ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not Applicable.
Nitrogen Products Manufacturing Segment Properties
The East Dubuque Facility is located on approximately 210 acres in the northwest corner of Illinois on a 140-foot bluff above Mile Marker 573 on the Upper Mississippi River. RNLLC owns all of the East Dubuque Facility’s properties and equipment; these include land, roads, buildings, several special purpose structures, equipment, storage tanks, and specialized truck, rail and river barge loading facilities. RNLLC also has 15,000 tons of leased storage tank capacity for ammonia products at Agrium’s terminal in Niota, Illinois. The East Dubuque Facility is used in our nitrogen products manufacturing segment.
RETC Properties
We own the site located in Commerce City, Colorado where we have constructed the PDU and the Rentech-ClearFuels Gasifier. The site consists of 17 acres located in an industrial area adjacent to a rail line and an interstate highway. Approximately six acres of the site are occupied by the PDU and the ClearFuels Gasifier, and the remaining approximately 11 acres of the site are available for other uses. There is an approximately 12,000 square foot building on that site that is primarily used for laboratory and maintenance functions supporting the PDU. We also lease a 2 1/2 acre industrial site located adjacent to the site, which includes a single building of approximately 3,000 square feet and is used for the storage and maintenance of construction equipment. These properties are used in our alternative energy segment.
Natchez Project Property
We own an approximately 450 acre site in Adams County, Mississippi near the city of Natchez. This property is used in our alternative energy segment.
Office Leases
Our executive offices are located in Los Angeles, California, and consist of approximately 13,000 square feet of leased office space. The lease expires in June 2015. These offices are used in both of our segments.
Our other principal leased offices are located in Denver, Colorado, and consist of approximately 8,000 square feet of office space. The lease expires in October 2014. These offices are used in both of our segments. We also have leased offices located in Honolulu, Hawaii, which consist of approximately 1,300 square feet of leased office space. The lease expires in July 2014. These offices are used in our alternative energy segment.
In the normal course of business, we are party to litigation from time to time. We maintain insurance to cover certain actions and believe that resolution of our current litigation will not have a material adverse effect on us.
In October 2009, the EPA Region 5 issued a Notice and Finding of Violation pursuant to the CAA related to the number 1 nitric acid plant at the East Dubuque Facility. The notice alleges violations of the CAA’s New Source Performance Standard for nitric acid plants, PSD requirements and Title V Permit Program requirements. The notice appears to be part of the EPA’s CAA National Enforcement Priority for New Source Review/PSD related to acid plants, which seeks to reduce emissions from acid plants through proceedings that result in the installation of new pollution control technology. Without admitting liability, RNLLC has negotiated a consent decree (the “Consent Decree”) with the EPA to resolve the alleged violations, and the Consent Decree has been lodged with the court. The Consent Decree requires RNLLC to pay a civil penalty of $108,000, install and operate certain pollution control equipment on one of its nitric acid plants, and to perform certain additional actions and periodically report to the EPA. RNLLC has commenced implementation of the Consent Decree requirements, including the installation and operation of the pollution control equipment, in anticipation of the court entering the Consent Decree.
Between December 29, 2009 and January 6, 2010, three purported class action shareholder lawsuits were filed against us and certain of our current and former directors and officers in the United States District Court for the Central District of California alleging that we and the named current and former directors and officers made false or misleading statements regarding our financial performance in connection with our financial statements for the fiscal year ended September 30, 2008 and the first three quarters of the fiscal year ended September 30, 2009. Plaintiffs in the actions purported to bring claims on behalf of all persons who purchased our securities between May 9, 2008 and December 14, 2009 and sought 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.), and a lead plaintiff was appointed on April 5, 2010. The lead plaintiff filed a consolidated complaint on May 20, 2010, and we filed a motion to dismiss the action on October 15, 2010. We announced on March 23, 2011 that we had reached an agreement to settle these matters with a settlement fund provided by its insurance carrier of approximately $1.8 million, from which plaintiffs’ counsel would receive an award of attorney fees and expenses, subject to court approval of the settlement. The United States District Court for the Central District of California approved the settlement at a hearing on September 26, 2011.
Between January 22, 2010 and February 10, 2010, five shareholder derivative lawsuits were filed against certain of our 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. The initial complaints alleged that the named current and former directors and officers caused us to make false or misleading statements regarding our financial performance in connection with our financial statements for the fiscal year ended September 30, 2008 and the first three quarters of the fiscal year ended September 30, 2009. The plaintiffs, who purported to assert claims on our behalf, sought various equitable and/or injunctive relief, unspecified restitution to us, interest, and attorneys’ fees and costs. The cases before the United States District Court were 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 were consolidated as Andrew L. Tarr v. Dennis L. Yakobson, et al., LASC Master File No. BC430553. We announced on March 23, 2011 that we had agreed to settle these matters by adopting certain corporate governance practices and paying, or causing our insurance carrier to pay, plaintiffs’ attorneys fees and expenses of approximately $300,000, subject to court approval of the settlements. The Superior Court of the State of California in Los Angeles approved the settlements at a hearing on July 21, 2011.
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the NYSE Amex under the symbol “RTK.” The following table sets forth the range of high and low closing prices for the common stock as reported by NYSE Amex for the fiscal years ended September 30, 2011 and 2010:
The approximate number of shareholders of record of our common stock as of November 30, 2011 was 536. Based upon the securities position listings maintained for our common stock by registered clearing agencies, we estimate the number of beneficial owners is not less than 28,900.
We have never paid cash dividends on our common stock. We currently expect that we will retain future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future.
Company Purchases of Equity Securities
Not applicable.
Recent Sales of Unregistered Securities
Not applicable.
STOCK PERFORMANCE GRAPH
The following graph and table compares the cumulative total shareholder return on our common stock to that of the Russell 2000 Index (the “Russell 2000”), an alternative energy peer group which is the Ardour Global Alternative Energy Index - North America (the “Alternative Energy Peer Group”), and a customized peer group for the last five fiscal years ending September 30. The customized peer group of four companies includes: Agrium, CF Industries Holdings, Terra Nitrogen Company, L.P., and Yara International (the “Fertilizer Peer Group”). The following graph and table assumes that a $100 investment was made at the close of trading on September 30, 2006 in our common stock and in the index and the peer groups, and that dividends, if any, were reinvested. The stock price performance shown on the graph below should not be considered indicative of future price performance.
The following tables include selected summary financial data for each of our last five fiscal years. The data below should be read in conjunction with “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II, Item 8. Financial Statements and Supplementary Data.”
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to the information provided here in Management’s Discussion and Analysis of Financial Condition and Results of Operations, we believe that in order to more fully understand our discussion in this section, you should read our consolidated financial statements and the notes thereto and the other disclosures herein, including the discussion of our business and the risk factors.
OVERVIEW OF OUR FINANCIAL CONDITION, LIQUIDITY, AND RESULTS OF OPERATIONS
Historically, we have relied upon sales of our equity securities, borrowings and cash flows from our nitrogen fertilizer manufacturing business for working capital. We have a history of significant net losses.
Our primary needs for working capital for the next 12 months related to our nitrogen products manufacturing segment are expected to include costs to operate the East Dubuque Facility, costs for expansion projects, debt service, and capital investments in the East Dubuque Facility. Our primary needs for working capital for the next 12 months related to our alternative energy segment are expected to include costs to commercially deploy our technologies, operate the PDU and the Rentech-ClearFuels Gasifier, continue research and development of our technologies, and fund administrative needs. Based on current market conditions, we expect that the non-expansion activities of our nitrogen products manufacturing segment for the next 12 months can be funded from RNP’s cash on hand, RNLLC’s forecasted operating cash flows, and the Revolving Credit Facility. We expect to fund our alternative energy segment-related activities during the next 12 months from cash on hand. We would need additional capital for our alternative energy segment in the event we decide to pursue significant unplanned development or acquisition activities. Such additional capital may be available, if needed, from external financing sources, including from offerings of equity or debt securities. In the event that such capital is not available, we would not be able to undertake such significant unplanned development or acquisition activities in our alternative energy segment. Capital markets have experienced extreme uncertainty in recent years, and access to those markets has been difficult. Our failure to raise additional capital if needed would have a material adverse effect on our business, financial condition, results of operations and liquidity.
For further information concerning our potential financing needs and related risks, see “Part I, Item 1. Business,” and “Part I, Item 1A. Risk Factors.”
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to: revenue recognition, inventories, the valuation of long-lived assets and intangible assets, stock based compensation and the realization of deferred income taxes. Actual amounts could differ significantly from these estimates.
Revenue Recognition. We recognize revenue when the following elements are substantially satisfied: there are no uncertainties regarding customer acceptance; there is persuasive evidence that an agreement exists documenting the specific terms of the transaction; the sales price is fixed or determinable; and collectibility is reasonably assured. Management assesses the business environment, the customer’s financial condition, historical collection experience, accounts receivable aging and customer disputes to determine whether collectibility is reasonably assured. If collectibility is not considered reasonably assured at the time of sale, we do not recognize revenue until collection occurs.
Product sales revenues from our nitrogen products manufacturing segment are recognized when the customer takes ownership upon shipment from the East Dubuque Facility or RNLLC’s leased facility in Niota, Illinois and assumes risk of loss, collection of the related receivable is probable, persuasive evidence of a sale arrangement exists and the sales price is fixed or determinable.
Certain product sales in our nitrogen products manufacturing segment occur under product prepayment contracts which require payment in advance of delivery. We record a liability for deferred revenue in the amount of, and upon receipt of, cash in advance of shipment. We recognize revenue related to the product prepayment contracts and relieve the liability for deferred revenue when customers take ownership of products. A significant portion of the revenue recognized during any period may be related to product prepayment contracts, for which cash may have been collected during an earlier period, with the result being that a significant portion of revenue recognized during a period may not generate cash receipts during that period.
Natural gas, though not purchased for the purpose of resale, is occasionally sold under certain circumstances in our nitrogen products manufacturing segment. Natural gas is sold when contracted quantities received are in excess of production requirements and storage capacities, in which case the sales price is recorded in product sales and the related cost is recorded in cost of sales. Natural gas is also sold with a simultaneous natural gas purchase in order to receive a benefit that reduces raw material cost, in which case the net of the sales price and the related cost of sales are recorded within cost of sales.
Inventories. Our inventory is stated at the lower of cost or estimated net realizable value. The cost of inventories is determined using the first-in first-out method. We perform an analysis of our inventory balances at least quarterly to determine if the carrying amount of inventories exceeds their net realizable value. The analysis of estimated net realizable value is based on customer orders, market trends and historical pricing. If the carrying amount exceeds the estimated net realizable value, the carrying amount is reduced to the estimated net realizable value. We allocate fixed production overhead costs to inventory based on the normal capacity of our production facilities.
