UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended December 31, 2010
Or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ___________ to ___________
Commission File No. 001-15795
RENTECH, INC.
(Exact name of registrant as specified in its charter)
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Colorado
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84-0957421
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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10877 Wilshire Boulevard, Suite 600
Los Angeles, California 90024
(Address of principal executive offices)
(310) 571-9800
(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):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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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 January 31, 2011 was
222,209,542.
RENTECH, INC.
Form 10-Q
Table of Contents
2
PART I. FINANCIAL INFORMATION
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ITEM 1.
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FINANCIAL STATEMENTS
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RENTECH, INC.
Consolidated Balance Sheets
(Amounts in thousands, except per share data)
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As of
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December 31,
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September 30,
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2010
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2010
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(Unaudited)
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ASSETS
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Current assets
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Cash and cash equivalents
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$
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84,586
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$
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54,146
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Restricted cash, short-term
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100
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Accounts receivable, net of allowance for doubtful accounts of $100 at December 31, 2010 and
September 30, 2010
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16,612
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9,586
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Inventories
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5,451
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6,966
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Deposits on gas contracts
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2,050
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2,353
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Prepaid expenses and other current assets
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3,296
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5,128
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Other receivables, net
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432
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470
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Total current assets
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112,427
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78,749
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Property, plant and equipment, net
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52,882
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55,299
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Construction in progress
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49,514
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41,098
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Other assets
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Other assets and deposits
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16,963
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17,599
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Goodwill
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7,209
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7,209
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Deferred income taxes
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561
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561
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Total other assets
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24,733
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25,369
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Total assets
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$
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239,556
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$
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200,515
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities
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Accounts payable
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$
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4,905
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$
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6,425
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Accrued payroll and benefits
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3,895
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5,786
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Accrued liabilities
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12,465
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13,515
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Capital lease obligation
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192
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322
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Deferred revenue
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31,501
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14,473
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Accrued interest
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2,212
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2,725
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Deferred income taxes
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561
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561
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Current portion of long-term debt and term loan
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29,850
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12,835
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Total current liabilities
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85,581
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56,642
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Long-term liabilities
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Term loan, net of current portion
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61,929
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48,040
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Long-term convertible debt to stockholders
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43,397
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42,163
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Advance for equity investment
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7,892
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7,892
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Other long-term liabilities
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484
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425
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Total long-term liabilities
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113,702
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98,520
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Total liabilities
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199,283
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155,162
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Commitments and contingencies
(Note 9)
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Stockholders equity:
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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
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Series C participating cumulative preferred stock: $10 par value; 500 shares authorized;
no shares issued and outstanding
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Common stock: $.01 par value; 450,000 shares authorized; 222,209 and 221,731 shares issued
and outstanding at December 31, 2010 and September 30, 2010, respectively
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2,222
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2,217
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Additional paid-in capital
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333,492
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332,696
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Accumulated deficit
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(302,508
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)
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(296,993
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)
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Total Rentech stockholders equity
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33,206
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37,920
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Noncontrolling interests
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7,067
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7,433
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Total stockholders equity
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40,273
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45,353
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Total liabilities and stockholders equity
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$
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239,556
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$
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200,515
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See Accompanying Notes to Consolidated Financial Statements.
3
RENTECH, INC.
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
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For the Three Months
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Ended December 31,
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2010
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2009
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(Unaudited)
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Revenues
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Product sales
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$
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42,014
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$
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27,023
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Service revenues
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51
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115
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Total revenues
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42,065
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27,138
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Cost of sales
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Product sales
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25,887
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28,184
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Service revenues
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50
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106
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Total cost of sales
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25,937
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28,290
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Gross profit (loss)
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16,128
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(1,152
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)
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Operating expenses
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Selling, general and administrative expense
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7,336
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7,069
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Depreciation and amortization
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573
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497
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Research and development
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5,777
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3,824
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Other project costs
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53
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Gain on disposal of property, plant and equipment
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(14
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)
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Total operating expenses
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13,739
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11,376
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Operating income (loss)
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2,389
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(12,528
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)
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Other income (expense), net
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Interest and dividend income
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45
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114
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Interest expense
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(3,730
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)
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(3,267
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)
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Loss on debt extinguishment
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(4,593
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)
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Gain on investments
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242
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Other income, net
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7
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93
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Total other income (expenses), net
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(8,271
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)
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(2,818
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)
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Loss from continuing operations before income taxes
and equity in net loss of investee company
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(5,882
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)
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(15,346
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Income tax benefit
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1
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Loss from continuing operations before equity in
net loss of investee company
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(5,881
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)
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(15,346
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)
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Equity in net loss of investee company
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(129
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)
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Loss from continuing operations
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(5,881
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)
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(15,475
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)
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Income from discontinued operations
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4
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Net loss
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(5,881
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)
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(15,471
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)
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Net loss attributable to noncontrolling interests
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366
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Net loss attributable to Rentech
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$
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(5,515
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)
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$
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(15,471
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)
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Basic and diluted net (loss) per common share
attributable to Rentech:
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Continuing operations
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$
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(0.03
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)
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$
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(0.07
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)
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Discontinued operations
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0.00
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0.00
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Net loss
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$
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(0.03
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)
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$
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(0.07
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)
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Weighted-average shares used to compute net loss
per common share:
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Basic and diluted
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221,980
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212,772
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See Accompanying Notes to Consolidated Financial Statements.
