Attached files
file | filename |
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EX-32.2 - EXHIBIT 32.2 - RENTECH, INC. | c16697exv32w2.htm |
EX-32.1 - EXHIBIT 32.1 - RENTECH, INC. | c16697exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - RENTECH, INC. | c16697exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - RENTECH, INC. | c16697exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly
period ended March 31, 2011
Or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition
period from
to
Commission File No. 001-15795
RENTECH, INC.
(Exact name of registrant as specified in its charter)
Colorado | 84-0957421 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
10877 Wilshire Boulevard, Suite 600
Los Angeles, California 90024
(Address of principal executive offices)
Los Angeles, California 90024
(Address of principal executive offices)
(310) 571-9800
(Registrants telephone number, including area code)
(Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of shares of the Registrants common stock outstanding as of April 30, 2011 was
222,860,964.
RENTECH, INC.
Form 10-Q
Form 10-Q
Table of Contents
3 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
8 | ||||||||
17 | ||||||||
26 | ||||||||
27 | ||||||||
27 | ||||||||
27 | ||||||||
28 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
RENTECH, INC.
Consolidated Balance Sheets
(Amounts in thousands, except per share data)
As of | ||||||||
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 77,320 | $ | 54,146 | ||||
Restricted cash, short-term |
| 100 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $100 at March 31, 2011 and
September 30, 2010 |
3,343 | 9,586 | ||||||
Inventories |
19,944 | 6,966 | ||||||
Deposits on gas contracts |
999 | 2,353 | ||||||
Prepaid expenses and other current assets |
4,639 | 5,128 | ||||||
Other receivables, net |
3,152 | 470 | ||||||
Total current assets |
109,397 | 78,749 | ||||||
Property, plant and equipment, net |
51,209 | 55,299 | ||||||
Construction in progress |
55,944 | 41,098 | ||||||
Other assets |
||||||||
Other assets and deposits |
16,757 | 17,599 | ||||||
Goodwill |
7,209 | 7,209 | ||||||
Deferred income taxes |
561 | 561 | ||||||
Total other assets |
24,527 | 25,369 | ||||||
Total assets |
$ | 241,077 | $ | 200,515 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 4,527 | $ | 6,425 | ||||
Accrued payroll and benefits |
4,432 | 5,786 | ||||||
Accrued liabilities |
14,489 | 13,515 | ||||||
Capital lease obligation |
57 | 322 | ||||||
Deferred revenue |
43,499 | 14,473 | ||||||
Accrued interest |
2,784 | 2,725 | ||||||
Deferred income taxes |
561 | 561 | ||||||
Current portion of term loan |
39,230 | 12,835 | ||||||
Total current liabilities |
109,579 | 56,642 | ||||||
Long-term liabilities |
||||||||
Term loan, net of current portion |
45,300 | 48,040 | ||||||
Long-term convertible debt to stockholders |
44,684 | 42,163 | ||||||
Advance for equity investment |
7,892 | 7,892 | ||||||
Other long-term liabilities |
524 | 425 | ||||||
Total long-term liabilities |
98,400 | 98,520 | ||||||
Total liabilities |
207,979 | 155,162 | ||||||
Commitments and contingencies (Note 9) |
||||||||
Stockholders equity: |
||||||||
Preferred stock: $10 par value; 1,000 shares authorized; 90 series A convertible
preferred shares authorized and issued; no shares outstanding and $0 liquidation
preference |
| | ||||||
Series C participating cumulative preferred stock: $10 par value; 500 shares authorized;
no shares issued and outstanding |
| | ||||||
Common stock: $.01 par value; 450,000 shares authorized; 222,235 and 221,731 shares
issued and outstanding at March 31, 2011 and September 30, 2010, respectively |
2,222 | 2,217 | ||||||
Additional paid-in capital |
334,404 | 332,696 | ||||||
Accumulated deficit |
(310,073 | ) | (296,993 | ) | ||||
Total Rentech stockholders equity |
26,553 | 37,920 | ||||||
Noncontrolling interests |
6,545 | 7,433 | ||||||
Total stockholders equity |
33,098 | 45,353 | ||||||
Total liabilities and stockholders equity |
$ | 241,077 | $ | 200,515 | ||||
See Accompanying Notes to Consolidated Financial Statements.
3
Table of Contents
RENTECH, INC.
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
For the Three Months | For the Six Months | |||||||||||||||
Ended March 31, | Ended March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Revenues |
||||||||||||||||
Product sales |
$ | 23,524 | $ | 19,182 | $ | 65,537 | $ | 46,205 | ||||||||
Service revenues |
51 | | 103 | 115 | ||||||||||||
Total revenues |
23,575 | 19,182 | 65,640 | 46,320 | ||||||||||||
Cost of sales |
||||||||||||||||
Product sales |
13,323 | 16,172 | 39,209 | 44,356 | ||||||||||||
Service revenues |
50 | | 100 | 106 | ||||||||||||
Total cost of sales |
13,373 | 16,172 | 39,309 | 44,462 | ||||||||||||
Gross profit |
10,202 | 3,010 | 26,331 | 1,858 | ||||||||||||
Operating expenses |
||||||||||||||||
Selling, general and administrative expense |
7,432 | 6,776 | 14,768 | 13,845 | ||||||||||||
Depreciation and amortization |
559 | 487 | 1,132 | 984 | ||||||||||||
Research and development |
6,687 | 4,478 | 12,464 | 8,302 | ||||||||||||
Other project costs |
| | 53 | | ||||||||||||
Gain on disposal of property, plant and equipment |
(44 | ) | (7 | ) | (44 | ) | (21 | ) | ||||||||
Total operating expenses |
14,634 | 11,734 | 28,373 | 23,110 | ||||||||||||
Operating loss |
(4,432 | ) | (8,724 | ) | (2,042 | ) | (21,252 | ) | ||||||||
Other income (expense), net |
||||||||||||||||
Interest and dividend income |
37 | 55 | 82 | 169 | ||||||||||||
Interest expense |
(3,712 | ) | (3,472 | ) | (7,442 | ) | (6,739 | ) | ||||||||
Loss on debt extinguishment |
| (2,268 | ) | (4,593 | ) | (2,268 | ) | |||||||||
Loss on investments |
| (1,473 | ) | | (1,231 | ) | ||||||||||
Other income, net |
20 | 35 | 26 | 127 | ||||||||||||
Total other expenses, net |
(3,655 | ) | (7,123 | ) | (11,927 | ) | (9,942 | ) | ||||||||
Loss from continuing operations before income taxes and equity in net loss
of investee company |
(8,087 | ) | (15,847 | ) | (13,969 | ) | (31,194 | ) | ||||||||
Income tax benefit |
| | 1 | | ||||||||||||
Loss from continuing operations before equity in net loss of investee company |
(8,087 | ) | (15,847 | ) | (13,968 | ) | (31,194 | ) | ||||||||
Equity in net loss of investee company |
| 149 | | 277 | ||||||||||||
Loss from continuing operations |
(8,087 | ) | (15,996 | ) | (13,968 | ) | (31,471 | ) | ||||||||
Income from discontinued operations |
| 2 | | 6 | ||||||||||||
Net loss |
(8,087 | ) | (15,994 | ) | (13,968 | ) | (31,465 | ) | ||||||||
Net loss attributable to noncontrolling interests |
522 | | 888 | | ||||||||||||
Net loss attributable to Rentech |
$ | (7,565 | ) | $ | (15,994 | ) | $ | (13,080 | ) | $ | (31,465 | ) | ||||
Basic and diluted net loss per common share attributable to Rentech: |
||||||||||||||||
Continuing operations |
$ | (0.03 | ) | $ | (0.07 | ) | $ | (0.06 | ) | $ | (0.15 | ) | ||||
Discontinued operations |
0.00 | 0.00 | 0.00 | 0.00 | ||||||||||||
Net loss |
$ | (0.03 | ) | $ | (0.07 | ) | $ | (0.06 | ) | $ | (0.15 | ) | ||||
Weighted-average shares used to compute net loss per common share: |
||||||||||||||||
Basic and diluted |
222,218 | 213,544 | 222,098 | 213,154 | ||||||||||||
See Accompanying Notes to Consolidated Financial Statements.
4
Table of Contents
RENTECH, INC.
Consolidated Statement of Stockholders Equity
(Amounts in thousands)
Additional | Total Rentech | Total | ||||||||||||||||||||||||||
Common Stock | Paid-in | Accumulated | Stockholders | Noncontrolling | Stockholders | |||||||||||||||||||||||
Shares | Amount | Capital | Deficit | Equity | Interests | Equity | ||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||||
Balance, September 30, 2010 |
221,731 | $ | 2,217 | $ | 332,696 | $ | (296,993 | ) | $ | 37,920 | $ | 7,433 | $ | 45,353 | ||||||||||||||
Issuance of common stock |
25 | | | | | | | |||||||||||||||||||||
Payment of offering costs |
| | (82 | ) | | (82 | ) | | (82 | ) | ||||||||||||||||||
Stock-based compensation expense |
| | 2,098 | | 2,098 | | 2,098 | |||||||||||||||||||||
Restricted stock units |
479 | 5 | (308 | ) | | (303 | ) | | (303 | ) | ||||||||||||||||||
Net loss |
| | | (13,080 | ) | (13,080 | ) | (888 | ) | (13,968 | ) | |||||||||||||||||
Balance, March 31, 2011 |
222,235 | $ | 2,222 | $ | 334,404 | $ | (310,073 | ) | $ | 26,553 | $ | 6,545 | $ | 33,098 |
See Accompanying Notes to Consolidated Financial Statements.
5
Table of Contents
RENTECH, INC.