Valuation of Long-Lived Assets and Intangible Assets. We assess the realizable value of long-lived assets and intangible assets for potential impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In assessing the recoverability of our assets, we make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. As applicable, we make assumptions regarding the useful lives of the assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets. During the fiscal year ended September 30, 2011, we recorded loss on impairments of $58,742,000. See Note 4 of our Consolidated Financial Statements for additional information on the impairments.
Stock Based Compensation. All stock based compensation awards granted are included in compensation expense based on grant-date fair value. We use the Black-Scholes valuation model to value the equity instruments issued. The Black-Scholes valuation model uses assumptions of expected volatility, risk-free interest rates, the expected term of options granted, expected rates of dividends and forfeitures. Management determines these assumptions by reviewing current market rates and reviewing conditions relevant to our Company, such as our historical experience relating to the exercise and forfeitures of grants.
Deferred Income Taxes. We have provided a full valuation allowance related to our substantial deferred tax assets. In the future, if sufficient evidence of our ability to generate sufficient future taxable income in certain tax jurisdictions becomes apparent, we may be required to reduce this valuation allowance, resulting in income tax benefits in our consolidated statement of operations. We evaluate our ability to utilize the deferred tax assets quarterly and assess the need for the valuation allowance.
Business Segments
We operate in two business segments as follows: (i) nitrogen products manufacturing and (ii) alternative energy. In our nitrogen products manufacturing segment, RNLLC manufactures a variety of nitrogen fertilizer and industrial products. In our alternative energy segment, we develop projects and market licenses that would use processes for conversion of low-value, carbon-bearing solids or gases into valuable hydrocarbons and electric power.
THE FISCAL YEAR ENDED SEPTEMBER 30, 2011 COMPARED TO THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
Continuing Operations:
Revenues
Nitrogen products manufacturing. Our nitrogen products manufacturing segment provides revenue from sales of various nitrogen fertilizer products manufactured at the East Dubuque Facility, primarily utilized in corn production. The East Dubuque Facility is designed to produce ammonia, UAN, liquid and granular urea, nitric acid and CO2 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 revenues for the fiscal year ended September 30, 2011 compared to the fiscal year ended September 30, 2010 was primarily the result of higher prices paid for our products during fiscal year ended September 30, 2011, resulting from stronger demand for nitrogen fertilizer products during the period. Ammonia sales volumes decreased and UAN sales volumes increased during the fiscal year ended September 30, 2011 as we upgraded more ammonia into UAN to realize higher gross profit margins.
The average sales prices per ton in the current fiscal year as compared with the prior fiscal year increased by 55% and 49% for ammonia and UAN, respectively. These increases were due to higher demand caused by a combination of low levels of corn and fertilizer inventories and expectations of higher corn acreage in 2011. These two products comprised approximately 88% and 86%, respectively, of our product sales for the each of the fiscal years ended September 30, 2011 and 2010.
Alternative Energy. This segment generates revenues for technical services and licensing activities related to our technologies.
Cost of Sales
Nitrogen Products Manufacturing. The decrease in cost of sales on product shipments for the fiscal year ended September 30, 2011 compared to the fiscal year ended September 30, 2010 was primarily due to lower natural gas prices during the fiscal year ended September 30, 2011 and unplanned repairs and maintenance costs during the first fiscal quarter of 2010.
Natural gas costs comprised approximately 50% of cost of sales on product shipments for the fiscal year ended September 30, 2011 compared to 54% of cost of sales on product shipments for the fiscal year ended September 30, 2010. Labor costs comprised approximately 12% of cost of sales on product shipments for each of the fiscal years ended September 30, 2011 and 2010. Depreciation expense included in cost of sales was $9,611,000 and $10,104,000 for the fiscal years ended September 30, 2011 and 2010, respectively, and comprised approximately 10% of cost of sales on product shipments for each of the fiscal years ended September 2011 and 2010.
Turnaround expenses represent the cost of planned maintenance during turnarounds, which occur approximately every two years. A facility turnaround occurred in September and October 2011 and October 2009. As a result, during the fiscal years ended September 30, 2011 and 2010, we incurred turnaround expenses of approximately $4.5 million and $4.0 million, respectively. In October 2011, we expensed additional costs relating to the turnaround.
Natural gas, though not purchased for the purpose of resale, is occasionally sold under certain circumstances, such as when contracted quantities received exceed our production requirements or our storage capacity. In these situations, which we refer to as sales of excess inventory of natural gas, the sales proceeds are recorded as revenue and the related cost is recorded as a cost of sales.
When the opportunity presents itself, we may also sell, to a third party at one location, natural gas that we have purchased or are required to purchase under fixed-price contracts and simultaneously purchase, at a different location and at a lower price, the same quantity of natural gas in order to capture an immediate benefit from the price differential between the two delivery points. We refer to these situations as a simultaneous sale and purchase of natural gas. The sale of gas in conjunction with a simultaneous purchase may be at a price lower (or higher) than the purchase price previously committed under a forward purchase contract, which may result in a loss (or profit) compared to the price required in the forward purchase contract. The natural gas is immediately repurchased at a lower price resulting in a lower cost of sales when inventory is sold. All or a portion of a loss relative to the forward purchase contract may be offset (or a profit increased) by a gain on the simultaneous sale and purchase transaction. None of these transactions occurred during the fiscal year ended September 30, 2011, and an immaterial amount occurred during the fiscal year ended September 30, 2010.
Alternative Energy. The cost of sales for our alternative energy segment during the fiscal years ended September 30, 2011 and 2010 was for costs incurred for work performed under technical services contracts.
Gross Profit
Nitrogen Products Manufacturing. The gross profit margin on product shipments was 45% for the fiscal year ended September 30, 2011 as compared to 23% for the fiscal year ended September 30, 2010. This increase was primarily due to higher sales prices, lower natural gas prices during the fiscal year ended September 30, 2011 and unplanned repairs and maintenance costs during the first fiscal quarter of 2010.
Operating Expenses
Selling, General and Administrative Expenses. During the fiscal year ended September 30, 2011 as compared to the fiscal year ended September 30, 2010, selling, general and administrative expenses decreased by $406,000 or 1%. Salaries and benefits increased by $920,000 as a result of annual salary increases and an increase in headcount. Consulting expenses increased by $1,400,000 primarily due to consolidation of ClearFuels and increases in consulting expenses related to business development. Stock-based compensation decreased by $3,366,000 primarily as a result of reversing previously accrued compensation expense on grants related to the Rialto Project milestones which will no longer be developed. See Note 4 in our Consolidated Financial Statements for additional information on the Rialto Project impairment.
Depreciation and Amortization. The amount of depreciation and amortization expense within operating expenses increased by $278,000 for the fiscal year ended September 30, 2011 which was primarily attributable to a change in estimated useful life of intellectual property acquired in the purchase of SilvaGas’ biomass gasification technology. A portion of depreciation and amortization expense is associated with assets supporting general and administrative functions and is recorded in operating expense. The majority of depreciation and amortization expense 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. Research and development expenses increased by $10,368,000 during the fiscal year ended September 30, 2011 compared to the fiscal year ended September 30, 2010 primarily due to the development of the Rentech-ClearFuels Gasifier, for which our portion of the development expenses were expensed as research and development expense. We incur research and development expenses at our demonstration plants and in our testing laboratory in Commerce City, Colorado, where we operate the PDU, and built and now operate the Rentech-ClearFuels Gasifier, and actively conduct work to further improve our technology and to perform services for our customers. These expenses are included in our alternative energy segment.
Loss on Impairments. We had recorded construction in progress and other costs related to the Rialto Project, the Natchez Project and the Port St. Joe Project totaling approximately $27,238,000, $29,172,000 and $6,434,000, respectively. Other costs primarily include previously capitalized option payments on potential sites and deferred fees on potential financing arrangements. Due to the lack of funding available through the various DOE loan guarantee programs, the higher than anticipated costs estimated to complete the Rialto Project, and the lack of financing for such projects, we decided to abandon the three projects. As a result, we recorded a loss on impairment relating to the Rialto Project, the Natchez Project and the Port St. Joe Project of $27,238,000, $26,645,000 and $4,806,000, respectively. The loss on impairment for the Rialto Project represents the total cost of the project. The loss on impairment for the Port St. Joe Project represents the total cost of the project less the elimination of a contingent consideration liability of $1,628,000. The loss on impairment for the Natchez Project represents the total costs of the project less the appraised value of the property, which we own, of approximately $2,500,000. During the fiscal year ended September 30, 2010, we determined that one of the sites that we had secured under option, a site which we were evaluating for the Rialto Project, was no longer a viable site. Therefore, at the end of the fiscal year ended September 30, 2010, we gave notice to terminate the option resulting in the write-off of the previously capitalized option payments of $1,095,000. We also determined that the cost of a feasibility study for the East Dubuque Facility conversion project, which had been recorded in construction in progress, would never be used. Therefore, the cost was written off during the fiscal year ended September 30, 2010.
Advance for Equity Investment. This is the extinguishment of a liability relating to the East Dubuque Facility coal-to-liquids conversion project which was abandoned during the fiscal year ended September 30, 2008. For the fiscal years ended prior to September 30, 2011, the liability for the advance for equity investment remained because the potential for another coal-to-liquids project still existed. During fiscal year ended September 30, 2011, we adopted a revised project development strategy for the commercialization of our alternative energy technologies, which includes pursuing projects that are smaller and require less capital. Coal-to-liquids projects, like the East Dubuque Facility conversion project, no longer fit our development strategy. As a result, the liability associated with this project was reversed.
Loss on Disposal of Property, Plant and Equipment. For the fiscal year ended September 30, 2011, loss on disposal of property, plant and equipment was primarily due to the removal of a selective catalyst recovery unit in our nitrogen products manufacturing segment for approximately $886,000, which was partially offset by various miscellaneous sales and exchanges of nonmonetary assets totaling approximately $363,000.
Operating Income (Loss)
Nitrogen Products Manufacturing. The increase in income from operations for product shipments for the fiscal year ended September 30, 2011 as compared to the prior year was primarily due to higher sales prices and lower natural gas prices during the fiscal year ended September 30, 2011 and unplanned repairs and maintenance costs during the first fiscal quarter of 2010, partially offset by additional audit and tax fees, administrative agent fees under RNLLC’s 2010 credit agreement, or the 2010 Credit Agreement, and sales-based incentive bonuses.
Alternative Energy. Loss from operations primarily consists of operating expenses, such as selling, general and administrative; depreciation and amortization; research and development; and losses and costs relating to the three projects that we abandoned.
Other Income (Expense), Net
The increase in other expense for the fiscal year ended September 30, 2011 as compared to the fiscal year ended September 30, 2010 was primarily due to the loss on debt extinguishment related to the various credit agreements and the increase in interest expense due to higher outstanding principal balances under the credit agreements.