4
RENTECH, INC.
Consolidated Statement of Stockholders Equity
(Amounts in thousands)
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Additional
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Total Rentech
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Total
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Common Stock
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Paid-in
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Accumulated
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Stockholders
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Noncontrolling
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Stockholders
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Shares
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Amount
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Capital
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Deficit
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Equity
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Interests
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Equity
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(Unaudited)
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|
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|
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|
|
|
|
|
|
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Balance, September 30, 2010
|
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221,731
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$
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2,217
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$
|
332,696
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$
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(296,993
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)
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$
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37,920
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$
|
7,433
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|
$
|
45,353
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Payment of offering costs
|
|
|
|
|
|
|
|
|
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|
(2
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)
|
|
|
|
|
|
|
(2
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)
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|
|
|
|
|
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(2
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)
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Stock-based compensation expense
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|
|
|
|
|
|
|
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1,106
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|
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|
1,106
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|
|
|
|
|
|
|
1,106
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|
Restricted stock units
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|
478
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|
5
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(308
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)
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|
|
|
|
|
|
(303
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)
|
|
|
|
|
|
|
(303
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)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,515
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)
|
|
|
(5,515
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)
|
|
|
(366
|
)
|
|
|
(5,881
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
222,209
|
|
|
$
|
2,222
|
|
|
$
|
333,492
|
|
|
$
|
(302,508
|
)
|
|
$
|
33,206
|
|
|
$
|
7,067
|
|
|
$
|
40,273
|
|
See Accompanying Notes to Consolidated Financial Statements.
5
RENTECH, INC.
Consolidated Statements of Cash Flows
(Amounts in thousands)
|
|
|
|
|
|
|
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For the Three Months
|
|
|
|
Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,881
|
)
|
|
$
|
(15,471
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,062
|
|
|
|
2,979
|
|
Accretion expense
|
|
|
9
|
|
|
|
8
|
|
Utilization of spare parts
|
|
|
380
|
|
|
|
564
|
|
Gain on disposal of property, plant and equipment
|
|
|
|
|
|
|
(15
|
)
|
Non-cash interest expense
|
|
|
1,793
|
|
|
|
2,021
|
|
Loss on debt extinguishment
|
|
|
4,593
|
|
|
|
|
|
Realized gain on sale of investments
|
|
|
|
|
|
|
(242
|
)
|
Gain on sale of subsidiary
|
|
|
|
|
|
|
(4
|
)
|
Stock-based compensation
|
|
|
1,106
|
|
|
|
1,508
|
|
Equity in net loss of investee company
|
|
|
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(7,026
|
)
|
|
|
2,050
|
|
Property insurance claim receivable
|
|
|
|
|
|
|
1,795
|
|
Other receivables and receivable from related party
|
|
|
37
|
|
|
|
(40
|
)
|
Inventories
|
|
|
1,451
|
|
|
|
2,492
|
|
Deposits on gas contracts
|
|
|
303
|
|
|
|
(1,249
|
)
|
Prepaid expenses and other current assets
|
|
|
926
|
|
|
|
340
|
|
Accounts payable
|
|
|
(1,522
|
)
|
|
|
(1,037
|
)
|
Deferred revenue
|
|
|
17,028
|
|
|
|
(6,538
|
)
|
Accrued interest
|
|
|
(513
|
)
|
|
|
(589
|
)
|
Accrued liabilities, accrued payroll and other
|
|
|
(3,154
|
)
|
|
|
(3,448
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
12,592
|
|
|
|
(14,747
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase of property, plant, equipment and construction in progress
|
|
|
(9,125
|
)
|
|
|
(6,498
|
)
|
Proceeds from disposal of property, plant and equipment
|
|
|
|
|
|
|
1,014
|
|
Proceeds from sale of available for sale securities
|
|
|
|
|
|
|
2,136
|
|
Issuance of note receivable
|
|
|
|
|
|
|
(500
|
)
|
Other items
|
|
|
(489
|
)
|
|
|
(317
|
)
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(9,614
|
)
|
|
|
(4,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from term loan, net of original issue discount
|
|
|
50,960
|
|
|
|
|
|
Payments on capital lease
|
|
|
(131
|
)
|
|
|
|
|
Payments on debt and notes payable
|
|
|
(22,522
|
)
|
|
|
(5
|
)
|
Payment of debt issuance costs
|
|
|
(290
|
)
|
|
|
(371
|
)
|
Payments on notes payable for financed insurance premiums
|
|
|
(553
|
)
|
|
|
(
557
|
)
|
Payment of offering costs
|
|
|
(2
|
)
|
|
|
(13
|
)
|
Payments on line of credit on available for sale securities
|
|
|
|
|
|
|
(2,194
|
)
|
Proceeds from options and warrants exercised
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
27,462
|
|
|
|
(3,124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
30,440
|
|
|
|
(22,036
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
54,146
|
|
|
|
69,117
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
84,586
|
|
|
$
|
47,081
|
|
|
|
|
|
|
|
|
6
RENTECH, INC.