Consolidated Statements of Cash Flows
(Amounts in thousands)
For the Six Months | ||||||||
Ended March 31, | ||||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
Cash flows from operating activities |
||||||||
Net loss |
$ | (13,968 | ) | $ | (31,465 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
4,987 | 5,103 | ||||||
Accretion expense |
17 | 15 | ||||||
Bad debt expense |
195 | 5 | ||||||
Utilization of spare parts |
586 | 1,017 | ||||||
Gain on disposal of property, plant and equipment |
(44 | ) | (21 | ) | ||||
Write-down of inventory to market |
14 | | ||||||
Non-cash interest expense |
3,316 | 3,883 | ||||||
Loss on debt extinguishment |
4,593 | 2,268 | ||||||
Loss on investments |
| 1,231 | ||||||
Gain on sale of subsidiary |
| (6 | ) | |||||
Stock-based compensation |
2,098 | 2,857 | ||||||
Equity in net loss of investee company |
| 277 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
6,243 | 3,002 | ||||||
Property insurance claim receivable |
| 1,795 | ||||||
Other receivables and receivable from related party |
(836 | ) | (51 | ) | ||||
Receivables from insurance |
(2,041 | ) | | |||||
Inventories |
(11,962 | ) | (6,619 | ) | ||||
Deposits on gas contracts |
1,354 | (151 | ) | |||||
Prepaid expenses and other current assets |
(231 | ) | 413 | |||||
Accounts payable |
(1,899 | ) | 1,156 | |||||
Deferred revenue |
29,026 | 11,405 | ||||||
Accrued interest |
60 | (437 | ) | |||||
Litigation settlement payable |
1,954 | | ||||||
Accrued liabilities, accrued payroll and other |
(2,011 | ) | (67 | ) | ||||
Net cash provided by (used in) operating activities |
21,451 | (4,390 | ) | |||||
Cash flows from investing activities |
||||||||
Purchase of property, plant, equipment and construction in progress |
(16,816 | ) | (12,661 | ) | ||||
Proceeds from disposal of property, plant and equipment |
5 | 1,014 | ||||||
Proceeds from sale of available for sale securities |
| 4,769 | ||||||
Other items |
(821 | ) | (875 | ) | ||||
Net cash used in investing activities |
(17,632 | ) | (7,753 | ) | ||||
Cash flows from financing activities |
||||||||
Proceeds from term loan, net of original issue discount |
50,960 | 60,625 | ||||||
Retirement of term loan, including costs |
| (38,040 | ) | |||||
Payments on capital lease |
(265 | ) | | |||||
Payments on debt and notes payable |
(29,908 | ) | (1,185 | ) | ||||
Payment of debt issuance costs |
(290 | ) | (3,662 | ) | ||||
Payments on notes payable for financed insurance premiums |
(1,060 | ) | (929 | ) | ||||
Payment of offering costs |
(82 | ) | (183 | ) | ||||
Payments on line of credit on available for sale securities |
| (4,532 | ) | |||||
Proceeds from issuance of common stock |
| 1,303 | ||||||
Proceeds from options and warrants exercised |
| 16 | ||||||
Net cash provided by financing activities |
19,355 | 13,413 | ||||||
Increase in cash and cash equivalents |
23,174 | 1,270 | ||||||
Cash and cash equivalents, beginning of period |
54,146 | 69,117 | ||||||
Cash and cash equivalents, end of period |
$ | 77,320 | $ | 70,387 | ||||
6
Table of Contents
RENTECH, INC.
Consolidated Statements of Cash Flows
(Amounts in thousands)
Consolidated Statements of Cash Flows
(Amounts in thousands)
(Continued from previous page)
Excluded from the statements of cash flows for the six months ended March 31, 2011 and 2010
were the effects of certain non-cash investing and financing activities as follows:
For the Six Months | ||||||||
Ended March 31, | ||||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
Cashless exercise of warrants |
$ | | $ | 8 | ||||
Purchase of insurance policies financed with a note payable |
516 | 379 | ||||||
Restricted stock units surrendered for withholding taxes payable |
303 | 132 |
See Accompanying Notes to Consolidated Financial Statements.
7
Table of Contents
RENTECH, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 Basis of Presentation
The accompanying unaudited consolidated financial statements of Rentech, Inc. and its
consolidated subsidiaries (collectively, the Company) have been prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP) and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by GAAP for complete financial statements. In the opinion
of management, the unaudited consolidated financial statements reflect all adjustments, consisting
only of normal recurring adjustments, considered necessary for a fair statement of the Companys
financial position at March 31, 2011, and the results of operations and cash flows for the periods
presented. The accompanying consolidated financial statements include the accounts of the Company,
its wholly owned subsidiaries and a variable interest entity (VIE) of which the Company is
considered the primary beneficiary. All significant intercompany accounts and transactions have
been eliminated in consolidation. Operating results for the three and six months ended March 31,
2011 are not necessarily indicative of the results that may be expected for the fiscal year ending
September 30, 2011. The information included in this Form 10-Q should be read in conjunction with
the consolidated financial statements and notes thereto included in the Companys Annual Report on
Form 10-K for the fiscal year ended September 30, 2010 filed with the Securities and Exchange
Commission (the SEC) on December 14, 2010 (the Annual Report).
The preparation of financial statements in conformity with GAAP 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.
Because of their short-term nature, the amounts reported in the Companys consolidated balance
sheets for cash and cash equivalents, accounts receivable, accounts payable and current portion of term loan approximate fair value.
The Company has evaluated events, if any, which occurred subsequent to March 31, 2011
through the date these financial statements were issued, to ensure that such events have been
properly reflected in these statements.
Note 2 Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (the FASB) issued a standard which
provides guidance about the information that a reporting entity provides in its financial reports
about a transfer of financial assets; the effects of a transfer on its financial position,
financial performance, and cash flows; and a transferors continuing involvement in transferred
financial assets. This standard is effective for fiscal years beginning after November 15, 2009. It
is effective for the Companys fiscal year beginning on October 1, 2010. The Company did not
transfer financial assets during the six months ended March 31, 2011; therefore the adoption of
this standard did not have a material impact on the Companys consolidated financial position,
results of operations or disclosures for the three and six months ended March 31, 2011.
In June 2009, the FASB issued a standard which amends previous guidance related to the
determination as to whether an entity is a VIE, and ongoing reassessments of whether an enterprise
is the primary beneficiary of a VIE. This standard is effective for fiscal years beginning after
November 15, 2009. It is effective for the Companys fiscal year beginning on October 1, 2010. The
Company applied the previous guidance in fiscal year 2010 to determine the accounting treatment for
its investment in ClearFuels Technology Inc. (ClearFuels). The Company determined that it was the
primary beneficiary of ClearFuels operations. Therefore, the operations of ClearFuels were
consolidated as of September 3, 2010. The adoption of this standard, as amended, did not have a
material impact on the Companys consolidated financial position, results of operations or
disclosures for the three and six months ended March 31, 2011.
Note 3 Accounts Receivable
Accounts receivable consisted of the following:
As of | ||||||||
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Trade receivables from nitrogen products |
$ | 3,343 | $ | 9,578 | ||||
Trade receivables from alternative energy |
100 | 108 | ||||||
Total accounts receivable, gross |
3,443 | 9,686 | ||||||
Allowance for doubtful accounts on trade accounts receivable |
(100 | ) | (100 | ) | ||||
Total accounts receivable, net |
$ | 3,343 | $ | 9,586 | ||||
8
Table of Contents
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 4 Inventories
Inventories consisted of the following:
As of | ||||||||
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Finished goods |
$ | 19,463 | $ | 6,338 | ||||
Raw materials |
481 | 628 | ||||||
Total inventory |
$ | 19,944 | $ | 6,966 | ||||
Note 5 Property, Plant and Equipment and Construction in Progress
Property, plant and equipment consisted of the following:
As of | ||||||||
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Land |
$ | 1,882 | $ | 1,811 | ||||
Buildings and building improvements |
10,031 | 10,323 | ||||||
Machinery and equipment |
75,846 | 74,625 | ||||||
Furniture, fixtures and office equipment |
865 | 861 | ||||||
Computer equipment and computer software |
4,750 | 4,657 | ||||||
Vehicles |
201 | 172 | ||||||
Leasehold improvements |
73 | 73 | ||||||
Conditional asset (asbestos removal) |
210 | 210 | ||||||
93,858 | 92,732 | |||||||
Less accumulated depreciation |
(42,649 | ) | (37,433 | ) | ||||
Total depreciable property, plant and equipment, net |
$ | 51,209 | $ | 55,299 | ||||
Construction in progress consisted of the following:
As of | ||||||||
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Construction in progress for projects under development |
$ | 41,669 | $ | 32,028 | ||||
Accumulated capitalized interest costs related to projects under development |
8,480 | 6,105 | ||||||
Construction in progress for East Dubuque Plant (as defined below) |
5,304 | 2,474 | ||||||
Software in progress (under capital lease) |
464 | 464 | ||||||
Conditional asset (asbestos removal) |
27 | 27 | ||||||
Total construction in progress |
$ | 55,944 | $ | 41,098 | ||||
The Company has a legal obligation to handle and dispose of asbestos at its plant at East
Dubuque, Illinois (the East Dubuque Plant) and at the site of its proposed project near Natchez,
Mississippi (the Natchez Project) in a special manner when conducting major or minor renovations
or when buildings at these locations are demolished, even though the timing and method of the
handling and disposal of asbestos are conditional on future events that may or may not be in its
control. As a result, the Company has a conditional obligation for this disposal. In addition, the
Company, through its normal repair and maintenance program, may encounter situations in which it is
required to remove asbestos in order to complete other work. The Company applied the expected
present value technique to calculate and record the fair value of the asset retirement obligation
for each property. In accordance with the applicable guidance, the liability is increased over time
and such increase is recorded as accretion expense. The liability at March 31, 2011 and accretion
expense for the six months ended March 31, 2011 were $285,000 and $17,000, respectively.
9
Table of Contents
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 6 Investment in ClearFuels Technology Inc.
The Company has consolidated the operations of ClearFuels as of September 3, 2010 because
the Company became the primary beneficiary of ClearFuels, a VIE. On April 14, 2011, the Company
gave ClearFuels notice of the exercise of its option to acquire a substantial majority of the
equity of ClearFuels (Note 13 Subsequent Events).
On June 23, 2009, the Company acquired 4,377,985 shares of Series B-1 Preferred Stock,
representing a 25% ownership interest in ClearFuels, and rights to license ClearFuels biomass
gasification technology, in exchange for a warrant to purchase up to five million shares of the
Companys common stock, access to the Companys Product Demonstration Unit (the PDU) in
Colorado for construction and operation of a ClearFuels biomass gasifier (the ClearFuels
Gasifier), and certain rights to license the Rentech Process, including the exclusive right for
projects using bagasse as a feedstock. The warrant vests in three separate tranches with one
tranche of 2 million shares vested as of the closing date, and two tranches of 1.5 million shares
each to vest on the achievement by ClearFuels of established milestones. The exercise price for
the first tranche is $0.60 per share and the exercise price per share for the second and third
tranches will be set at the ten-day average trading price of the Companys common stock at the
time of vesting. The fair value of the warrant was calculated using the Black-Scholes
option-pricing model at $628,815. This fair value was based on the vested tranche of 2 million
shares because the Company cannot currently determine the probability that ClearFuels will
achieve the milestones that would trigger vesting of the second and third tranches.
