What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-07-29 compared with 2021-04-29 · 211 added, 141 removed, 223 unchanged (61% 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 March 31, 2021 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 June 30, 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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In October 2020, we announced a new long-term nitric acid supply contract with a customer.

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

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

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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 improving

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

In July 2021, we signed a definitive agreement with LSB Funding (the “Holder”), an affiliate of Eldridge, to exchange the shares of LSB Series E and Series F Redeemable Preferred Stock held by the Holder for shares of LSB common stock.

We believe the exchange will relieve the Company and our common

stockholders from the expensive, compounding burden of the preferred stock dividend, improving the current capital structure and, when combined with favorable credit markets, may enable us to refinance our senior secured notes on more favorable terms than our current senior secured notes.

Additionally, we believe that consummation of the exchange transaction would provide us with the financial flexibility needed to grow our business organically and through strategic mergers and acquisitions, while maintaining our significant federal net operating losses.

Please refer to “Recent Business Developments” below for further information .

Evaluate Acquisitions of Strategic Assets or Companies.

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Recent Business Developments

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.

Continued Improvement in Product Sales

Driven by several supply and demand factors, selling prices for all of our major products improved during the second quarter of 2021 compared to the same quarter of 2020.

As for our agricultural business, corn prices reached an eight-year during the first half of 2021 and we are benefiting from strong farmer economics.

Chinese demand for corn continues to be 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.

In addition, domestic corn demand to produce ethanol continues 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 increased, pricing for fertilizers followed suit as growers sought to apply more fertilizer to increase yields.

Also entering into the second quarter of 2021, the supply of nitrogen products in the U.S.

was tight due to winter storm Uri and the resultant severe cold weather experienced in many areas of the U.S.

that caused many nitrogen producers to idle their plants during February 2021.

Additionally, wet weather across the Midwest and Southern Plains regions in May has resulted in the spring planting season extending into July and that combined with other factors discussed above has led to continued strong pricing thus far in July that is expected to continue throughout 2021 and into 2022.

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

As for our industrial and mining products, selling prices continued to improve as the supply of ammonia remained tight due to strong global demand, curtailed regional supply from the winter storm Uri, numerous global unplanned outages and lower than expected product imports.

As a result, the Tampa Ammonia benchmark price increased, which in turn, increased our selling prices as many of our industrial contracts are indexed to this benchmark price.

In addition, sales of nitric acid increased pursuant to the new long-term nitric acid supply contract discussed above.

Also, demand for our mining products continued to improve due to increased mining activities.

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.

PPP Loan Forgiven

In April 2020, we entered into a federally guaranteed PPP loan for $10 million 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 PPP Flexibility Act of 2020.

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

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

In June 2021, the PPP loan was fully forgiven by the SBA and lender.

As a result, we recognized a gain on extinguishment of debt of $10 million for the second quarter of 2021.

Planned Exchange Transaction and Special Common Stock Dividend

On July 19, 2021, we entered into a Securities Exchange Agreement (the “Exchange Agreement”) with LSB Funding LLC (the “Holder”), an affiliate of Eldridge, to exchange the shares of Series E and Series F Redeemable Preferred Stock held by it for shares of our common stock.

Under the terms of the Exchange Agreement, LSB would exchange, at the closing, approximately $300 million of preferred stock held by Eldridge into an equivalent value of our common stock based on an exchange price of $6.16, which is equal to the 30-day volume weighted average price as of the date of the Exchange Agreement.

In connection with the transaction, our common stockholders will receive a special dividend in the form of 0.30 shares of our common stock for every share owned as of the record date and any such amount received by the Holder will reduce the exchange consideration otherwise payable under the Exchange Agreement.

Completion of the exchange transaction is subject to a number of customary closing conditions, including receipt of stockholder approval from the holders of a majority of the shares of our outstanding common stock not held by Eldridge or any of its affiliates.

We expect to file a preliminary proxy for a special meeting of stockholders and deliver additional information related to the special

meeting to stockholders in the near term .

Results of the stockholder vote will be tabulated at the s pecial m eeting of s tockholders expected to be held in the third quarter of 2021.

Key Industry Factors

Supply and Demand

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.

Sales of our agricultural products were approximately 47% of our total net sales for the second 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.

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, including the impact from the Phase 1 trade agreement between the U.S.

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.

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

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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.

According to the June 2021 USDA annual Acreage Report, farmers intend to plant 93 million acres of corn in 2021, up 2 percent compared to the 2020 planting season.

As it relates to the 2022 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:

ending stocks will be approximately 36 million metric tons, a 32% increase from the current estimate for the 2021 Crop.

The UDSA also is estimating a record yield for the 2022 Crop up approximately 4% from a year ago.

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

(2021 Harvest)

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(2019 Harvest)

April Report (1)

July Report (1)

Area Planted (Million acres)

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World Ending Stocks (Million metric tons)

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.

Information obtained from WASDE reports dated July 12, 2021 (“July Report”) for the 2021/2022 (“2022 Crop”), 2020/2021 (“2021 Crop”) and 2019/2020 (“2020 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 2022 Crop amounts compared to the 2020 Crop amounts.

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.

From a demand perspective for 2021, since the USDA has significantly decreased ending corn stocks for the 2021 Crop 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 and the western U.S., ethanol use returning to pre-pandemic levels and favorable 2020 grower income, corn prices during the second quarter elevated to prices not seen in eight years and projected corn prices for the remainder of 2021 continue to be strong compared to the second half of 2020, which has had a positive impact on fertilizer demand and prices.

Most gasoline has 10% ethanol content.

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

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

corn, currently representing roughly 35% of total U.S.

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.

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 and ongoing industry downtime increases cause by “hard” plant shutdowns and the lingering problems of that event.

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 for the remainder of 2021, compared to the same period of 2020.

I ndustrial and Mining

Sales of our industrial products were approximately 43% of our total net sales for the second quarter of 2021.

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

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

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

Sales of our mining products were approximately 10% of our total net sales for the second 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.

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 .

Farmer Economics

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.

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 prices continue to improve in 2021 as producers continue to extract as much as possible.

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

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

Natural Gas Prices

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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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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 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.

Consolidated Results of the Second Quarter of 2021

Our consolidated net sales for the second quarter of 2021 were $140.7 million compared to $105.0 million for the same period in 2020.

Our consolidated operating income was $26.5 million compared to $10.7 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 First Quarter

Items Affecting Comparability of Results of the Second Quarter

Selling Prices

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.

For the second quarter of 2021, average agricultural selling prices for our a mmonia, UAN and HDAN increased 60%, 50% and 20%, respectively, compared to the second quarter of 2020.

As discussed above under “Recent Business Developments,” increased demand, higher corn prices and tighter supplies of nitrogen products contributed to the improved pricing.

For the second quarter of 2021, average industrial selling prices for most of our products were higher compared to the same period of 2020, primarily driven by the $311 per metric ton increase in the Tampa Ammonia benchmark price, as many of our industrial contracts are indexed to the Tampa Ammonia benchmark price.

Gain on Extinguishment of Debt – PPP Loan Forgiven (2021 only)

As discussed above under “Recent Business Developments,” in June 2021, the PPP loan was fully forgiven by the SBA and lender.

As a result, we recognized a gain on extinguishment of debt of $10 million during the second quarter of 2021.

Settlements with Certain Vendors (2020 only)

During the second quarter of 2020, EDC and certain vendors mediated settlements for EDC to recover certain costs associated with a nitric acid plant at our El Dorado Facility.

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

As a result, a recovery from these settlements was recognized, which included approximately $5.7 million classified as a reduction to cost of sales.

Results of Operations

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.

The following Results of Operations should be read in conjunction with our condensed consolidated financial statements for the three and six months ended June 30, 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.

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

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

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

The following table contains certain financial information:

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Turnaround expense

Recovery from settlements with certain vendors (3)

Total gross profit

Selling, general and administrative expense

Other income, net

Operating loss

Other expense (income), net

Operating income

Interest expense, net

Gain on extinguishment of debt

Non-operating other expense (income), net

Provision (benefit) for income taxes

Benefit for income taxes

Net income (loss)

Other information:

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Property, plant and equipment expenditures

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

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

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.