Consolidated Statements of Cash Flows
(Amounts in thousands)
(Continued from previous page)
Excluded from the statements of cash flows for the three months ended December 31, 2010 and
2009 were the effects of certain non-cash investing and financing activities as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
Cashless exercise of warrants
|
|
$
|
|
|
|
$
|
7
|
|
Purchase of insurance policies financed with a note payable
|
|
|
516
|
|
|
|
379
|
|
Restricted stock units surrendered for withholding taxes payable
|
|
|
303
|
|
|
|
64
|
|
See Accompanying Notes to Consolidated Financial Statements.
7
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 December 31, 2010, and the results of operations and cash flows for the
periods presented. The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation. Operating results for the three months ended December 31,
2010 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
long-term debt and term loan approximate fair value.
The Company has evaluated events, if any, which occurred subsequent to December 31, 2010
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 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 three months
ended December 31, 2010; therefore the adoption of this standard, did not have a material impact on
the Companys consolidated financial position, results of operations or disclosures.
In June 2009, the FASB issued a standard which amends previous guidance related to the
determination as to whether an entity is a variable interest entity (VIE), and ongoing
reassessments of whether an enterprise is the primary beneficiary of a variable interest entity.
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
months ended December 31, 2010.
Note 3 Accounts Receivable
Accounts receivable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
(in thousands)
|
|
Trade receivables from nitrogen products
|
|
$
|
16,612
|
|
|
$
|
9,578
|
|
Trade receivables from alternative energy
|
|
|
100
|
|
|
|
108
|
|
|
|
|
|
|
|
|
Total accounts receivable, gross
|
|
|
16,712
|
|
|
|
9,686
|
|
Allowance for doubtful accounts on trade accounts receivable
|
|
|
(100
|
)
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
Total accounts receivable, net
|
|
$
|
16,612
|
|
|
$
|
9,586
|
|
|
|
|
|
|
|
|
8
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 4 Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
(in thousands)
|
|
Finished goods
|
|
$
|
4,911
|
|
|
$
|
6,338
|
|
Raw materials
|
|
|
540
|
|
|
|
628
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
5,451
|
|
|
$
|
6,966
|
|
|
|
|
|
|
|
|
Note 5 Property, Plant and Equipment and Construction in Progress
Property, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
(in thousands)
|
|
Land
|
|
$
|
1,883
|
|
|
$
|
1,811
|
|
Buildings and building improvements
|
|
|
10,323
|
|
|
|
10,323
|
|
Machinery and equipment
|
|
|
74,662
|
|
|
|
74,625
|
|
Furniture, fixtures and office equipment
|
|
|
861
|
|
|
|
861
|
|
Computer equipment and computer software
|
|
|
4,702
|
|
|
|
4,657
|
|
Vehicles
|
|
|
172
|
|
|
|
172
|
|
Leasehold improvements
|
|
|
73
|
|
|
|
73
|
|
Conditional asset (asbestos removal)
|
|
|
210
|
|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
|
92,886
|
|
|
|
92,732
|
|
Less accumulated depreciation
|
|
|
(40,004
|
)
|
|
|
(37,433
|
)
|
|
|
|
|
|
|
|
Total depreciable property, plant and equipment, net
|
|
$
|
52,882
|
|
|
$
|
55,299
|
|
|
|
|
|
|
|
|
Construction in progress consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
(in thousands)
|
|
Construction in progress for projects under development
|
|
$
|
37,248
|
|
|
$
|
32,028
|
|
Accumulated capitalized interest costs related to projects under development
|
|
|
7,222
|
|
|
|
6,105
|
|
Construction in progress for East Dubuque Plant
|
|
|
4,553
|
|
|
|
2,474
|
|
Software in progress (under capital lease)
|
|
|
464
|
|
|
|
464
|
|
Conditional asset (asbestos removal)
|
|
|
27
|
|
|
|
27
|
|
|
|
|
|
|
|
|
Total construction in progress
|
|
$
|
49,514
|
|
|
$
|
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 December 31, 2010 and
accretion expense for the three months ended December 31, 2010 were $277,000 and $9,000,
respectively.
9
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 6 Investment in ClearFuels Technology Inc.
On June 23, 2009, the Company acquired 4,377,985 shares of Series B-1 Preferred Stock,
representing a 25% ownership interest in ClearFuels Technology Inc. (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 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 Rentech was not the 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 will be responsible for budgeted construction payments for the project after October
1, 2010, and will 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. Those costs and expenses not reimbursed by the DOE would be reimbursed by
ClearFuels in the event that ClearFuels were to complete a Qualified Financing as described
below.
