-based Compensation Expense Not Yet Recognized – At December 31, 2019, the total stock-based compensation expense not yet recognized is $ 3,378,000 , relating to all forms of non-vested restricted stocks and stock options, which we will be amortizing (subject to adjustments for actual forfeitures) through the respective remaining vesting periods through December 2022.

Other – As of December 31, 2019, we have reserved 1.4 million shares of common stock issuable upon potential conversion of preferred stocks and equity awards pursuant to their respective terms.

Stock-based Compensation Expense Not Yet Recognized – At December 31, 2020, the total stock-based compensation expense not yet recognized is $ 2,212,000 , relating to all forms of non-vested equity awards, which we will be amortizing (subject to adjustments for actual forfeitures and performance assessments associated with the PBRS restricted stock) through the respective remaining vesting periods through December 2022.

Reserved Shares of Common Stock – As of December 31, 2020, we have reserved 1.6 million shares of common stock issuable upon potential conversion of preferred stocks and equity awards pursuant to their respective terms.

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 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.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Stockholders’ Equity (continued)

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.

Non-Redeemable Preferred Stock

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The Series B Preferred provides for annual cumulative dividends of 12% ($ 12.00 per share) from date of issue, payable when and as declared.

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

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

Series Non-Redeemable D Preferred – The 1,000,000 shares of Series D 6 % cumulative, convertible Class C preferred stock (“Series D Preferred”) have no par value and are convertible, in whole or in part, into 250,000 shares of our common stock ( 1 share of common stock for 4 shares of preferred stock ) at any time at the option of the holder.

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Each holder of the Series D Preferred shall be entitled to .875 votes per share .

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

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

See discussions concerning dividends on the Series B and D Preferred in Note 14 – Related Party Transactions.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Non-Redeemable Preferred Stock (continued)

Other – At December 31, 2020, we are authorized to issue an additional 230,000 shares of $100 par value preferred stock and an additional 3,860,000 shares of no-par value preferred stock.

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Golsen”), who retired as discussed in Note 14-Related Party Transactions.

The 2005 Agreement provides that, upon Mr.

The 2005 Agreement provides that, upon J.

Golsen’s death, we will pay to the designated beneficiary, a lump-sum payment of $ 2,500,000 to be funded from the net proceeds received by us under certain life insurance policies on his life that are owned by us.

We are obligated to keep in existence life insurance policies with a total face amount of no less than $2,500,000 of the stated death benefit.

The following table includes information about these agreements:

The following table includes information about this agreement:

(In Thousands)

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Total accrued death benefit

Costs associated with these death benefits were not material for 2019, 2018 and 2017.

The accrued executive benefit under the 2005 Agreement is included in noncurrent accrued and other liabilities.

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The net cash surrender values of these policies are included in other assets.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Executive Benefit Agreement, Employee Savings Plans and Collective Bargaining Agreements (continued)

The following table summarizes certain information about these life insurance policies.

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Prior to 2019, we did not contribute to this plan except for certain employees.

The amounts contributed to this plan were not material for 2019, 2018 and 2017.

For 2020, 2019 and 2018, the amounts contributed to this plan were $ 1,022,000 , $ 997,000 , and $ 243,000 , respectively.

Collective Bargaining Agreements - As of December 31, 2020, we employed 573 persons, 188 of whom are represented by unions under agreements, including agreements being negotiated, that expire in July 2021 through November 2022 .

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Related Party Transacti ons

During 2019, we entered into two separate financing arrangements with an affiliate of LSB Funding as discussed in footnotes (E) of Note 7, which transactions included debt issuance costs totaling approximately $0.1 million paid to this affiliate.

In June 2019, we incurred a consent fee of approximately $0.3 million from LSB Funding associated with the issuance of the New Notes discussed in footnote (B) of Note 7.

Also, LSB Funding holds all outstanding shares of the Series E and Series F Redeemable Preferred discussed in Note 10.

During 2018, we sold $50.0 million and $0.5 million principal amount of notes to an affiliate of Security Benefit Corporation (“SBC”) and Daniel D.

Related Party Transactions

During 2020, we entered into a financing arrangement with an affiliate of LSB Funding as discussed in footnote (G) of Note 6, which transaction included debt issuance costs of approximately $ 0.1 million paid to this affiliate.

