Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended December 31, 2004

or

For the transition period from              to             

Commission File Number 0-19260

RENTECH, INC.

(Exact name of registrant in its charter)

1331 17th Street, Suite 720

Denver, Colorado 80202

(Address of principal executive offices)

(303) 298-8008

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

The number of shares of the Registrant’s common stock outstanding as of February 7, 2005 was 92,797,607.

Table of Contents

RENTECH, INC.

Form 10-Q

First Quarter ended December 31, 2004

Table of Contents

- 2 -

Table of Contents

RENTECH, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Consolidated Balance Sheets

(Continued on following page)

See notes to consolidated financial statements.

- 3 -

Table of Contents

RENTECH, INC.

Consolidated Balance Sheets

(Continued from previous page)

See notes to consolidated financial statements.

- 4 -

Table of Contents

RENTECH, INC.

Consolidated Statements of Operations

(Unaudited)

See notes to consolidated financial statements.

- 5 -

Table of Contents

RENTECH, INC.

Consolidated Statement of Stockholders’ Equity

(Unaudited)

See notes to consolidated financial statements.

- 6 -

Table of Contents

RENTECH, INC.

Consolidated Statements of Cash Flows

(Unaudited)

(Continued on following page)

See notes to consolidated financial statements.

- 7 -

Table of Contents

RENTECH, INC.

Consolidated Statements of Cash Flows

(Unaudited)

(Continued from previous page)

For the three months ended December 31, 2004 and 2003, the Company made cash interest payments of $142,314 and $113,028. Excluded from the statements of cash flows for the three months ended December 31, 2004 and 2003 were the effects of certain non-cash investing and financing activities as follows:

See notes to consolidated financial statements.

- 8 -

Table of Contents

RENTECH, INC.

Notes to Consolidated Financial Statements

December 31, 2004 (Unaudited)

Note 1 – Description of Business and Basis of Presentation

Description of Business

Rentech, Inc. (“Rentech”, “we”, or “the Company”) was incorporated in 1981 to develop and market processes, using Fischer-Tropsch technology (“the Rentech Process”), for conversion of synthesis gas derived from low-value, carbon-bearing solids or gases into high-value hydrocarbons, including high-grade diesel fuel, naphthas and waxes. Our business historically has focused on research and development of our Fischer-Tropsch (F-T) technology, and licensing it to third parties. During fiscal 2004 we expanded our original business strategy of licensing our technology to include the deployment of our Rentech Process in existing domestic fertilizer plants that we may acquire and in other selected domestic and international projects. In the United States, we are planning to acquire interests in existing nitrogen fertilizer plants currently using natural gas as feedstock. We plan to convert these plants to use coal or refinery residues, which are readily available and less expensive as feedstocks, and to add our Rentech Process to produce Fischer-Tropsch liquid hydrocarbon products in addition to the nitrogen fertilizers already being produced by the plants. We believe that converting domestic plants in this manner would enable us to utilize our technology in a commercial scale plant, and, we believe, greatly improve our financial results, as well as deploy our technology more rapidly in less risky circumstances than in international projects. We are planning to initially implement this strategy by purchasing Royster-Clark Nitrogen, Inc., which owns an 830 ton per day nitrogen fertilizer plant in East Dubuque, Illinois (East Dubuque plant). On December 10, 2004, we entered into a stock purchase agreement with Royster-Clark, Inc. for us to purchase all the outstanding stock of Royster-Clark Nitrogen. The purchase price for the stock is $50 million. We are also to pay up to $13 million to acquire the net working capital of the business, consisting of current assets including accounts receivable and inventories, and current liabilities including accounts payable and accrued liabilities. We are attempting to complete arrangements for equity and debt financing to consummate the purchase. The closing is currently scheduled to occur in February 2005.

In addition to our Fischer-Tropsch alternative fuels segment, we own interests in three subsidiaries. These are our paint segment conducted through OKON, Inc., our oil and gas field services segment conducted through Petroleum Mud Logging, Inc., and the industrial automation systems segment conducted by REN Corporation, of which we own 56%.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited consolidated financial statements should be read in conjunction with the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2004. Operating results for the three months ended December 31, 2004 are not necessarily indicative of the results that may be realized for the full fiscal year ending September 30, 2005.

Management’s Plans

From the Company’s inception on December 18, 1981 through December 31, 2004, the Company has incurred losses in the amount of $49,901,304. For the three months ended December 31, 2004, the Company recognized a $2,251,565 net loss. If the Company does not obtain additional financing and operate at a profit, the Company will be unable to continue its operations at the present level or to complete its business plans.

The Company has been successful in the past in obtaining debt and equity financing. For the years ended September 30, 2004 and 2003, the Company received net cash proceeds from the issuance of common stock of $4,706,951 and $1,577,100. For the years ended September 30, 2004 and 2003, the Company received cash proceeds from long-term debt and long-term convertible debt to stockholders of $565,000 and $2,505,000.

Historically, we have relied for working capital upon private placements of our equity represented by our common stock or securities convertible into common stock, supplemented by debt financing. On March 19, 2004, our shareholders approved an amendment to our articles of incorporation to increase the number of authorized shares of common stock from 100,000,000 to

- 9 -

Table of Contents

RENTECH, INC.