The Companys obligations with respect to 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. If a Qualified Financing occurs prior to March 31,
2011, then the Company will be repaid for any costs and expenses not already reimbursed by the
DOE, receive a fee equal to 15% of all such costs and expenses and receive a warrant to purchase
additional ClearFuels equity at an exercise price per share of one-half of the equity price per
share in the Qualified Financing. If no Qualified Financing occurs by March 31, 2011, then the
Company will have the opportunity to exercise an option to merge with and acquire substantially
all the remaining equity of ClearFuels for no additional consideration. The terms of the Project
Support Agreement also amend the warrant to extend the vesting milestone for a Qualified
Financing until March 31, 2011.
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 it was now the primary beneficiary as it will absorb a majority of Clearfuels losses or
receive a majority of the residual returns through its equity interest and via 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 first quarter of fiscal year
2011, the Company made retrospective adjustments to notes receivable, prepaids and goodwill in
the opening balance sheet of ClearFuels as of September 3, 2010 due to working capital
adjustments.
10
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,
|
|
|
|
(previously reported)
|
|
|
Adjustment
|
|
|
2010 (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.
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 (the
2010 Credit Agreement).
The Second Amendment, among other things, (1) permits 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 under the 2010 Credit Agreement, as amended by the first amendment dated July
21, 2010 (the First Amendment), 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 (as defined in the 2010 Credit Agreement, as amended) for fiscal
year 2010, leaving REMC with no additional prepayment requirement for fiscal year 2010. The excess
prepayment amount, which pursuant to the Second Amendment is capped at $11 million, will be credited against the prepayment requirement for fiscal year 2011,
pursuant to the terms of the 2010 Credit Agreement, as amended.
11
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
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% and net of discount and legal
fees, proceeds of approximately $50.85 million from the Second Incremental Loan were dividended to
the Company.
Immediately after giving effect to the $20 million prepayment and the Second Incremental Loan,
the total principal amount of outstanding term loans to REMC under the 2010 Credit Agreement, as
amended, was approximately $95.3 million. This transaction 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 three months ended December 31, 2010,
loss on extinguishment of debt of $4.59 million was recorded in the consolidated statements of
operations.
All outstanding term loans under the 2010 Credit Agreement, as amended, 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, as
amended, 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, as amended, 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, as amended, and related loan documents. The obligations under the 2010 Credit
Agreement, as amended, are guaranteed by the Company and certain of its subsidiaries. The 2010
Credit Agreement, as amended, 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, as amended,
includes restrictive covenants that limit, among other things, the Companys ability to make
investments, dispose of assets, pay cash dividends and repurchase stock.
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
(in thousands)
|
|
Face value of term loan under the credit agreements
|
|
$
|
92,769
|
|
|
$
|
63,291
|
|
Less unamortized discount
|
|
|
(990
|
)
|
|
|
(2,416
|
)
|
|
|
|
|
|
|
|
Book value of term loan under the credit agreements
|
|
|
91,779
|
|
|
|
60,875
|
|
Less current portion
|
|
|
(29,850
|
)
|
|
|
(12,835
|
)
|
|
|
|
|
|
|
|
Term loan, long-term portion
|
|
$
|
61,929
|
|
|
$
|
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 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.
Upon achievement of the conversion criteria, the notes may be converted into 14,332,002 shares
of common stock, subject to adjustment.
12
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Based on the market prices, the estimated fair value of the 4.00% Convertible Senior Notes was
approximately $52.6 million as of December 31, 2010.
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 March 31, 2011. Commitments
for natural gas purchases consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
(in thousands, except
|
|
|
|
weighted average rate)
|
|
MMBTUs under fixed-price contracts
|
|
|
1,657
|
|
|
|
3,465
|
|
MMBTUs under index-price contracts
|
|
|
55
|
|
|
|
403
|
|
|
|
|
|
|
|
|
Total MMBTUs under contracts
|
|
|
1,712
|
|
|
|
3,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to purchase natural gas
|
|
$
|
7,680
|
|
|
$
|
15,294
|
|
Weighted average rate per MMBTU based
on the fixed rates and the indexes
applicable to each contract
|
|
$
|
4.49
|
|
|
$
|
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. At this time, 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 matters are currently stayed to allow the parties to discuss settlement.
At this time, the Company does not believe that these matters will have a material adverse effect
on the Company.
13
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 matters have been stayed pending resolution of motions to dismiss the
Securities Action. At this time, the Company does not believe that these matters will have a
material adverse effect on the Company.
