What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-02 compared with 2021-07-29 · 172 added, 172 removed, 262 unchanged (57% 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 June 30, 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 September 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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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 both within and outside the U.S.

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 January 2021.

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

Continue Broadening the Distribution and optimization of our Product mix.

In the first quarter of 2021, we commenced 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 This contract advances our focus to leverage underutilized nitric acid production capacity at our El Dorado Facility.

We also executed a new contract to capture and sell carbon dioxide out of our El Dorado Facility, where our customer is building a guest plant.

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

Additionally, early in the second quarter of 2020, we completed a key storage project that 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.

We are evaluating our next phase of margin enhancement opportunities to optimize our storage and distribution capability, as well as, to upgrade ammonia into further downstream production to capture additional margin.

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

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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.

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

Exchange Transaction and Special Common Stock Dividend

On September 27, 2021, we closed a Securities Exchange Transaction (the “Exchange Transaction”) with LSB Funding LLC (the “Holder”), an affiliate of Eldridge, in which we exchanged the shares of Series E and Series F Redeemable Preferred Stock held by the Holder for shares of our common stock.

In summary, we exchanged the approximately $310 million liquidation preference of preferred stock held by the Holder into our common stock based on an exchange price of $6.16, which was equal to the 30-day volume weighted average price as of the date of the Exchange Agreement.

However, the exchange consideration paid under the Exchange Agreement was reduced by approximately 1.2 million shares, which shares were included in the Special Dividend and received by the Holder.

In connection with the transaction, on October 8, 2021, our common stockholders, including the Holder, received a special dividend in the form of 0.30 shares of our common stock for every share owned as of the September 24, 2021, special dividend record date.

The main benefit of the exchange is that it relieved our Company and our common stockholders from the expensive, compounding burden of the preferred stock dividend, improving the current capital structure.

Reduced Cost of Capital through Debt Refinancing

The Exchange Transaction discussed above prompted the major credit rating agencies, Moody’s and S&P to upgrade their credit ratings on our debt, which combined with the favorable credit markets, enabled us to complete a refinancing of our senior notes on significantly improved terms, reducing our cost of capital, bolstering our liquidity and extending the maturity of our debt.

More specifically, on October 14, 2021 we closed on an offering of $500 million of senior secured notes due 2028, bearing an interest rate of 6.250%, which we used to redeem our $435 million of 9.625% senior notes that were due to mature in 2023, with the balance being used to enhance the liquidity of our balance sheet and for general corporate purposes.

The reduction of the rate of interest on our outstanding notes by more than 300 basis points represents a meaningful reduction in our annual cash interest expense and puts us in a position to more aggressively pursue our key operating initiatives discussed above.

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.

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

As for our agricultural business, corn prices, while lower than in the second quarter of 2021, remain well above price levels for more than seven years leading up to 2021, and importantly, sit significantly higher than $4 per bushel, the level that we believe represent a key threshold as it relates to favorable 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.

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.

In addition, domestic corn demand to produce ethanol has rebounded to pre-pandemic levels as the continued roll-out of vaccines has allowed for the re-opening of the vast majority of the U.S.

economy, promoting increased mobility and a return to historical levels of gasoline consumption.

Additionally, in February 2021, 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 resulting in a tightening in the supply of nitrogen products headed into the spring planting season.

Also supporting the strength in fertilizer prices has been the significant increase in the cost of natural gas, the primary feedstock for production of ammonia, which has prompted various producers to cease operations of some facilities, particularly in Europe where natural gas prices have surged to more than $20 per MMBtu, rendering some ammonia plants uneconomical to operate.

The resultant decrease in global production of ammonia has fueled further strength in nitrogen-based fertilizer prices, which has thus far materially outstripped the impact to production costs of rising natural gas prices in the U.S.

The factors discussed above has led to continued strong pricing into the fourth quarter, which we expect to persist throughout 2021 and into 2022.

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 global supply due to rising natural gas prices, 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.

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

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 47% of our total net sales for the second quarter of 2021.

Sales of our agricultural products were approximately 40% of our total net sales for the third 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.

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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.

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

According to the October Report, farmers planted approximately 93 million acres of corn in 2021, up 3 percent compared to the 2020 planting season.