Notes to Consolidated Financial Statements

December 31, 2004 (Unaudited)

Note 1 – Description of Business and Basis of Presentation (continued)

Management’s Plans (continued)

150,000,000. We have recommended to shareholders in our proxy statement dated January 24, 2005 and filed with the Securities and Exchange Commission that shareholders approve an increase in the authorized shares to 250,000,000 shares of common stock. The annual meeting of shareholders, at which the vote will occur, is scheduled for March 17, 2005. To achieve our objectives as planned for fiscal year 2005, we will need substantial amounts of capital that we do not have now. We expect to incur additional indebtedness and to issue additional shares of common stock, and we may issue shares of convertible preferred stock, stock purchase warrants or other securities convertible into common stock to fund our working capital requirements, the acquisition of the East Dubuque plant, and our planned retrofit of the plant to use coal feedstock and to add our Rentech Process. In addition, we are seeking a buyer to purchase our one-half interest in the assets of Sand Creek Energy, LLC. We are also offering to sell OKON, Inc. through which we conduct our paint business. We believe that our current available cash, revenues from operations, and the potential sale of assets will not be sufficient to meet our cash operating requirements through the fiscal year ended September 30, 2005 without additional debt and equity financing. Obtaining financing through placements of additional securities or loans depends upon obtaining investors who are willing to invest in our equity securities or debt instruments.

As of December 31, 2004, we have incurred $1,203,061 of deferred acquisition costs related to the purchase of the East Dubuque plant, and approximately $129,000 of additional deferred acquisition costs subsequent to December 31, 2004 through the date of this filing. The East Dubuque plant currently produces ammonia, urea ammonium nitrate (UAN), nitric acid and urea, among other fertilizer products. We intend to continue operating the plant for the production of nitrogen fertilizer products while we add a commercially available clean coal gasification process that converts the plant to use synthesis gas derived from coal, instead of more expensive natural gas. In addition, we plan to add an additional plant to use our Rentech Process to produce liquid hydrocarbon products from the excess synthesis gas produced from the coal gasification process.

Note 2 – Summary of Certain Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Net Loss Per Common Share

Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (“SFAS No. 128”) provides for the calculation of “Basic” and “Diluted” earnings per share. Basic earnings per share includes no dilution and is computed by dividing income (loss) applicable to common stock by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted earnings per share.

For the three months ended December 31, 2004 and 2003, stock options for a total of 3,348,500 and 4,752,766 shares, stock warrants for a total of 5,054,113 and 4,988,405 shares and total long-term convertible debt which is convertible into shares of common stock of 2,750,903 and 6,707,062 shares were not included in the computation of diluted loss per share because their effect was anti-dilutive.

Stock Option Plans

The Company applies Accounting Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued to Employees”, and related interpretations in accounting for all stock option plans. Under APB Opinion 25, compensation cost is recognized for stock options issued to employees when the exercise price of the Company’s stock options granted is less than the market price

- 10 -

Table of Contents

RENTECH, INC.

Notes to Consolidated Financial Statements

December 31, 2004 (Unaudited)

Note 2 – Summary of Certain Significant Accounting Policies (continued)

Stock Option Plans (continued)

of the underlying common stock on the date of grant. Statement of Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” requires the Company to provide pro forma information regarding net loss as if compensation cost for the Company’s stock options plans had been determined in accordance with the fair value based method prescribed in SFAS No. 123. To provide the required pro forma information, the Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model. The Company applies Financial Accounting Standards Board (“FASB”) Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation (“FIN 44”). FIN 44 clarifies the application of APB Opinion 25 for certain issues related to stock issued to employees. Under the accounting provisions for SFAS No. 123, the Company’s net loss and net loss per share would have been increased by the pro forma amounts indicated below:

Minority Interest

Minority interests in the net assets of subsidiaries are reflected separately in the consolidated financial statements below current liabilities. Minority interests in the net loss of a subsidiary are reflected as an addition to consolidated net loss, reduced by the excess of any losses applicable to the minority interest in a subsidiary that exceed the minority interest in the equity capital of the subsidiary. The Company accounts for the excess loss in accordance with Accounting Research Bulletin No. 51, “Consolidated Financial Statements” (“ARB 51”) as the minority interest shareholders have no obligation to fund such losses. As of December 31, 2004, the Company had a cumulative minority interest excess loss of $195,604, including $60,685 in the three months ended December 31, 2004, which was charged against the majority interest on the Consolidated Statement of Operations, reducing the total minority interest expense to $0 for the three months ended December 31, 2004.

Note 3 - Inventories

Inventories consist of the following:

Note 4 – Investment in Advanced Technology Companies

On May 29, 1998, the Company acquired a 10% ownership in INICA, Inc. for $3,079,107. During the fourth quarter of fiscal 2003, the Company exchanged its 10% ownership in INICA for a 2.28% ownership in the common stock of Global Solar Energy, Inc. and a 5.76% ownership in the common stock of Infinite Power Solutions, Inc. Global Solar Energy manufactures

- 11 -

Table of Contents

RENTECH, INC.

Notes to Consolidated Financial Statements

December 31, 2004 (Unaudited)

Note 4 – Investment in Advanced Technology Companies (continued)

and markets flexible photovoltaic (PV) modules, while Infinite Power Solutions is developing micro-miniature thin-film rechargeable batteries. As of September 30, 2004, the Company completed an assessment of the value of its minority ownership interests in Global Solar Energy and Infinite Power Solutions based upon currently available information. As a result of that assessment, the Company recorded an impairment of investment of $588,500 and the investment in the two advanced technology companies was recorded at the estimated net realizable value of $611,500. The assessment that the Company performed was based upon estimates. The actual value that is realized from these investments may be more or less than $611,500. The Company will recognize gains or losses on these investments, if any, when realized. As of December 31, 2004, the Company reassessed the value of its minority ownership interests and determined no further impairment was necessary.