THE FISCAL YEAR ENDED SEPTEMBER 30, 2010 COMPARED TO THE FISCAL YEAR ENDED SEPTEMBER 30, 2009
Continuing Operations:
Revenues
Nitrogen products manufacturing. Revenues decreased in the fiscal year ended September 30, 2010 compared to the fiscal year ended September 30, 2009 primarily due to decreased sales prices for all of our products which was partially offset by an increase in our UAN sales volume. Sales volume increased for UAN due to a higher availability of the product in the fiscal year ended September 30, 2010, as compared to the previous year. This was due to a combination of higher carryover inventory into the year and lower production in the fiscal year ended September 30, 2009 compared to the fiscal year ended September 30, 2010. The lower production in the fiscal year ended September 30, 2009 can be attributed in part to an unplanned shutdown due to a power outage in January 2009, following which ammonia production was reduced to two-thirds of capacity for 67 days to avoid inventory containment issues. This was partially offset by a 15-day turnaround in October 2009 and subsequent 15-day unplanned shutdown due to equipment failures, which reduced production in the fiscal year ended September 30, 2010.
The average sales price per ton decreased by 48% for ammonia and by 32% for UAN in the fiscal year ended September 30, 2010 compared to the respective average sales prices per ton of ammonia and UAN in the fiscal year ended September 30, 2009. These decreases occurred because the prices for a majority of the shipments in the fiscal year ended September 30, 2009 had been determined in product prepayment contracts that were signed when fertilizer prices were at peak levels in 2008. Management believes that the significant decline in prices for nitrogen fertilizer that occurred from the end of 2008 through 2009 was due to, among other things, a substantial drop in corn prices and the price of natural gas, a key input, and weak economic conditions. Sales of ammonia and UAN comprised approximately 86% and 88%, respectively, of our product sales for the fiscal years ended September 30, 2010 and 2009.
Alternative Energy. This segment generates revenues for technical services and licensing activities related to our technologies, and previously generated revenues from rental income for leasing part of a building we owned. This rental income was included in our alternative energy segment because the rental income was generated from a building, which was sold in April 2010, used in the past by some of our research and development employees. The revenue earned in this segment during the fiscal year ended September 30, 2010 was technical service revenue. The revenue earned during the fiscal year ended September 30, 2009 included both technical service revenue of $145,000 and rental revenue of $93,000.
Cost of Sales
Nitrogen Products Manufacturing. Natural gas and labor costs comprised approximately 54% and 12%, respectively, of cost of sales on product shipments for the fiscal year ended September 30, 2010 compared to 64% and 13%, respectively, for the fiscal year ended September 30, 2009. Depreciation expense included in cost of sales was $10,104,000 and $8,280,000 for the fiscal years ended September 30, 2010 and 2009, respectively, and comprised approximately 10% of cost of sales on product shipments for the fiscal year ended September 30, 2010 compared to 8% of cost of sales on product shipments for the fiscal year ended September 30, 2009.
Turnaround expenses represent the cost of planned maintenance during turnarounds, which occur approximately every two years. A facility turnaround occurred in October 2009 and some preliminary turnaround activities occurred in September 2009, which did not require the facility to be shut down.
During the fiscal year ended September 30, 2009, we were able to take advantage of simultaneous sale and purchase opportunities, resulting in immediate benefits of $188,000. In the fiscal year ended September 30, 2009, the natural gas sold as part of the simultaneous sale and purchase transactions had been purchased under forward purchase contracts that required us to pay prices higher than the prices received in conjunction with the simultaneous sale and purchase transactions, resulting in losses on sales of this natural gas of $22,775,000. The natural gas was immediately repurchased at a lower price which resulted in the benefit of $188,000 from the simultaneous sale and purchase transactions. The losses were recorded as cost of sales at the time of the simultaneous purchase and sale transactions, net of the immediate benefits from the simultaneous sale and purchase of $188,000. The recording of the losses is effectively accelerating the timing of recognizing the cost of the high-priced natural gas purchased under the original forward purchase contracts. In the absence of the simultaneous sale and purchase transactions, the higher priced natural gas under contract would have been inventoried into finished product and later expensed when the related finished product was sold. For the fiscal year ended September 30, 2009, the $22,775,000 loss recorded at the time of the simultaneous sale and purchase transactions was followed by a $22,775,000 reduction in cost of sales as product produced from the lower priced natural gas was sold. During the fiscal year ended September 30, 2010, simultaneous sale and purchases of natural gas were negligible.
Alternative Energy. The cost of sales for our alternative energy segment during the fiscal years ended September 30, 2010 and 2009 was for costs incurred for work performed under technical services contracts.
Gross Profit
Nitrogen Products Manufacturing. Our gross profit margin on product shipments was 23% for the fiscal year ended September 30, 2010 compared to 46% for the fiscal year ended September 30, 2009. This decrease was primarily due to lower sales prices, partially offset by increased sales volume of UAN and lower natural gas prices in the fiscal year ended September 30, 2010 compared to the fiscal year ended September 30, 2009.
Operating Expenses
Selling, General and Administrative Expenses. During the fiscal year ended September 30, 2010 as compared to the fiscal year ended September 30, 2009, selling, general and administrative expenses increased by $4,349,000 or 18%. Stock-based compensation increased by $1,945,000 as a result of additional grants during the fiscal year ended September 30, 2010. Consulting expenses increased by $747,000 primarily due to an equity grant to a consultant and increases in consulting expenses related to renewable energy projects. Salaries and benefits increased by $456,000 as a result of an accrual for severance payments owed to one of our former officers, the acquisition of SilvaGas and the retention of its key employees, annual salary increases and an increase in headcount.
Depreciation and Amortization. The amount of depreciation expense within operating expenses increased by $469,000 for the fiscal year ended September 30, 2010 which was primarily attributable to amortization of intellectual property acquired in the purchase of SilvaGas’ biomass gasification technology. A portion of depreciation and amortization expense is associated with assets supporting general and administrative functions and is recorded in operating expense. The majority of depreciation and amortization expense 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. Research and development expenses decreased by $1,740,000 during the fiscal year ended September 30, 2010 compared to the fiscal year ended September 30, 2009 primarily due to a decrease of $2,622,000 in the accrual for taxes related to the construction of the PDU which was partially offset by an additional $394,000 due to the consolidation of ClearFuels. We incur research and development expenses in our testing laboratory in Commerce City, Colorado, where we actively conduct work to further improve our technology and to perform services for our customers.
Loss on Impairment. We had recorded in construction in progress the cost of a feasibility study which it determined in the fiscal year ended September 30, 2010 would never be used. Therefore, the cost was written off. We also had secured and were evaluating various sites for the Rialto Project. We determined that one of the sites, which we had an option to acquire, was no longer a viable site for the Rialto Project. Therefore, at the end of the fiscal year ended September 30, 2010, we gave notice to terminate the option resulting in the write-off of the previously capitalized option payments of $1,095,000.
Operating Income (Loss)
Nitrogen Products Manufacturing. The reduction in income from operations for product shipments for the fiscal year ended September 30, 2010 as compared to the prior year was primarily due to lower sales prices, partially offset by increased sales volume of UAN and lower natural gas prices.
Alternative Energy. Loss from operations primarily consists of operating expenses, such as selling, general and administrative; depreciation and amortization; and research and development.
Other Income (Expense), Net
The increase in other expense for the fiscal year ended September 30, 2010 as compared to the fiscal year ended September 30, 2009 is primarily due to a loss on extinguishment of debt in January 2010 and the net realized loss on the sale of available for sale securities, partially offset by the gain on equity method investment.
INFLATION
Inflation has and is expected to have an insignificant impact on our results of operations and sources of liquidity.
ANALYSIS OF CASH FLOWS
The following table summarizes our Consolidated Statements of Cash Flows:
Cash Flows From Operating Activities
Net Loss. We had a net loss of $65,382,000 during the fiscal year ended September 30, 2011, as compared to $42,262,000 during the fiscal year ended September 30, 2010. The cash flows provided by (used in) operations during these periods resulted from the following operating activities:
Loss on Impairments. During the fiscal year ended September 30, 2011, we recorded loss on impairments relating to the Rialto Project, the Natchez Project and the Port St. Joe Project of $27,238,000, $26,645,000 and $4,806,000, respectively. During the fiscal year ended September 30, 2010, we gave notice to terminate the option on a site considered for the Rialto Project resulting in the write-off of the previously capitalized option payments in the amount of $1,095,000.
Advance for Equity Investment. During the fiscal year ended September 30, 2011, we recorded the extinguishment of a liability relating to the East Dubuque Facility coal-to-liquids conversion project, which was abandoned during the fiscal year ended September 30, 2008.
Non-Cash Interest Expense. Total non-cash interest expense recognized during the fiscal year ended September 30, 2011 was $7,146,000, compared to $7,605,000 during the fiscal year ended September 30, 2010. The non-cash interest expense recognized was due to the amortization of bond issue costs of our convertible notes and amortization of debt issuance costs on borrowings under the term loan.
Loss on Debt Extinguishment. In November 2010, RNLLC entered into an amendment to the 2010 Credit Agreement; the transaction was accounted for as an extinguishment of debt. As a result, a loss on debt extinguishment was recorded for $4,593,000. In June 2011, RNLLC entered into the 2011 Credit Agreement; the transaction was accounted for as an extinguishment of debt. As a result, a loss on debt extinguishment was recorded for $9,223,000. As a result of these two transactions, during the fiscal year ended September 30, 2011, we recorded a total loss on debt extinguishment of $13,816,000. During 2010, RNLLC refinanced its 2008 credit agreement resulting in a loss of $2,268,000.
Stock-Based Compensation. Stock-based compensation expense was $3,366,000 lower during the fiscal year ended September 30, 2011 as compared to the fiscal year ended September 30, 2010 primarily due to reversal of expense on grants tied to the Rialto Project milestones.
Payment of Call Premium Fee. During the fiscal year ended September 30, 2011, in connection with the 2011 Credit Agreement, proceeds of $8,261,000 were used to pay the call premium fee on early payment premium related to the repayment of the term loans under the 2010 Credit Agreement.
Accounts Receivable. During the fiscal year ended September 30, 2011, accounts receivable decreased by $4,969,000, compared to an increase of $928,000 during the fiscal year ended September 30, 2010. The decrease during the fiscal year ended September 30, 2011 and the increase during the fiscal year ended September 30, 2010 are both due to having a high volume of summer sales in 2010, increasing the balance as of September 30, 2010, but which was partially offset by lower sales prices in 2010.
Receivables from Insurance / Litigation Settlement Payable. During the fiscal year ended September 30, 2011, we recorded insurance claim receivables of $2,023,000 relating to the class action shareholder lawsuits and the shareholder derivative lawsuits described in “Part I, Item 3.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. We were exposed to interest rate risk related to our borrowings under the 2011 Credit Agreement. Borrowings under the 2011 Credit Agreement bore interest at a variable rate based upon either Adjusted LIBOR (as defined in the 2011 Credit Agreement), or the lender’s Alternative Base Rate (as defined in the 2011 Credit Agreement), plus, in each case, an applicable margin. At September 30, 2011, three month LIBOR was approximately 0.374%, which was below the minimum of 1.5% in the 2011 Credit Agreement. As of September 30, 2011, RNLLC had outstanding borrowings under the 2011 Credit Agreement of $146.3 million. Based upon the outstanding balances of our variable-interest rate debt at September 30, 2011, and assuming interest rates were above the applicable minimum, an increase or decrease by 100 basis points, the potential annual increase or decrease in annual interest expense would have been approximately $1.5 million. Under our current policies, we do 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 Facility. Market prices of nitrogen-based products are affected by changes in natural gas prices as well as by supply and demand and other factors. Currently, RNLLC purchases natural gas for use in the East Dubuque Facility 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 the current 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.