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
|
|
|
|
Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Revenues
|
|
|
|
|
|
|
|
|
Nitrogen products manufacturing
|
|
$
|
42,014
|
|
|
$
|
27,023
|
|
Alternative energy
|
|
|
51
|
|
|
|
115
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
42,065
|
|
|
$
|
27,138
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
Nitrogen products manufacturing
|
|
$
|
15,005
|
|
|
$
|
(1,954
|
)
|
Alternative energy
|
|
|
(12,616
|
)
|
|
|
(10,574
|
)
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
$
|
2,389
|
|
|
$
|
(12,528
|
)
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
|
|
|
|
|
|
Nitrogen products manufacturing
|
|
$
|
7,516
|
|
|
$
|
(3,695
|
)
|
Alternative energy
|
|
|
(13,397
|
)
|
|
|
(11,780
|
)
|
|
|
|
|
|
|
|
Total income (loss) from continuing operations
|
|
$
|
(5,881
|
)
|
|
$
|
(15,475
|
)
|
|
|
|
|
|
|
|
14
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
(in thousands)
|
|
Total assets
|
|
|
|
|
|
|
|
|
Nitrogen products manufacturing
|
|
$
|
113,488
|
|
|
$
|
108,220
|
|
Alternative energy
|
|
|
126,068
|
|
|
|
92,295
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
239,556
|
|
|
$
|
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 months ended December 31, 2010, approximately 40.8 million shares, and for the
three months ended December 31, 2009, approximately 42.4 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
In February 2011, the Company extended the term of an Amended and Restated Distribution
Agreement (the Equity Distribution Agreement) between the Company and Knight Capital Americas,
L.P., successor in interest to Knight Capital Markets LLC, by an additional year. Pursuant to the
Equity Distribution Agreement, the Company may sell up to approximately $43.7 million of remaining
aggregate gross sales price of common stock until February 9, 2012, subject to certain
restrictions, including those related to trading volume of the Companys stock and limitations on
selling securities outside of Company trading windows.
15
|
|
|
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
accounting principles generally accepted in the United States of America. 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.
16
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 three months ended December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Years Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands of tons)
|
|
First Quarter
|
|
|
167
|
|
|
|
124
|
|
|
|
115
|
|
|
|
171
|
|
Second Quarter
|
|
|
n/a
|
|
|
|
86
|
|
|
|
65
|
|
|
|
103
|
|
Third Quarter
|
|
|
n/a
|
|
|
|
206
|
|
|
|
203
|
|
|
|
170
|
|
Fourth Quarter
|
|
|
n/a
|
|
|
|
181
|
|
|
|
150
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tons Shipped for Fiscal Year
|
|
|
167
|
|
|
|
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 affect 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 MONTHS ENDED DECEMBER 31, 2010 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2009:
Continuing Operations
Revenues
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Product shipments
|
|
$
|
42,014
|
|
|
$
|
25,584
|
|
Natural gas sales of excess inventory
|
|
|
|
|
|
|
1,439
|
|
|
|
|
|
|
|
|
Total nitrogen products manufacturing
|
|
$
|
42,014
|
|
|
$
|
27,023
|
|
Alternative energy
|
|
|
51
|
|
|
|
115
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
42,065
|
|
|
$
|
27,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Three Months
|
|
|
|
Ended December 31, 2010
|
|
|
Ended December 31, 2009
|
|
|
|
Tons
|
|
|
Revenue
|
|
|
Tons
|
|
|
Revenue
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Product Shipments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ammonia
|
|
|
45
|
|
|
$
|
22,348
|
|
|
|
45
|
|
|
$
|
14,421
|
|
Urea Ammonium Nitrate
|
|
|
79
|
|
|
|
14,917
|
|
|
|
57
|
|
|
|
8,128
|
|
Urea (liquid and granular)
|
|
|
6
|
|
|
|
2,934
|
|
|
|
5
|
|
|
|
1,962
|
|
Carbon Dioxide
|
|
|
34
|
|
|
|
783
|
|
|
|
15
|
|
|
|
369
|
|
Nitric Acid
|
|
|
3
|
|
|
|
1,032
|
|
|
|
2
|
|
|
|
704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
167
|
|
|
$
|
42,014
|
|
|
|
124
|
|
|
$
|
25,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 months ended December 31, 2010 compared to the three
months ended December 31, 2009 was due to increased sales volume and sales prices for the majority
of products. Sales volume increased, particularly for urea ammonium nitrate solution, due to a
higher availability of product in the current quarter, as compared to the previous quarter during
which the scheduled plant shutdown, in October 2009, resulted in less production of urea ammonium
nitrate solution.
17
The average sales price per ton in the first quarter of the current fiscal year as compared
with that of the prior fiscal year increased by 55% for anhydrous ammonia and by 32% for urea
ammonium nitrate solutions. These two products comprised approximately 89% and 88% of the product
sales for the three months ended December 31, 2010 and 2009, 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
|
|
|
|
Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
Product shipments
|
|
$
|
25,887
|
|
|
$
|
22,482
|
|
Turnaround expenses
|
|
|
|
|
|
|
3,951
|
|
Natural gas sales of excess inventory
|
|
|
|
|
|
|
1,694
|
|
Natural gas sales with simultaneous purchase
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
|
Total nitrogen products manufacturing
|
|
$
|
25,887
|
|
|
$
|
28,184
|
|
Alternative energy
|
|
|
50
|
|
|
|
106
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
$
|
25,937
|
|
|
$
|
28,290
|
|
|
|
|
|
|
|
|
Nitrogen Products Manufacturing
. The cost of sales for product shipments for the three months
ended December 31, 2010 increased from the prior comparable period primarily due to higher sales
volume. Natural gas and labor and benefit costs comprised approximately 53% and 12%, respectively,
of cost of sales on product shipments for the three months ended December 31, 2010. Natural gas
and labor and benefit costs comprised approximately 53% and 15%, respectively, of cost of sales on
product shipments for the three months ended December 31, 2009.
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 three months ended December 31, 2009, the Company incurred turnaround expenses
of $3,951,000. There was no plant turnaround during the three months ended December 31, 2010.
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.
Depreciation expense included in cost of sales from our nitrogen products manufacturing
segment was $2,488,000 and $2,482,000 for the three months ended December 31, 2010 and 2009,
respectively.
Alternative Energy.
The cost of sales for our alternative energy segment was for costs
incurred for work performed under technical services contracts.
18
Gross Profit (Loss)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Gross profit (loss):
|
|
|
|
|
|
|
|
|
Product shipments
|
|
$
|
16,127
|
|
|
$
|
3,102
|
|
Turnaround expenses
|
|
|
|
|
|
|
(3,951
|
)
|
Natural gas sales of excess inventory
|
|
|
|
|
|
|
(255
|
)
|
Natural gas sales with simultaneous purchase
|
|
|
|
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
Total nitrogen products manufacturing
|
|
$
|
16,127
|
|
|
$
|
(1,161
|
)
|
Alternative energy
|
|
|
1
|
|
|
|
9
|
|
|
|
|
|
|
|
|
Total gross profit (loss)
|
|
$
|
16,128
|
|
|
$
|
(1,152
|
)
|
|
|
|
|
|
|
|
Nitrogen Products Manufacturing.
The gross profit for product shipments for the three months
ended December 31, 2010 increased compared to the prior comparable period primarily due to higher
sales prices and higher sales volume.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
$
|
7,336
|
|
|
$
|
7,069
|
|
Depreciation and amortization
|
|
|
573
|
|
|
|
497
|
|
Research and development
|
|
|
5,777
|
|
|
|
3,824
|
|
Other project costs
|
|
|
53
|
|
|
|
|
|
Gain on disposal of property, plant and equipment
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
13,739
|
|
|
$
|
11,376
|
|
|
|
|
|
|
|
|
Selling, General and Administrative Expenses.
During
the three months ended December 31, 2010, as compared to the
three months ended December 31, 2009, selling, general and
administrative expenses increased by $267,000 or 4%. The increase was
primarily due to an increase in salaries as a result of additional
headcount, an increase in computer services and support and increases
in other expenses none of which were individually material, partially
offset by a decrease in stock-based compensation 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 $76,000 for the three months ended December 31, 2010 which was primarily
attributable to increased amortization of intellectual property as a result of the annual
impairment analysis of intangible assets.
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 $1,953,000 during the three months ended
December 31, 2010, compared to the three months ended December 31, 2009. The increase in research
and development expense was primarily caused by an increase in activities at the PDU for plant
modifications, repairs and catalyst usage, as well as an increase of $455,000 of expense due to the
consolidation of ClearFuels.
Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
Product shipments
|
|
$
|
15,005
|
|
|
$
|
2,309
|
|
Turnaround expenses
|
|
|
|
|
|
|
(3,951
|
)
|
Natural gas sales of excess inventory
|
|
|
|
|
|
|
(255
|
)
|
Natural gas sales with simultaneous purchase
|
|
|
|
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
Total nitrogen products manufacturing
|
|
$
|
15,005
|
|
|
$
|
(1,954
|
)
|
Alternative energy
|
|
|
(12,616
|
)
|
|
|
(10,574
|
)
|
|
|
|
|
|
|
|
Total income (loss) from operations
|
|
$
|
2,389
|
|
|
$
|
(12,528
|
)
|
|
|
|
|
|
|
|
19
Nitrogen Products Manufacturing.
The increase in income from operations for product shipments
for the three months ended December 31, 2010 as compared to the prior comparable period was
primarily due to higher sales prices and higher sales volume.
Alternative Energy.
Loss from operations primarily consists of operating expenses, such as
selling, general and administrative, depreciation and amortization, and research and development.
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
$
|
45
|
|
|
$
|
114
|
|
Interest expense
|
|
|
(3,730
|
)
|
|
|
(3,267
|
)
|
Loss on debt extinguishment
|
|
|
(4,593
|
)
|
|
|
|
|
Gain on investments
|
|
|
|
|
|
|
242
|
|
Other income, net
|
|
|
7
|
|
|
|
93
|
|
|
|
|
|
|
|
|
Total other expense
|
|
$
|
(8,271
|
)
|
|
$
|
(2,818
|
)
|
|
|
|
|
|
|
|
The increase in other expense for the three months ended December 31, 2010 as compared to the
three months ended December 31, 2009 is primarily due to the loss on debt extinguishment related to
amending the 2010 Credit Agreement and an increase in interest expense due to an increase in debt.