During 2019, we entered into two separate financing arrangements with an affiliate of LSB Funding as discussed in footnotes (E) and (F) Note 6, which transactions included debt issuance costs totaling approximately $ 0.1 million paid to this affiliate.

During 2019, we incurred a consent fee of approximately $ 0.3 million from LSB Funding associated with the issuance of the New Notes discussed in footnote (B) of Note 6.

During 2018, we sold $ 50.0 million and $ 0.5 million principal amount of notes to an affiliate of LSB Funding and Daniel D.

Greenwell, respectively, associated with the issuance and sale of the Notes discussed in footnote (B) of Note 6.

As discussed in Note 10, we paid a fee of $2.7 million to an affiliate of SBC relating to the letter agreement amending the terms of the Series E Redeemable Preferred.

As discussed in Note 10, all outstanding shares of the Series E and Series F Redeemable Preferred are held by this affiliate.

Pursuant to the terms of the Board Representation and Standstill Agreement, our Board includes two directors that are employees of SBC and affiliates.

As discussed in Note 10, we paid a fee of $ 2.8 million to LSB Funding relating to the letter agreement amending the terms of the Series E Redeemable Preferred.

LSB Funding holds all outstanding shares of the Series E and Series F Redeemable Preferred discussed in Note 10.

Pursuant to the terms of the Board Representation and Standstill Agreement, our Board includes two directors that are employees of affiliates of LSB Funding.

During 2020, 2019 and 2018, we incurred director fees associated with these directors totaling approximately $ 0.3 million for each respective year.

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Greenwell was entitled to certain severance benefits pursuant to the terms of his employment agreement.

At December 31, 2018, our accrued and other liabilities included approximately $2.8 million relating primarily to severance benefits owed to Mr.

As a result, we incurred an expense of approximately $ 2.6 million relating to these severance benefits in 2018.

In addition, approximately $ 2.7 million of share-based compensation was incurred in 2018 due to the accelerated vesting of 312,369 shares of restricted stock.

No dividends were declared during 2019, 2018 and 2017.

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

The Series B Preferred and Series D Preferred are non-redeemable preferred stocks issued in 1986 and 2001, respectively, of which all outstanding shares are owned by the Golsen Holders.

The Series B Preferred and Series D Preferred are non-redeemable preferred stocks issued in 1986 and 2001, respectively, of which all outstanding shares are owned by the Golsen Holders and an immediate family member.

During 2020, 2019 and 2018, we incurred director fees associated with Barry H.

Golsen totaling approximately $ 0.1 million for each respective year.

As the result of Jack E.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Related Party Transactions (continued)

As the result of J.

Golsen informing the Board of his election to retire as Executive Chairman effective December 31, 2017 , we determined not to extend the employment agreement with J.

Golsen beyond its current term expiring on December 31, 2017 (the “Retirement Date”) and, in accordance with the terms his employment agreement, delivered a notice of non-renewal to J.

Golsen remains a member of the Board and, following the Retirement Date, has the title of Chairman Emeritus.

Golsen beyond its then current term that expired on December 31, 2017 (the “Retirement Date”) and, in accordance with the terms his employment agreement, delivered a notice of non-renewal to J.

Following the Retirement Date, J.

Golsen serves as Chairman Emeritus of our Board.

During 2017, we entered into a transition agreement (the “Transition Agreement”) with J.

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Golsen for his cost of certain medical insurance coverage until his death.

Effective as of the Retirement Date, the previous existing severance agreement with J.

Effective as of the Retirement Date, the severance agreement that was in force with J.

Golsen was terminated.

In consideration for his services, including as Chairman Emeritus, we will pay J.

Golsen a one-time payment equal to $2,320,000 upon the consummation of a change in control that occurs prior to his death.

During 2017, a death benefit agreement with J.

Golsen was terminated pursuant to the terms of the agreement that allowed us to terminate at any time and for any reason prior to the death of the employee.

As a result, the liability of approximately $1.4 million for the estimated death benefit associated with this agreement was extinguished and derecognized with the offset classified as operating other income in 2017.