In the normal course of business, RNLLC currently produces nitrogen 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. We believe that market prices of nitrogen products are affected by changes in grain prices and demand, natural gas prices and other factors.
RNLLC enters into product prepayment contracts committing its customers to purchase its nitrogen fertilizer products at a later date. By using fixed-price forward contracts, RNLLC purchases approximately enough natural gas to manufacture the products that have been sold under product prepayment contracts for later delivery. We believe that entering into such fixed-price forward and pre-sale contracts effectively allows RNLLC to fix most of the gross margin on pre-sold product and mitigate risk of increasing market prices of natural gas or decreasing market prices of nitrogen products. However, this practice also subjects us to the risk of decreasing natural gas prices and increasing nitrogen fertilizer commodity prices after RNLLC has entered into the relevant fix-priced forward and product prepayment contracts. In addition, RNLLC occasionally makes forward purchases of natural gas that are not directly linked to specific product prepayment contracts. To the extent RNLLC makes such purchases, we also are exposed to fluctuations in natural gas prices.
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 and electricity, as well as the cost of potential feedstocks such as biomass, natural gas or other feedstocks. 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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
RENTECH, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Rentech Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Rentech Inc. and its subsidiaries at September 30, 2011 and September 30, 2010, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2011 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2011 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
December 14, 2011
RENTECH, INC.
Consolidated Balance Sheets
(Amounts in thousands, except per share data)
See Accompanying Notes to Consolidated Financial Statements.
RENTECH, INC.
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
See Accompanying Notes to Consolidated Financial Statements.
RENTECH, INC.
Consolidated Statements of Stockholders’ Equity
(Amounts in thousands)
See Accompanying Notes to Consolidated Financial Statements.
RENTECH, INC.
Consolidated Statements of Cash Flows
(Amounts in thousands)
See Accompanying Notes to Consolidated Financial Statements.
RENTECH, INC.
Consolidated Statements of Cash Flows
- Continued
(Amounts in thousands)
Consolidated Statements of Cash Flows
For the fiscal years ended September 30, 2011, 2010 and 2009, the Company made certain cash payments as follows:
Consolidated Statements of Cash Flows
Excluded from the statements of cash flows were the effects of certain non-cash financing and investing activities as follows:
See Accompanying Notes to Consolidated Financial Statements.
RENTECH, INC.
Notes to Consolidated Financial Statements
Note 1 - Description of Business
Description of Business
Rentech, Inc. (“Rentech”, “we”, or “the Company”) operates in two segments being alternative energy and nitrogen products manufacturing. See Note 18 - Segment Information.
Rentech’s vision is to be a provider of clean energy solutions. Rentech owns and develops technologies that enable the production of certified synthetic fuels and renewable power when integrated with certain other third-party technologies. The Company’s clean energy technology portfolio includes the Rentech-SilvaGas biomass gasification technology (the “Rentech-SilvaGas Technology”) and the Rentech-ClearFuels biomass gasification technology (the “Rentech-ClearFuels Technology”), both of which can produce synthesis gas (“syngas”) from biomass and waste materials for production of renewable power and fuels. Renewable hydrogen can also economically be separated out of the syngas produced using the Rentech-ClearFuels Technology. The Company also owns the patented Rentech Process which is based on Fischer-Tropsch (“FT”) chemistry. The Rentech Process can convert syngas from Rentech’s or others’ gasification technologies into complex hydrocarbons that then can be upgraded into fuels or chemicals using refining technology that Rentech licenses.
In the fourth quarter of the fiscal year ended September 30, 2011, Rentech adopted a revised strategy for the commercialization of its alternative energy technologies. The new strategy includes reduced spending on research and development and pursuit of projects that are smaller and require less capital to be invested by Rentech than those recently under development by the Company. The Company’s strategy for the first development of a particular technology at scale is to develop or participate in projects for which Rentech’s investment would be well within the Company’s expected liquidity. This revised strategy may be implemented by developing projects with partners, possibly employing partners’ technologies, or through select acquisitions.
The revised strategy reflects the Company’s expectation that project finance debt or equity for large, first-of-a-kind energy technology projects generally will not be available in the market, although the Company believes that project capital may be available, including for larger projects, after particular technologies and integrated systems have been proven at commercial scale. Given these developments and changes in the availability of government funding for such projects, certain of the Company’s projects under development no longer fit its near-term development and commercialization strategy. See Note 4 - Impairments for the financial statement implications of the change of strategy.
The Company’s nitrogen products manufacturing segment is operating through our wholly-owned subsidiary, Rentech Nitrogen, LLC (“RNLLC”), formerly known as Rentech Energy Midwest Corporation, which owns a nitrogen fertilizer manufacturing plant that uses natural gas as its feedstock. RNLLC’s plant, located in East Dubuque, Illinois (the “East Dubuque Facility”), manufactures and sells within the corn-belt region of the United States natural gas-based nitrogen fertilizer and industrial products including ammonia, urea ammonium nitrate, urea granule, urea solution, nitric acid and liquid carbon dioxide.
On November 9, 2011, Rentech Nitrogen Partners, L.P. (“RNP”) completed its initial public offering (the “Offering”) of 15,000,000 common units representing limited partner interests at a public offering price of $20.00 per common unit. The common units sold to the public in the Offering represent approximately 39.2% of RNP common units outstanding as of the closing of the Offering. Rentech Nitrogen Holdings, Inc. (“RNHI”), Rentech’s indirect wholly-owned subsidiary, owns the remaining 60.8% of RNP common units and Rentech Nitrogen GP, LLC (the “General Partner”), RNHI’s wholly-owned subsidiary, owns 100% of the non-economic general partner interest in RNP. RNP’s assets will consist of all of the equity interests of RNLLC, which owns the East Dubuque Facility. At the closing of the Offering, RNLLC was converted into a limited liability company, Rentech Nitrogen, LLC (the “LLC”). For additional information refer to Note 21 - Subsequent Events. Included in prepaid expenses and other assets at September 30, 2011 is $2.0 million of legal, accounting and other costs related to the Offering which will be offset against the proceeds in the 2012 financial statements.
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
Note 2 - Summary of Certain Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and a subsidiary in which the Company owns a controlling financial interest. All significant intercompany accounts and transactions have been eliminated in consolidation.
Presentation
Certain fiscal year ended September 30, 2010 amounts have been reclassified to conform to the fiscal year ended September 30, 2011 presentation.
Revisions
The Company has revised its December 31, 2010 and 2009 statement of cash flows to correct errors related to noncash activities for capital expenditures which were included as operating and investing activities in these years. The errors decreased net cash used by operating activities and increased net cash used in investing activities by $1.4 million for the fiscal year ended September 30, 2010. The errors increased net cash provided by operating activities and net cash used in investing activities by $1.4 million for the fiscal year ended September 30, 2009. The impact of these errors on the previously issued three-month ended December 31, 2010 and six-month ended March 31, 2011, decreased net cash provided by operating activities and net cash used in investing activities by $1.3 million and $1.3 million, respectively. The impact of errors for the previously issued nine-month ended June 30, 2011, increased net cash provided by operating activities and increased net cash used in investing activities by $2.8 million. The Company has evaluated this error and determined that the impact to the previously issued financial statements was not material.
Subsequent Events
The Company has evaluated events, if any, which occurred subsequent to September 30, 2011 through the date these financial statements were issued, to ensure that such events have been properly reflected in these statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Fair values of receivables, other current assets, accounts payable, accrued liabilities and other current liabilities were assumed to approximate carrying values for these financial instruments since they are short term in nature and their carrying amounts approximate fair value or they are receivable or payable on demand.
The carrying amount of convertible debt and other debt outstanding also approximates their fair value as of September 30, 2011 and 2010 because interest rates on these instruments approximate the interest rate on debt with similar terms available to the Company.
Revenue Recognition
Product sales revenues from our nitrogen products manufacturing segment are recognized when customers take ownership upon shipment from the East Dubuque Facility or its leased facility and assumes risk of loss, collection of the related receivable is probable, persuasive evidence of a sale arrangement exists and the sales price is fixed or determinable. Management assesses the business environment, the customer’s financial condition, historical collection experience, accounts receivable aging and customer disputes to determine whether collectability is reasonably assured. If collectability is not considered reasonably assured at the time of sale, the Company does not recognize revenue until collection occurs.
Natural gas, though not purchased for the purpose of resale, is occasionally sold. Natural gas is sold when contracted quantities received are in excess of production and storage capacities, in which case the sales price is recorded in product sales and the related cost is recorded in cost of sales. Natural gas is also sold with a simultaneous gas purchase in order to receive a benefit that reduces raw material cost, in which case the net of the sales price and the related cost of sales are recorded within cost of sales.
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
On April 26, 2006, the Company’s subsidiary, Rentech Development Corporation (“RDC”), entered into a Distribution Agreement with Royster-Clark Resources, LLC, who subsequently assigned the agreement to Agrium U.S. Inc. (“Agrium”). The Distribution Agreement is for a ten year period, subject to renewal options. Pursuant to the Distribution Agreement, Agrium is obligated to use commercially reasonable efforts to promote the sale of, and solicit and secure orders from its customers for nitrogen fertilizer products manufactured at the East Dubuque Facility, and to purchase from RNLLC nitrogen fertilizer products manufactured at the facility for prices to be negotiated in good faith from time to time. Under the Distribution Agreement, Agrium is appointed as the exclusive distributor for the sale, purchase and resale of nitrogen products manufactured at the East Dubuque Facility. Sale terms are negotiated and approved by RNLLC. Agrium bears the credit risk on products sold through Agrium pursuant to the Distribution Agreement. If an agreement is not reached on the terms and conditions of any proposed Agrium sale transaction, RNLLC has the right to sell to third parties provided the sale is on the same timetable and volumes and at a price not lower than the one proposed by Agrium. For the fiscal years ended September 30, 2011, 2010 and 2009, the Distribution Agreement accounted for 83%, 80%, and 85%, respectively, of net revenues from continuing operations. Receivables from Agrium accounted for 77% and 86% of the total consolidated accounts receivable balance of the Company as of September 30, 2011 and 2010, respectively. RNLLC employs personnel who negotiate sales with other customers and these transactions are not subject to the terms of the Distribution Agreement.