ClearFuels is a private company and a market does not exist for its common or preferred
stock. As a result, the Company determined the fair value of its investment in ClearFuels to be
equal to the fair market value of the vested warrant issued to ClearFuels at the closing. In June
2009, the Company determined that ClearFuels was a VIE, but the Company was not its primary
beneficiary. Through September 3, 2010, the investment in ClearFuels was recorded in other assets
and deposits under the equity method of accounting. At September 3, 2010, the investment balance
was $0.
ClearFuels was selected by the U.S. Department of Energy (the DOE) to receive up to
approximately $23 million as a grant to construct a ClearFuels Gasifier. On September 3, 2010,
the Company and ClearFuels executed a project support agreement (the Project Support Agreement)
which detailed the responsibilities of both parties regarding the second phase of construction of
the ClearFuels Gasifier. Pursuant to the terms of the Project Support Agreement, the Company
provided the DOE with a certification of its support of the ClearFuels Gasifier and it assumed
operational control and full decision making authority over the project as of October 1, 2010.
The Company is responsible for budgeted construction payments for the project after October 1,
2010, and expects to receive reimbursement from the DOE for approximately 62% of those payments
and of all costs and expenses it has incurred to support the ClearFuels Gasifier. The Company
estimates that third party cash expenses, excluding costs and expenses incurred to operate the
PDU in support of the project, will total approximately $2 million after receipt of all DOE
reimbursements.
Under accounting guidance, based on the execution of the Project Support Agreement, the
Company reconsidered whether it was the primary beneficiary of ClearFuels. The Company determined
that as of September 3, 2010 it was the primary beneficiary as it is responsible for a majority
of ClearFuels losses or entitled to receive a majority of ClearFuels residual returns through
its equity interest and as a result of the Project Support Agreement. Therefore, the operations
of ClearFuels have been consolidated as of September 3, 2010. Noncontrolling interests represents
the portion of equity or income in ClearFuels not attributable, directly or indirectly, to the
Company.
The Company recorded total assets, net assets, revenue and net loss of $9.4 million, $9.3
million, $0 and $0.3 million, respectively, in its consolidated financial statements as of and
for the fiscal year ended September 30, 2010 from the consolidation of ClearFuels. In accordance
with the guidance for accounting for business combinations, the assets, liabilities and amounts
attributed to noncontrolling interests have been recorded at fair value on the date of
consolidation. In the six months ended March 31, 2011, the Company made retrospective
adjustments to notes receivable, prepaid expenses and goodwill in the opening balance sheet of
ClearFuels as of September 3, 2010 due to working capital adjustments.
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RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
The following items were recorded on the consolidated balance sheets as of September 30, 2010
(in thousands):
Purchase | ||||||||||||
Price | ||||||||||||
September 30, 2010 | Allocation | September 30, 2010 | ||||||||||
(previously reported) | Adjustment | (adjusted) | ||||||||||
Cash |
$ | 747 | $ | 0 | $ | 747 | ||||||
Notes receivable and
accrued interest on
notes
receivable(1) |
250 | 22 | 272 | |||||||||
Prepaid expenses |
1,710 | (571 | ) | 1,139 | ||||||||
Goodwill |
6,660 | 549 | 7,209 | |||||||||
Fixed assets |
8 | 0 | 8 | |||||||||
Other assets |
5 | 0 | 5 | |||||||||
Accounts payable |
63 | 0 | 63 |
(1) | Recorded in Other Receivables on the Consolidated Balance Sheet |
The fair value of the Companys interest in ClearFuels was determined to be approximately
$1,909,000. The difference between the fair value and the investment balance, which was $0 at
September 3, 2010, was recorded in the fourth quarter of fiscal year 2010 as a gain on equity
method investment in the consolidated statements of operations in the amount of $1,909,000. The
Company has not pledged any of the consolidated assets as collateral for any obligation of
ClearFuels.
Under the Project Support Agreement, the Companys obligations to incur costs and expenses for
the ClearFuels Gasifier extend until the earlier of (a) the date that ClearFuels closes a financing
with proceeds of at least $25,000,000 (a Qualified Financing) for construction of the ClearFuels
Gasifier and other technology and development efforts or (b) March 31, 2011. A Qualified Financing
did not occur by March 31, 2011. However, the Company may elect in its discretion to continue to
incur such costs and expenses after its obligation to do so terminated. The Company has exercised
an option to acquire substantially all the remaining equity of ClearFuels for no additional
consideration, which became exercisable because a Qualified Financing had not occurred by March 31,
2011. For additional information regarding the Companys exercise of its option, refer to Note 13
Subsequent Events.
Note 7 Debt
On November 24, 2010, the Company and Rentech Energy Midwest Corporation (REMC) entered into
a Second Amendment to Credit Agreement, Waiver and Collateral Agent Consent (the Second
Amendment) to the 2010 Credit Agreement (as defined below) among REMC, the Company, certain
subsidiaries of the Company, certain lenders party thereto and Credit Suisse AG, Cayman Islands
Branch, as administrative agent and collateral agent (Credit Suisse). The Second Amendment
further amends and waives certain provisions of a senior collateralized credit agreement entered
into by the Company, REMC, Credit Suisse and the lenders party thereto on January 29, 2010, as
initially amended on July 21, 2010 (the First Amendment) (such credit agreement with the First
Amendment and Second Amendment the 2010 Credit Agreement).
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RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
The Second Amendment, among other things, (1) permitted a special distribution by REMC to the
Company in 2011 of up to $5 million, subject to compliance with and satisfaction of certain
conditions; (2) modified the definition of Required Lenders, the requirement regarding prepayment
of excess cash flow, the prepayment premium schedule, the interest coverage financial covenant, the
maximum leverage financial covenant and certain other covenants such as indebtedness, liens,
restricted payments and capital expenditures; (3) waived the EBITDA (as defined in the Second
Amendment) and maximum principal requirements in connection with the Second Incremental Loan (as
described below); and (4) increased the maximum aggregate uncommitted incremental term loan amount
to $40 million under which REMC may request future borrowing subject to the satisfaction of
certain conditions. In connection with the Second Amendment, REMC prepaid $20 million of
outstanding principal from cash on hand that REMC had reserved for such purpose. Approximately
$8.685 million of the $20 million prepayment was deducted from the mandatory excess cash flow
prepayment requirement for fiscal year 2010, leaving REMC with no additional prepayment requirement
for fiscal year
2010. Of such prepayment $11 million will be credited against the mandatory excess cash flow
prepayment requirement for fiscal year 2011.
Concurrently with entering into the Second Amendment, REMC and the Company entered into a
second incremental loan assumption agreement (the Second Incremental Loan Agreement) to borrow an
additional $52.0 million incremental term loan (the Second Incremental Loan). The Second
Incremental Loan was issued with an original issue discount of 2%. Net proceeds of approximately
$50.85 million from the Second Incremental Loan were distributed to the Company in the form of a
dividend from REMC. As permitted by terms of the Second Amendment, REMC made a special distribution
to the Company on March 11, 2011 of $5 million. Simultaneously with this distribution, REMC made a
permitted early prepayment of the term loan of $5 million.
The Second Amendment was accounted for as an extinguishment of debt, taking into consideration
the change in future cash flows after this amendment and amendments in the preceding 12 months. As
a result, for the six months ended March 31, 2011, a loss on extinguishment of debt of $4.6 million
was recorded in the consolidated statements of operations.
All outstanding term loans under the 2010 Credit Agreement bear interest, at the election of
REMC, at either (a)(i) the greater of LIBOR or 2.5%, plus (ii) 10.0% or (b)(i) the greatest of (w)
the prime rate, as determined by Credit Suisse, (x) 0.5% in excess of the federal funds effective
rate, (y) LIBOR plus 1.0% or (z) 3.5% plus (ii) 9.0%. Interest payments are generally made on a
quarterly basis. The term loans outstanding under the 2010 Credit Agreement mature on July 29, 2014
and were or are subject to annual amortization, payable quarterly, of 7.5% of the outstanding
principal amount in calendar years 2010 and 2011, 15.0% of the outstanding principal amount in
calendar years 2012 and 2013, and the remainder payable in the last six months prior to, and at,
maturity.
The obligations under the 2010 Credit Agreement are collateralized by substantially all of the
Companys assets and the assets of most of the Companys subsidiaries, including a pledge of the
equity interests in most of the Companys subsidiaries. In addition, REMC granted the lenders a
mortgage on its real property to collateralize its obligations under the 2010 Credit Agreement and
related loan documents. The obligations under the 2010 Credit Agreement are also guaranteed by the
Company and certain of its subsidiaries. The 2010 Credit Agreement contains restrictions on the
amount of cash that can be transferred from REMC to the Company or its non-REMC subsidiaries. The
2010 Credit Agreement includes restrictive covenants that limit, among other things, the Company
and certain subsidiaries ability to make investments, dispose of assets, pay cash dividends and
repurchase stock.
Long-term debt consists of the following:
As of | ||||||||
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Face value of term loan under the credit agreements |
$ | 85,383 | $ | 63,291 | ||||
Less unamortized discount |
(853 | ) | (2,416 | ) | ||||
Book value of term loan under the credit agreements |
84,530 | 60,875 | ||||||
Less current portion |
(39,230 | ) | (12,835 | ) | ||||
Term loan, long-term portion |
$ | 45,300 | $ | 48,040 | ||||
Note 8 Convertible Debt
In April 2006, the Company issued $57,500,000 in aggregate principal amount of 4.00%
Convertible Senior Notes due 2013 (the Notes) with net proceeds to the Company of $53,700,000
after deducting $3,800,000 of underwriting discounts, commissions, fees and other expenses. The
Company recognized these deductions as prepaid debt issuance costs which is a component of other
assets and deposits on the consolidated balance sheets.
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RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Upon achievement of the conversion criteria, the Notes may be converted into 14,332,002 shares
of common stock, subject to adjustment.