See discussion above under “Items Affecting Comparability of Results of the Second Quarter.”

As a percentage of the total net sales.

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Gross Average Selling Prices (price per ton)

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

With respect to sales of i ndustrial and mining p roducts, the following table indicate s key operating metrics of our major products:

Three Months Ended

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Tampa Ammonia Benchmark (price per metric ton)

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.

Net sales of our agricultural products increased during the second quarter of 2021 compared to the prior year period driven by stronger pricing for UAN, ammonia and HDAN.

Partially offsetting the benefit of stronger pricing was the lingering impact from winter storm Uri in February 2021.

Our El Dorado and Pryor Facilities were shut down as our natural gas supply was curtailed during the very cold weather conditions that were experienced throughout the central U.S.

These shutdowns, resulted in a drawdown of inventory, particularly of HDAN, given increased sales during the first quarter of 2021, reducing our inventory available for sale in the second quarter of 2021.

Also depressing agricultural volumes during the second quarter of 2021 was the impact of wet weather across the Southern Plains throughout much of May delaying the application of fertilizer products.

As a result, we are seeing an extension of the season into July given early season weather issues.

Agricultural sales were also impacted by a shift in product mix as we continue our focus on the industrial products business.

Net sales of our industrial and mining products increased as a result of higher pricing related to a rise in the Tampa ammonia benchmark price, to which many of our industrial contracts are tied.

Also benefitting industrial sales was the ramp up of a new nitric acid offtake agreement along with the continued recovery of demand from several key end markets including automotive, home building quarry and construction, precious metals mining and power generation, which have now exceeded pre-pandemic demand levels .

As noted in the table above, we recognized a gross profit of $35 million for the second quarter of 2021 compared to $19 million for the same period in 2020, or a $16 million improvement.

Overall, our gross profit percentage was 24.9% compared to 18.1% for the same period in 2020.

Our adjusted gross profit percentage increased to 37.4% for the second quarter of 2021 from 28.9% for the second 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 industrial and mining products and UAN partially offset by lower volumes of HDAN.

The improvement in gross profit was partially offset by overall higher average natural gas costs which averaged $2.78 per MMBtu for the second quarter of 2021 as compared to $1.81 per MMBtu for the second quarter of 2020.

The second quarter of 2020 also included settlements with certain vendors resulting in a recovery of approximately $5.7 million.

Gain on Extinguishment of Debt – PPP Loan Forgiven

As discussed above under “Recent Business Developments,” in June 2021, the PPP loan was fully forgiven by the SBA and lender.

As a result, we recognized a gain on extinguishment of debt of $10 million for the second quarter of 2021.

Benefit for Income Taxes

The benefit for income taxes for the second quarter of 2021 was $0.2 million compared to $1.3 million for the same period of 2020.

For both periods, the effective tax rate is less than the statutory rate primarily due to the impact of the PPP loan forgiveness, state tax law changes and valuation allowances.

Also see discussion in Note 7.

Six Months Ended June 30, 2021 Compared to Six Month Ended June 30, 2020

The following table contains certain financial information:

Six Months Ended

(Dollars In Thousands)

Agricultural products

Industrial and mining products

Total net sales

Gross profit:

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 income

Interest expense, net

Gain on extinguishment of debt

Non-operating other expense (income), net

Benefit for income taxes

Net income (loss)

Other information:

Gross profit percentage (4)

Adjusted gross profit percentage (4)

Property, plant and equipment expenditures

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

Represents amount classified as cost of sales.

See discussion above under “Items Affecting Comparability of Results of the Second Quarter.”

As a percentage of the total net sales.

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

Six Months Ended

Product (tons sold)

Six Months Ended

Gross Average Selling Prices (price per ton)

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

Six Months Ended

Product (tons sold)

AN, Nitric Acid and Other

Tampa Ammonia Benchmark (price per metric ton)

Agricultural product sales increased driven primarily by higher sales prices for all of our agricultural products and improved UAN sales volumes partially offset by lower sales volumes of HDAN and ammonia resulting from and lower production, including ammonia, due to the February 2021 weather event), the impact of wet weather across the Southern Plains throughout much of May, which delayed the application of fertilizer products, and product mix shifts to our industrial and mining products.