ANALYSIS OF CASH FLOW
The following table summarizes our Consolidated Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Net Cash Provided by (Used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
12,592
|
|
|
$
|
(14,747
|
)
|
Investing activities
|
|
|
(9,614
|
)
|
|
|
(4,165
|
)
|
Financing activities
|
|
|
27,462
|
|
|
|
(3,124
|
)
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
30,440
|
|
|
$
|
(22,036
|
)
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities
Net Loss.
The Company had net losses of $5,881,000 and $15,471,000 for the three months
ended December 31, 2010 and 2009, respectively. The cash flows provided by or used in operations
during these periods, primarily resulted from the following operating activities:
Accounts Receivable.
During the first three months of fiscal 2011, accounts receivable
increased by $7,026,000 due to rising sales prices and higher sales volume as compared to the
first three months of fiscal 2010, when lower sales volume caused a decrease in accounts
receivable of $2,050,000.
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 three months ended December 31, 2009, the Company collected the
outstanding balance of $1,795,000.
Loss on debt extinguishment.
During the three months ended December 31, 2010, REMC entered
into the Second Amendment to the Credit Agreement, Waiver and Collateral Agent Consent; the
transaction was accounted for as an extinguishment of debt. As a result, a loss on debt
extinguishment was recorded for $4,593,000. No such loss was recorded during the three months
ended December 31, 2009.
20
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 $17,028,000 during the
three months ended December 31, 2010, versus a decrease of $6,538,000 during this same period in
fiscal year 2010. The increase in the current fiscal year was due to substantial receipts of cash
in December 2010, reflecting favorable payment terms in contracts for spring delivery of pre-sold
product, whereas in the prior year, contracts for spring delivery did not require cash payments
by December 31. The increase in deferred revenue for the three months ended December 31, 2010 was
partially offset by delivery of product in the period related to previous product pre-sale
contracts. The decrease in deferred revenue for the three months ended December 31, 2009 was due
to product deliveries in the period related to fulfillment of product pre-sale contracts.
Cash Flows from Investing Activities
Proceeds from Sale of Available for Sale Securities
. During the three months ended December
31, 2009, the Company sold, through a tender offer, $2,136,000 of available for sale securities
with a book value of $1,894,000, which resulted in a net realized gain on sale of investments of
$242,000. For the three months ended December 31, 2010, there were no such sales.
Purchase of Property, Plant, Equipment and Construction in Progress.
The increase in net
additions of $2,627,000 for the three months ended December 31, 2010 compared to the three months
ended December 31, 2009 was primarily due an increase in spending for development activities at
our renewable energy project in Rialto, California (the Rialto Project) that are capitalized;
partially offset by decreased capital spending at REMC.
Cash Flows from Financing Activities
Proceeds from term loan, net of original issue discount.
During the three months ended
December 31, 2010, the Company entered into a second incremental loan assumption agreement to
borrow an additional $52 million, with an original issue discount of $1,040,000.
Payments on debt and notes payable.
During the three months ended December 31, 2010, in
addition to a $2,522,000 scheduled principal payment, REMC prepaid $20 million 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 three months ended
December 31, 2009, we paid down a portion of the borrowings incurred under a line of credit with
the net proceeds from the sale of available for sale securities securing such line of credit.
For the three months ended December, 31, 2010, there was no similar transaction.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
At December 31, 2010, our current assets totaled $112,427,000, including cash and cash
equivalents of $84,586,000, of which $36,621,000 was held at REMC and was subject to the
restrictions imposed by the 2010 Credit Agreement, as amended; and accounts receivable of
$16,612,000. Our current liabilities were $85,581,000. We had long-term liabilities of
$113,702,000, most of which related to our long-term convertible senior notes and debt under our
2010 Credit Agreement, as amended. REMCs income from continuing operations for the three months
ended December 31, 2010 was $7,516,000 compared to a loss from continuing operations of $3,695,000
for the three months ended December 31, 2009. The Companys loss from continuing operations for the
three months ended December 31, 2010 and 2009 was $5,881,000 and $15,475,000, respectively.
Pursuant to the Equity Distribution Agreement, as amended, we may sell up to approximately
$43.7 million of remaining aggregate gross sales price of common stock until February 9, 2012,
subject to certain restrictions, including those related to trading volume of our stock and
limitations on selling securities outside of Company trading windows. In addition to liquidity, if
any, available from 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, as amended.
As of December 31, 2010 approximately $94.3 million aggregate offering price of securities was
available to be sold under our shelf registration statement (including up to $43.7 million 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.
21
We may also consider sales of non-alternative energy assets as a source of non-dilutive
capital 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 two years, and
access to those markets has been difficult. Our failure to raise additional capital when needed
would have a material adverse effect on our business, financial condition and 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) that we expect to incur in the next twelve
months include costs related to the completion of front-end engineering and design (FEED) for 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, and general working capital and administrative needs. We do not
expect to require additional capital for these budgeted activities during the next twelve months.
We do expect to require additional capital if we elect to pursue additional activities beyond our
current budget, 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 for unbudgeted activities were not
available, we would not be able to advance these projects beyond FEED (in the case of the Rialto
Project) or into the feasibility or FEED stages (in the case of other projects). In the event that
we decide to pursue unbudgeted activities, and we need additional capital, depending on the
availability of such capital, we expect to obtain it through various combinations of project debt
and equity, corporate equity, asset sales, equity from strategic partners and suppliers, new
financings at REMC, and various forms of government support.
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
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.
All outstanding loans under the 2010 Credit Agreement, as amended, are subject to annual
amortization and require cash payments of interest. This amortization provision requires us to make
payments of 7.5% of the principal amount in 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, as amended, 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, as
amended, on such date.
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 two commercial
projects that are the furthest along in their development are 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, corporate debt and equity, equity from strategic
partners and suppliers, and various forms of government support.
22
The outstanding loans under the 2010 Credit Agreement, as amended, mature on July 29, 2014.
However, the 2010 Credit Agreement, as amended, 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, as amended:
|
|
|
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 three months ended December 31, 2010, REMC incurred $2.7
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 December 31, 2010, our actual interest coverage ratio
was 5.56:1.00;
|
|
|
|
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, as amended, by EBITDA, as defined in the 2010 Credit Agreement, as amended. 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 December 31, 2010, our
actual leverage ratio was 2.06:1.00 (compared to a maximum leverage ratio of 2.5:1.00); and
|
|
|
|
During the months of April
through December, REMC must maintain at least $7.5 million of
unrestricted cash and permitted investments and during the months of
January through March, REMC must
maintain at least $5.0 million of unrestricted cash and permitted investments. At December
31, 2010, REMC had $36.6 million of unrestricted cash and permitted investments.
|
CONTRACTUAL OBLIGATIONS
We have entered into various contractual obligations as detailed in our Annual Report. During
the normal course of business in the three months ended December 31, 2010, the amount of our
contractual obligations changed as scheduled payments were made and new contracts were executed.
During the three months ended December 31, 2010, the following significant changes occurred to our
contractual obligations:
|
|
|
The Company and REMC entered into the Second Amendment and the Second Incremental Loan
Agreement. The 2010 Credit Agreement, as amended, matures on July 29, 2014 and, as of
December 31, 2010, the balance of the 2010 Credit Agreement, as amended, was $92,769,000.
|
|
|
|
Natural gas purchase contracts committed decreased by $7,614,000 to $7,680,000. 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 December 31,
2010, the natural gas purchase contracts included delivery dates through March 31, 2011.
Subsequent to December 31, 2010, we entered into additional fixed quantity natural gas
supply contracts at fixed and indexed prices for various delivery dates through February 28,
2011. The total MMBTUs associated with these additional contracts was $330,000 and the
total amount of the purchase commitments was $1,536,000, resulting in a weighted average
rate per MMBTU of $4.65.
|
|
|
|
Purchase obligations increased by $5,107,000 to $24,866,000 as measured by the total
amount of open purchase orders. The increase is primarily due to the inclusion of open
purchase orders for ClearFuels, Inc. 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.
23
|
|
|
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, as amended. Borrowings under the 2010 Credit Agreement, as amended, bear
interest at a variable rate based upon either LIBOR, or the lenders alternative base rate, plus,
in each case, an applicable margin. At December 31, 2010, 3 month LIBOR was approximately 0.30281,
which is below the minimum of 2.5% in the 2010 Credit Agreement. As of December 31, 2010, we had
outstanding borrowings under the 2010 Credit Agreement, as amended, of $92,769,000. Based upon the
outstanding balances of our variable-interest rate debt at December 31, 2010, 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 $928,000. 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.
24
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ITEM 4.
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CONTROLS AND PROCEDURES
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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 December
31, 2010. 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 December 31, 2010 that materially affect
our internal control over financial reporting.
Except as described above, there were no changes in our internal control over financial
reporting during the quarter ended December 31, 2010 that materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
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ITEM 1.
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LEGAL PROCEEDINGS
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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.
Exhibit Index
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10.1
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Amended and Restated Distribution Agreement dated February 9, 2011, between Rentech, Inc. and
Knight Capital Americas, L.P., successor in interest to Knight Capital Markets LLC.
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31.1
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Certification of President and Chief Executive Officer pursuant to Rule 13a-14 or Rule 15d-14(a).
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31.2
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Certification of Chief Financial Officer pursuant to Rule 13a-14 or Rule 15d-14(a).
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32.1
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Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
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32.2
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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.
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RENTECH, INC.
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Dated: February 9, 2011
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/s/ D. Hunt Ramsbottom
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D. Hunt Ramsbottom,
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President and Chief Executive Officer
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Dated: February 9, 2011
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/s/ Dan J. Cohrs
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Dan J. Cohrs
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Chief Financial Officer
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26
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