Based on the market prices, the estimated fair value of the Notes was approximately $53.0
million as of March 31, 2011.
Note 9 Commitments and Contingencies
Natural Gas Agreements
The Companys policy and practice are to enter into fixed-price purchase contracts for natural
gas in conjunction with contracted product sales in order to substantially fix gross margin on
those product sales contracts. The Company may enter into a limited amount of additional
fixed-price purchase contracts for natural gas in order to minimize monthly and seasonal gas price
volatility. The Company has entered into multiple natural gas supply contracts, including both
fixed- and indexed-price contracts, for various delivery dates through June 30, 2011. Commitments
for natural gas purchases consist of the following:
As of | ||||||||
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
(in thousands, except | ||||||||
weighted average rate) | ||||||||
MMBTUs under fixed-price contracts |
840 | 3,465 | ||||||
MMBTUs under index-price contracts |
431 | 403 | ||||||
Total MMBTUs under contracts |
1,271 | 3,868 | ||||||
Commitments to purchase natural gas |
$ | 5,230 | $ | 15,294 | ||||
Weighted average rate per MMBTU based on the fixed rates and the indexes applicable to each contract |
$ | 4.11 | $ | 3.95 |
The Company is required to make additional prepayments under these purchase contracts in the
event that market prices fall below the purchase prices in the contracts.
Litigation
The Company is party to litigation from time to time in the normal course of business. The
Company maintains insurance to cover certain actions and believes that resolution of its current
litigation will not have a material adverse effect on the Company.
In October 2009, the United States Environmental Protection Agency (the EPA) Region 5 issued
a Notice and Finding of Violation pursuant to the Clean Air Act (CAA) related to the #1 nitric
acid plant at the East Dubuque Plant. The notice alleges violations of the CAAs New Source
Performance Standard for nitric acid plants, Prevention of Significant Deterioration requirements
and Title V Permit Program requirements. The notice appears to be part of the EPAs Clean Air Act
National Enforcement Priority for New Source Review/Prevention of Significant Deterioration related
to nitric acid plants, which seeks to reduce emissions from nitric acid plants through proceedings
that result in the installation of new pollution control technology. The Company continues to
engage in dialogue with the EPA regarding the Companys defenses to the alleged violations and has
had meetings and conversations with the EPA to discuss technical issues associated with the
installation, and the associated monitoring and emissions limits, of any new pollution control
technology to resolve the EPAs alleged violations. The EPA has informed the Company that it has
referred this matter to the United States Department of Justice. Based on discussions with the
EPA, the Company does not believe that the matter will have a material adverse effect on the
Company.
Between December 29, 2009 and January 6, 2010, three purported class action shareholder
lawsuits were filed against the Company and certain of its current and former directors and
officers in the United States District Court for the Central District of California (C.D. Cal.)
alleging that the Company and the named current and former directors and officers made false or
misleading statements regarding the Companys financial performance in connection with its
financial statements for fiscal year 2008 and the first three quarters of fiscal year 2009.
Plaintiffs in the actions purport to bring claims on behalf of all persons who purchased the
Companys securities between May 9, 2008 and December 14, 2009 and seek unspecified damages,
interest, and attorneys fees and costs. The cases were consolidated as Michael Silbergleid v.
Rentech, Inc., et al. (In re Rentech Securities Litigation), Lead Case No. 2:09-cv-09495-GHK-PJW
(C.D. Cal.) (the Securities Action), and a lead plaintiff was appointed on April 5, 2010. The
Lead plaintiff filed a consolidated complaint on May 20, 2010, and the Company filed a motion to
dismiss the action on October 15, 2010. The Company announced on March 23, 2011 that it has reached
an agreement to settle these matters with a settlement fund provided by its insurance carrier of
approximately $1.8 million, subject to court approval of the settlement.
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RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Between January 22, 2010 and February 10, 2010, five shareholder derivative lawsuits were
filed against certain of the Companys current and former officers and directors in the United
States District Court for the Central District of California and the Superior Court of the State of
California for the County of Los Angeles (LASC). The initial complaints allege that the named
current and former directors and officers caused the Company to make false or misleading statements
regarding the Companys financial performance in connection with its financial statements for
fiscal year 2008 and the first three quarters of fiscal year 2009. The plaintiffs, who purport to
assert claims on behalf of the Company, seek various equitable and/or injunctive relief,
unspecified restitution to the Company, interest, and attorneys fees and costs. The cases before
the United States District Court are consolidated as John Cobb v. D. Hunt Ramsbottom, et al. (In re
Rentech Derivative Litigation), Lead Case No. 2:10-cv-0485-GHK-PJW (C.D. Cal.), and the cases
before the Superior Court are consolidated as Andrew L. Tarr v. Dennis L. Yakobson, et al., LASC
Master File No. BC430553. The Company announced on March 23, 2011 that it has agreed to settle
these matters by adopting certain corporate governance practices and paying, or causing its
insurance carrier to pay, plaintiffs attorneys fees and expenses of approximately $300,000,
subject to court approval of the settlement.
Note 10 Income Taxes
The provision for income taxes is based on earnings reported in the consolidated financial
statements. A deferred income tax asset or liability is determined by applying currently enacted
tax laws and relates to the expected reversal of the cumulative temporary differences between the
carrying value of the assets and liabilities for financial statement and income tax purposes.
Deferred income tax expense is measured by the change in the deferred income tax asset or liability
during the year. The Company has recorded a full valuation allowance against its deferred tax
assets to reflect the uncertainty of realization.
Note 11 Segment Information
The Company operates in two business segments as follows:
| Nitrogen products manufacturing: The Company manufactures a variety of nitrogen
fertilizer and industrial products. |
| Alternative energy: The Company develops and markets processes for conversion of
low-value, carbon-bearing solids or gases into valuable hydrocarbons and electric power, and
develops projects that would employ these processes. |
The Companys reportable operating segments have been determined in accordance with the
Companys internal management structure, which is organized based on operating activities. The
Company evaluates performance based upon several factors, of which the primary financial measure is
segment operating income.
For the Three Months | For the Six Months | |||||||||||||||
Ended March 31, | Ended March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Revenues |
||||||||||||||||
Nitrogen products manufacturing |
$ | 23,524 | $ | 19,182 | $ | 65,537 | $ | 46,205 | ||||||||
Alternative energy |
51 | | 103 | 115 | ||||||||||||
Total revenues |
$ | 23,575 | $ | 19,182 | $ | 65,640 | $ | 46,320 | ||||||||
Operating income (loss) |
||||||||||||||||
Nitrogen products manufacturing |
$ | 9,418 | $ | 2,374 | $ | 24,424 | $ | 420 | ||||||||
Alternative energy |
(13,850 | ) | (11,098 | ) | (26,466 | ) | (21,672 | ) | ||||||||
Total operating loss |
$ | (4,432 | ) | $ | (8,724 | ) | $ | (2,042 | ) | $ | (21,252 | ) | ||||
Income (loss) from continuing operations |
||||||||||||||||
Nitrogen products manufacturing |
$ | 6,410 | $ | (1,846 | ) | $ | 13,926 | $ | (5,541 | ) | ||||||
Alternative energy |
(14,497 | ) | (14,150 | ) | (27,894 | ) | (25,930 | ) | ||||||||
Total loss from continuing operations |
$ | (8,087 | ) | $ | (15,996 | ) | $ | (13,968 | ) | $ | (31,471 | ) | ||||
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RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
As of | ||||||||
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Total assets |
||||||||
Nitrogen products manufacturing |
$ | 118,956 | $ | 108,220 | ||||
Alternative energy |
122,121 | 92,295 | ||||||
Total assets |
$ | 241,077 | $ | 200,515 | ||||
Note 12 Net Income (Loss) Per Common Share Attributable to the Company
Basic income (loss) per common share attributable to the Company is calculated by dividing net
income (loss) attributable to the Company by the weighted average number of common shares
outstanding for the period. Diluted net income (loss) per common share attributable to the Company
is calculated by dividing net income (loss) attributable to the Company by the weighted average
number of common shares outstanding plus the dilutive effect of unvested restricted stock units,
outstanding stock options and warrants, and convertible debt using the treasury stock method.
For the three and six months ended March 31, 2011, approximately 39.9 million shares and for
the three and six months ended March 31, 2010, approximately 42.1 million shares of the Companys
common stock issuable pursuant to stock options, stock warrants, restricted stock units and
convertible debt were excluded from the calculation of diluted earnings (loss) per share because
their inclusion would have been anti-dilutive.
Note 13 Subsequent Events
On April 12, 2011, GCSEC Holdings, LLC (GCSEC), a wholly-owned subsidiary of the Company,
entered into a Membership Interest Purchase Agreement (the Purchase Agreement) with Biomass
Energy Holdings LLC (Seller), and acquired 100% of the membership interests of Northwest Florida
Renewable Energy Center LLC (NWFREC).
NWFREC is developing the Port St. Joe Renewable Energy Center (the Port St. Joe Project)
located in Port St. Joe, Florida. The Port St. Joe Project is designed to use a Rentech-SilvaGas
biomass gasifier to provide synthesis gas to a combined-cycle power plant to produce renewable
power from woody biomass. The Company has signed a term sheet with White Construction, Inc. to
serve as the basis for an engineering, procurement and construction contract for construction of
the Port St. Joe Project (the EPC Contract).
The consideration for the purchase of NWFREC has been deferred and may be paid in part at the
closing of construction financing from proceeds of that financing, and in part from available
operating cash flow of the project following commencement of commercial operation. Subject to
adjustments set forth in the Purchase Agreement, the maximum consideration to be paid for the
project is $6 million, consisting of approximately $4.9 million of cash payments and $1.1 million
of equity in NWFREC. The cash portion represents development costs to date paid by Seller plus 10%
of such costs. The cash consideration may be paid 30% at the closing of construction financing, and
70% from available cash flows of the project, both subject to approval of any lenders to, or new
equity investors in, the project. The purchase price can be decreased in certain instances,
including in the event that the lump sum turnkey price in the EPC Contract exceeds an agreed-upon
maximum price.