Under the Distribution Agreement, RNLLC pays commissions to Agrium not to exceed $5 million per contract year on applicable gross sales. The commission rate was 2% during the first year of the agreement and increased by 1% on each anniversary date of the agreement up to the current maximum rate of 5%. For the fiscal years ended September 30, 2011, 2010 and 2009, the effective commission rate associated with sales under the Distribution Agreement was 4.3%, 4.2% and 2.3%, respectively.
RNLLC derives substantially all of its revenues and cash flows from the production and sale of nitrogen fertilizers, and it sells a majority of its nitrogen products to customers located in its core market. RNLLC sold over 90% of its nitrogen products to customers for agricultural uses during each of the fiscal years ended September 30, 2011, 2010 and 2009. Given the nature of its business, and consistent with industry practice, RNLLC does not have long-term minimum purchase contracts with any of its customers.
Technical service revenues from our alternative energy segment are recognized as the services are provided during each month. Revenues from feasibility studies are recognized based on the terms of the services contract.
Rental income from our alternative energy segment is recognized monthly as per the lease agreement, and is included in the alternative energy segment as a part of service revenues.
Deferred Revenue
The Company records a liability for deferred revenue to the extent that payment has been received under product prepayment contracts, which create obligations for delivery of product within a specified period of time in the future. The terms of these product prepayment contracts require payment in advance of delivery. The Company recognizes revenue related to the product prepayment contracts and relieves the liability for deferred revenue when products are shipped. A significant portion of the revenue recognized during any period may be related to product prepayment contracts, for which cash was collected during an earlier period, with the result that a significant portion of revenue recognized during a period may not generate cash receipts during that period. As of September 30, 2011 and 2010, deferred revenue was $34,154,000 and $14,473,000, respectively.
Cost of Sales
Cost of sales are primarily comprised of manufacturing costs related to the Company’s nitrogen fertilizer and industrial products. Cost of sales expenses include direct materials such as natural gas, direct labor, indirect labor, employee fringe benefits, depreciation on plant machinery and other costs, including shipping and handling charges incurred to transport products sold.
The Company enters into short-term contracts to purchase physical supplies of natural gas in fixed quantities at both fixed and indexed prices. We anticipate that we will physically receive the contract quantities and use them in the production of fertilizer and industrial products. We believe it probable that the counterparties will fulfill their contractual obligations when executing these contracts. Natural gas purchases, including the cost of transportation to the East Dubuque Facility, are recorded at the point of delivery into the pipeline system.
Accounting for Derivative Instruments
We elect the normal purchase normal sale exemption for our derivative instruments. As such, we do not recognize the unrealized gains or losses in our financial statements.
Research and Development Expenses
Research and development expenses include direct materials, direct labor, indirect labor, fringe benefits, third-party consultants and other costs incurred to develop and refine certain technologies employed in the Company’s alternative energy segment. These costs are expensed as incurred.
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
Our technology activities are centered at the Rentech Energy Technology Center (the “RETC”), which houses our Product Demonstration Unit (“PDU”), including the ClearFuels Technology Inc. (“ClearFuels”) biomass gasifier (the “ClearFuels Gasifier”). The RETC is where we have skilled technical, engineering and operating teams that work at our development and testing laboratories. The laboratory contains equipment and support facilities that provide us with resources for the continued development and testing of the Rentech Process, the Rentech-SilvaGas Technology and the Rentech-ClearFuels Technology as well as complementary technologies for additional applications and performance enhancements. In addition, the facilities allow us to conduct online analysis of feedstock and products. For the fiscal years ended September 30, 2011, 2010 and 2009, the Company incurred research and development expenses of $18.5 million, $9.7 million and $12.3 million, respectively, related to the construction, commissioning, startup and operation of the PDU and ClearFuels Gasifier.
Cash
The Company has various checking and savings accounts with major financial institutions. At times balances with these institutions may be in excess of federally insured limits.
Restricted Cash
As of September 30, 2011, restricted cash, included in other assets, of approximately $327,000, is comprised of cash that has been pledged as collateral for a standby letter of credit. As of September 30, 2010, restricted cash, of approximately $100,000, is comprised of cash that has been pledged as collateral for future tax liabilities that may arise as a result of the November 2006 sale of a subsidiary. Restricted cash pledged for less than one year is classified as a short-term asset and restricted cash that has been pledged as collateral for over one year has been classified as a long-term asset.
Accounts Receivable
Trade receivables are initially recorded at fair value based on the sale of goods to customers and are stated net of allowances.
Allowance for Doubtful Accounts
The allowance for doubtful accounts reflects the Company’s best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on known troubled accounts, historical experience, and other currently available evidence. The Company reviews its allowance for doubtful accounts quarterly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Inventories
Inventories consist of raw materials and finished goods within our nitrogen products manufacturing segment. The primary raw material in the production of nitrogen products is natural gas. Raw materials also include certain chemicals used in the manufacturing process. Finished goods include the nitrogen products stored at the East Dubuque Facility that are ready for shipment along with any inventory that may be stored at a remote facility. The Company allocates fixed production overhead costs to inventory based on the normal capacity of its production facilities and unallocated overhead costs are recognized as expense in the period incurred. At September 30, 2011 and 2010, inventories on the consolidated balance sheets included depreciation of $836,000 and $513,000, respectively.
Inventories are stated at the lower of cost or estimated net realizable value. The cost of inventories is determined using the first-in first-out method. The estimated net realizable value is based on customer orders, market trends and historical pricing. The Company performs on at least a quarterly basis an analysis of its inventory balances to determine if the carrying amount of inventories exceeds their net realizable value. If the carrying amount exceeds the estimated net realizable value, the carrying amount is reduced to the estimated net realizable value.
Deposits on Gas Contracts
The Company enters into forward contracts with fixed delivery prices to purchase portions of the natural gas required to produce fertilizer for the Company’s nitrogen fertilizer business. Some of the forward contracts require the Company to pay a deposit for the natural gas at the time of contract signing, and all of the contracts require deposits in the event that the market price for natural gas falls after the date of the contract to a price below the fixed price in the contracts.
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation expense is calculated using the straight-line method over the estimated useful lives of the assets, as follows:
Significant renewals and betterments are capitalized. Costs of maintenance and repairs are expensed as incurred. Approximately every two years, RNLLC incurs turnaround expenses which represent the cost of shutting down the East Dubuque Facility for planned maintenance. Such costs are expensed as incurred. When property, plant and equipment is retired or otherwise disposed of, the asset and accumulated depreciation or amortization are removed from the accounts and the resulting gain or loss is reflected in operating expenses.
Spare parts are maintained by RNLLC to reduce the length of possible interruptions in plant operations from an infrastructure breakdown at the East Dubuque Facility. The spare parts may be held for use for many years before the spare parts are used. As a result, they are capitalized as a fixed asset at cost and are depreciated on a straight-line basis over the useful life of the related equipment until the spare parts are installed. When spare parts are utilized, the net book values of the assets are charged to earnings as a cost of sale. Periodically, the spare parts are evaluated for obsolescence and impairment and if the value of the spare parts is impaired, it is charged against earnings.
Long-lived assets, construction in progress and identifiable intangible assets are reviewed whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the expected future cash flow from the use of the asset and its eventual disposition is less than the carrying amount of the asset, an impairment loss is recognized and measured using the asset’s fair value.
The Company capitalizes certain direct development costs associated with internal-use software, including external direct costs of material and services, and payroll costs for employees devoting time to software implementation projects. Costs incurred during the preliminary project stage, as well as maintenance and training costs, are expensed as incurred.
Grants received are recorded as a reduction of the cost of the related project when there is reasonable assurance that the Company will comply with the conditions attached to them, and funding under the grant is receivable. Grants that compensate the Company for the cost of property, plant and equipment are recorded as a reduction to the cost of the related asset and are recognized over the useful life of the asset by reducing depreciation expense.
Construction in Progress
We track project development costs and capitalize those costs after a project has completed the scoping phase and enters the feasibility phase. We also capitalize costs for improvements to the existing machinery and equipment at the East Dubuque Facility and certain costs associated with our information technology initiatives. Interest incurred on development and construction projects is capitalized until construction is complete. We do not depreciate construction in progress costs until the underlying assets are placed into service.
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
Patents
Costs for patents on intellectual property are capitalized and amortized using the straight-line method over the remaining lives of the patents. The cost of patents was $9,612,000 with accumulated amortization of $1,775,000 and $769,000 at September 30, 2011 and 2010, respectively. The Company recorded $1,006,000 and $615,000 in amortization expense for the fiscal year ended September 30, 2011 and 2010, respectively. The amortization of the patents will result in amortization expense of $1,038,000 for each of the next five years.
Recoverability of Goodwill
The Company tests goodwill assets for impairment annually, or more often if an event or circumstance indicates that an impairment may have occurred. The recoverability of goodwill involves a high degree of judgment since the first step of the required impairment test consists of a comparison of the fair value of a reporting unit with its book value. Based on the assumptions underlying the valuation, impairment is determined by estimating the fair value of a reporting unit and comparing that value to the reporting unit’s book value. If the fair value is more than the book value of the reporting unit, an impairment loss is not recognized. If an impairment exists, the fair value of the reporting unit is allocated to all of its assets and liabilities excluding goodwill, with the excess amount representing the fair value of goodwill. An impairment loss is measured as the amount by which the book value of the reporting unit’s goodwill exceeds the estimated fair value of that goodwill.
For purposes of evaluating whether goodwill is impaired, goodwill is allocated to reporting units, which are either at the operating segment level or one reporting level below the operating segment. The reporting unit with goodwill is ClearFuels. The Company utilizes the fair value based upon the discounted cash flows that the business can be expected to generate in the future (the “Income Approach”) when evaluating goodwill for impairment. The Income Approach valuation method requires the Company to make projections of revenue and operating costs for the reporting unit over a multi-year period. Additionally, management must make an estimate of a weighted average cost of capital that a market participant would use as a discount rate. Changes in these projections or estimates could result in passing or failing the first step of the impairment model, which could significantly change the amount of any impairment ultimately recorded. As of September 30, 2011, the Company performed the annual impairment test for goodwill as required and determined that its goodwill was not impaired since the fair value of the reporting unit exceeded its carrying amount.
Income Taxes
The Company accounts for income taxes under the liability method, which requires an entity to recognize deferred tax assets and liabilities for temporary differences. Temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. An income tax valuation allowance has been established to reduce the Company’s deferred tax asset to the amount that is expected to be realized in the future.
The Company recognizes in its consolidated financial statements only those tax positions that are “more-likely-than-not” of being sustained, based on the technical merits of the position. The Company performed a comprehensive review of its material tax positions in accordance with the applicable guidance.
Net Income (Loss) Per Common Share Attributable To Rentech
Basic income (loss) per common share attributable to Rentech is calculated by dividing net income (loss) attributable to Rentech by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per common share attributable to Rentech is calculated by dividing net income (loss) attributable to Rentech by the weighted average number of common shares outstanding plus the dilutive effect, calculated using the “treasury stock” method for the unvested restricted stock units, outstanding stock options and warrants and using the “if converted” method for the convertible debt.