During 2017, we sold our engineered products business (industrial machinery and related components) to Industrial Acquisitions LLC and Industrial Products LLC (both entities are owned by immediate family members of J.

Golsen) for $3.5 million which sale resulted in a loss of approximately $0.8 million, classified as operating other expense.

During 2016, we entered into a consulting agreement with Steven J.

Golsen”), son of J.

Golsen and former employee and President and Chief Operating Officer of our former climate control business.

Pursuant to the terms of the agreement, S.

Golsen provided services relating to the sale of the climate control business and subsequent services to improve the transition process from LSB to NIBE Industrier AB (publ).

The total consulting fee was approximately $0.4 million and the term of the agreement was for 2 years through May 2018.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Golsen a one-time payment equal to $ 2,320,000 upon the consummation of a change in control should one occur prior to his death.

Supplemental Cash Flow Information

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Noncash investing and financing activities:

Incentive tax credit receivable associated with property,

plant and equipment

Supplies and accounts payable associated with

additions of property, plant and equipment

Accounts receivable, supplies and accounts payable

associated with additions of PP&E

Dividend accrued on Series E Redeemable Preferred

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Agricultural products

Industrial acids and other chemical products

Industrial products

Mining products

Other products

Total net sales

Upon adoption of ASC 606, nets sales have not been adjusted under the modified retrospective method.

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 17 months at December 31, 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.

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During 2020, revenues of $ 1.9 million were recognized and included in the balance at the beginning of the period.

Discontinued Operations

During 2016, LSB completed the sale of all the stock of Climate Control Group Inc.

(an indirect subsidiary that conducted LSB’s former climate control business) pursuant to the terms of the stock purchase agreement.

Additionally, pursuant to the stock purchase agreement, we agreed to have a certain portion of the purchase price proceeds deposited in an indemnity escrow account.

In 2018, we received approximately $ 2.7 million representing an indemnity escrow balance.

For 2017, we recognized income from discontinued operations of $1.1 million, net of income taxes of $1.5 million.

For 2017, cash flow information of discontinued operations included deferred income taxes of $2.5 million.

LSB Industries, Inc.

Notes to Consolidated Financial Statements (continued)

Information related to our leases as of December 31, 2020 and 2019 are presented below:

(Dollars In Thousands)

Components of lease expense:

Operating lease cost

Short-term lease cost

Other cost (1)

Total lease cost

Supplemental cash flow information related to leases:

Operating cash flows from operating leases

Operating cash flows from finance leases

Financing cash flows from finance leases

Cash paid for amounts included in the measurement of lease liabilities

Right-of-use assets obtained in exchange for new operating lease liabilities

Other lease-related information:

Weighted-average remaining lease term - operating leases (in years)

Weighted-average remaining lease term - finance leases (in years)

Weighted-average discount rate - operating leases

Weighted-average discount rate - finance leases

(1) Includes variable and finance lease costs.

Additionally, under ASC 840, expenses associated with our operating leases agreements, including month-to-month leases, were $ 10,235,000 in 2018.

At December 31, 2020, future minimum operating lease payments due under ASC 842 are summarized by fiscal year in the table below:

Operating Leases

(In thousands)

Total lease payments

Less imputed interest

Present value of lease liabilities

As of December 31, 2020, we did not have any executed operating leases with lease terms greater than one year that have not yet commenced.

LSB Industries, Inc.

Supplementary Information

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Gross profit (loss) (1)

Net income (loss) (1) (2)

Net loss (1) (2)

Net loss attributable to common stockholders

Basic and dilutive loss per common share

Basic and diluted loss per common share

Gross profit (loss) (1)

Net loss (1) (2)

Net income (loss) (1) (2)

Net loss attributable to common stockholders

Basic and dilutive loss per common share

Basic and diluted loss per common share

LSB Industries, Inc.

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(In Thousands)

Recovery from settlements with certain vendors

Turnaround expense:

Recovery from a settlement with a vendor

Unrealized gain (loss) on natural gas contracts

The following income (expense) items impacted net income (loss):

Charge associated with assets held for sale

Loss on extinguishment of debt

Severance benefits and accelerated stock-based compensation

Legal fees associated with Leidos matter

Interest expense associated with Global judgment

Benefit (provision) for income taxes

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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 9A. Controls and Procedures