What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-29 compared with 2020-11-06 · 182 added, 339 removed, 182 unchanged (74% of the section changed)

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

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

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with a review of the other Items included in this Form 10-Q and our March 31, 2021 condensed consolidated financial statements included elsewhere in this report.

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

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LSB is headquartered in Oklahoma City, Oklahoma and through its subsidiaries, manufactures and sells chemical products for the agricultural, mining, and industrial markets.

We own and operate facilities in Cherokee, Alabama, El Dorado, Arkansas and Pryor, Oklahoma, and operate a facility for Covestro in Baytown, Texas.

We own and operate facilities in Cherokee, Alabama, El Dorado, Arkansas and Pryor, Oklahoma, and operate a facility on behalf of a global chemical company in Baytown, Texas.

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

and parts of Mexico and Canada.

Key Operating Initiatives for 2021

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

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

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

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

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

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

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

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

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

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

Continue Broadening the Distribution of our Products.

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

as well as markets outside the U.S.

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

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

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

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

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

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

Additionally, early in the second quarter of 2020, we completed a key storage project that is allowing us to further maximize our production of HDAN at our El Dorado Facility, which has, and we expect will continue to enable us to achieve higher production, a lower cost per ton and increased sales of that product during periods of more attractive pricing.

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

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

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

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

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

Improve Our Capital Structure and Overall Cost of Capital.

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

We believe that continued improvement in operating performance combined with economic recovery from the COVID-19 pandemic and improved pricing for our products will be a benefit in achieving those efforts.

We believe that continued improvement in operating performance combined with improving

fundamentals in the agriculture market and the continued economic recovery from the COVID-19 pandemic , will be a benefit in achieving those efforts.

Evaluate Acquisitions of Strategic Assets or Companies.

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

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

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Recent Business Developments

COVID-19 Pandemic

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

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

health crisis resulting from the COVID-19 pandemic .

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Also, the U.S.

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

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

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

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

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

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

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

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

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

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

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

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

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

Long-Term Nitric Acid Supply Contract

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

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

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

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

Agricultural Spring Season

Since the latter part of 2020, the corn market continues to experience positive indicators pushing corn prices to an eight-year high.

Chinese demand for corn is strong as China continues to rebuild their swine population following the swine flu, which decimated the swine population several years ago.

This demand for feed is expected to remain robust as China has moved to large institutional hog farms for which the demand for feed is significant.

Secondly, approximately 40% of domestic corn demand comes from ethanol, an additive to gasoline, which has continued to rebound since the second quarter of 2020 as vaccines are rolled out, stay-at-home orders are lifted and demand for gasoline continues to improve.

As corn prices increase, fertilizers generally follow suit as growers seek to apply more fertilizer to increase yields.

Furthermore, farm income last year, aided by government subsidies, was at its highest levels since 2014, which further supports fertilizer pricing.

Also, as discussed below, during February 2021, many areas of the U.S.

experienced severe cold weather, negatively impacting the availability of natural gas while the demand for natural gas increased from electrical utilities, businesses and residents in certain regions of the country.

These factors resulted in a shortage of natural gas, causing prices for the commodity to rise significantly and industrial users to be severely curtailed on their requirements.

Many nitrogen producers were forced or elected to idle their plants.

With the supply of nitrogen products in the U.S.

tight prior to the cold weather, we believe that these recent widespread production disruptions, coupled with unplanned outages in the global market, have substantially reduced the available supply of nitrogen to the U.S.

market and further increased the fertilizer pricing outlook in the near term.

Overall, improvements in fertilizer demand and pricing are being somewhat tempered by higher natural gas costs thus far in 2021 as compared to 2020.

See a more detailed discussion below under “Key Industry Factors.”

February Weather Event, Natural Gas Curtailment and Settlement of Natural Gas Contracts

On February 12, 2021, the Pryor Facility was taken out of service due to extreme cold weather that 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.

On February 21, 2021, this facility began a phased restart and the facility’s ammonia plant was in production shortly thereafter.

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

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

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

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

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, 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 is classified as a reduction to cost of sales.

As a result of the settlement of these natural gas contracts, we were able to significantly mitigate the impact from lost production, lost sales and higher costs resulting from the impact of the natural gas shortage caused by the February cold weather event.