Note 5 – Debt

On September 27, 2002, the Company entered into a $500,000 business line of credit agreement with the Bank of Denver. The line of credit was due on demand. On March 4, 2004, the Company and the Bank of Denver signed a change in terms agreement converting the line of credit to an installment loan under which the maturity date of the line was extended from March 1, 2004 to September 1, 2007, at which time all unpaid principal and interest is due. The line of credit accrued interest at the Bank of Denver Base Rate plus 0.5% (6.5% at December 31, 2004), and was payable monthly through October 1, 2004, at which time the line of credit converted to an installment loan which bears interest at the same rate. The remaining balance is being amortized over 36 months beginning October 1, 2004. The installment loan is collateralized by all inventory, accounts receivable and equipment of Rentech. In addition, the installment loan is secured by a mortgage against the building in which our research and development laboratory is housed, and 1,308,500 shares of the Company’s common stock consisting of shares owned by five officers of the Company. The balance of this installment loan at December 31, 2004 was $462,718.

Under date of November 19, 2004, the Company issued three unsecured promissory notes for loans totaling $850,000. The Company paid $61,528 in debt issuance costs related to the promissory notes. The promissory notes mature November 18, 2005, and bear annual interest between 8.5% and 10.0% with principal and interest payable on November 18, 2005. In connection with the promissory notes, the Company issued stock purchase warrants for the purchase of 745,613 shares of common stock and entered into Registration Rights Agreements providing for the registration of the shares of common stock underlying the warrants. The warrants have an exercise price of $1.14 per share of common stock, and may be exercised for three years ending on November 18, 2007. The warrants were valued using the Black-Scholes option-pricing model, which resulted in debt issuance charges of $288,154. In the event of default on the promissory notes, the Company is required to issue similar warrants to the investors on the same terms as the original warrants for the purchase of 186,404 additional shares of its common stock at $1.14 per share. The Company paid a placement agent $42,500 for their services related to these promissory notes, which was recorded as debt issuance costs. In addition, the Company issued the placement agent 37,280 warrants to purchase the common stock of the Company. The warrants are exercisable at $1.14 per share. The warrants were valued using the Black-Scholes option-pricing model, which resulted in debt issuance costs of $14,407. As of December 31, 2004, the balance of the promissory notes, including principal and interest, was $601,801, which is shown net of unamortized debt issuance costs of $254,996.

Under date of November 19, 2004, the Company issued two unsecured promissory notes totaling $1,000,000. In connection with the promissory notes, the Company issued stock purchase warrants for the purchase of 877,192 shares of common stock and entered into Registration Rights Agreements providing for the registration of the shares of common stock underlying the warrants. The promissory notes mature November 18, 2005, and bear annual interest of 8.5% with principal and interest payable on November 18, 2005. The warrants have an exercise price of $1.14 per share of common stock, and may be exercised for three years ending on November 18, 2007. The warrants were valued using the Black-Scholes option-pricing model, which resulted in debt issuance charges of $339,005. In the event of default on the promissory notes, the Company is required to issue similar warrants to the investor on the same terms as the original warrants for the purchase 109,649 additional shares of its common stock at $1.14 per share, and to allow the conversion of the unpaid balances of the notes into common stock at the rate of $1.14 per share. As of December 31, 2004, the balance of the promissory notes, including principal and interest, was $703,730, which is shown net of unamortized debt issuance costs of $299,996.

- 12 -

Table of Contents

RENTECH, INC.

Notes to Consolidated Financial Statements

December 31, 2004 (Unaudited)

Note 6 – Long-Term Convertible Debt

On February 25, 2002, the Company issued four long-term convertible notes totaling $2,250,000 to existing stockholders of the Company, which accrued interest at 8.5% and were due in full on February 25, 2006. The Company recorded $132,461 in debt issuance costs related to these notes. Monthly payments on the notes of $19,526 commenced on April 1, 2002. The notes were convertible into no more than 4,500,000 registered shares of the Company’s common stock, less two shares for every dollar of principal reduction of the notes paid in the form of cash. The notes allowed the Lenders to convert part or all of the principal balance into common stock at a conversion price of $0.50 per share if the market price of the common stock on the conversion date was $0.50 per share or higher. Starting on the first day of the thirteenth calendar month following the date of the notes, and continuing on the first day of each succeeding month until the notes were paid in full, principal in the amount of one-thirty-sixth of the declining principal balance of the notes automatically converts into the Company’s common stock at a conversion price of $0.50 per share. The notes began to automatically convert into the Company’s common stock on March 1, 2003. On December 29, 2004, three of the convertible notes were converted into 1,629,929 shares of the Company’s common stock. The balance of the remaining convertible note at December 31, 2004 was $214,970. Subsequent to December 31, 2004, the remaining long-term convertible note was converted into 424,332 shares of the Company’s common stock.