Variable Interest Entities
In the normal course of business, the Company may enter into joint ventures or make investments with business partners that support its underlying business strategy and provide it the ability to enter new markets. In certain instances, an entity in which the Company may make an investment may qualify as a variable interest entity (“VIE”). If the Company determines that it is the primary beneficiary of an entity, it must consolidate that entity’s operations. Determination of the primary beneficiary focuses on determining which variable interest holder has the power to direct the most significant activities of the VIE.
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (the “FASB”) issued a standard providing 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 transferor’s continuing involvement in transferred financial assets. This standard is effective for fiscal years beginning after November 15, 2009. It is effective for the Company’s fiscal year beginning on October 1, 2010. The Company did not transfer financial assets during the fiscal year ended September 30, 2011; therefore the adoption of this standard did not have any impact on the Company’s consolidated financial position, results of operations or disclosures for the fiscal year ended September 30, 2011.
In June 2009, the FASB issued a standard amending previous guidance related to the determination as to whether an entity is a VIE, and ongoing reassessments of whether an enterprise is the primary beneficiary of a VIE. This standard is effective for fiscal years beginning after November 15, 2009. It is effective for the Company’s fiscal year beginning on October 1, 2010. The Company applied the previous guidance in the fiscal year ended September 30, 2010 to determine the accounting treatment for its investment in 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 Company’s consolidated financial position, results of operations or disclosures for the fiscal year ended September 30, 2011.
In May 2011, the FASB issued guidance clarifying previous guidance related to fair value measurement. This guidance is effective during interim and annual periods beginning after December 15, 2011. It is effective for the Company’s interim period beginning on January 1, 2012. Early application is not permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial position, results of operations or disclosures.
In June 2011, the FASB issued guidance on comprehensive income. Under the guidance, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This standard is effective for fiscal years beginning after December 15, 2011. It is effective for the Company’s fiscal year beginning on October 1, 2012. Early adoption is permitted. The adoption of this standard did not have a material impact on the Company’s consolidated financial position, results of operations or disclosures.
In September 2011, the FASB issued guidance amending previous guidance on testing goodwill for impairment. The guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. It is effective for the Company’s fiscal year beginning on October 1, 2012. Early adoption is permitted. The Company is evaluating the provisions of this guidance and the potential impact on the Company’s consolidated financial position, results of operations and disclosures.
Note 3 - Discontinued Operations
Effective August 1, 2005, the Company sold its 56% ownership interest in REN Testing Corporation (“REN”) to REN Holding Corporation, (“RHC”) an Oklahoma corporation, consisting of a management group previously involved in REN. The sales price of the transaction was $1,175,000 payable in the form of earn-out payments based on RHC’s cash receipts for sales and services from REN’s customers. The earn-out payments are based on 5% of REN’s qualified cash receipts up to the first $2,500,000 per year and 10% of qualified cash receipts in excess of $2,500,000 per year. The earn-out payment will continue indefinitely until Rentech collects the $1,175,000. As of September 30, 2011 and 2010, the Company had collected $478,000 of this amount and had recorded $107,000 of the remaining receivable in current assets as other receivables. In addition, we recorded a reserve against the earn-out receivable due to uncertainty surrounding the estimation of collections. The balance of the reserve was $697,000 as of September 30, 2011 and 2010. Pursuant to the terms of the agreement, the buyer was responsible for all contingent liabilities that existed or might be incurred after the date of disposal.
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
Note 4 - Impairments
Prior to the fourth quarter of the fiscal year ended September 30, 2011, the Company’s alternative energy segment had under development three projects for which it had capitalized certain construction work in process and other development costs. These projects include a biomass project in Rialto, California (the “Rialto Project”), a coal to liquid project in Natchez, Mississippi (the “Natchez Project”) and a renewable energy project in Port St. Joe Florida (the “Port St. Joe Project”).
As indicated in Note 1 “Description of Business”, in the fourth quarter of the fiscal year ended September 30, 2011 the Company revised its strategy for commercialization of its alternative energy technologies to include reduced spending on research and development and pursuit of projects that are smaller and require less capital to be invested by Rentech than those recently under development by the Company. In addition to the revised strategy, the Company has withdrawn its applications to the U.S. Department of Energy (DOE) for loan guarantees for its Rialto Project and the Port St. Joe Project. The Company has previously stated that it will no longer pursue project financing for its projects from the DOE loan guarantee programs. The Company had applied under the DOE’s Section 1705 loan guarantee program for both projects, had been notified by the DOE that its applications had been placed on hold, and had also been notified that the projects would be considered for funding under the Section 1703 loan guarantee program. With the withdrawal from the loan guarantee program, Rentech now believes that project financing for the Rialto Project and the Port St. Joe Project will not be available, and the Company will not be moving forward with the projects. As a result, Rentech impaired capitalized costs associated with the projects in its financial statements for the period ending September 30, 2011. The loss on impairment for the Rialto Project represents the total costs of the project. The loss on impairment for the Port St. Joe Project represents the total costs of the project less the elimination of the contingent consideration liability of $1,628,000, as described in Note 10.
The Company has also concluded that project financing for its large Natchez Project is not available, and the Company’s future development efforts at its Natchez site will focus on pursuing smaller projects that would use biomass or natural gas as feedstocks, not on the Natchez Project. As a result, Rentech impaired capitalized costs associated with its development of the Natchez Project in its financial statements for the period ending September 30, 2011. The loss on impairment for the Natchez Project represents the total costs of the project less the appraised value of the property, which we own, of approximately $2,500,000. The appraisal was dated October 12, 2011 and the emphasis was on the cost approach and sales comparison approach. The Company may in the future seek to deploy its Rentech Fischer-Tropsch process in large scale plants if project capital is available, or in smaller scale plants if efficiencies improve and costs at smaller scales can be reduced.
The financial impact recorded in the fiscal year ended September 30, 2011 statement of operations and the remaining capitalized costs reflected in the balance sheet at September 30, 2011 are as follows:
Note 5 - Accounts Receivable
Accounts receivable consisted of the following:
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
Note 6 - Inventories
Inventories consisted of the following:
Note 7 - Property, Plant and Equipment
Property, plant and equipment consisted of the following:
Construction in progress consisted of the following:
The Company has a legal obligation to handle and dispose of asbestos at its East Dubuque Facility and Natchez Project in a special manner when undergoing major or minor renovations or when buildings at these locations are demolished, even though the timing and method of settlement are conditional on future events that may or may not be in its control. As a result, the Company has developed an estimate for 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 the fair value of the asset retirement obligation for each property and, accordingly, the asset and related obligation for each property have been recorded. In accordance with the applicable guidance, the liability is increased over time and such increase is recorded as accretion expense. The liability at September 30, 2011 and 2010 was $303,000 and $268,000, respectively. The accretion expense for the fiscal years ended September 30, 2011, 2010 and 2009 was $35,000, $31,000 and $0, respectively.
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
Note 8 - 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, and rights to license ClearFuels’ biomass gasification technology, in exchange for a warrant to purchase up to five million shares of the Company’s common stock, access to the PDU in Colorado for construction and operation of the ClearFuels Gasifier, and certain rights to license certain Rentech technologies, including the exclusive right for projects using bagasse as a feedstock. The warrant was structured to vest 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 was $0.60 per share and the exercise price per share for the second and third tranches was to have been set at the ten-day average trading price of the Company’s common stock at the time of vesting. In May 2011, ClearFuels did not meet the milestone for the second tranche of the warrant to vest and the Company now owns 95% of the equity interests of ClearFuels. The fair value of the warrant at the date of grant 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 could not determine the probability that ClearFuels would achieve the milestones that would trigger vesting of the second and third tranches.
ClearFuels was a private company and a market did not exist for its common or preferred stock. As a result, the Company determined the fair value of its initial 2009 investment in ClearFuels to be equal to the fair market value of the vested warrant issued to ClearFuels of $628,815. In June 2009, the Company determined that ClearFuels was a VIE, but Rentech was not its primary beneficiary. Through September 3, 2010, the investment in ClearFuels was recorded in other assets and deposits under the equity method of accounting. At September 3, 2010, the investment balance was $0 and the Company’s share of ClearFuels’ loss for the eleven months ended September 3, 2010 and the fiscal year ended September 30, 2009 was $544,000 and $84,000, respectively, which is shown as equity in net loss of investee company in the consolidated statements of operations.
During the fiscal year ended September 30, 2010, pursuant to the warrant agreement, ClearFuels acquired 832,390 shares of Company common stock through the cashless exercise of warrants representing 1,500,000 shares.
ClearFuels was selected by the DOE to receive up to approximately $23 million as a grant to construct the 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 became responsible for budgeted construction payments for the project after October 1, 2010, and expects to receive reimbursement from the DOE for between approximately 62% and 65% 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 between approximately $2.7 million and $3.0 million after receipt of all DOE reimbursements. At September 30, 2011 the Company has recorded in other receivables, amounts due from the DOE under the grant of $1.2 million.
Under accounting guidance, based on the execution of the Project Support Agreement, the Company reconsidered whether it was the primary beneficiary of ClearFuels. The Company determined that as of September 3, 2010 it was the primary beneficiary as it was responsible for a majority of ClearFuels’ losses or entitled to receive a majority of ClearFuels’ residual returns through its equity interest and as a result of the Project Support Agreement. Therefore, the operations of ClearFuels were consolidated as of September 3, 2010. Noncontrolling interests represents the portion of equity or results of operations 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 fiscal year ended September 30, 2011, the Company made retrospective adjustments to notes receivable, prepaid expenses and goodwill in the opening balance sheet of ClearFuels as of September 3, 2010 due to working capital adjustments.
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
The following items were recorded on the consolidated balance sheets as of September 30, 2010 (in thousands):
(1)
Recorded in Other Receivables on the Consolidated Balance Sheet
The fair value of the Company’s 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 the fiscal year ended September 30, 2010 as a gain on equity method investment in the consolidated statements of operations in the amount of $1,909,000.
On April 14, 2011, the Company exercised an option to acquire substantially all the remaining equity of ClearFuels, which became exercisable because ClearFuels had not closed a financing with proceeds of at least $25,000,000 by March 31, 2011. On April 19, 2011, ClearFuels received from the Company $160,000 under a promissory note executed on that date by both parties. The note was intended to provide temporary funding for ClearFuels until the closing pursuant to the option exercise was completed. On May 13, 2011, the Company acquired a substantial majority of the equity of ClearFuels (the “Merger”). The Company’s equity ownership interest increased to 95%, with existing ClearFuels investors retaining a 5% equity interest. The acquisition was accomplished through the merger of a subsidiary of the Company into ClearFuels, with ClearFuels continuing as the surviving company in the Merger. Consideration for the Merger consisted of the obligations assumed by the Company in the Project Support Agreement to support the construction of the ClearFuels Gasifier. The Company also issued a warrant to purchase 1,980,463 shares of Company common stock at an exercise price of $0.99 per share to Ohana Holdings LLC, a shareholder in ClearFuels, and agreed to provide the minority shareholders in ClearFuels with a carried interest in a potential project in Hawaii, which is currently being developed by ClearFuels. The fair value of the warrant was calculated using the Black-Scholes option-pricing model at $1,276,940. Under accounting guidance, the fair value of the warrant and the loan for $160,000 was the consideration for the Merger, resulting in total consideration of $1.4 million. The difference between the fair value of the noncontrolling interest transferred and the total consideration is the additional capital contributed from the acquisition of $4.5 million.