GCSEC has agreed in the Purchase Agreement to continue to develop the Port St. Joe Project
through the fall of 2011 in accordance with a development budget. In the event that the Company
fails to fund development activities in accordance with the budget, other than for good cause (as
defined in the Purchase Agreement), the Company would be obligated to pay Seller a $1 million break
fee and Seller may, at its option, require GCSEC to re-convey NWFREC back to Seller for a potential
deferred purchase price. If the Port St. Joe Project achieves financial close within five years of
a re-conveyance, then the Company would be reimbursed for its development costs and any break-up
fee and it would receive an equity interest in NWFREC on terms substantially similar to those
described above for deferred payments and equity for Seller.
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RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
With the commercialization of the Companys biomass-to-power technology through the Port St.
Joe Project, the Company will focus its renewable energy project in Rialto, California (the Rialto
Project) on commercialization of its synthetic fuels technology
by shifting the design of that project from the co-production of renewable power and fuels to
a maximum renewable fuels configuration. The Rialto Project has been a candidate for a loan
guarantee in the DOEs Section 1705 Title XVII Loan Guarantee Program, which requires that projects
commence construction no later than September 30, 2011. The Rialto Project remains in due diligence
in the DOEs loan guarantee program, and the Company intends to pursue a loan guarantee under
Section 1703 of Title XVII, which does not include a deadline for commencement of construction.
The Company intends to use additional time available under the 1703 program to optimize the Rialto
Project, designing it for maximum fuel output and reducing the projects capital costs, the
estimate for which had become higher than the Company initially estimated.
On April 14, 2011, the Company gave ClearFuels notice of the exercise of its option to acquire
a substantial majority of the equity of ClearFuels. Upon closing of the transaction, the Company
would own 95% of the equity of ClearFuels, with existing ClearFuels investors retaining a 5% equity
interest. The transaction will be accomplished through the merger of a subsidiary of Rentech into
ClearFuels, with ClearFuels continuing as the surviving company in the merger.
Consideration for the shares of ClearFuels to be acquired by Rentech consists of the
obligations assumed by the Company in the Project Support Agreement to support the construction of
the ClearFuels Gasifier. In connection with the transactions contemplated by the option and
agreement and plan of merger and the Project Support Agreement, the Company also expects to issue a
warrant to purchase approximately two million shares of Company common stock and to provide the
minority shareholders in ClearFuels with a carried interest in a potential project in Hawaii, which
is currently being developed by ClearFuels.
On May 6, 2011, the Company announced that its proposed Olympiad Renewable Energy Centre (the Olympiad Project) in The
Township of White River, Ontario, had been selected by the Province of Ontario for a proposed supply of up to 1.1 million
cubic meters (1.3 million U.S. tons) per year of Crown timber. The award would provide the Company with a reliable long-term
supply of biomass for its proposed Olympiad Project. The Olympiad Project, scheduled to be in service in 2015, will be
designed as a state-of-the-art renewable energy facility that will employ the Companys Rentech-ClearFuels biomass
gasification system and the Rentech Process to produce the only type of alternative jet fuel certified for use in commercial
aviation today. The Company has recently submitted an application for funding to the NextGen Biofuels Fund, which funds up
to 40 per cent to a maximum of C$200 million (approximately $207 million) of eligible project development and construction
costs, which would be repaid from a percentage of the projects cash flows. The Olympiad Project is estimated to have a
total project cost in excess of $500 million.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
FORWARD-LOOKING STATEMENTS
Certain information included in this report and other reports or materials filed or to be
filed by the Company with the SEC (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
the Companys results include the risk factors detailed in Part I. Item 1A. Risk Factors in the
Annual Report and from time to time in the Companys other periodic reports and registration
statements filed with the SEC. 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. We
undertake no responsibility to update any of the forward-looking statements after the date of this
report to conform them to actual results.
As used in this Quarterly Report on Form 10-Q, the terms we, our, us Rentech and the
Company mean Rentech, Inc., a Colorado corporation and its consolidated subsidiaries, unless the
context indicates otherwise.
OVERVIEW OF OUR BUSINESSES
Rentech, Inc., incorporated in 1981, provides alternative and clean energy solutions and
manufactures and sells nitrogen fertilizer products. The Companys Rentech-SilvaGas biomass
gasification process can convert multiple biomass feedstocks into synthesis gas (syngas) for
production of renewable fuels and power. Combining the gasification process with the Companys
unique application of syngas conditioning and clean-up technology and the patented Rentech Process
based on Fischer-Tropsch chemistry, the Company offers an integrated solution for production of
synthetic fuels from biomass. The Rentech Process can also convert syngas produced from fossil
resources using other technologies into ultra-clean synthetic jet and diesel fuels, specialty waxes
and chemicals. Final product upgrading and acid gas removal technologies are provided under an
alliance with UOP, a Honeywell company. The Company develops projects and licenses these
technologies for application in synthetic fuels and power facilities worldwide. REMC, the Companys
wholly-owned subsidiary, manufactures and sells nitrogen fertilizer products including ammonia,
urea ammonia nitrate, urea granule, and urea solution in the corn-belt region of the central United
States.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Managements Discussion and Analysis of Financial Condition and Results of Operations are
based upon our consolidated financial statements, which have been prepared in accordance with GAAP.
The preparation of our consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and
related disclosure of contingent assets and liabilities. The most significant estimates and
judgments relate to: revenue recognition, inventories, construction in progress, the valuation of
financial instruments, long-lived assets and intangible assets, stock-based compensation and the
realization of deferred income taxes. Actual amounts could differ significantly from these
estimates. There has been no material change to our critical accounting policies and estimates from
the information provided in our Annual Report.
RESULTS OF OPERATIONS
More detailed information about our consolidated financial statements is provided in the
following portions of this section. The following discussion should be read in conjunction with our
consolidated financial statements and the notes thereto as presented in this report and in our
Annual Report.
Seasonality
Results of operations for the interim periods are not necessarily indicative of results to be
expected for the year primarily due to the impact of seasonality on the sales at REMC. Our nitrogen
products manufacturing segment and our customers businesses are seasonal, based on planting,
growing and harvesting cycles. The following table shows product tonnage shipped by quarter for the
last three fiscal years and the six months ended March 31, 2011.
17
Table of Contents
For the Fiscal Years Ended September 30, | ||||||||||||||||
2011 | 2010 | 2009 | 2008 | |||||||||||||
(in thousands of tons) | ||||||||||||||||
First Quarter |
167 | 124 | 115 | 171 | ||||||||||||
Second Quarter |
89 | 86 | 65 | 103 | ||||||||||||
Third Quarter |
n/a | 206 | 203 | 170 | ||||||||||||
Fourth Quarter |
n/a | 181 | 150 | 199 | ||||||||||||
Total Tons Shipped for Fiscal Year |
256 | 597 | 533 | 643 | ||||||||||||
The highest volume of tons shipped is typically during the spring planting season during the
third fiscal quarter and the next highest volume of tons shipped is typically after the fall
harvest during the first fiscal quarter, although, as reflected in the table above, sales volumes
may fluctuate due to various circumstances. These seasonal increases and decreases in demand can
also cause sales prices to fluctuate accordingly.
As a result of the seasonality of shipments and sales, we experience significant fluctuations
in our revenues, income and net working capital levels from quarter to quarter. Weather conditions
can significantly impact quarterly results by affecting the timing and amount of product
deliveries. Our receivables and deferred revenues are seasonal and relatively unpredictable.
Significant amounts of our products are typically pre-sold for later shipment, and the timing of
these pre-sales and the amount of down payments as a percentage of the total contract price may
vary with market conditions. The variation in the timing of these pre-sales and of these contract
terms may add to the seasonality of our cash flows and working capital.
THREE AND SIX MONTHS ENDED MARCH 31, 2011 COMPARED TO THREE AND SIX MONTHS ENDED MARCH 31, 2010:
Continuing Operations
Revenues
For the Three Months | For the Six Months | |||||||||||||||
Ended March 31, | Ended March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Revenues: |
||||||||||||||||
Product shipments |
$ | 23,524 | $ | 18,770 | $ | 65,537 | $ | 44,354 | ||||||||
Natural gas sales of excess inventory |
| 412 | | 1,851 | ||||||||||||
Total nitrogen products manufacturing |
$ | 23,524 | $ | 19,182 | $ | 65,537 | $ | 46,205 | ||||||||
Alternative energy |
51 | | 103 | 115 | ||||||||||||
Total revenues |
$ | 23,575 | $ | 19,182 | $ | 65,640 | $ | 46,320 | ||||||||
For the Three Months | For the Three Months | |||||||||||||||
Ended March 31, 2011 | Ended March 31, 2010 | |||||||||||||||
Tons | Revenue | Tons | Revenue | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Product Shipments: |
||||||||||||||||
Ammonia |
20 | $ | 11,780 | 23 | $ | 8,461 | ||||||||||
Urea Ammonium Nitrate |
30 | 6,036 | 25 | 4,396 | ||||||||||||
Urea (liquid and granular) |
9 | 4,046 | 11 | 4,488 | ||||||||||||
Carbon Dioxide |
27 | 725 | 24 | 702 | ||||||||||||
Nitric Acid |
3 | 937 | 3 | 723 | ||||||||||||
Total |
89 | $ | 23,524 | 86 | $ | 18,770 | ||||||||||
For the Six Months | For the Six Months | |||||||||||||||
Ended March 31, 2011 | Ended March 31, 2010 | |||||||||||||||
Tons | Revenue | Tons | Revenue | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Product Shipments: |
||||||||||||||||
Ammonia |
64 | $ | 34,127 | 68 | $ | 22,882 | ||||||||||
Urea Ammonium Nitrate |
109 | 20,953 | 82 | 12,524 | ||||||||||||
Urea (liquid and granular) |
15 | 6,980 | 16 | 6,450 | ||||||||||||
Carbon Dioxide |
61 | 1,508 | 39 | 1,071 | ||||||||||||
Nitric Acid |
7 | 1,969 | 5 | 1,427 | ||||||||||||
Total |
256 | $ | 65,537 | 210 | $ | 44,354 | ||||||||||
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Nitrogen products manufacturing. Our nitrogen products manufacturing segment provides revenue
from sales of various nitrogen fertilizer products manufactured at our East Dubuque Plant and used
primarily in corn production. The East Dubuque Plant is designed to produce anhydrous ammonia,
nitric acid, urea liquor, ammonium nitrate solutions, granular urea and carbon dioxide using
natural gas as a feedstock. Revenues are seasonal based on the planting, growing, and harvesting
cycles of customers utilizing nitrogen fertilizer.