On August 28, 2003, the Company entered into two convertible notes totaling $865,000 with existing stockholders of the Company, of which, $550,000 was received in fiscal 2003 and $315,000 was received during the three months ended December 31, 2003. The notes bear interest at 10% and mature on August 28, 2006, with all unpaid principal and interest due at that time. Interest-only payments are due on the first day of each month. The market price of the Company’s common stock was greater than the conversion rate included in the notes. As a result, the Company recorded $187,000 in deferred financing charges related to these notes during the three months ended December 31, 2003. The notes are convertible at any time in whole or in part into registered common stock of the Company at a conversion rate of $0.45 per share. The balance of these convertible notes at December 31, 2004 was $754,206, which is shown net of unamortized deferred financing charges of $110,794.

Note 7 – Lines of Credit

On February 25, 2002, the Company entered into a $1,000,000 business line of credit agreement with Premier Bank through our 56% owned subsidiary, REN. The line of credit matures on May 1, 2005, at which time all unpaid principal and interest is due. The line of credit bears interest at prime plus 1.5% (6.75% at December 31, 2004), and interest is accrued and payable monthly. Payments of principal are tied to the receipt of accounts receivable by REN. On February 27, 2002, the Company purchased a $500,000 certificate of deposit with Premier Bank, to be used as collateral on the line of credit. On September 29, 2004, the Company entered into an amended agreement with Premier Bank whereby the Company redeemed the $500,000 certificate of deposit and applied it against the outstanding balance of the loan. In addition, the available line of credit amount was reduced from $1,000,000 to $500,000. The line of credit is collateralized by the first deed of trust on the real property of Petroleum Mud Logging and REN. The line of credit is guaranteed by Rentech, PML and the minority shareholder of REN. The balance of this line of credit at December 31, 2004 was $499,218.

On September 17, 2004, the Company entered into a Senior Secured Note with Mitchell Technology Investments, a California general partnership (“Mitchell”) that provides Rentech with a credit facility of up to $2,000,000. In connection with the Senior Secured Note, Rentech issued Mitchell a stock purchase warrant for the purchase of 1,250,000 shares of common stock and entered into a Registration Rights Agreement with Mitchell providing for the registration of the shares of common stock underlying the warrant. The Senior Secured Note matures March 20, 2005, and bears annual interest at 9%, payable monthly, commencing November 1, 2004. The Company recorded $216,376 in debt issuance costs related to the note. The note is secured by a junior deed of trust against Rentech’s laboratory building in Denver, Colorado and by a first priority security interest in the intellectual property of Rentech and all of the assets of Rentech Services Corporation, a wholly-owned subsidiary. Payment of the note is also secured by guarantees of Rentech Services Corporation, Rentech Development Corporation, Petroleum Mud Logging, Inc. and OKON, Inc., all of which are wholly-owned subsidiaries of Rentech. As of December 31, 2004, the balance of the credit facility was $1,438,645, which is shown net of unamortized debt issuance costs related to the warrants of $211,355.

The warrants issued to Mitchell have an exercise price of $1.14 per share of common stock, subject to adjustments, and may be exercised for five years ending on September 16, 2009. If Rentech’s planned conversion of the Royster-Clark nitrogen fertilizer

- 13 -

Table of Contents

RENTECH, INC.

Notes to Consolidated Financial Statements

December 31, 2004 (Unaudited)

Note 7 – Lines of Credit (continued)

plant in East Dubuque, Illinois, which Rentech intends to acquire, to use coal as a feedstock rather than natural gas is not completed, and Rentech does not commence commercial operations of the reconfigured plant, by March 31, 2008, the term of the warrant will be extended for a period equal to the delay and the exercise price will be reduced by one-half. The warrants were valued using the Black-Scholes option-pricing model, which resulted in offering cost charges of $492,271 recorded as debt issuance costs. The number of shares of common stock for which the warrant may be exercised will be increased by 12,500 shares for each 30-day period if the registration statement required by the terms of the Registration Rights Agreement is not timely filed or thereafter declared effective. In that event, Rentech must also issue additional warrants to Mitchell for the purchase of additional shares of common stock equal to 50,000 shares for each 30-day period of delay. Jefferies & Company, Inc. (“Jefferies”) acted as financial advisor and sole placement agent with the structuring, issuance and sale of the debt securities for the Company. The Company paid Jefferies $80,468 for its services, which was recorded as debt issuance costs. In addition, the Company issued Jefferies 50,000 warrants to purchase the common stock of Rentech. The warrants are exercisable at $1.14 per share. The warrants were valued using the Black-Scholes option-pricing model, which resulted in offering cost charges of $19,691 recorded as debt issuance costs.

Note 8 – Related Party Transactions

On January 1, 2003, the Company began to defer monthly salary payments to certain officers. These officers and the Company entered into convertible notes in the amount of their deferred salary payments. The notes bear interest at 9% and mature on September 30, 2005. The notes may be converted in whole or in part into unregistered common stock of the Company at a conversion rate of $0.45 per share for the deferrals between January 1, 2003 and March 31, 2003 and at the closing market price for all subsequent deferrals. As of December 31, 2004 the balance of these convertible notes was $188,682.