As discussed above under “Recent Business Developments,” increased demand, higher corn prices and tighter supplies of nitrogen products contributed to the improved pricing.

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, and product mix shifts.

The average Tampa Ammonia pricing was approximately $205 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.

Mining products sales improved driven by primarily from increased sales volumes.

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.

As noted in the table above, we recognized a gross profit of $43.1 million for the first six months of 2021 compared to $21.6 million for the same period in 2020, or a $21.5 million improvement.

Overall, our gross profit percentage was 18.0% compared to 11.4% for the same period in 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.

Our adjusted gross profit percentage increased to 32.5% for the first six months of 2021 from 28.6% for the first six months of 2020.

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 $2.96 per MMBtu for the first six months of 2021 as compared to $1.95 per MMBtu for the same period of 2020.

The first six months of 2020 also included settlements with certain vendors resulting in a recovery of approximately $5.7 million.

Selling, General and Administrative

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.

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 First Quarter” partially offset by an increase in short and long-term compensation incentives.

Our SG&A expenses were $17.3 million for the first six months of 2021, a decrease of $1.2 million compared to the same period in 2020.

The net decrease was primarily driven by lower professional fees, including lower legal fees of $2.9 million associated with claims we are pursuing against Leidos, partially offset by an increase in short and long-term compensation incentives of $2.0 million.

Interest Expense, net

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.

Interest expense for the first half of 2021 was $24.7 million compared to $26.0 million for the same period in 2020.

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

Gain on Extinguishment of Debt – PPP Loan Forgiven

As discussed above under “Recent Business Developments,” in June 2021, the PPP loan was fully forgiven by the SBA and lender.

As a result, we recognized a gain on extinguishment of debt of $10 million for the second quarter of 2021.

Non-operating Other Expense (Income), net

Non-operating other expense for the first half of 2021 was $1.1 million compared to non-operating income of $0.8 million for the same period in 2020 or a change of $1.9 million.

This change primarily relates to the change in fair value of the embedded derivative included in the Series E Preferred.

Benefit for Income Taxes

The benefit for income taxes for the first six months of 2021 was $0.2 million compared to $1.6 million for the same period in 2020.

For both periods, the effective tax rate is less than the statutory rate primarily due to the impact of the PPP loan forgiveness, state tax law changes and valuation allowances.

Also see discussion in Note 7.

LIQUIDITY AND CAPITAL RESOURCES

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

The following table summarizes our cash flow activities for the six months ended June 30:

(In Thousands)

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Net Cash Flow from Operating Activities

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 provided by operating activities was $30.6 million for first half of 2021 compared to $19.4 million for the same period of 2020, a change of $11.2 million.

For the first half of 2021, the net cash provided is the result of net income of $10.4 million plus adjustments of $33.7 million for depreciation and amortization of PP&E, other adjustments of $2.6 million less $10.0 million for a gain on extinguishment of debt, and net cash used of $6.1 million primarily from our working capital.

For the first half of 2020, the net cash provided is the result of a net loss of $19.8 million plus adjustments of $34.6 million for depreciation and amortization of PP&E and other adjustments of $2.1 million and net cash provided of $2.5 million primarily from our working capital.

Net Cash Flow from Investing Activities

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 used by investing activities was $14.5 million for the first half of 2021 compared to $17.7 million for the same period of 2020, a change of $3.1 million.

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

Net Cash Flow from 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.

Net cash used by financing activities was $14.7 million for the first half of 2021 compared to net cash provided of $32.0 million for the same period of 2020, a change of $46.7 million.

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

For the first half of 2020, the net cash provided primarily consists of proceeds of $30 million from our Working Capital Revolver Loan and proceeds of $12.6 million from other long-term debt partially offset by payments on other long-term debt and short-term financing of $10.5 million and payments of $0.1 million for other financing activities.

Capitalization

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Senior Secured Notes due 2023

Unsecured Loan Agreement due 2022

Secured Financing due 2023

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Secured Financing due 2025

Unsecured Loan Agreement due 2022

Secured Promissory Note due 2021

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Total stockholders' equity

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

Liquidation preference of $297.7 million as of June 30, 2021 .