Key Industry Factors

Supply and Demand

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

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

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

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

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

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

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

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

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

The USDA estimates the number of acres of corn being planted in the U.S.

in 2020 to be approximately 91 million acres.

In addition, the USDA estimates corn production for the 2020 harvest at approximately 14.7 billion bushels, up 8 percent from the 2019 harvest.

The average yield in the U.S.

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

The following October estimates are associated with the corn market:

Sales of our agricultural products were approximately 46% of our total net sales for the first quarter of 2021.

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

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

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

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

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

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

The March 2021 USDA annual Prospective Planting report currently indicates farmers intend to plant 91 million acres of corn in 2021, slightly higher than in 2020, and certain industry sources maintain an estimated range of 91 to 93 million corn acres.

As it relates to the 2021 Crop as noted in the table below, the USDA estimates the U.S.

ending stocks to be approximately 34 million metric tons, a 29.7% decrease from a year ago.

The following April 2021 estimates are associated with the corn market:

(2020 Harvest)

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(2018 Harvest)

October Report (1)

April Report (1)

Area Planted (Million acres)

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World Ending Stocks (Million metric tons)

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

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

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

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

After a challenging 2019 for U.S.

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

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

ethanol facilities.

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

ethanol production.

From a demand perspective for 2021, since the USDA has significantly decreased ending corn stocks and only slightly increased the number corn acres to be planted, coupled with increasing export volumes primarily to China, drought conditions for certain areas in South America, favorable 2020 grower income and improving demand for ethanol, current and projected corn prices have elevated to prices not seen in eight years, which has had a positive impact on fertilizer demand and prices for the spring planting season.

Most gasoline has 10% ethanol content.

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

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

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

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

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

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

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

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

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

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

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

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

primarily from Trinidad and Russia and exports from the U.S.

to decrease, resulting in increased overall supply in the U.S market.

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

I ndustrial and Mining

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

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

The available U.S.

supply of ammonia and other nitrogen products has tightened in 2021 to date, primarily as the result of higher demand for such products, in addition to the idling of many nitrogen plants in February 2021 due to the severe cold weather discussed above under “Recent Business Developments.”

As a result of these factors discussed above, we have experienced a price rally for fertilizers over the last several months, which we expect will continue through the spring planting season.

Industrial and Mining

Sales of our industrial products were approximately 41% of our total net sales for the first quarter of 2021.

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

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

economic indicators are experiencing weakness and contracting in the wake of the COVID-19 pandemic and its impact on the U.S market we serve in addition to weakness in the global economy.

economic indicators are improving and pointing towards continued improvement in the markets we serve.

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

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

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

Sales of our mining products were approximately 13% of our total net sales for the first quarter of 2021.

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

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

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

In our mining markets, our sales volumes are typically driven by

changes in the overall North American consumption levels of mining products that can be impacted by weather.

Metals p rices continue to improve in 2021 as producers continue to extract as much as possible .

This includes an increase in copper mining, driven primarily by demand for electric vehicles.

For 2021, the EIA is projecting a 9% increase in U.S .

coal production driven by a forecasted 39% increase in natural gas prices for electricity generators, making coal more competitive in the electric power sector.

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

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

Farmer Economics

The demand for fertilizer is affected by the aggregate crop planting decisions and fertilizer application rate decisions of individual farmers.

Natural Gas Prices

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natural gas reserves have increased significantly due to, among other factors, advances in extracting shale gas, which has reduced and stabilized natural gas prices, providing North America with a cost advantage over certain imports.

As a result, our competitive position and that of other North American nitrogen fertilizer producers have been positively affected.

Over the last several months, the COVID-19 global economic downturn and resultant decline in energy prices has lowered natural gas costs in countries where low natural gas has not been the norm.

Although the North American cost advantage has narrowed, North America is still the low-cost producer.

While we believe a recovery in global markets and easing of stay-at-home orders combined with a reduction in global natural gas production will lead to a long-term increase in global natural gas prices, in the short term we believe the low-price environment will continue.

We historically have purchased natural gas in the spot market, using forward purchase contracts, or through a combination of both and have used forward purchase contracts to lock in pricing for a portion of our natural gas requirements.

As a result, our competitive position and that of other North American nitrogen fertilizer producers has been positively affected.