Note 9 – Stockholders’ Equity

Stock Options and Warrants

During the three months ended December 31, 2004, the Company issued options to employees and directors of the Company to purchase 145,000 shares of the Company’s common stock at the market price on the date of grant. The options were valued at $70,530 using the Black-Scholes option-pricing model and did not result in a charge to compensation expense. The Company also issued warrants to accredited investors in conjunction with five bridge loans to purchase 1,660,085 shares of the Company’s common stock. The warrants were valued using the Black-Scholes option-pricing model, which resulted in charges to additional paid in capital of $641,566. In addition, the Company issued options to Royster-Clark, Inc. to purchase 250,000 shares of the Company’s common stock as part of a stand-still agreement. The options were valued using the Black-Scholes option-pricing model, which resulted in an offering cost charge to additional paid in capital of $178,766.

Note 10 – Segment Information

The Company operates in four business segments as follows:

Alternative fuels - The Company develops and markets processes for conversion of low-value, carbon-bearing solids or gases into valuable liquid hydrocarbons. We are now seeking to expand this business into ownership of interests in existing plants that would use our Fischer-Tropsch technology.

Paints - The Company manufactures and distributes water-based stains, sealers and coatings.

Oil and gas field services - The Company is in the business of logging the progress of drilling operations for the oil and gas industry.

Industrial automation systems - The Company is in the business of manufacturing complex microprocessor controlled industrial automation systems, primarily for the fluid power industry.

- 14 -

Table of Contents

RENTECH, INC.

Notes to Consolidated Financial Statements

December 31, 2004 (Unaudited)

Note 10 – Segment Information (continued)

The Company’s reportable operating segments have been determined in accordance with the Company’s internal management structure, which is organized based on operating activities. The accounting policies of the operating segments are the same as those described in the summary of accounting policies. The Company evaluates performance based upon several factors, of which the primary financial measure is segment-operating income.

- 15 -

Table of Contents

RENTECH, INC.

Notes to Consolidated Financial Statements

December 31, 2004 (Unaudited)

Note 10 – Segment Information (continued)

In order to refocus our efforts on our core business of exploiting our Fischer-Tropsch technology, we are considering the sale of all our subsidiaries not directly related to that technology. In this connection, we do not believe that any impairment of assets is appropriate.

- 16 -

Table of Contents

RENTECH, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Certain information included in this report contains, and other reports or materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company or its management) contain or will contain, “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, Section 27A of the Securities Act of 1933, as amended, and pursuant to the Private Securities Litigation Reform Act of 1995. The forward-looking statements may relate to financial results and plans for future business activities, and are thus prospective. The forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by the forward-looking statements. They can be identified by the use of terminology such as “may,” “will,” “expect,” “believe,” “intend,” “plan,” “estimate,” “anticipate,” “should” and other comparable terms or the negative of them. You are cautioned that, while forward-looking statements reflect our good faith belief and best judgment based upon current information, they are not guarantees of future performance and are subject to known and unknown risks and uncertainties. Factors that could affect Rentech’s results include our ability to obtain financing for working capital and for our proposed acquisition of the East Dubuque nitrogen fertilizer plant currently owned by Royster-Clark Nitrogen, Inc. and for our costs to convert it to use coal as a feedstock and to produce liquid hydrocarbon products using our technology; our success in purchasing and converting that plant; our ability to obtain natural gas at reasonable prices while we convert the plant to use coal; our ability to secure a long-term coal supply contract on reasonable terms; prices for the products of the plant; environmental requirements; success in obtaining customers for our technology and services; the decision of our licensees and potential licensees to proceed with and the timing of any project using our technology; the entry into definitive agreements with others related to a project, and the risk factors detailed from time to time to time in the Company’s periodic reports and registration statements filed with the Securities and Exchange Commission. Any forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995, and thus are current only as of the date made. Other factors that could cause actual results to differ from those reflected in the forward-looking statements include dangers associated with construction and operation of gas processing plants like those using the Rentech Process, risks inherent in making investments and conducting business in foreign countries, protection of intellectual property rights, competition, and other risks described in this report.

OUR BUSINESSES

Rentech Process - Alternative Fuels Segment. We have developed and are engaged in marketing and licensing our patented and proprietary technology that converts synthesis gas, a mixture of hydrogen and carbon monoxide derived from coal and other solid and liquid carbon-bearing materials, as well as from industrial gas and natural gas, into clean-burning, liquid hydrocarbon products. The products include fuels and chemicals. Our technology which we refer to as the “Rentech Process,” is an advanced derivative of the well established Fischer-Tropsch process.

Our business historically has focused on research and development of our Fischer-Tropsch (F-T) technology, and licensing it to third parties. During fiscal 2004 we expanded our original business strategy of licensing our technology to include the deployment of our Rentech Process in existing domestic fertilizer plants that we may acquire and in other selected domestic and international projects. We plan to conduct these activities through our wholly-owned subsidiary, Rentech Development Corporation. In the United States, we are planning to acquire interests in existing nitrogen fertilizer plants currently configured to use natural gas a feedstock. We plan to convert these plants to use coal or refinery residues, which are readily available and less expensive as feedstocks, and to add our Rentech Process to produce Fischer-Tropsch liquid hydrocarbon products in addition to the nitrogen fertilizers already being produced by the plants. Our patent issued in October 2003 covers integration of our Rentech Process with nitrogen fertilizer processes. By converting domestic plants in this manner, we believe we can significantly enhance the economic results of these plants. The conversion would enable us to utilize our technology in a commercial scale plant, and, we believe, greatly improve our financial results, as well as deploy our technology more rapidly in less risky circumstances than in international projects.