In addition, the USDA estimates the U.S.

ending stocks for the 2022 Crop will be approximately 38 million metric tons, a 12% increase from the 2021 Crop.

The UDSA also is estimating a record yield for the 2022 Crop, up approximately 3% from a year ago.

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

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

(2021 Harvest)

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(2019 Harvest)

July Report (1)

October Report (1)

Area Planted (Million acres)

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World Ending Stocks (Million metric tons)

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.

Information obtained from WASDE reports dated October 12, 2021 (“October 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 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.

The current USDA corn outlook for the U.S.

compared to the July Report is for slightly higher production, lower feed and residual use, and larger ending stocks.

From a demand perspective, corn prices , while lower than in the second quarter of 2021, remain well above prices levels for more than seven years leading up to 2021, remaining significantly higher than $4 per bushel, the level that we believe represent a key threshold as it relates to favorable farmer economics.

In addition, domestic corn demand to produce ethanol has rebounded to pre-pandemic levels as the continued roll-out of vaccines has allowed for the re-opening of the vast majority of the U.S.

economy, promoting increased mobility and a return to historical levels of gasoline consumption.

Most gasoline has 10% ethanol content.

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

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 caused the lingering problems of that event coupled with more turnaround activity in 2021 as many companies chose to delay turnarounds in 2020 as a result of the pandemic and lost production from several hurricane events in 2021.

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.

Sales of our industrial products were approximately 50% of our total net sales for the third 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 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.

Sales of our mining products were approximately 10% of our total net sales for the third quarter of 2021.

Our mining products are LDAN and AN solution, which are primarily 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.

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Three Months Ended

September 30,

Natural gas volumes (MMBtu in millions)

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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.

Additionally, continued truck driver shortages could impact our ability to fulfill customer demand.

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

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

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

Our Cherokee Facility is currently on a three-year ammonia plant Turnaround cycle completing a planned Turnaround during the third quarter of 2021 with t he next ammonia plant Turnaround planned in the third quarter of 202 4 .

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 .

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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 810,000 tons to 830,000 tons despite a 30-day Turnaround at our Cherokee Facility, which will lower ammonia production during the third quarter by approximately 15,000 tons.

For 2021, we are targeting total ammonia production of approximately 770,000 tons to 780,000 tons despite the Turnaround performed at our Cherokee Facility, which lowered ammonia production during the third quarter by approximately 21,000 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.

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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 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.

Consolidated Results of the Third Quarter of 2021

Our consolidated net sales for the third quarter of 2021 were $127.2 million compared to $74.0 million for the same period in 2020.

Our consolidated operating income for the third quarter of 2021 was $5.4 million compared to an operating loss of $9.0 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 Second Quarter

Items Affecting Comparability of Results of the Third Quarter

Selling Prices

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.

For the third quarter of 2021, average agricultural selling prices for our ammonia, UAN and HDAN increased 188%, 128% and 66%, respectively, compared to the third 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.

For the third quarter of 2021, average industrial selling prices for most of our products were also higher compared to the same period of 2020, primarily driven by the $403 per metric ton increase in the Tampa Ammonia benchmark price, as many of our industrial contracts are indexed to the Tampa Ammonia benchmark price.

Turnaround Activities (2021 only)

When a Turnaround is performed, overall results are negatively impacted.

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

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

Turnaround Expense

Estimated Lost Production

2021 Related Period

(In Thousands)

Change of Control and Special Dividend (2021 only)

As the result of the Exchange Transaction discussed above under Recent Business Developments and in Note 2, Eldridge held over 60% of our outstanding shares of common stock on the closing date of the Exchange Transaction.

As a result, a change of control (“CoC”) event occurred as defined in certain agreements, including stock-based awards and cash-based awards.

As a result, additional expense was recognized due to the CoC event.

In addition, pursuant to anti-dilutive terms included in the cash-based awards, the number of units of cash-based awards increased due to the Special Dividend, also resulting in additional expense being recognized.

In summary, we recognized approximately $5.0 million expense, of which $1.2 million is classified as cost of sales and $3.8 million is classified as SG&A.

Results of Operations

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.

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, 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 represents net sales less cost of sales.

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

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

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 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:

Gross profit (loss):

Adjusted gross profit (1)

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Turnaround expense

Recovery from settlements with certain vendors (3)

Total gross profit

Total gross profit (loss)

Selling, general and administrative expense

Other expense (income), net

Operating income

Other expense, net

Operating income (loss)

Interest expense, net

Gain on extinguishment of debt

Non-operating other expense (income), net

Benefit for income taxes

Net income (loss)

Non-operating other expense, net

Provision (benefit) for income taxes

Other information:

Gross profit percentage (4)

Gross profit (loss) percentage (3)

Adjusted gross profit percentage (3)

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

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.

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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 i ndustrial and mining p roducts, the following table indicate s key operating metrics 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)

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Tampa Ammonia Benchmark (price per metric ton)

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.

Net sales of our agricultural products increased during the third 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 lower sales volumes for UAN and ammonia caused by the Turnaround completed at our Cherokee Facility during the third quarter of 2021 and more sales out of inventory in the third quarter of 2020 as a result of higher inventory levels headed into the period.

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

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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.

As noted in the table above, we recognized a gross profit of $17.4 million for the third quarter of 2021 compared to a gross loss of $1.1 million for the same period in 2020, or an $18.5 million improvement.

Overall, our gross profit percentage was 13.7% compared to a gross loss percentage of 1.4% for the same period in 2020.

Our adjusted gross profit percentage increased to 33.8% for the third quarter of 2021 from 22.1% for the third quarter of 2020.

The increase in gross profit was primarily driven by higher sales prices for our products coupled with increased sales volume of HDAN partially offset by lower volumes of UAN, ammonia and upgraded industrial and mining products.

The improvement in gross profit was partially offset by overall higher average natural gas costs which averaged $3.71 per MMBtu for the third quarter of 2021 as compared to $1.98 per MMBtu for the third quarter of 2020 and the impact of the Turnaround completed at our Cherokee Facility as discussed above under “ Turnaround Activities”.

Selling, General and Administrative

Our SG&A expenses were $11.6 million for the third quarter of 2021, an increase of $4.5 million compared to the same period in 2020.

Non-operating Other Expense, net

Non-operating other expense for the third quarter of 2021 was $1.3 million compared to $0.2 million for the same period in 2020 or a change of $1.1 million.

This change primarily relates to the change in fair value of the embedded derivative included in the Series E Redeemable Preferred prior to its extinguishment through the completion of the Exchange Transaction discussed above under “Recent Business Developments”.

Provision (Benefit) for Income Taxes

The provision for income taxes for the third quarter of 2021 was minimal compared to a benefit for income taxes of $1.4 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 8.

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

Nine Months Ended September 30, 2021 Compared to Nine Month Ended September 30, 2020

The following table contains certain financial information:

Six Months Ended

Nine Months Ended

September 30,

(Dollars In Thousands)

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Other expense, net

Operating income

Operating income (loss)

Interest expense, net

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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

Nine Months Ended

September 30,

Product (tons sold)

Six Months Ended

Nine Months Ended

September 30,

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

Nine Months Ended

September 30,

Product (tons sold)

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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.

Agricultural product sales increased driven primarily by higher sales prices for all of our agricultural products partially offset by lower sales volumes of our products resulting from lower production, including ammonia, due to the February 2021 weather event, the completion of a Turnaround at our Cherokee Facility during the third quarter of 2021, 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.

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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 $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.

As noted in the table above, we recognized a gross profit of $60.5 million for the first nine months of 2021 compared to $20.5 million for the same period in 2020, or a $40.0 million improvement.

Overall, our gross profit percentage was 16.5% compared to 7.8% for the same period in 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.

Our adjusted gross profit percentage increased to 33.0% for the first nine months of 2021 from 25.5% for the first nine months of 2020.

The increase in gross profit was primarily driven by higher sales prices for our products coupled with an overall increase in sales volume of upgraded industrial and mining products partially offset by lower volumes of our agricultural products.

The improvement in gross profit was also partially offset by the net impact of the February weather disruption and overall higher average natural gas costs, which averaged $3.20 per MMBtu for the first nine months of 2021 as compared to $1.96 per MMBtu for the same period of 2020 and the impact of the Turnaround completed at our Cherokee Facility as discussed above under “ Turnaround Activities”.

The first nine 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 $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.

Our SG&A expenses were $28.9 million for the first nine months of 2021, an increase of $3.4 million compared to the same period in 2020.

The net increase was primarily driven by approximately $3.8 million of expense due to CoC and anti-dilutive provisions included in certain agreements as discussed above under “Change of Control and Special Dividend.”, approximately $2.3 million associated with short and long-term compensation incentives and other payroll related costs partially offset by lower professional fees of $4.0 million.

Interest Expense, net

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.

Interest expense for the first nine months of 2021 was $37.6 million compared to $38.5 million for the same period in 2020.

The decrease relates primarily to the interest expense incurred during the first nine months of 2020 associated with a litigation judgment discussed in footnote (B) of Note 6.

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 discuss ed in Note 5 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.

Non-operating other expense for the first nine months of 2021 was $2.5 million compared to non-operating income of $0.6 million for the same period in 2020 or a change of $3.1 million.

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.

The benefit for income taxes for the first nine months of 2021 was $0.2 million compared to $3.0 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.

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LIQUIDITY AND CAPITAL RESOURCES

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

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

(In Thousands)

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Net Cash Flow from Operating Activities

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 provided by operating activities was $65.5 million for first nine months of 2021 compared to $24.7 million for the same period of 2020, a change of $40.8 million.

For the first nine months of 2021, the net cash provided is the result of net income of $1.5 million plus adjustments of $51.4 million for depreciation and amortization of PP&E, other adjustments of $8.8 million less $10.0 million for a gain on extinguishment of debt, and net cash provided of $13.8 million primarily from our working capital.

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.

Net Cash Flow from Investing Activities

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 used by investing activities was $25.7 million for the first nine months of 2021 compared to $20.2 million for the same period of 2020, a change of $5.5 million.

For the first nine months 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 $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.

Net cash used by financing activities was $23.2 million for the first nine months of 2021 compared to net cash provided of $14.8 million for the same period of 2020, a change of $38.0 million.

For the first nine months of 2021, the net cash used primarily consists of payments on other long-term debt and short-term financing of $20.2 million, payments of $2.6 million for equity and debt-related cost and $0.3 million for other financing activities.

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.

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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Total long-term debt, including current portion, net

Series E and F redeemable preferred stock (1)

Series E and Series F redeemable preferred stocks (1)

Total stockholders' equity (1)

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.”

See discussion above under “Recent Business Developments” and Note 2 relating to the Exchange Transaction associated with the Series E and Series F redeemable preferred stock and debt refinancing completed in October.

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

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

As of September 30, 2021 , our Working Capital Revolver Loan was undrawn and had approximately $48.2 million of availability.

For the full year of 2021, we expect capital expenditures to be approximately $35 million to $40 million, which includes approximately $5 million for margin enhancement 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 June 30, 2021, no trigger event had occurred.

Loan Agreements and Redeemable Preferred Stock

Senior Secured Notes due 2023 – LSB has $435 million aggregate principal amount of the 9.625% Senior Secured Notes currently outstanding, as discussed in footnote (B) of Note 4.

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

As of September 30, 2021, no trigger event had occurred.

Loan Agreements

Senior Secured Notes – As discussed in Note 13, an October 14, 2021, LSB completed a private offering of $500 million in aggregate principal amount of its 6.250% Senior Secured Notes due 2028 (the “Notes”).

The Notes were issued at a price equal to 100% of their face value and pursuant to an indenture, dated as of October 14, 2021, and will mature on October 15, 2028 and rank senior in right of payment to all of our debt that is expressly subordinated in right of payment to the notes, and will rank pari passu in right of payment with all of our liabilities that are not so subordinated, including the Working Capital Revolver Loan .

Our obligations under the Notes are jointly and severally guaranteed by the subsidiary guarantors named in the Indenture on a senior secured basis.

Interest on the Notes accrues at a rate of 6.250% per annum and is payable semi-annually in arrears on May 15 and October 15 of each year, beginning on May 15, 2022, to the holders of record on the immediately preceding May 1 and October 1.

The net proceeds from the Notes were used to redeem $435 million in aggregate principal amount of the Senior Secured Notes due 2023 (the “Existing Notes”), representing all of the notes outstanding, to pay related transaction fees, expenses and premiums and, to the extent of any remaining net proceeds, for general corporate purposes.

We previously issued a conditional notice of redemption on September 29, 2021, to redeem all of the Existing Notes (the “Redemption”), conditioned on the closing of the offering of the Notes, which condition was satisfied as of October 14, 2021.

The Redemption was completed by the trustee on October 29, 2021.

Also on October 14, 2021, LSB satisfied and discharged its obligations under the indenture governing the Existing Notes by irrevocably depositing with the trustee for the Existing Notes funds sufficient to redeem th e Existing Notes in full and to pay related fees and expenses.

We are currently evaluating the impact on our financial statements as the result of the debt transaction discussed above.

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

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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 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.

Working Capital Revolver Loan – At September 30, 2021, our Working Capital Revolver Loan was undrawn and had approximately $48.2 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 .”

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.

Capital Expenditures – First Nine Months of 2021

For the first nine months of 2021, capital expenditures relating to PP&E were $26.1 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 $1.7 million during the first six months of 2021 in connection with environmental projects.

As a result, we incurred expenses of $2.6 million during the first nine months of 2021 in connection with environmental projects.

For the remainder of 2021, we expect to incur expenses ranging from $0.9 million to $1.1 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.”

See discussions above under “Recent Business Developments” and Notes 1 and 13 regarding the common stock Special 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 14.5% 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 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 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 June 30, 2021, the amount of accumulated dividends on the Series D Preferred and Series B Preferred totaled approximately $1.7 million.

As of September 30, 2021, the amount of accumulated dividends on the Series D Preferred and Series B Preferred totaled approximately $1.8 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.

The lender of our Working Capital Revolver Loan has provided LSB a consent to allow for a payment of dividends not to exceed $2 million to the holders of the Series B and Series D Preferred, if and when declared by the Board.

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.

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

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.

As of September 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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CF Industries, Inc., et al., discussed under “Other Pending, Threatened or Settled Litigation ” of Note 6.

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

Series E and Series F Redeemable Preferred - As discussed in Note 1, the Series E and Series F Redeemable Preferred that were redeemable outside of our control were classified as temporary/mezzanine equity.

These redeemable preferred stocks were recorded at fair value upon issuance, net of issuance costs or discounts.

In addition, certain embedded features included in the Series E Redeemable Preferred required bifurcation and were classified as derivative liabilities.

The carrying values of the redeemable preferred stocks were 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 would equal the redemption value as of the earliest possible redemption date by the holder (October 25, 2023).

The accretion was recorded to retained earnings.

However, during the third quarter of 2021, our redeemable preferred stocks were exchanged into our common stock as discussed in below.

As discussed in Note 2, in July 2021, we entered into the Exchange Agreement with the Holder, an affiliate of Eldridge, which Exchange Agreement was voted on and approved by our stockholders at the Special Meeting held in September 2021.

Pursuant to the terms of the Exchange Agreement, the Holder would exchange all of the shares of the Series E and Series F Redeemable Preferred into our common stock based on the Liquidation Preference and 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.

The Liquidation Preference primarily consists of $1,000 per share of Series E Redeemable Preferred plus accrued and unpaid dividends plus the participation rights value.

However, the exchange consideration paid under the Exchange Agreement would be reduced by approximately 1.2 million shares, which shares were included in the Special Dividend and received by the Holder.

On September 27, 2021, the closing of the Exchange Agreement occurred, and the Exchange Transaction was consummated.

Pursuant to the terms of the Exchange Agreement, the Holder exchanged all of the shares of the Series E and Series F Redeemable Preferred for approximately 49.1 million shares of our common stock.

The total fair value of the approximately 49.1 million shares of common stock issued was approximately $531.1 million (based on the average per share price on the date of closing).

The fair value of the common stock issued was in excess of the Ser ies E and Series F Redeemable Preferred carrying amount, net of the bifurcated embedded derivative and unamortized issuance costs, by approximately $231.8 million and is treated as a deemed dividend.

Because we were in an accumulated deficit position on the closing date, the deemed dividend was charged to capital in excess of par value .

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

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled.

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Significant judgment is applied in evaluating the need for and the magnitude of appropriate valuation allowances against deferred tax assets.

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 June 30, 2021 could change in the near term.

It is also reasonably possible that the estimates and assumptions utilized as of September 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