The increase in revenue for the three and six months ended March 31, 2011 compared to the
three and six months ended March 31, 2010 was due to increased sales prices for a majority of
products and sales volume for urea ammonium nitrate solution, partially offset by lower sales
volume for anhydrous ammonia and granular urea. Sales volume increased for urea ammonium nitrate
solution due to a higher availability of product in the current year, as compared to the previous
year during which the scheduled plant shutdown, in October 2009, and subsequent equipment failures
resulted in less production of urea ammonium nitrate solution.
The average sales price per ton in the second quarter of the current fiscal year as compared
with that of the prior fiscal year increased by 60% for anhydrous ammonia and by 14% for urea
ammonium nitrate solutions. These two products comprised approximately 76% and 69% of the product
sales for the three months ended March 31, 2011 and 2010, respectively. The average sales price per
ton in the six months ended March 31, 2011 as compared with that of the six months ended March 31,
2010 increased by 58% for anhydrous ammonia and by 26% for urea ammonium nitrate solutions. These
two products comprised approximately 84% and 80% of the product sales for the six months ended
March 31, 2011 and 2010, respectively. Average sales prices per ton increased due to higher demand
caused by a combination of low levels of corn and fertilizer inventories and expectations of higher
corn acreage in 2011.
Alternative Energy. This segment generates revenues for technical services and licensing
activities related to the Companys technologies.
Cost of Sales
For the Three Months | For the Six Months | |||||||||||||||
Ended March 31, | Ended March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Cost of sales: |
||||||||||||||||
Product shipments |
$ | 13,323 | $ | 15,700 | $ | 39,209 | $ | 38,183 | ||||||||
Turnaround expenses |
| 44 | | 3,995 | ||||||||||||
Natural gas sales of excess inventory |
| 428 | | 2,121 | ||||||||||||
Natural gas sales with simultaneous purchase |
| | | 57 | ||||||||||||
Total nitrogen products manufacturing |
$ | 13,323 | $ | 16,172 | $ | 39,209 | $ | 44,356 | ||||||||
Alternative energy |
50 | | 100 | 106 | ||||||||||||
Total cost of sales |
$ | 13,373 | $ | 16,172 | $ | 39,309 | $ | 44,462 | ||||||||
Nitrogen Products Manufacturing. The cost of sales for product shipments for the three months
ended March 31, 2011 decreased from the prior comparable period primarily due to lower natural gas
prices. Natural gas and labor costs comprised approximately 55% and 12%, respectively, of cost of
sales on product shipments for the three months ended March 31, 2011. Natural gas and labor costs
comprised approximately 62% and 11%, respectively, of cost of sales on product shipments for the
three months ended March 31, 2010. The cost of sales for product shipments for the six months ended
March 31, 2011 increased from the prior comparable period primarily due to higher sales volume,
partially offset by lower gas prices. Natural gas and labor costs comprised approximately 55% and
12%, respectively, of cost of sales on product shipments for the six months ended March 31, 2011.
Natural gas and labor costs comprised approximately 57% and 13%, respectively, of cost of sales on
product shipments for the six months ended March 31, 2010.
Turnaround expenses represent the cost of shutting down the plant for scheduled maintenance,
which is done approximately every two years. A plant turnaround occurred in October 2009. As a
result, during the six months ended March 31, 2010, the Company incurred turnaround expenses of
$3,995,000. There was no plant turnaround during the six months ended March 31, 2011.
Natural gas, though not purchased for the purpose of resale, is occasionally sold under
certain circumstances, such as when contracted quantities received are in excess of production
requirements and storage capacities. In that case, the sales proceeds are recorded as revenue and
the related cost is recorded as a cost of sales. Natural gas may also be sold to a third party with
a simultaneous purchase of gas by the Company of the same quantity at a lower price in order to
realize a reduction of raw material cost. In this case, no revenue is recorded for the sale of gas,
and the difference between the cost of the gas that was sold and the cost of gas that was
simultaneously purchased is recorded directly to cost of sales.
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Depreciation expense included in cost of sales from our nitrogen products manufacturing
segment was $1,365,000 and $1,636,000 for the three months ended March 31, 2011 and 2010,
respectively. Depreciation expense included in cost of sales from our nitrogen products
manufacturing segment was $3,853,000 and $4,118,000 for the six months ended March 31, 2011 and
2010, respectively.
Alternative Energy. The cost of sales for our alternative energy segment was for costs
incurred for work performed under technical services contracts.
Gross Profit (Loss)
For the Three Months | For the Six Months | |||||||||||||||
Ended March 31, | Ended March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Gross profit (loss): |
||||||||||||||||
Product shipments |
$ | 10,201 | $ | 3,070 | $ | 26,328 | $ | 6,171 | ||||||||
Turnaround expenses |
| (44 | ) | | (3,995 | ) | ||||||||||
Natural gas sales of excess inventory |
| (16 | ) | | (270 | ) | ||||||||||
Natural gas sales with simultaneous purchase |
| | | (57 | ) | |||||||||||
Total nitrogen products manufacturing |
$ | 10,201 | $ | 3,010 | $ | 26,328 | $ | 1,849 | ||||||||
Alternative energy |
1 | | 3 | 9 | ||||||||||||
Total gross profit (loss) |
$ | 10,202 | $ | 3,010 | $ | 26,331 | $ | 1,858 | ||||||||
Nitrogen Products Manufacturing. The gross profit for product shipments for the three and six
months ended March 31, 2011 increased compared to the prior comparable periods primarily due to
higher sales prices and sales volume and lower gas prices.
Operating Expenses
For the Three Months | For the Six Months | |||||||||||||||
Ended March 31, | Ended March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Operating expenses: |
||||||||||||||||
Selling, general and administrative |
$ | 7,432 | $ | 6,776 | $ | 14,768 | $ | 13,845 | ||||||||
Depreciation and amortization |
559 | 487 | 1,132 | 984 | ||||||||||||
Research and development |
6,687 | 4,478 | 12,464 | 8,302 | ||||||||||||
Other project costs |
| | 53 | | ||||||||||||
Gain on disposal of property, plant and equipment |
(44 | ) | (7 | ) | (44 | ) | (21 | ) | ||||||||
Total operating expenses |
$ | 14,634 | $ | 11,734 | $ | 28,373 | $ | 23,110 | ||||||||
Selling, General and Administrative Expenses. During the three months ended March 31, 2011, as
compared to the three months ended March 31, 2010, selling, general and administrative expenses
increased by $656,000 or 10%. During the six months ended March 31, 2011, as compared to the six
months ended March 31, 2010, selling, general and administrative expenses increased by $923,000 or
7%. The increase for both the three and six months ended March 31, 2011 was primarily due to an
increase in salaries as a result of additional headcount, an increase in computer services and
support and increases in professional services, partially offset by a decrease in stock-based
compensation and legal expense.
Depreciation and Amortization. A portion of depreciation and amortization expense is
associated with assets that support general and administrative functions and that expense is
recorded in operating expense. The amount of depreciation and amortization expense within operating
expenses increased by $72,000 and $148,000 for the three and six months ended March 31, 2011,
respectively, which was primarily attributable to increased amortization of intellectual property
as a result of revisions to the amortization period of the patents.
The majority of depreciation originates at our nitrogen products manufacturing segment and, as
a manufacturing cost, is distributed between cost of sales and finished goods inventory, based on
product volumes.
Research and Development. We incur research and development expenses at our technology center
in Commerce City, Colorado, where we actively conduct work to further improve our technologies and
to perform services for our customers. These expenses are included in our alternative energy
segment. Research and development expenses increased by $2,209,000 during the three months ended
March 31, 2011, compared to the three months ended March 31, 2010. The increase in research and
development expense was primarily caused by increased expenses at the PDU for plant modifications
and repairs; expenses to support a significantly higher number of operating days; and an increase
of $444,000 of expense due to the consolidation of ClearFuels. Research and development expenses
increased by $4,162,000 during the six months ended March 31, 2011, compared to the six months
ended March 31, 2010. The increase in research and development expense was primarily caused by
increased expenses at the PDU for plant modifications and
repairs; expenses to support a significantly higher number of operating days; and an increase of
$899,000 of expense due to the consolidation of ClearFuels.
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Operating Income (Loss)
For the Three Months | For the Six Months | |||||||||||||||
Ended March 31, | Ended March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Income (loss) from operations: |
||||||||||||||||
Product shipments |
$ | 9,418 | $ | 2,434 | $ | 24,424 | $ | 4,742 | ||||||||
Turnaround expenses |
| (44 | ) | | (3,995 | ) | ||||||||||
Natural gas sales of excess inventory |
| (16 | ) | | (270 | ) | ||||||||||
Natural gas sales with simultaneous purchase |
| | | (57 | ) | |||||||||||
Total nitrogen products manufacturing |
$ | 9,418 | $ | 2,374 | $ | 24,424 | $ | 420 | ||||||||
Alternative energy |
(13,850 | ) | (11,098 | ) | (26,466 | ) | (21,672 | ) | ||||||||
Total loss from operations |
$ | (4,432 | ) | $ | (8,724 | ) | $ | (2,042 | ) | $ | (21,252 | ) | ||||
Nitrogen Products Manufacturing. The increase in income from operations for product shipments
for the three and six months ended March 31, 2011 as compared to the prior comparable periods was
primarily due to higher sales prices and sales volume and lower gas prices.
Alternative Energy. Loss from operations primarily consists of operating expenses, such as
selling, general and administrative, depreciation and amortization, and research and development.
ANALYSIS OF CASH FLOW
The following table summarizes our Consolidated Statements of Cash Flows:
For the Six Months | ||||||||
Ended March 31, | ||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Net Cash Provided by (Used in): |
||||||||
Operating activities |
$ | 21,451 | $ | (4,390 | ) | |||
Investing activities |
(17,632 | ) | (7,753 | ) | ||||
Financing activities |
19,355 | 13,413 | ||||||
Net increase in cash and cash equivalents |
$ | 23,174 | $ | 1,270 | ||||
Cash Flows from Operating Activities
Net Loss. The Company had net losses of $13,968,000 and $31,465,000 for the six months ended
March 31, 2011 and 2010, respectively. The cash flows provided by or used in operations during
these periods, primarily resulted from the following operating activities:
Loss on debt extinguishment. During the six months ended March 31, 2011, REMC entered into
the Second Amendment; the transaction was accounted for as an extinguishment of debt. As a
result, a loss on debt extinguishment was recorded for $4,593,000. During the six months ended
March 31, 2010, REMC entered into the 2010 Credit Agreement; the transaction was accounted for as
an extinguishment of debt. As a result, a loss on debt extinguishment was recorded for
$2,268,000.
Accounts Receivable. During the first six months of fiscal 2011 and fiscal 2010, accounts
receivable decreased by $6,243,000 and $3,002,000, respectively, caused by low winter sales
volume due to normal seasonality of the fertilizer business. The decrease was higher in fiscal
2011 due to a high accounts receivable balance at September 30, 2010 which resulted from high
summer sales volume, mainly due to some large shipments by barge.
Property Insurance Claim Receivable. During fiscal year 2009, we recorded a property
insurance claim receivable for insured property losses related to a weather-related shutdown of
REMC in January 2009. During the six months ended March 31, 2010, the Company collected the
outstanding balance of $1,795,000.
Receivables from Insurance / Litigation Settlement Payable. During the six months ended
March 31, 2011, we recorded insurance claim receivables of $2,041,000 relating to the class
action shareholder lawsuits and the shareholder derivative lawsuits described in Note 9 to the
consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q. During the same period, we
also recorded an accrual of $1,954,000 for the related litigation settlements. Accounting
guidance does not allow for the offset of these items in the balance sheets.
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Inventories. During the first six months of fiscal 2011 and fiscal 2010, inventories
increased by $11,962,000 and $6,619,000 due to seasonal build-up of inventory during the winter
months in anticipation of the high volume spring planting season. The increase in 2011 was more
than the increase in fiscal 2010 due to a lower inventory balance leading into the 2011 fiscal
year which resulted from high summer sales volume, mainly due to some large shipments by barge.
Deferred Revenue. We record deferred revenue on product pre-sale contracts prior to delivery
of the product to the extent we receive cash payments under those contracts. Deferred revenue
increased $29,026,000 during the six months ended March 31, 2011, versus an increase of
$11,405,000 during this same period in fiscal year 2010. The increase for both fiscal years is
due to collection of cash on product pre-sale contracts prior to the high volume spring planting
season. The greater increase in the current fiscal year was due to significantly higher sales
prices and the fact that we have already begun collecting payments under product sales contracts
for fall 2011.
Cash Flows from Investing Activities
Proceeds from Sale of Available for Sale Securities. During the six months ended March 31,
2010, the Company sold, through a tender offer and various sales, its entire holdings of
available for sale securities for approximately $4,769,000, which resulted in a net loss on sale
of investments of approximately $1,231,000. For the six months ended March 31, 2011, there were
no such sales.
Purchase of Property, Plant, Equipment and Construction in Progress. The increase in net
additions of $4,155,000 for the six months ended March 31, 2011 compared to the six months ended
March 31, 2010 was primarily due to an increase in spending for development activities at the
Rialto Project that was capitalized; partially offset by decreased capital spending at REMC due
to the high amount of capital spending during the October 2009 scheduled turnaround.
Cash Flows from Financing Activities
Proceeds from term loan, net of original issue discount. During the six months ended March
31, 2011, the Company entered into a second incremental loan assumption agreement to borrow an
additional $52,000,000, with an original issue discount of $1,040,000. During the six months
ended March 31, 2010, the Company replaced its then-existing credit agreement, which had an
outstanding balance of $37,112,000 and issuance costs of $928,000, with the 2010 Credit
Agreement with an initial principal amount of $62,500,000 and an original issue discount of
$1,875,000.
Payments on debt and notes payable. During the six months ended March 31, 2011, in
addition to $9,908,000 of scheduled principal payments, REMC prepaid $20,000,000 of outstanding
principal in connection with the Second Amendment to the 2010 Credit Agreement, from cash on
hand that REMC had reserved for such purpose.
Payments on Line of Credit on Available for Sale Securities. During the six months ended
March 31, 2010, we paid off the line of credit with the net proceeds from the various sales of
available for sale securities. For the six months ended March 31, 2011, there were no such
sales.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
At March 31, 2011, our current assets totaled $109,397,000, including cash and cash
equivalents of $77,320,000, of which $43,001,000 was held at REMC and was subject to the
restrictions imposed by the 2010 Credit Agreement; and accounts receivable of $3,343,000. Our
current liabilities were $109,579,000. We had long-term liabilities of $98,400,000, most of which
related to our long-term convertible senior notes and debt under our 2010 Credit Agreement. REMCs
income from continuing operations for the six months ended March 31, 2011 was $13,926,000 compared
to a loss from continuing operations of $5,541,000 for the six months ended March 31, 2010. The
Companys loss from continuing operations for the six months ended March 31, 2011 and 2010 was
$13,968,000 and $31,471,000, respectively.
Pursuant to an Equity Distribution Agreement, as amended, we may sell up to approximately
$43,700,000 of remaining aggregate gross sales price of common stock until February 9, 2012,
subject to certain restrictions, including those related to the trading volume
of our common stock and limitations on selling securities outside of the trading windows under the
Companys insider trading policy. In addition to liquidity, if any, available under the Equity
Distribution Agreement, depending on capital market conditions, other sources of liquidity for
corporate activities during fiscal years 2011 and 2012 could include the issuance of equity or
equity-linked securities, project debt and project equity, and various forms of financing for REMC,
including restructuring the 2010 Credit Agreement.
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As of March 31, 2011 approximately $94,300,000 aggregate offering price of securities was
available to be sold under our shelf registration statement (including up to $43,700,000 of common
stock that may be sold under the Equity Distribution Agreement). This report shall not constitute
an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of securities
in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such jurisdiction.
We may also consider sales of assets not used or held for use in our alternative energy
segment as a source of capital that is not dilutive to our common stockholders to fund the
Companys non-REMC activities. We have received inquiries regarding the sale of a portion or all
of our interest in REMC from time to time. We may, in the future, decide to pursue such a
transaction if we believe the likely proceeds from such a sale are more valuable to the Company and
its shareholders than the operating expertise we gain from owning REMC and the cash flow and
financing proceeds that are expected to be generated by REMC.
Capital markets have experienced periods of extreme uncertainty over the past few years, and
access to those markets has been difficult. If we need to access capital markets, we cannot assure
you that we will be able to do so on acceptable terms, or at all. Our failure to raise additional
capital when needed would have a material adverse effect on our business, financial condition,
results of operations and liquidity.
Liquidity Requirements
Short-Term Liquidity Requirements. We generally consider our short-term liquidity
requirements to consist of those items that are expected to be incurred within the next 12 months.
Our budgeted liquidity needs (other than for REMC) extend through the end of our fiscal year,
September 30, 2011, and include development costs to bring the Port St. Joe Project to the point
where a closing of construction financing is possible, costs related to the completion of front-end
engineering and design (FEED) for the original configuration of the Rialto Project, continued
development of the Natchez Project and other projects, operation of the PDU, continued research and
development of the Companys technologies, construction of the
ClearFuels Gasifier at the PDU, debt service requirements coming due
within the next year and
general working capital and administrative needs. We do not expect to require additional capital
for these budgeted liquidity needs. We expect to require additional capital to continue these
activities after the end of this fiscal year. In the event that such capital were not available, we
would need to reduce the level of or discontinue some or all of these corporate and development activities. We would also require
additional capital to close on construction financing for the Port St. Joe Project, which may occur
before September 30, 2011.
The Port St. Joe Project is estimated to have a total project cost of approximately $225
million, based on feasibility engineering. The Company has received a term sheet from the DOE for a
potential guarantee and commitment of an amount of debt that we expect would represent the majority
of the capital required for the project. Construction of the project must commence by September 30,
2011 to qualify for a loan guarantee under the Section 1705 Title XVII Loan Guarantee Program, and
the provision of a term sheet by the DOE is not an assurance that the project will receive a loan
guarantee. We expect the remaining funding for the project to be from possible equity investors in
the project and from equity that we may raise and invest in the project. Equity that we may invest
could be raised through new or restructured financings at REMC or through the issuance of equity or
debt securities by the Company. We cannot assure you that the equity funding for the Port St. Joe
Project will be available on acceptable terms, or at all. In the event that the Company does not
receive the required capital to fund the construction costs for the Port St. Joe Project on a
timely basis then the Port St. Joe Project may not be completed.
We would also need additional capital during the next 12 months if we elected to pursue other
significant development activities, such as continuing the development of the Rialto Project beyond
the FEED phase, funding the development of certain new technologies, or pursuing other projects
beyond the early development stages that they are in. Pre-FEED development activities for our
projects require relatively low levels of spending. In the event that capital was not available, we
would not be able to advance the Rialto Project beyond FEED or advance other projects into the
feasibility or FEED stages. We expect to obtain additional capital through various combinations of
project debt and equity, equity or debt issued by the Company, asset sales, equity from strategic
partners and suppliers, equity or debt issued by or other new financings at REMC, and various forms of government support, but there
is no assurance that these sources of capital will be available to us.
During the next 12 months, we expect REMCs principal liquidity needs, which include costs to
operate and maintain the East Dubuque Plant, such as its ordinary
course needs for working capital, debt service requirements coming
due within the next year and capital expenditures, to be met from cash on hand at REMC and cash forecasted to be generated
by REMCs operations. REMCs fertilizer business is seasonal, based upon the planting, growing
and harvesting cycles. Inventories must be accumulated to allow for customer shipments during the
spring and fall fertilizer application seasons. The accumulation of inventory to be available for
seasonal sales requires that working capital be available at REMC. Our practice of selling
substantial amounts of our fertilizer products through prepayment contracts also significantly
affects working capital needs at REMC. Working capital available at REMC is also affected by
changes in commodity prices for natural gas and nitrogen fertilizers, which are the East Dubuque
Plants principal feedstock and products. We are studying an expansion of the capacity at the East
Dubuque Plant. If we pursue that expansion, we will require additional capital to fund engineering
and construction.
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All outstanding loans under the 2010 Credit Agreement are subject to annual amortization and
require cash payments of interest. This amortization provision requires us to make payments of
5.625% of the principal amount for the remainder of calendar year 2011, 15.0% of the entire
principal amount in calendar years 2012 and 2013, and the remainder payable in the last six months
prior to, and at, maturity. The 2010 Credit Agreement also requires that a certain percentage of
excess cash flow from REMC, as defined in the 2010 Credit Agreement, be applied to repay the term
loans and any incremental term loans. The percentage of REMCs excess cash flow required to be
applied as a prepayment will depend on REMCs leverage ratio as of the relevant calculation date
and the aggregate outstanding principal amount of loans under the 2010 Credit Agreement on such
date. For fiscal year 2011 we will credit $11 million from the prepayment made at the time of
entering into the Second Amendment towards the mandatory excess cash flow prepayment.
The Company is actively working with its financial advisor to investigate refinancing the 2010
Credit Agreement in order to take advantage of potentially more attractive terms available in the
marketplace today. There can be no assurance that the Company will refinance the 2010 Credit
Agreement or what the terms and conditions of any refinancing would be.
Long-Term Liquidity Requirements. We generally consider our long-term liquidity requirements
to consist of those items that are expected to be incurred beyond the next 12 months. Our principal
long-term needs for liquidity are to fund development, detailed engineering, procurement,
construction and operation of commercial projects as well as our ongoing research and development
expenses, including operation of the PDU, and corporate administrative expenses. The commercial
project that is the furthest along in its development, and the Companys first priority for project
development, is the Port St. Joe Project followed by the Rialto Project and the Natchez Project,
and we have begun early stage development of additional projects. We will require substantial
amounts of capital that we do not now have to fund our long-term liquidity requirements and develop
commercial projects, for which we anticipate that the construction costs will range from hundreds
of millions of dollars to multiple billions of dollars depending upon their size and scope.
Depending on the availability of such capital, we expect these projects to be funded by various
combinations of project debt and equity, debt and equity issued by the Company or REMC, equity from
strategic partners and suppliers, and various forms of government support.
The outstanding loans under the 2010 Credit Agreement mature on July 29, 2014. However, the
2010 Credit Agreement requires us to meet the following financial covenants, and failure to meet
such covenants could result in acceleration of the term loans under the 2010 Credit Agreement:
| REMC and its subsidiaries cannot spend more than a specified maximum amount of capital
expenditures in each fiscal year. From October 1, 2010 through September 30, 2012, the
aggregate limit on capital expenditures is $33 million, and such limit varies each
succeeding fiscal year. For the six months ended March 31, 2011, REMC incurred $4.7 million
of capital expenditures. If REMC and its subsidiaries do not expend the maximum amount of
capital expenditures permitted for any period, then the unused amount from that period,
subject to a $9.0 million maximum carry forward amount for the period from October 1, 2010
to September 30, 2012, may be carried forward to the subsequent period; |
| REMC and its subsidiaries must maintain a minimum interest coverage ratio for any period
of four consecutive fiscal quarters. For fiscal year 2011, the minimum interest coverage
ratio requirement ranges from 3.10:1.00 to 4.10:1.00 for the applicable measurement
periods. For the twelve months ended March 31, 2011, our actual interest coverage ratio
was 5.79:1.00 (compared to the minimum interest coverage ratio of 3.10:1.00); |
| REMC and its subsidiaries cannot exceed a maximum leverage ratio as of the
last day of any period of four consecutive fiscal quarters. The maximum leverage ratio is
calculated by dividing the outstanding principal amount of the loans under the 2010 Credit
Agreement by EBITDA, as defined in the 2010 Credit Agreement. For fiscal year 2011, the
maximum leverage ratio requirement ranges from 2.50:1.00 to 1.80:1.00 for the applicable
measurement periods. For the twelve months ended March 31, 2011, our actual leverage ratio
was 1.58:1.00 (compared to a maximum leverage ratio of 2.3:1.00); and |
| During the months of April through December, REMC and its subsidiaries must maintain at
least $7.5 million of unrestricted cash and permitted investments and during the months of
January through March maintain at least $5.0 million of unrestricted cash and permitted
investments. At March 31, 2011, REMC had $43 million of unrestricted cash and permitted
investments. |
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The full $57.5 million principal amount of the Notes is due in April 2013. During the
remainder of the term of the Notes, the required annual cash interest payments are $2.3 million. At
any time, we may redeem the Notes, in whole or in part, at a redemption price payable in cash equal
to 100% of the principal amount of the Notes to be redeemed, plus any accrued and unpaid interest
to, but not including, the redemption date. On or before the maturity date, we expect to either
exchange the Notes for new debt or equity securities, or pay off the Notes through various
combinations of cash holdings, proceeds from debt or equity issued by the Company, asset sales and
new financings at REMC. There is no assurance that such exchanges can be completed or that these
sources of capital will be available to us in amounts sufficient to pay the principal amount of the
Notes.
CONTRACTUAL OBLIGATIONS
We have entered into various contractual obligations as detailed in our Annual Report. During
the normal course of business in the six months ended March 31, 2011, the amount of our contractual
obligations changed as scheduled payments were made and new contracts were executed. During the six
months ended March 31, 2011, the following significant changes occurred to our contractual
obligations:
| The Company and REMC entered into the Second Amendment and the Second Incremental Loan
Agreement under which the principal amount of the term loan was increased. As of March 31,
2011, the balance of the 2010 Credit Agreement was $85,383,000. |
| Natural gas purchase contracts committed decreased by $10,064,000 to $5,230,000. We are
required to make additional prepayments under these purchase contracts in the event that
market prices fall further below the purchase prices in the contracts. As of March 31, 2011,
the natural gas purchase contracts included delivery dates through June 30, 2011. Subsequent
to March 31, 2011, we entered into additional fixed quantity natural gas supply contracts at
fixed and indexed prices for various delivery dates through August 31, 2011. The total MMBTUs
associated with these additional contracts was 1,385,000 and the total amount of the purchase
commitments was $5,998,000, resulting in a weighted average rate per MMBTU of $4.33. |
| Purchase obligations increased by $5,155,000 to $24,914,000 as measured by the total
amount of open purchase orders. The increase is primarily due to the inclusion of open
purchase orders for ClearFuels which the Company is responsible for under the Project
Support Agreement. |
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements.
RECENTLY ISSUED ACCOUNTING STANDARDS
Refer to Note 2 to the consolidated financial statements, Recent Accounting Pronouncements.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Interest Rate Risk. We are exposed to interest rate risk related to our borrowings under the
2010 Credit Agreement. Borrowings under the 2010 Credit Agreement bear interest at a variable rate
based upon either LIBOR, or the lenders alternative base rate, plus, in each case, an applicable
margin. At March 31, 2011, three month LIBOR was approximately 0.303%, which is below the minimum of 2.5% in the 2010 Credit Agreement. As of March 31, 2011,
we had outstanding borrowings under the 2010 Credit Agreement of $85,383,000. Based upon the
outstanding balances of our variable-interest rate debt at March 31, 2011, and assuming interest
rates are above the applicable minimum, and increase or decrease by 100 basis points, the potential
annual increase or decrease in annual interest expense is approximately $854,000. Under its current
policies, the Company does not use interest rate derivative instruments to manage exposure to
interest rate changes.
Commodity Price Risk. We are exposed to significant market risk due to potential changes in
prices for fertilizer products and natural gas. Natural gas is the primary raw material used in the
production of various nitrogen-based products manufactured at the East Dubuque Plant. Market prices
of nitrogen-based products are affected by changes in natural gas prices as well as by supply and
demand and other factors. In the normal course of business, REMC currently produces nitrogen-based
fertilizer products throughout the year to supply the needs of its customers during the
high-delivery-volume spring and fall seasons. Fertilizer product inventory is subject to market
risk due to fluctuations in the relevant commodity prices. Currently, REMC purchases natural gas
for use in its East Dubuque Plant on the spot market, and through short-term, fixed supply, fixed
price and index price purchase contracts. Natural gas prices have fluctuated during the last
several years, increasing in 2008 and subsequently declining to lower levels. A hypothetical
increase of $0.10 per MMBTU of natural gas would increase the cost to produce one ton of ammonia by
approximately $3.50. REMC has experienced no difficulties in securing supplies of natural gas,
however, natural gas is purchased at market prices and such purchases are subject to price
volatility.
Alternative Energy. The future success of our alternative energy business depends to a great
extent on the levels and volatility of certain commodities such as petroleum-based fuels, natural
gas and electricity. It may also depend on the level and volatility of prices or taxes placed on
emissions of carbon or other pollutants. The cost of feedstocks for our projects could also
materially affect prospective profitability of those projects. We expect that our projects will be
designed to produce fuels and power that may compete with conventional fuels and power as well as
with fuels and power produced from non-traditional sources. The prices of our products may be
influenced by the prices of those traditional or alternative fuels and power. Fluctuations in the
price of construction commodities such as concrete, steel and other materials could have a material
effect on the construction cost, and therefore of the projected returns to investors, on such
projects. Significant fluctuations in such prices may materially affect the business prospects of
our alternative energy business.
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ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures. We have established and currently maintain
disclosure controls and procedures designed to ensure that information required to be disclosed by
us in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the
Exchange Act) is recorded, processed, summarized and reported within the time periods specified
by the SECs rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including the Chief Executive Officer and
the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures were effective as of March 31,
2011. Accordingly, management has concluded that our consolidated financial statements contained in
this report fairly present, in all material respects, our financial condition, results of
operations, and cash flows for the periods presented.
Changes in Internal Control over Financial Reporting. There were no changes in our internal
control over financial reporting during the quarter ended March 31, 2011 that materially affect or
are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
A description of the legal proceedings to which the Company and its subsidiaries are a party
is contained in Note 9 to the consolidated financial statements included in Part I of this
Quarterly Report on Form 10-Q.
ITEM 6. | EXHIBITS. |
Exhibit Index
31.1 | Certification of President and Chief Executive Officer pursuant to Rule 13a-14 or Rule 15d-14(a). |
|||
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14 or Rule 15d-14(a). |
|||
32.1 | Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350. |
|||
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
RENTECH, INC. |
||||
Dated: May 10, 2011 | /s/ D. Hunt Ramsbottom | |||
D. Hunt Ramsbottom, | ||||
President and Chief Executive Officer | ||||
Dated: May 10, 2011 | /s/ Dan J. Cohrs | |||
Dan J. Cohrs | ||||
Chief Financial Officer |
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