We are planning to initially implement this strategy by purchasing Royster-Clark Nitrogen, Inc. which owns a nitrogen fertilizer plant in East Dubuque, Illinois (East Dubuque plant). The purchase price for the stock is $50 million. We are also to pay up to $13 million to acquire the net working capital of the business. The net working capital consists of current assets including accounts receivable and inventories, and current liabilities, including accounts payable and accrued liabilities. We are attempting to complete arrangements for equity and debt financing to obtain funds for the purchase price and the planned retrofitting of the plant.

- 17 -

Table of Contents

RENTECH, INC.

The East Dubuque plant is an operating integrated plant rated at 830 tons of ammonia per day. It produces ammonia, urea ammonium nitrate (UAN), nitric acid and urea, among other fertilizer products. We intend to continue operating the plant for the production of nitrogen fertilizer products while we add a commercially available clean coal gasification process that converts the plant to use synthesis gas derived from coal, instead of more expensive natural gas. In addition, we plan to add our Rentech Process to produce liquid hydrocarbon products from the excess synthesis gas produced from the coal gasification process.

Our efforts have been focused on achieving commercial use of our proprietary F-T process which we plan to achieve in the East Dubuque plant. We are continuing to seek revenues from licensing the technology, from royalties charged for each barrel of liquid hydrocarbons produced by process plants that would use the technology, and from contract payments for the engineering designs and technical services we provide for evaluating the feasibility of proposed plants, and after a license is granted, for the engineering design of a plant. We have maintained a Fischer-Tropsch development and testing laboratory to support use of this technology, and to further develop and refine the Rentech Process. The lab has also conducted contract work for Texaco Energy Systems LLC (Texaco), a licensee, and for other companies that are potential licensees and want to evaluate the feasibility of their feedstock for use with the Rentech Process.

We have historically exploited the Rentech Process by marketing licenses to energy companies, owners of industrial gas plants, and owners of other carbon-bearing sources of feedstock such as natural gas. No commercial plant is now using the technology, and economic operation of the technology has not been fully demonstrated. We believe the advancements we have made in Fischer-Tropsch technology will enable use of the Rentech Process on a cost-effective basis in some situations.

In June 2004, we organized a joint venture called FT Solutions LLC with Headwaters Technology Innovation Group, Inc. (Headwaters), a wholly-owned subsidiary of Headwaters Incorporated. The joint venture combines our iron-based Fischer-Tropsch technology with that of Headwaters. The joint venture enables us to benefit from both the marketing efforts of FT Solutions LLC, from which we will receive 50% of the net profits, and from our separate licensing and our own projects, from which we will receive 100% of the net profits, except for catalyst sales which we will share equally with Headwaters. In order to provide representative products for testing by potential customers, FT Solutions LLC has initiated the design and construction of a Fischer-Tropsch demonstration plant. The plant will be capable of producing between 10 and 15 barrels per day of liquid hydrocarbon products. The current schedule provides for this plant to be ready for initial startup operations by September 2005.

Marketing of Licenses. We are discussing proposals with several owners of energy feedstocks for use of the Rentech Process through licenses or other business ventures.

We received royalty income as a result of our 1998 license of the Rentech Process to Texaco and revenues from our 1999 technical services contract with Texaco. We are not now receiving royalties on production of liquid hydrocarbons from use of the Rentech Process, or license fees. We receive revenues from prospective businesses that engage us to perform studies for their potential projects that would use the Rentech Process. These studies are preliminary engineering design studies and evaluations of the feasibility of their use of their feedstock with our technology. Revenues from the Rentech Process and the revenues from our other businesses conducted through OKON, Inc., Petroleum Mud Logging, Inc., and REN Corporation are not sufficient to cover our ongoing losses at this time related to our efforts to commercialize the Rentech Process.

Subsidiaries. In addition to our Fischer-Tropsch alternative fuels segment, we own interests in three subsidiary businesses. OKON, Inc. and Petroleum Mud Logging Inc. are wholly owned, and we own 56 percent of REN Corporation.

OKON, Inc. – Paint Segment. OKON manufactures and markets water-based wood stains, concrete stains, concrete block pluggers and other water repellent sealers. All of the coatings we produce are biodegradable and environmentally clean.

Petroleum Mud Logging, Inc. – Oil and Gas Field Services Segment. PML provides well logging services to the oil and gas industry. We own special vehicles equipped as mobile laboratories that are moved in the field from well to well and eight remote controlled units that are similarly outfitted. Through state-of-the-art instruments, the logging equipment measures traces of gases and water throughout the depth of a well bore by analyzing the drilling mud recovered from the well as drilling progresses. The mineral owners use this information to detect the presence of oil and gas deposits in underground formations, and to direct the exploration and development drilling of their properties.

REN Corporation – Industrial Automation Systems Segment. REN manufactures computer-controlled testing equipment

- 18 -

Table of Contents

RENTECH, INC.

systems and sells them on a custom-order basis to industrial manufacturers. These manufacturers use REN’s industrial automation systems for controlling quality and increasing productivity in the manufacture of their products. The customers’ products include automatic hydraulic pumps, valves and actuators; diesel fuel injection pumps; transmissions; automatic hydraulic presses; and hydraulic hose assembles. REN’s primary market has been automated test equipment for the fluid power industry.