We historically have purchased natural gas either on the spot market, through forward purchase contracts, or a combination of both and have used forward purchase contracts to lock in pricing for a portion of our natural gas requirements.

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

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

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

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Three Months Ended

September 30,

Natural gas volumes (MMBtu in millions)

Natural gas average cost per MMBtu

The natural gas average cost excludes a gain of approximately $6.8 million associated with the settlements of natural gas contracts and volume purchase commitments discussed above under “ Recent Business Developments”

Transportation Costs

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

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

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

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

Since the Magellan ammonia pipeline was permanently shut down in 2020, certain Oklahoma and Texas producers that relied on the pipeline to transport their ammonia are relying on other transportation modes, primarily trucks, but also rail and barge transport.

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

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

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

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

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

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

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

Our Pryor Facility is currently on a two-year Turnaround cycle with the next Turnaround planned for the third quarter of 2021.

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

Our El Dorado Facility is currently on a three-year Turnaround cycle with the next Turnaround planned in the third quarter of 2022.

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

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

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

Ammonia Production

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

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

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

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

Forward Sales Contracts

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

Consolidated Results of the Third Quarter of 2020

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

Consolidated Results of the First Quarter of 2021

Our consolidated net sales for the first quarter of 2021 were $98.1 million compared to $83.4 million for the same period in 2020.

Our consolidated operating loss was $0.5 million compared to $7.0 million for the same period in 2020.

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

Items Affecting Comparability of Results of the Third Quarter

Items Affecting Comparability of Results of the First Quarter

Selling Prices

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

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

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

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

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

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

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

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

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

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

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

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

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

Due to the impact from the COVID-19 pandemic, the trial date has been delayed and we are awaiting a new trial date.

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

Turnaround Expense (2019 only)

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

Turnaround costs are included in cost of sales.

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

For the first quarter of 2021, average agricultural selling prices for our a mmonia increased 18% while UAN and HDAN selling prices increased slightly compared to the first quarter of 2020.

As discussed above under “Forward Sales Contracts”, our selling prices were below spot market prices since most of these sales were pursuant to forward sales contracts during the first quarter of 2021.

Ammonia prices have improved due to contracted inventory levels in North America driven by higher demand and from numerous plant outages caused primarily by the extreme cold weather event during February.

For the first three months of 2021, average industrial selling prices for most of our products were higher compared to the same period of 2020, primarily driven by the $98 per metric ton increase in the Tampa Ammonia benchmark price, as many of our industrial contracts are indexed to the Tampa Ammonia benchmark price.

As for our mining products, average selling prices for our products increased as mining activity improves in addition to certain of our mining contracts are linked to natural gas indexes and as the cost of natural gas increases, the pricing for these products increases accordingly.

Settlement of Natural Gas Contracts

As discussed above under “Recent Business Developments”, during the first quarter of 2021, 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 is classified as a reduction to cost of sales.

Legal Fees-Leidos

For the first quarters of 2021 and 2020, certain legal fees were approximately $0.9 million and $3.3 million, respectively.

These fees relate to claims we are pursuing against Leidos to recover damages and losses associated with the construction of the ammonia plant at the El Dorado Facility as discussed in footnote B of Note 5.

Due to the impact from the COVID-19 pandemic, the trial date has been delayed.

We are awaiting a new trial date.

Results of Operations

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

The following Results of Operations should be read in conjunction with our condensed consolidated financial statements for the three months ended March 31, 2021 and 2020 and accompanying notes and the discussions under “Overview” and “Liquidity and Capital Resources” included in this MD&A.

We present the following information about our results of operations.

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

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

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

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

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

The following table contains certain financial information:

Three Months Ended

September 30,

(Dollars In Thousands)

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Total net sales

Gross profit (loss):

Agricultural products (1)

Industrial and mining products (1)

Adjusted gross profit by market (1)

Gross profit:

Adjusted gross profit (1)

Depreciation and amortization (2)

Turnaround expense

Total gross loss

Total gross profit

Selling, general and administrative expense

Other expense, net

Other income, net

Operating loss

Interest expense, net (3)

Non-operating other expense, net

Benefit for income taxes

Non-operating other expense (income), net

Provision (benefit) for income taxes

Other information:

Gross profit (loss) percentage (3)

Gross profit percentage (4)

Adjusted gross profit percentage (4)

Property, plant and equipment expenditures

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Represents amount classified as cost of sales.

The first quarters of 2021 and 2020 includes interest expense of $0.1 and $1.3 million associated with a litigation judgment discussed in footnote (B) of Note 5.

As a percentage of the total net sales.

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

Three Months Ended

September 30,

Adjusted gross profit by market (1)

Adjusted gross profit percentage

by market (2)

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

See reconciliation included in the financial information table above.

As a percentage of the respective net sales.

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

Three Months Ended

September 30,

Product (tons sold)

Three Months Ended

September 30,

Gross Average Selling Prices (price per ton)

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

Three Months Ended

September 30,

Product (tons sold)

Other Industrial Products

Tampa Ammonia Benchmark (price per metric ton)

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

With respect to sales of industrial and mining products, the following table indicates key operating metrics of our major products:

Three Months Ended

September 30,

Product (tons sold)

LDAN/HDAN/AN Solution

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

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

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

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

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

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

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

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

Gross Profit (Loss)

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

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

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

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

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

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

Selling, General and Administrative

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

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

Benefit for Income Taxes

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

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

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

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

Also see discussion in Note 7.

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

The following table contains certain financial information:

Nine Months Ended

September 30,

(Dollars In Thousands)

Agricultural products

Industrial and mining products

Total net sales

Gross profit:

Agricultural products (1)

Industrial and mining products (1)

Adjusted gross profit by market (1)

Depreciation and amortization (2)

Turnaround expense

Recovery from settlements with certain vendors (3)

Total gross profit

Selling, general and administrative expense

Other expense, net

Operating loss

Interest expense, net (4)

Non-operating other income, net

Benefit for income taxes

Other information:

Gross profit percentage (5)

Property, plant and equipment expenditures

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

Represents amount classified as cost of sales.

See discussion in “Contingencies” of Note 1.

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

As a percentage of the total net sales.

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

Nine Months Ended

September 30,

Adjusted gross profit by market (1)

Adjusted gross profit percentage

by market (2)

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

See reconciliation included in the financial information table above.

As a percentage of the respective net sales.

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

Nine Months Ended

September 30,

Product (tons sold)

Nine Months Ended

September 30,

Gross Average Selling Prices (price per ton)

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

Nine Months Ended

September 30,

Product (tons sold)

Other Industrial Products

AN, Nitric Acid and Other

Tampa Ammonia Benchmark (price per metric ton)

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

Nine Months Ended

September 30,

Product (tons sold)

LDAN/HDAN/AN Solution

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

The impact from the decline in selling prices was partially offset by an increase in sales volume of UAN as a result of higher production from the Pryor facility as a result of the new Urea reactor which was installed in the fourth quarter of 2019.

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

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

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

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

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

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

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

Agricultural product sales increased driven primarily by higher ammonia sales prices and higher sales volumes of HDAN and ammonia partially offset by lower UAN sales volumes resulting from the production interruption from the February weather event discussed under “Items Affecting Comparability of Results of the First Quarter.” Ammonia selling prices have increased as a result of increasing demand and tightening inventory levels.

Industrial acids and other industrial product sales increased primarily from higher sales prices due primarily to higher Tampa Ammonia benchmark pricing and higher nitric acid sales volume due in part to sales beginning in 2021 pursuant to the new long-term nitric acid supply agreement.

The average Tampa Ammonia pricing was approximately $98 per ton higher compared to the same period in 2020.

This increase was partially offset by lower ammonia sales volume as more of this product was upgraded to other products, including agricultural and mining products.

Mining products sales improved driven by both increased sales volumes and prices.

Demand for mining products has improved, especially relating to metals mining as expanding electric vehicle market is driving the need for copper.

Also, certain mining sales contracts are linked to natural gas indexes and as the cost of natural gas increases, the pricing for these products increase accordingly.

As noted in the table above, we recognized a gross profit of $8.1 million for the first quarter of 2021 compared to $2.6 million for the same period in 2020, or a $5.5 million improvement.

Overall, our gross profit percentage was 8.2% compared to 3.1% for the same period in 2020.

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

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

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

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

Our adjusted gross profit percentage increased slightly to 25.4% for the first quarter of 2021 from 24.1% for the first quarter of 2020.

The increase in gross profit was primarily driven by higher sales prices for our products coupled with increased sales volume of upgraded product including nitric acid and AN.

The improvement in gross profit was partially offset by the net impact of the February weather disruption and overall higher average natural gas costs which averaged $3.15 per MMBtu for the first quarter of 2021 as compared to $2.09 per MMBtu for the first quarter of 2020.

Selling, General and Administrative

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

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

Our SG&A expenses were $8.8 million for the first quarter of 2021, a decrease of $1.2 million compared to the same period in 2020.

Interest Expense, net

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

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

Benefit for Income Taxes

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

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

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

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

Interest expense for the first quarter of 2021 was $12.4 million compared to $13.5 million for the same period in 2020.

The decrease relates primarily to the interest expense incurred during the first quarter of 2020 associated with a litigation judgment discussed in footnote (B) of Note 5.

Provision ( B enefit ) for Income Taxes

The provision for income taxes for the first quarter of 2021 was minimal compared to a benefit for income taxes $0.3 million for the same period in 2020.

The resulting effective tax rate for the first quarter of 2020 was 2%.

For the first quarters of 2021 and 2020, the effective tax rate is less than the statutory rate primarily due to the impact of the valuation allowance.

Also see discussion in Note 7.

LIQUIDITY AND CAPITAL RESOURCES

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

The following table summarizes our cash flow activities for the three months ended March 31:

(In Thousands)

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Net Cash Flow from Operating Activities

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

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

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

Net cash provided by operating activities was $12.7 million for the first quarter of 2021 compared to net cash used of $2.2 million for the same period of 2020, a change of $14.9 million.

For the first quarter of 2021, the net cash provided is the result of a net loss of $13.3 million plus adjustments of $16.8 million for depreciation and amortization of PP&E less other adjustments of $0.4 million and net cash provided of $9.6 million primarily from our working capital.

For the first quarter of 2020, the net cash used is the result of a net loss of $19.5 million plus adjustments of $17.6 million for depreciation and amortization of PP&E and other adjustments of $1.3 million and net cash used of $1.6 million primarily from our working capital.

Net Cash Flow from Investing Activities

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

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

Net cash used by investing activities was $5.9 million for the first quarter of 2021 compared to $10.6 million for the same period of 2020, a change of approximately $4.6 million.

For the first quarters of 2021 and 2020, the net cash used relates primarily to expenditures for PP&E.

Net Cash Flow from Financing Activities

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

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

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

Net cash used by financing activities was $8.8 million for the first quarter of 2021 compared to net cash provided of $27.4 million for the same period of 2020, a change of $36.2 million.

For the first quarter of 2021, the net cash used primarily consists of payments on other long-term debt and short-term financing.

For the first quarter of 2020, the net cash provided primarily consists of proceeds of $30 million from our Working Capital Revolver Loan and proceeds of $2.6 million from other long-term debt partially offset by payments on other long-term debt and short-term financing of $5.1 million and payments of $0.1 million for other financing activities.

Capitalization

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

September 30,

(In Millions)

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Senior Secured Notes due 2023

Secured Promissory Note due 2021

Unsecured Loan Agreement due 2022

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Secured Loan Agreement due 2025

Secured Financing due 2025

Secured Promissory Note due 2021

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Total stockholders' equity

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

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

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

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

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

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

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

Liquidation preference of $287.5 million as of March 31, 2021 .

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

As of March 31, 2021 , our Working Capital Revolver Loan was undrawn and had approximately $41.8 million of availability.

For the full year of 2021, we expect capital expenditures to be approximately $30 million, which includes approximately $5 million for margin enhancement projects.

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

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

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

As of March 31, 2021, no trigger event had occurred.

Loan Agreements and Redeemable Preferred Stock

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

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

This promissory note bears interest at the annual rate of 5.25%.

Principal and interest are payable in monthly installments.

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

Unsecured Loan Agreement due 2022 – LSB is a party to an unsecured PPP loan with a lender pursuant to a new loan program through the SBA as the result of the PPP established by the CARES Act and amended by the Paycheck Protection Program Flexibility Act of 2020.

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

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

Once the SBA notifies the lender the

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

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

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.

As of March 31, 2021, 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.