See discussion above under “Recent Business Developments - Planned Exchange Transaction and Special Common Stock Dividend.”

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.

As of June 30, 2021 , our Working Capital Revolver Loan was undrawn and had approximately $50.3 million of availability.

For the full year of 2021, we expect capital expenditures to be approximately $30 million to $35 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 March 31, 2021, no trigger event had occurred.

As of June 30, 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.

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 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.

Secured Financing due 2023 – EDC is party to a secured financing arrangement with an affiliate of LSB Funding.

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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.

Principal 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 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.

Working Capital Revolver Loan – At June 30, 2021, our Working Capital Revolver Loan was undrawn and had approximately $50.3 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 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”).

Additionally, at our option, we may redeem the Series E Redeemable Preferred at any time at a redemption price per share equal to the Liquidation Preference of such share as of the redemption date.

Lastly, with receipt of (i) prior consent of the electing Series E holder or a majority of shares of Series E Redeemable Preferred and (ii) all other required approvals, including under any principal U.S.

securities exchange on which our common stock is then listed for trading, we can redeem the Series E Redeemable Preferred by the issuance of shares of common stock having an aggregate common stock price equal to the amount of the aggregate Liquidation Preference of such shares being redeemed in shares of common stock in lieu of cash at the redemption date.

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

In the event of a change of control, we must make an offer to purchase all of the shares of Series E Redeemable Preferred outstanding at the Liquidation Preference.

Since carrying values of the redeemable preferred stocks are being increased by periodic accretions (including the amount for dividends earned but not yet declared or paid) using the interest method so that the carrying amount will equal the redemption value as of October 25, 2023, the earliest possible redemption date by the holder, this accretion has and will continue to affect income (loss) per common share.

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

Capital Expenditures – First Quarter of 2021

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

Series E Redeemable Preferred – At June 30, 2021 , there were 139 ,768 outstanding shares of Series E Redeemable Preferred and the aggregate liquidation preference (par value plus accrued dividends) was $ 2 97 .

See discussion above under “Recent Business Developments - Planned Exchange Transaction and Special Common Stock Dividend.”

Capital Expenditures – First Six Months of 2021

For the first half of 2021, capital expenditures relating to PP&E were $14.8 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 $0.9 million during the first quarter of 2021 in connection with environmental projects.

As a result, we incurred expenses of $1.7 million during the first six months of 2021 in connection with environmental projects.

For the remainder of 2021, we expect to incur expenses ranging from $1.9 million to $2.2 million in connection with additional environmental projects.

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

See discussion above under “Recent Business Developments - Planned Exchange Transaction and Special Common Stock Dividend.”

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 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.

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 14.5% of the liquidation value of $1,000 per share, but such annual rate will increase to 15.0% beginning in April 2022 and to 16% beginning in April 2023 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 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.

As of June 30, 2021, the semi-annual compounded dividend is approximately $150.84 per share for the current aggregate semi-annual dividend of $21.1 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 March 31, 2021, the amount of accumulated dividends on the Series E Redeemable Preferred was approximately $147.7 million.

As of June 30, 2021, the amount of accumulated dividends on the Series E Redeemable Preferred was approximately $157.9 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 March 31, 2021, the amount of accumulated dividends on the Series D Preferred and Series B Preferred totaled approximately $1.7 million.

As of June 30, 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.

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

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.

As of June 30, 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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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 March 31, 2021 could change in the near term.

It is also reasonably possible that the estimates and assumptions utilized as of June 30, 2021 could change in the near term.

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

See discussion above under “Recent Business Developments - Planned Exchange Transaction and Special Common Stock Dividend.”

Off-Balance Sheet Arrangements

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 at the end of a reporting period.

At June 30, 2021, 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.

At June 30, 2021, we had no outstanding natural gas contracts, which are accounted for on a mark-to-market basis.

Interest Rate Risk

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

As of June 30, 2021, we had no outstanding borrowings on this credit facility and no other variable rate borrowings.

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

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