OVERVIEW OF FINANCIAL CONDITION

At December 31, 2004, we had negative working capital of $2,689,790. For the three months ended December 31, 2004, the Company has incurred losses in the amount of $49,901,304. If the Company does not obtain additional loans or operate at a profit, the Company will be unable to continue its operations at this present level or to complete its business plans. Historically, we have relied for working capital upon private placements of our equity represented by our common stock, supplemented by debt financing. On March 19, 2004, our stockholders approved an amendment to our articles of incorporation to increase the number of authorized shares of common stock from 100,000,000 to 150,000,000. We have recommended that our shareholders approve an increase in the authorized number of shares of common stock to 250,000,000 at the annual meeting scheduled for March 17, 2005. To achieve our objectives as planned for fiscal year 2005, we will need substantial amounts of capital that we do not now have. We expect to incur additional indebtedness and to issue additional shares of common stock, and we may issue shares of convertible preferred stock, stock purchase warrants or other securities convertible into common stock to fund our working capital requirements, to fund the acquisition of the East Dubuque plant, and our planned retrofit of the plant to use coal feedstock and to add our Rentech Process. In addition, we are seeking a buyer to purchase our one-half interest in the assets of Sand Creek Energy, LLC, which owns a closed methanol plant in the Denver metropolitan area. We are also offering to sell OKON, Inc. through which we conduct our paint business. We believe that our current available cash, revenues from operations, and the potential sale of assets will not be sufficient to meet our cash operating requirements through the fiscal year ended September 30, 2005 without additional debt and equity financing. Obtaining financing through placements of additional securities or loans depends upon obtaining investors who are willing to invest in our equity securities or debt instruments.

Selected Business Segment Information

The revenue and operating income (loss) amounts in this report are presented in accordance with accounting principles generally accepted in the United States of America. Segment information appearing in Note 10 of the Notes to the Consolidated Financial Statements is presented in accordance with SFAS 131, Disclosures about Segments of an Enterprise and Related Information.

The following table provides revenues, operating income (loss) from operations and net loss applicable to common stockholders by each of our business segments for the three months ended December 31, 2004 and 2003. More complete details about the results of operations of our business segments are set forth later in this report under the section heading “Results of Operations”.

- 19 -

Table of Contents

RENTECH, INC.

Overview of Revenues Associated with Licensing the Rentech Process

In prior fiscal periods, we realized revenues associated with licensing activities in our alternative fuels segment. These revenues included royalties earned up to March 2003 under our October 1998 license of the Rentech Process to Texaco Energy Systems, LLC, now a division of ChevronTexaco Corporation, and contract payments for technical engineering services provided to Texaco and certain other companies.

Effective March 24, 2003, our license agreement with Texaco was modified. By the change, Texaco’s exclusive rights to use the Rentech Process for conversion of coal, petroleum coke and other solid and liquid hydrocarbons became non-exclusive. Our license with Texaco remains in effect, as modified. Texaco retained non-exclusive rights to use our technology with these hydrocarbon materials as well as non-exclusive rights to use our technology with gaseous hydrocarbons. Beginning in March 2003, we are no longer receiving royalty payments of $20,000 per month under the license, and we will not be required to share any license fees and royalties we receive from others in the future with Texaco. In March 2003, we completed work for Texaco under a 1999 contract by which we performed technical services to make the Rentech Process compatible for use with Texaco’s gasification technology. In early 2003, we completed our subcontract with Texaco on its contract with the U.S. Department of Energy on developing plans for an Early Entrance Co-production Plant. This contract was focused on developing a program for the Department of Energy for an energy plant that would produce both transportation fuels and electricity.

With the change to the Texaco license, we are now able to offer licenses of our Rentech Process to other energy businesses for conversion of coal, petroleum coke and other solids and liquids. We are now working with several other companies to study the feasibility of developing F-T projects using the Rentech Process. No commitments have been made to proceed with these projects, however, we have received revenues from several studies of the feasibility of these projects.

In the future, we expect to receive revenues associated with licensing the Rentech Process from the following principal sources:

- 20 -

Table of Contents

RENTECH, INC.

We anticipate that we may receive increased contract payments for design studies if interest by members of the energy industry in our technology grows. We do not expect to realize significantly increased revenues from marketing licenses of the Rentech Process until we obtain a customer and grant a license for a commercial-scale plant using the technology and work on designing the plant is underway. We are cooperating with several energy companies and related businesses to prepare and evaluate their proposals to develop new plants that would use our technology. There are no assurances that they will pursue these projects or that adequate financing will be available or that we will succeed in retrofitting and successfully operating any existing plant at a profit. Other factors affecting our success include competition by other Fischer-Tropsch technologies, availability of low-cost feedstock, and market prices for conventional fuels and hydrocarbon products with which synthetic liquid hydrocarbons produced by use of our technology will compete.

The revenues from our license fees and royalties and the contract work performed at our Fischer-Tropsch laboratory, including payments we previously received from contract work for Texaco, have not been adequate to fund our operations. We do not expect activities associated with marketing licenses of our Fischer-Tropsch technology to produce a net profit until we obtain additional contracts for feasibility studies and engineering designs for planning for a Fischer-Tropsch plant using our technology, and fees for grants of licenses. During the three months ended December 31, 2004, we incurred a net loss of $2,375,942 associated with the Rentech Process in our alternative fuels segment, compared with a net loss of $1,738,270 for the three months ended December 31, 2003.