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

Secured Loan Agreement due 2025 - EDC is party to a secured loan agreement with an affiliate of LSB Funding, which provided for available borrowings (the “Interim Loan”) during the construction of certain equipment (the “Interim Loan Period”), subject to certain conditions.

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

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

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

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

Secured Loan Agreement due 2025 - EDC is party to a secured loan agreement with an affiliate of LSB Funding .

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

Secured Financing due 2025 – EDA is party to a $30 million secured financing arrangement with an affiliate of LSB Funding.

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

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

Working Capital Revolver Loan – At March 31, 2021, our Working Capital Revolver Loan was undrawn and had approximately $41.8 million of availability , based on our eligible collateral, less outstanding letters of credit as of that date.

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

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

Redemption of Series E Redeemable Preferred – At March 31, 2021 , there were 139,768 outstanding shares of Series E Redeemable Preferred and the aggregate liquidation preference (par value plus accrued dividends) was $287.5 million.

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

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

Capital Expenditures – First Nine Months of 2020

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

Capital Expenditures – First Quarter of 2021

For the first quarter of 2021, capital expenditures relating to PP&E were $6.1 million.

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

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

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

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

As a result, we incurred expenses of $0.9 million during the first quarter of 2021 in connection with environmental projects.

For the remainder of 2021, we expect to incur expenses ranging from $2.9 million to $3.3 million in connection with additional environmental projects.

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

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

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

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

by our Board .

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

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

Dividends on the Series E Redeemable Preferred are cumulative and payable semi-annually (May 1 and November 1) in arrears at the annual rate of 14% of the liquidation value of $1,000 per share, but such annual rate increased to 14.5% beginning in April 2021 as discussed in Note 10.

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

In addition, dividends in arrears at the dividend date, until paid, shall compound additional dividends at the annual rate.

As of March 31, 2021, the semi-annual compounded dividend is approximately $136.29 per share for the current aggregate semi-annual dividend of $19.0 million.

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

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

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

As of March 31, 2021, the amount of accumulated dividends on the Series E Redeemable Preferred was approximately $147.7 million.

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

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

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

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

As of March 31, 2021, the amount of accumulated dividends on the Series D Preferred and Series B Preferred totaled approximately $1.7 million.

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

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

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

The selling seasons for agricultural products are primarily during the spring and fall planting seasons, which typically extend from March through June and from September through November in the geographical markets we distribute the majority of our agricultural products.

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

The selling seasons for agricultural products are primarily during the spring and fall planting seasons, which typically extend from March through June and from September through November in the geographical markets where we distribute the majority of our agricultural products.

As a result, we typically increase our inventory of fertilizer products prior to the beginning of each planting season in order to meet the demand for our products.

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

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

As of March 31, 2021, we have agreed to indemnify the sureties for payments , up to $9.7 million, made by them in respect of such bonds.

These insurance bonds are expected to expire or be renewed later in 2021.

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See “Critical Accounting Policies and Estimates,” Item 7 of our 2020 Form 10-K.

In addition, the preparation of financial statements requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses, and disclosures of contingencies and fair values, including, but not limited to, various environmental and legal matters , including a remedy of annual monitoring and the implementation of an EUC selected by the KDHE discussed under footnote 2 – Other Environmental Matters of Note 5 and the lawsuits styled City of West, Texas vs.

In addition, the preparation of financial statements requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses, and disclosures of contingencies and fair values, including, but not limited to, various environmental and legal matters , including matters discussed under footnote A and the lawsuit styled City of West, Texas vs.

CF Industries, Inc., et al., discussed under “Other Pending, Threatened or Settled Litigation” of Note 5.

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

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

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

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

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

It is also reasonably possible that the estimates and assumptions utilized as of March 31, 2021 could change in the near term.

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

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We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K under the Exchange Act.

Quantitative and Qualitat ive Disclosures about Market Risk

Our results of operations and operating cash flows are impacted by changes in market prices of ammonia and natural gas and changes in market interest rates.

Forward Sales Commitments Risk

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

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

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

Commodity Price Risk

A substantial portion of our products and raw materials are commodities whose prices fluctuate as market supply and demand fundamentals change.

S ince we are exposed to commodity price risk, we periodically enter into contracts to purchase natural gas for anticipated production needs to manage risk related to changes in prices of natural gas commodities.

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

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

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

Interest Rate Risk

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

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

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

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis