What changed in this filing

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Item 1. Financial Statements

2021-04-29 compared with 2020-11-06 · 168 added, 198 removed, 399 unchanged (48% of the section changed)

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CONDENSED CONSOLIDATED BALANCE SHEETS

(Information at September 30, 2020 is unaudited)

September 30,

(Information at March 31, 2021 is unaudited)

(In Thousands)

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CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

(Information at September 30, 2020 is unaudited )

September 30,

(Information at March 31, 2021 is unaudited )

(In Thousands)

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Capital in excess of par value

Retained earnings (accumulated deficit)

Accumulated deficit

Less treasury stock, at cost:

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Three Months Ended

Nine Months Ended

September 30,

(In Thousands, Except Per Share Amounts)

Cost of sales

Gross profit (loss)

Selling, general and administrative expense

Other expense, net

Other income, net

Operating loss

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Non-operating other expense (income), net

Loss before benefit for income taxes

Benefit for income taxes

Loss before provision (benefit) for income taxes

Provision (benefit) for income taxes

Dividends on convertible preferred stocks

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Stock-based compensation

Issuance of restricted stock, net

Balance at March 31, 2021

Dividend accrued on redeemable

preferred stock

Accretion of redeemable preferred stock

Stock-based compensation

Balance at June 30, 2020

Dividend accrued on redeemable

preferred stock

Accretion of redeemable preferred stock

Stock-based compensation

Balance at September 30, 2020

Balance at December 31, 2019

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Balance at March 31, 2020

Dividend accrued on redeemable

preferred stock

Accretion of redeemable preferred stock

Stock-based compensation

Balance at June 30, 2019

Dividend accrued on redeemable

preferred stock

Accretion of redeemable preferred stock

Stock-based compensation

Balance at September 30, 2019

See accompanying notes.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended

September 30,

Three Months Ended

(In Thousands)

Cash flows from operating activities

Adjustments to reconcile net loss to net cash provided by operating activities:

Adjustments to reconcile net loss to net cash provided (used) by operating activities:

Deferred income taxes

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Amortization of intangible and other assets

Stock-based compensation

Cash provided (used) by changes in assets and liabilities:

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Other assets and other liabilities

Net cash provided by operating activities

Net cash provided (used) by operating activities

Cash flows from investing activities

Expenditures for property, plant and equipment

Proceeds from vendor settlements associated with

property, plant and equipment

Other investing activities

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Proceeds from revolving debt facility

Payments on revolving debt facility

Net proceeds from 9.625 % senior secured notes

Proceeds from other long-term debt

Payments on other long-term debt

Payments of debt-related costs

Payments on short-term financing

Taxes paid on equity awards

Net cash provided by financing activities

Net increase in cash and cash equivalents

Other financing activities

Net cash provided (used) by financing activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

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See accompanying notes.

LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Summary of Significant Accounting Policies

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Basis of Consolidation – LSB Industries, Inc.

(“LSB”) and its subsidiaries (the “Company”, “We”, “Us”, or “Our”) are consolidated in the accompanying consolidated financial statements.

(“LSB”) and its subsidiaries (the “Company,” “we,” “us,” or “our”) are consolidated in the accompanying condensed consolidated financial statements.

LSB is a holding company with no significant operations or assets other than cash, cash equivalents, and investments in its subsidiaries.

All material intercompany accounts and transactions have been eliminated.

Certain prior period amounts reported in our consolidated financial statements and notes thereto have been reclassified to conform to current period presentation.

Nature of Business – We are engaged in the manufacture and sale of chemical products.

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and Pryor, Oklahoma (the “Pryor Facility”);

and one of which we operate on behalf of a global chemical company in Baytown, Texas (the “Baytown Facility”).

and one of which we operate on behalf of a global chemical company in Baytown, Texas.

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.”);

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and explosive manufacturers in the U.S.

and parts of Mexico.

In our opinion, the unaudited condensed consolidated financial statements of the Company as of September 30, 2020 and for the three and nine months ended September 30, 2020 and 2019 include all adjustments and accruals, consisting of normal, recurring accrual adjustments, which are necessary for a fair presentation of the results for the interim periods.

and parts of Mexico and Canada .

In our opinion, the unaudited condensed consolidated financial statements of the Company as of March 31, 2021 and for the three months ended March 31, 2021 and 2020 include all adjustments and accruals, consisting of normal, recurring accrual adjustments, which are necessary for a fair presentation of the results for the interim periods.

These interim results are not necessarily indicative of results for a full year due, in part, to the seasonality of our sales of agricultural products and the timing of performing our major plant maintenance activities.

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If the recognition threshold is met, we recognize a tax benefit measured at the largest amount of the tax benefit that, in our judgment, is greater than 50% likely to be realized.

Income tax benefits associated with amounts that are deductible for income tax purposes are recorded through the statement of operations.

These benefits are principally generated from exercises of restricted stock.

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

See Note 7 regarding the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.

LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Summary of Significant Accounting Policies (continued)

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

In June 2020, one of our subsidiaries, El Dorado Chemical Company (“EDC”), and certain vendors mediated settlements for EDC to recover certain costs associated with a nitric acid plant at our El Dorado Facility.

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

As a result of the settlements, the vendors paid EDC $ 4.3 million and will provide services and parts totaling $ 2.8 million, which amount, or portion thereof, may be paid in cash at the option of the vendo rs (amount included in noncurrent accounts receivable, which is classified as a noncurrent other asset at September 30, 2020).

As part of the settlements, EDC paid the vendors $ 2.7 million to settle $ 3.2 million of invoices that were held in our accounts payable.

As a result, the recovery from these settlements recognized during the nine months ended September 30, 2020 includes approximately $ 5.7 million classified as a reduction to cost of sales and approximately $ 1.9 million classified as a reduction to property, plant and equipment (“PP&E”).

Redeemable Preferred Stocks – Our redeemable preferred stocks that are redeemable outside of our control are classified as temporary/mezzanine equity.

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Changes in fair value of derivatives are recorded in results of operations unless the normal purchase or sale exceptions apply, or hedge accounting is elected.

The fair value amounts recognized for our derivative contracts executed with the same counterparty under a master netting arrangement may be offset.

We have the choice to offset or not, but that choice must be applied consistently.

A master netting arrangement exists if the reporting entity has multiple contracts with a single counterparty that are subject to a contractual agreement that provides for the net settlement of all contracts through a single payment in a single currency in the event of default on or termination of any one contract.

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.

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:

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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 March 31, 2021 and December 31, 2020, 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.

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

For equity awards with service conditions that have a graded vesting period, we recognize compensation cost on a straight-line basis over the requisite service period for the entire award.

Forfeitures are accounted for as they occur.

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

In January 2021, the compensation committee of our Board of Directors approved the grant of 614,999 shares of time-based restricted stock and 219,084 shares of performance-based restricted stock to certain executives under our 2016 Long Term Incentive Plan .

The time-based restricted stock shares will vest 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 .

The performance-based restricted stock will vest at the end of three years , subject to achievement of certain performance metrics.

The unvested restricted shares carry dividend and voting rights contingent upon the vesting and lapsing of restriction.

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

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.

LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Summary of Significant Accounting Policies (continued)

Revenue Recognition

Revenue Recognition and Performance Obligations

We determine revenue recognition through the following steps:

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

Summary of Significant Accounting Policies (continued)

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account.

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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.

Transaction Price Constraints and Variable Consideration

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.

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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.

Recently Adopted Accounting Pronouncements

ASU 2019-12 – In December 2019, the FASB issued ASU 2019-12 , Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes, which affects general principles within Topic 740, Income Taxes.

The amendments of ASU 2019-12 are meant to simplify and reduce the cost of accounting for income taxes.

The ASU removes certain exceptions to the general framework and also seeks to simplify and/or clarify accounting for income taxes by adding certain requirements that would simplify GAAP for financial statement preparers.

On January 1, 2021, we adopted ASU 2019-12, which did not have a material impact on our condensed consolidated financial statements or related disclosures.

LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Summary of Significant Accounting Policies (continued)

Recently Issued Accounting Pronouncements

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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.

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.

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We continue to evaluate the effect of this ASU and plan to utilize this relief for our debt agreements that include LIBOR rates.

ASU 2019-12 – In December 2019, the FASB issued ASU 2019-12 , Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes which affects general principles within Topic 740, Income Taxes.

The amendments of ASU 2019-12 are meant to simplify and reduce the cost of accounting for income taxes.

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

LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Loss Per Common Share

Three Months Ended

Nine Months Ended

September 30,

(Dollars In Thousands, Except Per Share Amounts)

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Three Months Ended

Nine Months Ended

September 30,

Restricted stock and stock units

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Current and Noncurrent Accrued and Other Liabilities

September 30,

(In Thousands)

Accrued interest

Accrued payroll and benefits

Current portion of operating lease liabilities

Accrued payroll and benefits

Accrued death and other executive benefits

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Current portion of accrued and other liabilities

LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Long-Term Debt

Our long-term debt consists of the following:

September 30,

(In Thousands)

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Senior Secured Notes due 2023 (B)

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)

rate of 1.00 % (C)

Secured Financing due 2023, with an interest

rate of 8.32 % (E)

rate of 8.32 % (D)

Secured Loan Agreement due 2025, with an interest

rate of 8.75 % (F)

rate of 8.75 % (E)

Secured Financing due 2025, with an interest

rate of 8.75 % (G)

Secured Promissory Note due 2023 (G)

rate of 8.75 % (F)

Secured Promissory Note due 2021

Unamortized discount, net of premium and debt issuance

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(A) O ur revolving credit facility, as amended (the “Working Capital Revolver Loan”), provides for advances up to $ 65 million (the “Maximum Revolver Amount”), based on specific percentages of eligible accounts receivable and inventories and up to $ 10 million of letters of credit, the outstanding amount of which reduces the available for borrowing under the Working Capital Revolver Loan.

At September 30, 2020 , our available borrowings under our Working Capital Revolver Loan were approximately $ 36.3 million , based on our eligible collateral, less outstanding letters of credit and loan balance.

At March 31, 2021 , 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.

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Interest is to be paid semiannually in arrears on May 1 st and November 1 st .

Principal and interest are payable in monthly installments.

LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Long-Term Debt (continued)

(D) In April 2020, LSB entered into a federally guaranteed loan agreement (“PPP loan”) for $ 10 million with a lender pursuant to a new loan program through the U.S.

(C) 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.

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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.

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 eight weeks or 24 weeks after disbursement of the loan.

In April 2021, we submitted the PPP loan forgiveness application to the lender.

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.

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

(E) EDC is party to a secured financing arrangement with an affiliate of LSB Funding L.L.C.

(D) El Dorado Chemical Company (“EDC”), one of our subsidiaries, is party to a secured financing arrangement with an affiliate of LSB Funding L.L.C.

(“LSB Funding”).

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

(F) EDC is party to a secured loan agreement with an affiliate of LSB Funding, which provided for available borrowings (the “Interim Loan”) during the construction of certain equipment (the “Interim Loan Period”), subject to certain conditions.

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

Effective February 28, 2020, the Interim Loan Period ended, and the Interim Loan was replaced by a secured promissory note due in March 2025.

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

(G) In August 2020, El Dorado Ammonia L.L.C.

(E) EDC is party to a secured loan agreement with an affiliate of LSB Funding.

Principal and interest are payable in 60 equal monthly installments through March 2025.

(F) 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.

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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 .

Commitments and Contingencies

Natural Gas Purchase Commitments – At September 30, 2020, certain of our natural gas contracts qualify as normal purchases under GAAP and thus are not mark-to-market, which contracts included volume purchase commitments with fixed costs of approximately 4.3 million MMBtus of natural gas.

These contracts extend through February 2021 at a weighted-average cost of $ 2.46 per MMBtu ($ 10.6 million) and a weighted-average market value of $ 2.48 per MMBtu ($ 10.7 million).

Settlements and Outstanding Natural Gas Purchase Commitments – During several days in February 2021, the Pryor Facility was taken out of service after extreme cold weather caused a surge in natural gas prices in the region, along with the curtailment of gas distribution by the operator of the pipeline that supplies natural gas to the facility.

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

In order to mitigate a portion of the commodity price risk associated with natural gas, we periodically enter into natural gas forward contracts and volume purchase commitments that locked in the cost of certain volumes of natural gas.

Prior to this weather event, we had both types of arrangements.

During the first quarter of 2021, as a result of the extreme conditions previously described, we settled all of our natural gas forward contracts and certain volume purchase commitments and recognized a realized gain of approximately $6.8 million, which includes the realized gain discussed under “Natural Gas Contracts” in Note 6 and is classified as a reduction to cost of sales.

At March 31, 2021, certain of our natural gas contracts qualify as normal purchases under GAAP and thus are not mark-to-market, which contracts included volume purchase commitments with fixed costs of approximately 9.0 million MMBtus of natural gas.

These contracts extend through December 2021 at a weighted-average cost of $ 2.69 per MMBtu ($ 24.1 million) and a weighted-average market value of $ 2.55 per MMBtu ($ 22.9 million).

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

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In addition, claims for damages to persons or property, including natural resources, may result from the environmental, health and safety effects of our operations.

LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Commitments and Contingencies (continued)

There can be no assurance that we will not incur material costs or liabilities in complying with such laws or in paying fines or penalties for violation of such laws.

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Further, a number of our facilities are dependent on environmental permits to operate, the loss or modification of which could have a material adverse effect on their operations and our financial condition.

Commitments and Contingencies (continued)

Historically, significant capital expenditures have been incurred by our subsidiaries in order to comply with the Environmental and Health Laws, and significant capital expenditures are expected to be incurred in the future.

We will also be obligated to manage certain discharge water outlets and monitor groundwater contaminants at our facilities should we discontinue the operations of a facility.

As of September 30, 2020, our accrued liabilities for environmental matters totaled $ 183,000 relating primarily to the matters discussed below.

As of March 31, 2021, 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.

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

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

Although the Injection Well Permit expired in 2018, PCC continues to operate the injection well pending the Oklahoma Department of Environmental Quality (“ODEQ”) action on the Permit Renewal Application.

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In 2010, the ADEQ issued a draft NPDES permit renewal for the El Dorado Facility, which contained more restrictive discharge limits than the previous 2004 permit.

In August 2017, ADEQ issued a final NPDES permit with new dissolved mineral limits.

EDC filed an appeal in September 2017 and a Permit Appeal Resolution (“PAR”) was signed in July 2018.

During 2017, ADEQ issued a final NPDES permit with new dissolved mineral limits;

however, EDC filed an appeal, and a Permit Appeal Resolution (“PAR”) was signed in 2018.

EDC is in compliance with the revised permit limits agreed upon in the PAR.

In November 2006, the El Dorado Facility entered into a Consent Administrative Order (“CAO”) that recognizes the presence of nitrate contamination in the shallow groundwater.

In 2006, the El Dorado Facility entered into a Consent Administrative Order (“CAO”) that recognizes the presence of nitrate contamination in the shallow groundwater.

The CAO required EDC to perform semi-annual groundwater monitoring, continue operation of a groundwater recovery system, submit a human health and ecological risk assessment, and submit a remedial action plan.

The risk assessment was submitted in August 2007.

In February 2015, the ADEQ stated that El Dorado Chemical was meeting the requirements of the CAO and should continue semi-annual monitoring.

Subsequent to the PAR mentioned previously, a new CAO was signed in October 2018, which required an Evaluation Report of the data and effectiveness of the groundwater remedy for nitrate contamination.

In February 2019, the Evaluation Report was submitted to the ADEQ and the ADEQ approved the report in August 2019.

No liability has been established at September 30, 2020 , in connection with this ADEQ matter.

The risk assessment was submitted in 2007.

In 2015, the ADEQ stated that El Dorado Chemical was meeting the requirements of the CAO and should continue semi-annual monitoring.

Subsequent to the PAR mentioned previously, a new CAO was signed in 2018, which required an Evaluation Report of the data and effectiveness of the groundwater remedy for nitrate contamination.

During 2019, the Evaluation Report was submitted to the ADEQ and the ADEQ approved the report.

No liability has been established at March 31, 2021 , in connection with this ADEQ matter.

Other Environmental Matters

In 2002, certain of our subsidiaries sold substantially all of their operating assets relating to a Kansas chemical facility (the “Hallowell Facility”) but retained ownership of the real property where the facility is located.

Our subsidiary retained the obligation to be responsible for, and perform the activities under, a previously executed consent order to investigate the surface and subsurface contamination at the real property and develop a corrective action strategy based on the investigation.

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

The final remedy, including the EUC, the finalization of the cost estimates and any required financial assurances remains under negotiation.

Additionally, the current operator of the site recently closed its operations at the site.

The change in the use of the site, from active manufacturing to a closed facility, may impact the selected remedy and remains an open item to be discussed with the KDHE.

Pending the negotiation of the final remedy and any impact based on operational changes at the site, we continue to accrue our allocable portion of costs primarily for the additional testing, monitoring and risk assessments that could be reasonably estimated, which is included in our accrued liabilities for environmental matters discussed above.

LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Commitments and Contingencies (continued)

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.

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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.

In 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.

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We continue to defend these lawsuits vigorously and we are unable to estimate a possible range of loss at this time if there is an adverse outcome in this matter as to EDC.

As of September 30, 2020 , no liability reserve has been established in connection with this matter.

As of March 31, 2021, no liability reserve has been established in connection with this matter.

In 2015, we and EDA received formal written notice from Global Industrial, Inc.

(“Global”) of Global’s intention to assert mechanic liens for labor, service, or materials furnished under certain subcontract agreements for the improvement of the new ammonia plant (“Ammonia Plant”) at our El Dorado Facility.

(“Global”) of its intention to assert mechanic liens for labor, service, or materials furnished under certain subcontract agreements for the improvement of the new ammonia plant (“Ammonia Plant”) at our El Dorado Facility.

Global was a subcontractor of Leidos Constructors, LLC (“Leidos”), the general contractor for EDA for the construction for the Ammonia Plant.

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LSB and EDA intend to pursue recovery of any damage or loss caused by Global’s work performed through their contract with Leidos at our El Dorado Facility.

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

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

d/b/a Global Turnaround vs.

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As a result, we are seeking reimbursement of legal expenses from Leidos under our contracts.

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

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

LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Commitments and Contingencies (continued)

On September 25, 2018, the Court bifurcated the case into:

During 2018, the court bifurcated the case into:

(1) Global’s claims against Leidos and LSB, and (2) the cross-claims between Leidos and LSB.

Part (1) of the case was tried in the Court during the fall of 2018 and the Court rendered an interim judgment in March 2020 and issued its final judgment on April 23, 2020.

In summary, the judgment awarded Global (i) approximately $ 7.4 million (amount includes the $ 3.5 million discussed above) for labor, service, and materials furnished relating to the Ammonia Plant, (ii) approximately $ 1.3 million for prejudgment interest, and (iii) a claim of lien on certain property and the foreclosure of the lien to satisfy these obligations.

Part (1) of the case was tried in the court.

In March 2020, the court rendered an interim judgment and issued its final judgment in April 2020.

In summary , the judgment awarded Global (i) approximately $ 7.4 million (including the $ 3.5 million discussed above) for labor, service, and materials furnished relating to the Ammonia Plant, (ii) approximately $ 1.3 million for prejudgment interest, and (iii) a claim of lien on certain property and the foreclosure of the lien to satisfy these obligations.

In addition, post-judgment interest will accrue at the annual rate of 4.25 % until paid.

As a result of the judgment during the first quarter of 2020, we accounted for the following:

accrued an additional $ 3.9 million in accounts payable, which offset amount was capitalized as PP&E, since such costs directly related to the construction of the Ammonia Plant ;

recognized additional depreciation expense of $ 0.5 million associated with the amount above capitalized to PP&E, which offset amount was a credit to PP&E (accumulated depreciation) ;

accrued prejudgment and post- judgment interest totaling $ 1.4 million in accrued interest, which offset amount was classified as interest expense .

During the first quarter of 2020, this judgment impacted our condensed consolidated statement of operations as follows:

additional depreciation expense of $ 0.5 million classified as cost of sales;

prejudgment and post- judgment interest expense totaling $ 1.3 million.

We have filed a notice of intent to appeal, and the Court entered a stay of the judgment pending appeal.

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

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

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 March 31, 2021 or December 31, 2020, 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).

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Natural Gas Contracts

During the first nine months of 2020, we entered into certain forward natural gas contracts (“natural gas contracts”), which are accounted for on a mark-to-market basis.

Periodically, we entered into certain forward natural gas contracts (“natural gas contracts”), which are accounted for on a mark-to-market basis.

We are utilizing these natural gas contracts as economic hedges for risk management purposes but are not designated as hedging instruments.

At September 30, 2020, our natural gas contracts included 1.0 million MMBtu of natural gas and extend through January 2021 (there were none at December 31, 2019).

At December 31, 2020, our natural gas contracts included 7.3 million MMBtu of natural gas, that extended through December 2021, but these contracts were settled during the first quarter of 2021, primarily due to the weather event discussed in Note 5.

As a result, we had no outstanding natural gas contracts at March 31, 2021.

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

At September 30, 2020, the valuation inputs included the contractual weighted-average cost of $ 2.01 per MMBtu and the weighted-average market value of $ 2.53 per MMBtu.

For the three and nine months ended September 30, 2020, we recognized a $ 0.5 million gain and a $ 0.2 million loss (classified as cost of sales), respectively (none for the three and nine months ended September 30, 2019), which includes an unrealized gain of $ 0.8 million and $ 0.6 million, respectively, attributed to natural gas contracts still held at the reporting date.

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 the three months ended March 31, 2021 and 2020, we recognized a gain of $ 2.7 million (includes a realized gain of $ 1.5 million) and a loss of $ 0.7 million (includes a realized loss of $ 0.2 million), respectively.

The gain is classified as a reduction of cost of sales and the loss is classified as cost of sales.

Embedded Derivative

As discussed in Note 8, certain embedded features (“embedded derivative”) relating to the redemption of the Series E Redeemable Preferred, which includes certain contingent redemption features and the participation rights value have been bifurcated from the Series E Redeemable Preferred and recorded as a liability.

At September 30, 2020 and December 31, 2019, we estimate that the contingent redemption features have fair value since we estimate that it is probable that a portion of the shares of this preferred stock would be redeemed prior to October 25, 2023.

At March 31, 2021 and December 31, 2020, we estimate that the contingent redemption features have fair value since we estimate that it is probable that a portion of the shares of this preferred stock would be redeemed prior to October 25, 2023.

For certain other embedded features, we estimated no fair value based on our assessment that there is a remote probability that these features will be exercised.

The fair value of the embedded derivative was valued using discounted cash flow models and primarily based on the difference in the present value of estimated future cash flows with no redemptions prior to October 25, 2023 compared to certain redemptions deemed probable during the same period and applying the effective dividend rate of the Series E Redeemable Preferred.

In addition, at September 30, 2020 and December 31, 2019, the fair value of the embedded derivative included the valuation of the participation rights, which was based on the equivalent of 303,646 shares of our common stock at $ 1.61 and $ 4.20 per share, respectively.

In addition, at March 31, 2021 and December 31, 2020, 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 $ 5.13 and $ 3.39 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Derivatives, Hedges and Financial Instruments (continued)

For the three months ended September 30, 2020 and 2019, we recognized an unrealized gain and unrealized loss of approximately $ 0.1 million and $ 0.4 million, respectively, due to the change in fair value of the embedded derivative.

For the nine months ended September 30, 202 0 and 2019, we recognized an unrealized gain of approximately $ 0.6 million and $ 0.1 million, respectively, due to the change in fair value of the embedded derivative.

These unrealized gains are included in non-operating other income.

The following details our assets and liabilities that are measured at fair value on a recurring basis at September 30, 2020 and December 31, 2019 :

For the three months ended March 31, 2021 and 2020, we recognized an unrealized loss of approximately $ 0.4 million and an unrealized gain of approximately $ 0.6 million, respectively, due to the change in fair value of the embedded derivative.

The unrealized gain and loss are included in non-operating other income and expense.

The following details our assets and liabilities that are measured at fair value on a recurring basis at March 31, 2021 and December 31, 2020 :

Fair Value Measurements at

September 30, 2020 Using

September 30,

March 31, 2021 Using

Quoted Prices

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other liabilities:

Natural gas contracts

Embedded derivative

There was no Level 3 transfer activity for the nine months ended September 30, 2020.

Other Financial Instruments

At September 30, 2020 and December 31, 2019, we did not have any financial instruments with fair values significantly different from their carrying amounts (which excludes issuance costs, if applicable), except for the Senior Secured Notes as shown below.

September 30, 2020

December 31, 2019

(In Millions)

Senior Secured Notes (1)

(1) Based on a quoted price of 98.0 at September 30, 2020 and 103.25 at December 31, 2019 .

The Senior Secured Notes valuations are classified as Level 2.

On March 27, 2020, the President of the U.S.

signed into law the CARES Act.

The CARES Act provides relief to corporate taxpayers by permitting a five year carryback of 2018-2020 net operating losses (“NOLs”), removing the 80% limitation on the carryback of those NOLs, increasing the Section 163(j) 30% limitation on interest expense deductibility to 50% of adjusted taxable income for 2019 and 2020, and accelerates refunds for minimum tax credit carryforwards, along with a few other provisions.

During the three and nine months ended September 30, 2020, no material adjustments were required to the income tax benefit as a result of the enactment of the CARES Act.

On July 28, 2020, the U.S.

Treasury Department released final regulations, which are effective January 1, 2021, and proposed regulations with guidance on the business interest expense limitation under Section 163(j).

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

Income Taxes (continued)

Benefit for income taxes is as follows:

There was no Level 3 transfer activity for the three months ended March 31, 2021 or 2020.

Provision (benefit) for income taxes is as follows:

Three Months Ended

Nine Months Ended

September 30,

(In Thousands)

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Total Deferred

Benefit for income taxes

For the three and nine months ended September 30, 2020 and 2019, the current provision (benefit) for state income taxes shown above includes regular state income tax, provisions for uncertain state income tax positions, the impact of state tax law changes and other similar adjustments.

Our estimated annual effective rate for 2020 includes the impact of permanent tax differences, limits on deductible compensation, valuation allowances and other permanent items.

Provision (benefit) for income taxes

LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Income Taxes (continued)

For the three months ended March 31, 2021 and 2020, the current provision (benefit) for state income taxes shown above includes regular state income tax, provisions for uncertain state income tax positions, the impact of state tax law changes and other similar adjustments.

Our estimated annual effective tax rate for 2021 includes the impact of permanent tax differences including but not limited to limits on deductible compensation, and valuation allowances.

We considered both positive and negative evidence in our determination of the need for valuation allowances for deferred tax assets.

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Based on our analysis, we currently believe that it is more-likely-than-not that a portion of our federal deferred tax assets will not be able to be utilized and we estimate the valuation allowance to be recorded during 2021 to be approximately $ 3.0 million.

We have also determined it was more-likely-than-not that a portion of our state deferred tax assets would not be able to be utilized and we estimate the valuation allowance associated with these state deferred tax assets to be recorded during 2020 will be approximately $ 3.7 million.

We have also determined it is more-likely-than-not that a portion of our state deferred tax assets will not be able to be utilized.

However, we estimate a reduction in the related valuation allowance associated with these state deferred tax assets to be recorded during 2021 will be approximately $ 0.5 million.

We will continue to evaluate both the positive and negative evidence on a quarterly basis in determining the need for a valuation allowance with respect to our deferred tax assets.

Changes in positive and negative evidence, including differences between estimated and actual results and additional guidance for various provisions of the CARES Act, could result in changes in the valuation of our deferred tax assets that could have a material impact on our consolidated financial statements.

Changes in positive and negative evidence, including differences between estimated and actual results, could result in changes in the valuation of our deferred tax assets that could have a material impact on our consolidated financial statements.

Changes in existing tax laws could also affect actual tax results and the realization of deferred tax assets over time.

The tax benefit for the nine months ended September 30, 2020 was $ 3.0 million ( 7 % benefit on pre-tax loss) and the tax benefit for the nine months ended September 30, 2019 was $ 5.8 million ( 14 % benefit on pre-tax loss).

For the nine months ended September 30, 2020 and 2019, the effective tax rate is less than the statutory tax rate primarily due to the impact of the valuation allowances.

The tax provision for the three months ended March 31, 2021 was minimal and the tax benefit for the three months ended March 31, 2020 was $ 0.3 million ( 2 % benefit on pre-tax loss).

For both periods, the effective tax rate is less than the statutory tax rate primarily due to the impact of the valuation allowances.

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

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Internal Revenue Service and other major tax jurisdictions.

Additionally , the 2013-2016 years remain subject to examination for determining the amount of net operating loss and other carryforwards.

LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Redeemable Preferred Stocks

Series E and Series F Redeemable Preferred

As of September 30, 2020, the Series E Redeemable Preferred has a 14 % annual dividend rate and a participating right in dividends and liquidating distributions equal to 303,646 shares of common stock (participation rights value).

As of March 31, 2021, the Series E Redeemable Preferred had a 14 % annual dividend rate and a participating right in dividends and liquidating distributions equal to 303,646 shares of common stock (participation rights value).

Dividends accrue semi-annually in arrears and are compounded.

Pursuant to the terms of the Series E Redeemable Preferred, the annual dividend rate will increase (a) by 0.50 % in April 2021 (b) by an additional 0.50 % in April 2022 and (c) by an additional 1.0 % in April 2023.

Pursuant to the terms of the Series E Redeemable Preferred, the annual dividend rate increased 0.50 % in April 2021 and will increase (a) by an additional 0.50 % in April 2022 and (b) by an additional 1.0 % in April 2023.

The Series E Redeemable Preferred contains redemption features and a participation rights value that are being accounted for as derivative instruments and have been bifurcated from the Series E Redeemable Preferred as discussed in Note 6.

As of September 30, 2020 , the Series F Redeemable Preferred has voting rights to vote as a single class on all matters which the common stock have the right to vote and is entitled to a number of votes equal to 456,225 shares of our common stock.

As of March 31, 2021 , the Series F Redeemable Preferred has voting rights to vote as a single class on all matters which the common stock have the right to vote and is entitled to a number of votes equal to 456,225 shares of our common stock.

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

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Accumulated dividends

Balance at September 30, 2020

Balance at March 31, 2021

Disaggregated Net Sales

As discussed in Note 1, we primarily derive our revenues from the sales of various chemical products.

The following table presents our net sales disaggregated by our principal markets, which disaggregation is consistent with other financial information utilized or provided outside of our consolidated financial statements:

Three Months Ended

Nine Months Ended

September 30,

(Dollars In Thousands)

(In Thousands)

Agricultural products

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Other Information

Although most of our contracts have an original expected duration of one year or less, for our contracts with a duration greater than one year at contract inception, the average remaining expected duration was approximately 10 months at September 30, 2020 .

Liabilities associated with contracts with customers (contract liabilities) primarily relate to deferred revenue and customer deposits associated with cash payments received in advance from customers for volume shortfall charges and product shipments.

We had approximately $ 2.1 million and $ 3.6 million of contract liabilities as of September 30, 2020 and December 31, 2019, respectively.

For the three and nine months ended September 30, 2020 revenues of $ 0.6 million and $ 1.5 million, respectively, were recognized and included in the balance at the beginning of the respective period.

For the three and nine months ended September 30, 2019, revenues of $ 1.2 million and $ 3.2 million, respectively, were recognized and included in the balance at the beginning of the respective period.

We had approximately $ 2.7 million and $ 2.5 million of contract liabilities as of March 31, 2021 and December 31, 2020, respectively.

For the three months ended March 31, 2021 and 2020, revenues of $ 1.0 million and $ 0.5 million, respectively, were recognized and included in the balance at the beginning of the respective period.

LSB INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Related Party Transactions

As of September 30, 2020, we have three separate outstanding financing arrangements with an affiliate of LSB Funding as discussed in footnotes (E), (F) and (G) of Note 4.

As of March 31, 2021, we have three separate outstanding financing arrangements with an affiliate of LSB Funding as discussed in footnotes (D), (E) and (F) of Note 4.

Also, an affiliate of LSB Funding holds $ 50 million of our Senior Secured Notes discussed in footnote (B) of Note 4.

In addition, LSB Funding holds all outstanding shares of the Series E and Series F Redeemable Preferred discussed in Note 8.

The Golsen Holders hold all outstanding shares of the Series B Preferred and Series D Preferred, which accumulated dividends on such shares totaled approxim ately $ 1.5 million at September 30, 2020 .

The Golsen Holders and an immediate family member hold all outstanding shares of the Series B Preferred and Series D Preferred, which accumulated dividends on such shares totaled approxim ately $ 1.7 million at March 31, 2021 .

Supplemental Cash Flow Information

The following provides additional information relating to cash flow activities:

Nine Months Ended

September 30,

Three Months Ended

(In Thousands)

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Noncash continuing investing and financing activities:

Supplies and accounts payable associated with

additions of property, plant and equipment

Accounts receivable, supplies and accounts payable

associated with additions of property, plant and

Dividends accrued on Series E Redeemable Preferred

Accretion of Series E Redeemable Preferred

NOL Rights Agreement

On July 6, 2020, we entered into the Section 382 Rights Agreement (the “NOL Rights Agreement”), dated as of July 6, 2020, between LSB and Computershare Trust Company, N.A., as rights agent.

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

Our ability to use these NOLs and other tax attributes would be substantially limited if we experience an “ownership change,” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”).

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

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

The rights issued under the NOL Rights Agreement will expire on the earliest to occur of (i) the close of business on the day following the certification of the voting results of our 2021 annual meeting of stockholders, or other duly held stockholders’ meeting, (ii) the date on which our Board of Directors (the “Board”) determines in its sole discretion that (x) the NOL Rights Agreement is no longer necessary for the preservation of material valuable NOLs or tax attributes or (y) the NOLs and tax attributes have been fully utilized and may no longer be carried forward and (iii) the close of business on July 6, 2023.

Our Board may, in its discretion, determine that a person, entity or a certain transaction is exempt from the operation of the NOL Rights Agreement or amend the terms of the rights.

This summary description of the NOL Rights Agreement does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement filed as an exhibit to our Current Report on Form 8-K filed on July 6, 2020.

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

What changed 10-Q

Item 1. Financial Statements