Reducing our activities related to the Rentech Process would materially adversely impact our ability to commercialize the Rentech Process. We believe it is important to continue work on further improvements to the technology, improving its economic efficiency, and seeking patents to protect our proprietary rights in any advancements. Cutting back these operations might delay commercial use of the Rentech Process and could limit our ability to realize full economic benefits from its exploitation.

We believe that important events within the Fischer-Tropsch industry during the last year indicate increasing interest in the energy industry and the investment community in the commercial use of Fischer-Tropsch technology. These announcements describe plans by several large companies engaged in the oil and gas or energy business to develop large projects to use their respective Fischer-Tropsch technologies. Each of these projects would require substantial financial investments. We believe that these announcements signal that the energy industry, with support from financial institutions, may be moving toward commercial use of Fischer-Tropsch technologies like ours.

Operating Expenses

Our operating expenses have historically been grouped primarily into several categories of major expenses. These are development of the Rentech Process through small pilot plants and our large-scale Synhytech pilot plant in Pueblo, Colorado; acquiring and funding our other business segments in efforts to achieve profitable operations; investing in advanced technologies; acquiring a 56% interest in REN Corporation; marketing our technology; other general and administrative expenses; and the costs of financing our operations.

Our research and development expenses were substantially increased after we enhanced our development and testing laboratory and enlarged our laboratory staff in 1999. We have also had significant growth in our general and administrative expenses as our salary expenses and operating costs have grown. We are incurring substantial costs associated with our one-half ownership interest in Sand Creek Energy LLC, which owns the mothballed Sand Creek plant. These include the maintenance and holding expenses for our one-half interest in the plant.

We have incurred significant expenses associated with our feasibility studies and consulting contracts related to our efforts to acquire the East Dubuque plant from Royster-Clark, Inc., including expenses in connection with negotiating a purchase contract

- 21 -

Table of Contents

RENTECH, INC.

and related agreements and obtaining feasibility studies and consulting services. If we succeed in acquiring the plant, we expect to have significantly larger expenses related to financing the acquisition, operation and construction work to retrofit the East Dubuque plant. If we invest with others in developing another plant that uses our Rentech Process, we expect to also incur significant costs. When production is achieved from any plant, we anticipate incurring new expenses to market and sell the products. Because of the substantial capital investments we anticipate making in plants in which we may acquire an equity interest, we believe that we will incur significant depreciation and amortization expenses in the future.

Overview of the Status of Our Subsidiaries

We have realized revenues from the stains, sealers and coatings business conducted by our wholly-owned subsidiary, OKON, Inc.; from the oil and gas field services provided by Petroleum Mud Logging, Inc., a wholly-owned subsidiary; and from the manufacture of complex microprocessor controlled industrial automation systems by REN Corporation, a 56% owned subsidiary. During the years ended September 30, 2004 and 2003, OKON, Inc. and REN Corporation experienced net losses. We are attempting to increase the revenues of our subsidiaries.

During the three months ended December 31, 2004, OKON expanded its net revenues over those in the same period in fiscal 2004 through increased sales to wholesalers who distribute OKON’s products to independent retail stores, as well as to national and retail paint manufacturers. The increase in paint revenue reflects our continued marketing efforts in our primary distribution channels that we have been expanding over the past two years. OKON’s net loss for the three months ended December 31, 2004 was $47,614, compared to a net loss of $131,350 for the three months ended December 31, 2003.

Petroleum Mud Logging, Inc. continued to perform well during the three months ended December 31, 2004, increasing its net revenues over those for the same period in fiscal 2004. PML is benefiting from our investments made over the last several fiscal years in upgrading its technology, as well as from increased demand for drilling for natural gas, and increased marketing efforts. PML’s net income for the three months ended December 31, 2004 was $252,824, compared to $80,805 for the three months ended December 31, 2003.

REN Corporation experienced a decline in contract orders for its automated test systems during the three months ended December 31, 2004 compared to the three months ended December 31, 2003. We believe this reduction is due to a decrease in industry orders resulting from a general economic downturn and a series of corporate reorganizations that have affected REN’s historical customers, and deferred placements of new orders with REN. REN’s net loss for the three months ended December 31, 2004 was $80,833, compared to a net loss of $128,828 for the three months ended December 31, 2003. This decreased loss is due to certain cost reductions implemented during the year. The net loss also reflects a lack of new contracts required to provide sufficient revenue to cover operating costs. REN Corporation is considering alternatives to increase its revenues. These include an aggressive program to develop a more standardized test stand and to expand REN’s contracts to service test stands it has previously sold as well as test stands manufactured by its competitors.

During fiscal year 2004, we expanded our original business strategy of licensing our Fischer-Tropsch technology to include deploying it in domestic fertilizer plants and other plants in which we may acquire ownership interests. To implement this revised strategy, we expect to refocus our efforts on our core business, which is centered on our Fischer-Tropsch technology. As we redirect our business efforts, we are considering the sale of all of these subsidiaries, none of which are directly related to our core business.

RESULTS OF OPERATIONS

More detailed information about our financial statements is provided in the following portions of this section. The following discussion should be read in conjunction with our consolidated financial statements included in our annual report on Form 10-K for the year ended September 30, 2004 and the notes to those statements and to the notes and consolidated financial statements of this report.

- 22 -

Table of Contents

RENTECH, INC.

The following table sets forth, for the three months ended December 31, 2004 and December 31, 2003, a comparison of changes between the periods in the components of our Consolidated Statements of Operations: