What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-04 compared with 2021-11-02 · 168 added, 269 removed, 165 unchanged (73% of the section changed)

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with a review of the other Items included in this Form 10-Q and our September 30, 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 March 31, 2022 condensed consolidated financial statements included elsewhere in this report.

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

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

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

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

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

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Key Operating Initiatives for 2022

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

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

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

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

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

Those initiatives are focused on, 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.

We expect our future results of operations and financial condition to benefit from following key initiatives:

Investing to improve Environmental, Health & Safety and Reliability at our Facilities to further our Progress Towards Becoming a “Best in Class” Chemical Plant Operator while Supplying our Customers with Products of the Highest Quality.

We believe that our operational progress over the past several years represents proof that high safety standards not only enable us to protect what matters, which is the well-being of our employees, but also translates into improved plant performance.

With that in mind, in 2022 we remain acutely focused on our efforts to further the progress we’ve made in creating a high performing safety culture as we advance the safety programs, we have underway and implement new ones.

Additionally, we intend to invest additional capital at all three of our facilities to further promote safe and reliable operations in order to build upon the success we have had in implementing enhanced safety programs during the last three years.

We have several initiatives currently underway focused on continuing to improve the reliability of our plants which we expect will enable us to produce greater volumes of product for sale while lowering our unit cost of production and increasing our overall profitability.

These initiatives are focused on operations excellence through enhancements in leadership at certain of our facilities, bolstering our operating procedures, leveraging the technology investments we’ve made to improve the optimization of our asset health monitoring and asset care maintenance programs.

Additionally, our product quality program continues to focus on providing products to our customers that meet our quality standards.

Continue Broadening the Distribution and Optimization of our Product Mix.

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 while also focusing our efforts to upgrade our margins through the 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.

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 .

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

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

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

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

Evaluate Acquisitions of Strategic Assets or Companies.

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

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

Even if we successfully implement the initiatives, they may not achieve the results that we expect or desire.

Over the course of 2021 we were successful in improving upon the production capacity of our plants, and we plan to continue to expand the distribution of our products by partnering with customers to take product into different markets while also focusing on opportunities to upgrade our margins through the 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 which we agreed to supply between 70,000 and 100,000 tons of nitric acid per year.

We progressively ramped the volume of product supplied to the customer over the course of 2021, and in 2022, we will recognize a full year of sales under this agreement, which we expect will put us in a sold-out position for nitric acid at our El Dorado facility and will achieve our objective of exhausting our production capacity for this product.

The initial contract term extends through 2027 and includes automatic one-year renewals, subject to certain termination rights in favor of each party.

We are targeting $10 million to $15 million of capital improvement projects for 2022 focused on margin enhancement opportunities related to our storage and distribution capabilities.

Additionally, we are evaluating opportunities to upgrade more of the ammonia we produce into higher value downstream products that could enable us to capture additional margin.

We also believe we have opportunities to increase our production volume of certain products through debottlenecking projects and intend to analyze the opportunities for potential returns from these types of investments.

Development and Implementation of a Strategy to Capitalize on Low Carbon Ammonia and Clean Energy Opportunities .

The reduction of greenhouse gas emissions, particularly related to carbon dioxide, has been, and we expect will increasingly become a global environmental priority as part of efforts to stem the harmful effects of climate change.

There is increasing evidence from a variety of industry studies to indicate that ammonia can play a significant role in making meaningful progress towards this objective.

As a result, we are currently evaluating and developing projects that could enable us to become a producer and marketer of blue and green ammonia and other derivative products.

Blue ammonia is produced using natural gas and conventional processes but includes an additional stage where the carbon dioxide emissions are captured and permanently stored in deep underground rock formations, resulting in a low carbon emission product that, we believe, can be sold at a premium to agricultural, industrial,

mining, power generation and marine customers seeking to reduce their carbon footprint and potentially capitalize on government incentives.

Green ammonia is ammonia produced using renewable energy to power electrolyzers that extract hydrogen from water, resulting in zero-carbon production of ammonia , which we believe can also be sold at a premium to a variety of customers and industries around the world .

Ammonia has continued to emerge as one of the more viable alternatives to serve as a hydrogen-based energy source for a variety of applications due to its higher energy density and ease of storage relative to hydrogen gas.

Blue and green ammonia can be used as zero carbon fuel in the maritime sector, as a carbon free fertilizer and as a coal substitute in power generation.

If ammonia were to be adopted for these and other energy needs globally, some studies have indicated that future demand could increase significantly from current levels of global annual production of ammonia.

We believe we are well-positioned to capitalize on this opportunity and become a market leader given our potential to retrofit our existing plants rather than needing to invest entirely in greenfield projects, which we believe can reduce our time to market for this product and also reduce the upfront capital expenditures necessary to enable us to produce this product, thereby enhancing the economic attractiveness for us to such investments.

Evaluate and Pursue Organic Capacity Expansion.

We are evaluating opportunities across all of our facilities to increase production capacity through the implementation of several potential debottlenecking projects.

Our initial calculations suggest that, assuming mid-market pricing assumptions for Tampa ammonia, UAN and natural gas, these projects could potentially represent significant incremental annual profitability.

Pursue Acquisitions of Strategic Assets or Companies.

We are actively engaged in evaluating and pursuing various opportunities to acquire strategic assets or companies, where we believe those acquisitions will enhance the value of the Company and provide attractive returns.

We evaluate assets and companies that can provide us with geographic expansion, extend an existing product line, add one or more new product lines, leverage our existing ammonia production capabilities, or complement our existing business lines, among other accretive opportunities.

Recent Business Developments

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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.

In connection with the transaction, on October 8, 2021, our common stockholders, including the Holder, received the Special Dividend in the form of 0.30 shares of our common stock for every share owned as of the September 24, 2021, the 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, simplifying and creating more flexibility with our capital structure.

Reduced Cost of Capital through Debt Refinancing

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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 6.25%, 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.

In February and March of 2022, we received additional credit upgrades from S&P and Moody’s, respectively, after which we completed an offering of $200 million of senior secured notes due 2028, bearing an interest rate of 6.25%.

The proceeds from this “tack on” offering in combination with the enhanced liquidity we attained through our October 2021 offering along with our current level of strong cash flow provide us with ample capital for use in pursuing and investing in the Key Operating Initiatives summarized above.

Continued Improvement in Product Sales

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 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.

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.

Selling prices for all of our major products continued to increase during the first quarter of 2022 as compared to the same quarter of 2021 driven by a combination of supply and demand factors.

The strong corn prices over the past year have been driven, in part, by a rebound in the production of ethanol, a gasoline additive that represents approximately 40% of total U.S.

corn use annually, as miles driven have returned to near pre-pandemic levels.

Also supporting the strong corn pricing over the past year has been Chinese demand for corn for use as feed for swine as part of the nation’s efforts to rebuild its swine production in the wake of a virus that dramatically reduced its swine population several years ago.

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

Globally, corn supplies have been constrained by drought conditions in South America and the Western U.S., which has served to further bolster corn prices.

Early forecasts point to U.S.

acreage to be planted in the 2022-2023 planting season to be approximately 90 million acres, modestly lower than the 2021-2022 estimate of 93.4 million acres, but still at a very healthy level to support strong demand for fertilizers.

In addition to strong corn pricing, which has prompted farmers to increase fertilizer purchases to maximize yields, a series of supply related factors that unfolded over the course of 2021 have served to create a global shortage of ammonia, driving the strong increase in the prices for nitrogen products that has persisted into 2022.

Constraints to ammonia production began in February 2021 as winter storm Uri and the resultant severe cold weather experienced in many areas of the U.S.

caused many nitrogen producers to idle their plants resulting in a tightening in the supply of nitrogen products headed into the spring planting season.

Constraining supply further, during the third quarter of 2021 a number of ammonia facilities underwent turnarounds that were originally scheduled for third quarter of 2020 but were postponed due to the COVID-19 pandemic.

Additionally, in late August, Hurricane Ida, a Category 4 storm caused production along the U.S.

Gulf coast to be shut down for a period of time, further reducing production.

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 had surged to more than $30 per MM Btu by late 2021, and through the first quarter of 2022 averaged $33 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 have thus far materially outstripped the impact to production costs of rising natural gas prices in the U.S.

The factors discussed above have led to continued strong pricing into the first quarter of 2022, which we expect to support continued favorable pricing levels over the balance of the year.

These factors combined to serve as the foundation for the global ammonia market dynamic that our industry is now experiencing thus far in 2022, in which demand exceeds available supply.

Further contributing to increased fertilizer prices has been the impact of the Russian invasion of Ukraine.

Ukraine is one of the world’s largest exporters of corn and the current unstable geopolitical situation is expected to disrupt the nation’s corn production and exports in 2022 and 2023;

a concern that appears to be reflected in corn futures prices which currently sit at their highest prices in recent years.

With respect to global nitrogen supply, Russia has historically been one of the top exporters of ammonia worldwide.

Current economic sanctions against Russia by numerous countries around the world have further reduced the supply of ammonia flowing into the global fertilizer market, resulting in rising prices.

Finally, the war in Ukraine has resulted in continued high prices for natural gas in Europe, which imports more than 40% of its gas from Russia, making ammonia production even more uneconomical for European ammonia producers.

On top of the dynamics already resulting in elevated nitrogen prices entering 2022, Russia’s aggression toward Ukraine is likely to have impacts on the global ammonia market far beyond when the conflict ends.

As for our industrial products, selling prices have increased as the supply of ammonia remains tight due to the aforementioned factors.

As a result, the Tampa Ammonia benchmark price remains at record high levels, which has translated into higher selling prices for our products as many of our industrial contracts are indexed to this benchmark price.

Demand trends for the industrial products we sell, primarily nitric acid and ammonia, have remained robust despite disruptions to certain end markets, such as auto manufacturing which has been constrained due to a shortage of microprocessors, as activity in other markets, such as homebuilding and power generation has remained strong.

In addition, our sales of nitric acid increased steadily throughout 2021 pursuant to the new long-term nitric acid supply contract discussed above.

Demand for our products from mining end-markets continues to improve as quarry and construction activity has been elevated due to robust levels of residential, commercial and civil infrastructure buildout along with strong demand for precious metals, including expectations for rising copper production to support the growing domestic production of electric vehicles.

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

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Supply and Demand

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.

The price at which our fertilizer 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.

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

The March 2022 USDA annual Prospective Planting report currently indicates farmers intend to plant 89.5 million acres of corn in 2022, down 4% from 202 1, and certain industry sources maintain an estimate of approximately 90 million corn acres .

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.

ending stocks for the 2022 Crop as noted in the table below, will be approximately 3 7 million metric tons, a 16.6 % increase from the 2021 Crop .

The UDSA also is estimating a record yield for the 2022 Crop, up approximately 3.3 % from a year ago .

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

The following April 2022 estimates are associated with the corn market:

(2021 Harvest)

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(2019 Harvest)

October Report (1)

April Report (1)

Area Planted (Million acres)

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World Ending Stocks (Million metric tons)

Information obtained from WASDE reports dated October 12, 2021 (“October 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 April 12, 2022 (“April 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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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.

did not change production, food, seed and industrial use and unchanged ending stocks.

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.

The Biden administration announced t he Environmental Protection Agency would issue an emergency waiver from the Clean Air Act that will permit the sale of gasoline that is 15 percent ethanol, 5 percent more than the typical blend, from June 1 to Sept.

Ethanol is commonly made from corn and ethanol production is the largest user of 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 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 50% of our total net sales for the third quarter of 2021.

corn, currently representing approximately 40% of total U.S.

Industrial and Mining Products

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 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.

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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Three Months Ended

September 30,

Natural gas volumes (MMBtu in millions)

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Costs for transporting nitrogen-based products can be significant relative to their selling price.

For example, ammonia is a hazardous gas at ambient temperatures and must be transported in specialized equipment, which is more expensive than other forms of nitrogen fertilizers.

In recent years, a significant amount of the ammonia consumed annually in the U.S.

was imported.

Therefore, nitrogen fertilizers prices in the U.S.

are influenced by the cost to transport product from exporting countries, giving domestic producers who transport shorter distances an advantage.

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

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

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

We continue to evaluate the recent rising costs of freight domestically.

As a result of increases in demand for available rail, truck and barge options to transport product, 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.

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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 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 .

Our Cherokee Facility is currently on a three-year ammonia plant Turnaround cycle completing with t he next ammonia plant Turnaround planned in the third quarter of 2024.

Our El Dorado and Pryor Facilities are both currently scheduled for their next ammonia plant Turnarounds during the third quarter of 2022.

Following those Turnarounds, they will be on a three-year and two-year ammonia plant Turnaround cycle, respectively.

Ammonia Production

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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 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.

For 2022, we are targeting total ammonia production of approximately 770,000 tons to 790,000 tons despite Turnarounds at our Pryor and El Dorado Facilities, which will lower ammonia production during the third quarter by approximately 55,000 to 65,000 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 2022.

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

Consolidated Results of the Third Quarter of 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.

Consolidated Results of the First Quarter of 2022

Our consolidated net sales for the first quarter of 2022 were $199.0 million compared to $98.1 million for the same period in 2021.

Our consolidated operating income for the first quarter of 2022 was $80.0 million compared to an operating loss of $0.5 million for the same period in 2021.

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

Items Affecting Comparability of Results of the Third Quarter

Items Affecting Comparability of Results of the First Quarter

Selling Prices

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 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.

For the first quarter of 2022, average selling prices for our key products increased approximately 85% to more than 200% compared to the first quarter of 2021.

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

For the first quarter of 2022, average industrial selling prices for most of our products were also higher compared to the same period of 2021, primarily driven by the $858 per metric ton increase in the Tampa Ammonia benchmark price, as many of our industrial contracts are indexed to the Tampa Ammonia benchmark price.

Settlement of Natural Gas Contracts

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 was 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 2021 cold weather event.

Results of Operations

The following Results of Operations should be read in conjunction with our condensed consolidated financial statements for the three and nine months ended September 30, 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 months ended March 31, 2022 and 2021 and accompanying notes and the discussions under “Overview” and “Liquidity and Capital Resources” included in this MD&A.

We present the following information about our results of operations.

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

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

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

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

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

The following table contains certain financial information:

Three Months Ended

September 30,

(Dollars In Thousands)

Agricultural products

Industrial and mining products

AN & Nitric Acid

Urea ammonium nitrate (UAN)

Total net sales

Gross profit (loss):

Gross profit:

Adjusted gross profit (1)

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Turnaround expense

Total gross profit (loss)

Total gross profit

Selling, general and administrative expense

Other expense, net

Other income, net

Operating income (loss)

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Non-operating other expense, net

Provision (benefit) for income taxes

Provision for income taxes

Net income (loss)

Other information:

Gross profit (loss) percentage (3)

Gross profit percentage (3)

Adjusted gross profit percentage (3)

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As a percentage of the total net sales.

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

The following tables provide key operating metrics for the fertilizer and major industrial and mining products:

Three Months Ended

September 30,

Product (tons sold)

AN & Nitric Acid

Urea ammonium nitrate (UAN)

Three 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:

AN & Nitric Acid

Urea ammonium nitrate (UAN)

Three Months Ended

September 30,

Product (tons sold)

AN, Nitric Acid and Other

Tampa Ammonia Benchmark (price per metric ton)

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.

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 $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.

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

The following table contains certain financial information:

Nine Months Ended

September 30,

(Dollars In Thousands)

Agricultural products

Industrial and mining products

Total net sales

Gross profit:

Adjusted gross profit by market (1)

Depreciation and amortization (2)

Turnaround expense

Recovery from settlements with certain vendors

Total gross profit

Selling, general and administrative expense

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)

Other information:

Gross profit 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 amount classified as cost of sales.

As a percentage of the total net sales.

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

Nine Months Ended

September 30,

Product (tons sold)

Nine Months Ended

September 30,

Gross Average Selling Prices (price per ton)

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

Nine Months Ended

September 30,

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 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.

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 $274 per ton higher compared to the same period in 2020.

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.

Average Benchmark Prices (price per ton)

Tampa Ammonia Benchmark

UAN Southern Plains

Net sales of our primary products increased during the first quarter of 2022 compared to the prior year period driven by stronger pricing for all of our products.

Partially offsetting the benefit of stronger pricing was lower sales volumes for fertilizer products including UAN, AN and ammonia caused by wet weather delaying the planting season.

AN sales were also impacted by a shift in product mix as we optimize our sales of nitric acid.

Historically, we have built inventory of HDAN used for fertilizer in the second half of the year, to sell in season, during the first six months of the following year.

Due to a shift in product mix to nitric acid volumes beginning in the first quarter of 2021, which are more ratable, we did not have significant inventory build of AN over the latter half of 2021 to sell during the fertilizer season in 2022.

Demand for our industrial and mining products has been strong as quarry and construction activity has been elevated due to robust levels of residential, commercial and civil infrastructure buildout along with strong demand for precious metals, including expectations for rising copper production to support the growing domestic production of electric vehicles.

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 $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.

As noted in the table above, we recognized a gross profit of $90.7 million for the first quarter of 2022 compared $8.1 million for the same period in 2022, or an $82.6 million improvement.

Overall, our gross profit percentage was 45.6% compared to 8.2% for the same period in 2021.

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.

Our adjusted gross profit percentage increased to 55.5% for the first quarter of 2022 from 25.4% for the first quarter of 2021.

The increase in gross profit was primarily driven by higher sales prices for our products partially offset by lower volumes of our agricultural products.

Also, during the first quarter of 2021 gross profit was negatively impact by the February 2021 weather disruption, winter storm Uri.

The improvement in gross profit was also partially offset by overall higher average natural gas costs, which averaged $4.74 per MMBtu for 2022 as compared to $3.15 per MMBtu for 2021.

Selling, General and Administrative

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 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 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 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 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.

Our SG&A expenses were $10.9 million for the first quarter of 2022, an increase of $2.1 million compared to the same period in 2021.

The net increase was primarily driven by approximately $2.2 million of expense relating to nonrecurring transaction fees partially offset by lower long-term and short-term incentive compensation incentives.

Interest Expense

Interest expense for the first quarter of 2022 was $10.0 million compared to $12.4 million for the same period of 2021.

The decrease relates primarily to lower interest expense incurred from the new senior secured notes held during the first quarter of 2022 which carry an interest rate of 6.25% compared to the same period in 2021 which the old senior secured notes interest rate was 9.625%.

Provision for Income Taxes

The provision for income taxes for the first quarter of 2022 was $11.1 million and was minimal for the same period in 2021.

The resulting effective tax rate for the first quarter of 2022 was 15.9%.

For the first quarters of 2022 and 2021, the effective tax rate is less than the statutory rate primarily due to the impact of the valuation allowance.

Also see discussion in Note 7.

LIQUIDITY AND CAPITAL RESOURCES

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

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

(In Thousands)

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Net Cash Flow from Operating Activities

Net cash provided by operating activities was $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 provided by operating activities was $85.5 million for first quarter of 2022 compared to $12.7 million for the same period of 2021, a change of $72.8 million.

For the first quarter of 2022, the net cash provided is the result of a net income of $58.8 million plus adjustments of $17.2 million for depreciation and amortization of PP&E, $10.8 million for deferred taxes and other adjustments of $1.7 million and net cash used of $3.0 million primarily from our working capital.

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.

Net Cash Flow from Investing Activities

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 used by investing activities was $97.5 million for the first quarter 2022 compared to $5.9 million for the same period of 2021, a change of $91.6 million.

For the first quarters of 2022, the net cash used primarily relates purchases of short-term investments of $89.3 million and expenditures for PP&E.

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

Net Cash Flow from 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,

Net cash provided by financing activities was $184.2 million for the first quarter of 2022 compared to net cash used of $8.8 million for the same period of 2021, a change of $193.0 million.

For the first quarter of 2022, the net cash provided primarily consists of proceeds of $200 million from the New Notes partially offset by payments on other long-term debt and short-term financing of $9.7 million, payments of $4.1 million for equity and debt-related cost and $2.0 million for other financing activities.

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

C apitalization

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

(In Millions)

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Secured Financing due 2023

Secured Loan Agreement due 2025

Secured Financing due 2025

Unsecured Loan Agreement due 2022

Secured Promissory Note due 2021

Secured Loan Agreement due 2025

Unamortized discount and debt issuance costs

Total long-term debt, including current portion, net

Series E and Series F redeemable preferred stocks (1)

Total stockholders' equity

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.

See discussion contained in Note 4.

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

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.

As of March 31, 2022, our Working Capital Revolver Loan was undrawn and had approximately $62.4 million of availability.

For the full year of 2022, we expect capital expenditures to be approximately $65 million, which includes approximately $15 million for margin enhancement projects.

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

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

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

As of March 31, 2022, 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.

Senior Secured Notes due 2028 – LSB has $700 million aggregate principal amount of the 6.25% Senior Secured Notes currently outstanding, including the $200 million associated with the New Notes as discussed in footnote (B) of Note 5.

Interest is to be paid semiannually on May 15 th and October 15 th , maturing October 15, 2028.

As a result of the financing transactions, our interest expense has increased and is expected to increase compared to 2021.

The proceeds from the issuance of the New Notes were used to pay related transaction expenses, with the remainder intended to be used to pursue strategic acquisition opportunities, to fund organic growth, and for general corporate purposes.

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

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

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

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

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

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

Working Capital Revolver Loan – At September 30, 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.

Working Capital Revolver Loan – At March 31, 2022, our Working Capital Revolver Loan was undrawn and had approximately $62.4 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 .”

Capital Expenditures – First Nine Months of 2021

For the first nine months of 2021, capital expenditures relating to PP&E were $26.1 million.

Capital Expenditures – First Quarter of 2022

For the first quarter of 2022, capital expenditures relating to PP&E were $8.3 million.

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

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

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

As a result, our expenses were minimal during the first quarter of 2022 in connection with environmental projects.

For the remainder of 2022, we expect to incur expenses ranging from $0.7 million to $0.9 million in connection with additional environmental projects.

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

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 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:

$0.06 per share on our outstanding non-redeemable Series D Preferred for an aggregate dividend of $60,000, and

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

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.

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

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

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

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

In addition, the amount and timing of sales to the agricultural markets depend upon weather conditions and other circumstances beyond our control.

In addition, the amount and timing of sales to the fertilizer markets depend upon weather conditions and other circumstances beyond our control.

Performance and Payment Bonds

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

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.

As of March 31, 2022, we have agreed to indemnify the sureties for payments , up to $9.7 million, ma de by them in respect of such bonds.

These insurance bonds are expected to expire or be renewed later in 2022.

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See “Critical Accounting Policies and Estimates,” Item 7 of our 2021 Form 10-K.

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

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

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.

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

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

It is also reasonably possible that the estimates and assumptions utilized as of March 31, 2022 could change in the near term.

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

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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