Note 9 - Acquisition of SilvaGas Holdings Corporation
On June 23, 2009, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) to acquire SilvaGas Holdings Corporation (“SilvaGas”) and its patented biomass gasification technology. The transactions contemplated by the Merger Agreement closed on June 30, 2009 at which time SilvaGas became a wholly-owned subsidiary of the Company and changed its name to Rentech SilvaGas LLC. The Company’s results of operations include SilvaGas’ results of operations beginning July 1, 2009.
As part of the closing the Company issued approximately 14.5 million shares of common stock to the SilvaGas stockholders, approximately 3.4 million of which remain deposited with an escrow agent to support certain indemnification obligations of the SilvaGas stockholders and to provide for certain possible expenses.
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
In addition to the consideration paid at the closing, SilvaGas stockholders may be entitled to receive additional shares of the Company’s common stock as earn-out consideration. Potential earn-out consideration will be calculated based on the degree to which the biomass gasification unit implementing SilvaGas technology at the Rialto Project, or an alternative project to be designated by the Company, achieves certain performance criteria no later than March 29, 2022. Depending on the performance of the gasifier, such
additional earn-out consideration may vary from zero to the sum of (i) 6,250,000 shares of Company common stock and (ii) that number of shares equal in value to $5,500,000 at the time of any such payment (provided that such number may not exceed 11,000,000 shares). In the event the SilvaGas biomass gasification unit fails to achieve the performance criteria, SilvaGas stockholders may be entitled to receive shares of the Company’s common stock with a value equal to a portion of the licensing fees and other royalties the Company receives from licensing the SilvaGas technology. The SilvaGas stockholders will not be entitled to receive such common stock unless the licensing fees and other royalties received by the Company exceed a certain threshold. In no event will the aggregate consideration paid in shares of the Company to SilvaGas stockholders at closing and as earn-out consideration exceed 20% of the total outstanding common stock of the Company as of the date of the Merger Agreement. The purchase price did not include the earn-out consideration because the Company could not determine the probability that the milestones that trigger the earn-out consideration would be achieved.
Note 10 - Acquisition of Northwest Florida Renewable Energy Center LLC
On April 12, 2011, GCSEC Holdings, LLC (“GCSEC”), a wholly-owned subsidiary of the Company, entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Biomass Energy Holdings LLC (“Seller”), and acquired 100% of the membership interests of NWFREC in connection with the Port St. Joe Project.
The consideration for the purchase of NWFREC had been deferred and may have been paid in part at the closing of construction financing from proceeds of that financing, and in part from available operating cash flow of the Port St. Joe Project following commencement of commercial operation. Subject to adjustments set forth in the Purchase Agreement, the maximum consideration to be paid for the Port St. Joe Project was $6 million, consisting of approximately $4.9 million of cash payments and $1.1 million of equity in NWFREC. The cash portion represented development costs to date paid by Seller plus 10% of such costs. The cash consideration may have been paid 30% at the closing of construction financing, and 70% from available cash flows of the Port St. Joe Project, both subject to approval of any lenders to, or new equity investors in, the Port St. Joe Project. The purchase price could have been decreased in certain instances. Under accounting guidance, the Company was required to recognize the acquisition date fair value of the contingent consideration as part of the consideration transferred in exchange for NWFREC. The Company calculated the fair value of the contingent consideration using the present value technique based on probability-weighted outcomes. The fair value of the contingent consideration was classified as a liability. As of the acquisition date, the Company recorded on the consolidated balance sheet an intangible asset of $1.7 million, accounts payable of $0.1 million and other liability of $1.6 million, which represented the contingent consideration. As indicated in Note 4 “Impairments”, during the fourth quarter of the fiscal year ended September 30, 2011, the intangible asset was impaired and the contingent consideration liability reduced to zero. Since the acquisition and the impairment were done in the same fiscal year, the purchase price allocation was not finalized.
Note 11 - Debt
The Company’s debt obligations at September 30, 2011 and 2010 consist of short-term notes payable, a term loan and a convertible debt to stockholders.
Short-term Notes Payable
The Company enters into non-collateralized short-term notes payable to finance insurance premiums. During the fiscal year ended September 30, 2010, the Company entered into non-collateralized short-term notes payable to finance insurance premiums totaling $1,893,000. The notes payable bore interest between 2.55% and 3.28% with monthly payments of principal and interest and a scheduled maturity date in March 2011. The balance due as of September 30, 2010 was $825,000 which was included in accrued liabilities. During the fiscal year ended September 30, 2011, the Company entered into non-collateralized short-term notes payable to finance insurance premiums totaling $1,872,000. The notes payable bear interest between 2.55% and 3.04% with monthly payments of principal and interest and a scheduled maturity date in March 2012. The balance due as of September 30, 2011 was $739,000 which was included in accrued liabilities.
Term Loans
On June 13, 2008, Rentech and RNLLC executed an amended and restated credit agreement (the “2008 Credit Agreement”) by and among RNLLC as the borrower, Rentech as a guarantor, Credit Suisse, Cayman Islands Branch (“Credit Suisse”), as administrative agent and collateral agent and the lenders party thereto for the principal amount of $53,000,000.
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
Term loans outstanding under the 2008 Credit Agreement bore interest at the election of RNLLC of either: (a)(i) the greater of LIBOR or 3%, plus (a)(ii) 10.0%; or (b)(i) the greater of 4%, the prime rate, as determined by Credit Suisse, or 0.5% in excess of the federal funds effective rate, plus (b)(ii) 9.0%. Interest payments were generally made on a quarterly basis, as required by the terms of the agreement.
On January 14, 2009, RNLLC entered into the First Amendment to Amended and Restated Credit Agreement and Waiver (the “2009 First Amendment and Waiver”). In addition to an increase in interest rates and certain fees to the lenders and its advisors, as further consideration for the 2009 First Amendment and Waiver, the Company sold to Credit Suisse Management LLC, SOLA LTD and Solus Core Opportunities Master Fund Ltd., for an aggregate issue price of approximately $50,000, warrants to purchase 4,993,379 shares of the Company’s common stock, or 3% of the Company’s outstanding shares at the time of issuance. The exercise price of $0.92 per share for each warrant was a 20% premium above the weighted average price for the Company’s stock over the 10 trading days preceding the January 14, 2009 closing date of the 2009 First Amendment and Waiver. Seventy-five percent of the warrants were immediately exercisable and expire 5 years from the grant date. The remaining 25% of the warrants were set to expire on the maturity date of the term loan. This portion of the warrants vested and became exercisable July 1, 2009. The fair value of the warrants was calculated using the Black-Scholes option-pricing model at $1,626,000. The fair value of the warrants, reduced by the $50,000 of consideration received for the warrants, was recorded as a discount on the debt and was amortized to interest expense over the remaining contractual term of the debt using the effective interest method.
On January 29, 2010, the Company and RNLLC replaced the 2008 Credit Agreement with a senior collateralized credit agreement (the “2010 Credit Agreement”) with Credit Suisse, as administrative agent and collateral agent, and the lenders party thereto. Under the 2010 Credit Agreement, RNLLC borrowed $62.5 million in the form of new collateralized term loans (the “2010 Initial Term Loans”), the proceeds of which were used to repay the term loan outstanding under the 2008 Credit Agreement (the principal amount of which at the time of prepayment was approximately $37 million), to make an intercompany loan to the Company in the amount of approximately $18 million and to pay related fees and expenses. The 2010 Initial Term Loans were issued with original issue discount of 3%. The payoff of the term loan under the 2008 Credit Agreement was considered an early extinguishment of debt. As a result, for the fiscal year ended September 30, 2010, loss on debt extinguishment of $2.3 million was recorded in the consolidated statements of operations.
On July 21, 2010, RNLLC and Rentech entered into an amendment to credit agreement, waiver and collateral agent consent to the 2010 Credit Agreement (the “First Amendment”). The First Amendment included an early prepayment by RNLLC of $15 million of principal of the 2010 Initial Term Loans outstanding, and a simultaneous borrowing of an additional $20 million (the “First Incremental Loan”), with proceeds of approximately $18.5 million transferred to Rentech in the form of an intercompany loan. The First Incremental Loan was issued with original issue discount of 6%. The other terms of the First Incremental Loan, including without limitation, the maturity date, interest rate and collateral security, are the same as the Initial Term Loans.
On November 24, 2010, the Company and RNLLC entered into a Second Amendment to Credit Agreement, Waiver and Collateral Agent Consent (the “Second Amendment”) to the 2010 Credit Agreement with certain subsidiaries of the Company, certain lenders party thereto and Credit Suisse, as administrative agent and collateral agent.
The Second Amendment included an early prepayment by RNLLC of $20 million of principal of the 2010 Initial Term Loans outstanding, and a simultaneous borrowing of an additional $52.0 million (the “Second Incremental Loan”), with proceeds of approximately $50.85 million distributed to Rentech in the form of a dividend from RNLLC. The Second Incremental Loan was issued with an original issue discount of 2%. In addition, the Second Amendment, among other things permitted a special distribution of up to $5 million by RNLLC to the Company upon the satisfaction of certain conditions, and on March 11, 2011 RNLLC made the $5 million dividend to the Company. Simultaneously with this distribution, RNLLC made a mandatory early prepayment of the term loan of $5 million.
All outstanding term loans under the 2010 Credit Agreement incurred interest, at the election of RNLLC, 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 were made on a quarterly basis and were subject to annual amortization, payable quarterly, of 7.5% of the outstanding principal amount in calendar years 2010 and 2011.
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
On June 10, 2011, the Company and RNLLC entered into a five-year $150.0 million collateralized term loan facility pursuant to a credit agreement (the “2011 Credit Agreement”) among RNLLC, the Company, certain subsidiaries of the Company, certain lenders party thereto and Credit Suisse. The Company paid upfront fees to the lenders under the 2011 Credit Agreement equal to 2.0% of the
aggregate principal amount of the term loans. The term loans incurred interest, upon the Company’s election, at either (a)(i) the greater of LIBOR and 1.5%, plus (ii) 8.5% 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% and (z) 2.5% plus (ii) 7.5%. Interest payments are generally required to be made on a quarterly basis. The term loans were subject to amortization, payable quarterly, of 2.5% of the original principal amount until March 31, 2016. The remaining unpaid principal balance is payable on June 10, 2016, the maturity date. The term loans may be prepaid voluntarily at any time. In the first year, voluntary prepayments of the term loans may be made subject to a prepayment fee of 2.0% of the amount prepaid, and if prepaid in the second year, 1.0% of the amount prepaid. Voluntary prepayments made after the second anniversary of the closing date of the loan may be prepaid without any prepayment fee. RNLLC used a portion of the net proceeds of the 2011 Credit Agreement to repay amounts outstanding under the 2010 Credit Agreement in full, and to pay related fees and expenses.
The 2011 Credit Agreement required that a certain percentage of excess cash flow from RNLLC, as defined in the 2011 Credit Agreement, be applied to repay outstanding principal. The percentage of RNLLC’s excess cash flow required to be applied as a prepayment depended on RNLLC’s leverage ratio as of the relevant calculation date and the aggregate outstanding principal amount of loans under the 2011 Credit Agreement on such date.
The obligations under the 2011 Credit Agreement were collateralized by substantially all of the Company’s assets and the assets of most of the Company’s subsidiaries, including a pledge of the equity interests in many of the Company’s subsidiaries. In addition, RNLLC granted the lenders a mortgage on its real property to collateralize its obligations under the 2011 Credit Agreement and related loan documents. The obligations under the 2011 Credit Agreement were also guaranteed by the Company and certain of its subsidiaries. The 2011 Credit Agreement contained restrictions on the amount of cash that can be transferred from RNLLC to the Company or its non-RNLLC subsidiaries. The 2011 Credit Agreement includes restrictive covenants that limit, among other things, the Company and certain subsidiaries’ ability to dispose of assets, pay cash dividends and repurchase stock. RNLLC’s total assets and net assets as of September 30, 2011 were $150,648,000 and $(50,909,000), respectively.
The Second Amendment was accounted for as an extinguishment of debt, taking into consideration the change in future cash flows after this amendment and amendments in the preceding 12 months. As a result, for the fiscal year ended September 30, 2011, a loss on extinguishment of debt, related to the Second Amendment, of $4.6 million was recorded in the consolidated statements of operations. The 2011 Credit Agreement was also accounted for as an extinguishment of debt. As a result, for the fiscal year ended September 30, 2011, a loss on extinguishment of debt, related to the entry into the 2011 Credit Agreement and repayment of the 2010 Credit Agreement, of $9.2 million was recorded in the statements of operations, resulting in a total loss on debt extinguishment, related to the Second Amendment and the 2011 Credit Agreement, of $13.8 million.
As of September 30, 2011, we were in compliance with all covenants under the 2011 Credit Agreement.
Long-term debt consists of the following:
Future maturities of term loans under the 2011 Credit Agreement are as follows (in thousands):
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
On November 9, 2011, the 2011 Credit Agreement was repaid in full. For additional information refer to Note 21 - Subsequent Events.
Convertible Debt
During April 2006, the Company closed its public offering of $57,500,000 principal amount of its 4.00% Convertible Senior Notes Due in 2013 (the “Notes”). In connection with the closing, the Company, and Wells Fargo Bank, National Association, as the Trustee, entered into an Indenture dated April 18, 2006 (the “Indenture”). Certain subsidiaries of the Company are also parties to the Indenture, although none of the subsidiary guarantors has any obligation under the Notes. The Notes bear interest at the rate of 4.00% per year on the principal amount of the Notes, payable in cash semi-annually in arrears on April 15 and October 15 of each year. The Notes are the Company’s general unsubordinated unsecured obligations, ranking equally in right of payment to all of the Company’s existing and future unsubordinated unsecured indebtedness, and senior in right of payment to any of the Company’s future indebtedness that is expressly subordinated to the Notes. The Notes are junior in right of payment to all of the Company’s existing and future collateralized indebtedness to the extent of the value of the collateral for such obligations and structurally subordinated in right of payment to all existing and future obligations of the Company’s subsidiaries, including trade credit. The Notes are not guaranteed by any of the Company’s subsidiaries.
Holders may convert their Notes into shares of the Company’s common stock (or cash or a combination of cash and shares of common stock, if the Company so elects) at an initial conversion rate of 249.2522 shares of the Company’s common stock per $1,000 principal amount of Notes (which represents a conversion price of $4.012 per share of common stock), subject to adjustment as provided in the Indenture, under the following circumstances: (1) during any fiscal quarter, if the closing sale price of the Company’s common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter exceeds 120% of the conversion price per share on such last trading day, (2) if the Company has called the Notes for redemption, (3) if the average of the trading prices of the Notes for any five consecutive trading day period is less than 98% of the average of the conversion values of the Notes during that period, (4) if the Company makes certain significant distributions to the holders of common stock, (5) in connection with a transaction or event constituting a fundamental change or (6) at any time on or after January 15, 2013 until the close of business on the business day immediately preceding the maturity date. In the event of a fundamental change (as defined in the Indenture), the Company may be required to pay a make-whole premium on Notes converted in connection with the fundamental change. The make-whole premium will be payable in shares of the Company’s common stock, or the consideration into which of the Company’s common stock has been converted or exchanged in connection with such fundamental change, on the repurchase date for the Notes after the fundamental change.
At any time on or after April 15, 2011, the Company may redeem the Notes, in whole or in part, at a redemption price payable in cash equal to 100% of the principal amount of the Notes to be redeemed, plus any accrued and unpaid interest to, but not including, the redemption date.
The issuance of the Notes resulted in 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 prepaid expenses and other assets on the consolidated balance sheets. The Company follows accounting guidance which specifies that issuers of convertible debt instruments which can be settled in cash shall separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The estimated effective interest rate on the Notes was 18.00% as of the time of issuance, which resulted in the recognition of a $30,495,000 discount to the debt portion of these notes with an amount equal to that discount recorded in additional paid-in capital at the time of issuance. Such discount is amortized as interest expense (non-cash) over the remaining life of the Notes. Convertible debt components are as follows:
Long-term convertible debt, including automatic conversions to common stock and required cash payments, matures in 2013. The required cash interest payments on convertible notes for the year ending September 30, 2012 based on current interest rates will be $2,300,000. Upon achievement of the conversion criteria, the notes may be converted into 14,332,002 shares of common stock.
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
Based on the market prices, the estimated fair value of the 4.00% Convertible Senior Notes was approximately $46.7 million as of September 30, 2011.
Note 12 - Advance for Equity Investment
In May 2007, the Company entered into an Equity Option Agreement with Peabody Venture Fund, LLC (“PVF”). Under the Equity Option Agreement, PVF agreed to fund the lesser of $10.0 million or 20% of the development costs for our proposed coal-to-liquids conversion project at the East Dubuque Facility incurred during the period between November 1, 2006 and the closing date of the financing for the project. In consideration for PVF’s payment of development costs, Rentech granted PVF an option to purchase up to 20% of the equity interest in the project for a purchase price equal to 20% of the equity contributions made to the project at the closing of the project financing, less the amount of development costs paid by PVF as of such time.
The net proceeds from PVF under this agreement were $7,892,000 which was recorded as an advance for equity investment on the Consolidated Balance Sheets. Though the Company’s Board of Directors decided in the first quarter of 2008 to suspend development of the conversion of the East Dubuque Facility, the liability for the advance for equity investment remained as the potential for another coal-to-liquids project still existed and was considered probable by the Company. The non-interest bearing advance was a liability, but not considered debt. Therefore, the Company did not impute interest on the advance.
During the fiscal year ended September 30, 2011, the Company adopted a revised project development strategy for the commercialization of its alternative energy technologies, which includes pursuing projects that are smaller and require less capital. Coal-to-liquids projects no longer fit our development strategy and development of a coal-to-liquids project is no longer probable. As a result, the liability was reversed as it is unlikely the Company will be required to fund the obligation in the future.
Note 13 - Commitments and Contingencies
Natural Gas Forward Purchase Contracts
Our policy and our practice are to enter into fixed-price forward purchase contracts for natural gas in conjunction with contracted product sales in order to substantially fix gross margin on those product sales contracts. We may enter into a limited amount of additional fixed-price forward purchase contracts for natural gas in order to minimize monthly and seasonal gas price volatility. Occasionally we enter into index-price contracts. We have entered into multiple natural gas forward purchase contracts for various delivery dates through March 31, 2012. Commitments for natural gas purchases consist of the following:
Subsequent to September 30, 2011, we entered into additional fixed quantity natural gas supply contracts at fixed and indexed prices for various delivery dates through May 31, 2012. The total MMBtus associated with these additional contracts are approximately 2,140,000 and the total amount of the purchase commitments are approximately $7,723,000, resulting in a weighted average rate per MMBtu of approximately $3.61. We are required to make additional prepayments under these purchase contracts in the event that market prices fall below the purchase prices in the contracts. These payments are recorded as deposits on gas contracts in the accompanying balance sheets.
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
Operating Leases
The Company has various operating leases of real and personal property which expire through October 2014. Total lease expense, including month-to-month rent, common area maintenance charges and other rent related fees, for the fiscal years ended September 30, 2011, 2010, and 2009 was $2,077,000, $2,390,000 and $2,199,000, respectively.
Future minimum lease payments as of September 30, 2011 are as follows (in thousands):
Litigation
The Company is party to litigation from time to time in the normal course of business. While the outcome of the Company’s current matters cannot be predicted with certainty, 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 EPA Region 5 issued a Notice and Finding of Violation pursuant to the Clean Air Act (“CAA”) related to the number 1 nitric acid plant at the East Dubuque Facility. The notice alleges violations of the CAA’s 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 EPA’s CAA National Enforcement Priority for New Source Review/Prevention of Significant Deterioration related to acid plants, which seeks to reduce emissions from acid plants through proceedings that result in the installation of new pollution control technology. Without admitting liability, RNLLC has negotiated a consent decree (the “Consent Decree”) with the EPA to resolve the alleged violations, and the Consent Decree has been lodged with the court. The Consent Decree requires RNLLC to pay a civil penalty of $108,000, install and operate certain pollution control equipment on one of its nitric acid plants, and to perform certain additional obligations and periodically report to the EPA. RNLLC has commenced implementation of the Consent Decree requirements, including the installation and operation of the pollution control equipment, in anticipation of the court entering the Consent Decree.
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 alleging that the Company and the named current and former directors and officers made false or misleading statements regarding the Company’s financial performance in connection with its financial statements for the fiscal year ended September 30, 2008 and the first three quarters of the fiscal year ended September 30, 2009. Plaintiffs in the actions purported to bring claims on behalf of all persons who purchased the Company’s securities between May 9, 2008 and December 14, 2009 and sought 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.), and a lead plaintiff was appointed on April 5, 2010. The lead plaintiff filed a consolidated complaint on May 20, 2010, and the Company filed a motion to dismiss the action on October 15, 2010. The Company announced on March 23, 2011 that it had reached an agreement to settle these matters with a settlement fund provided by its insurance carrier of approximately $1.8 million, from which plaintiffs’ counsel would receive an award of attorney fees and expenses, subject to court approval of the settlement. The United States District Court for the Central District of California approved the settlement at a hearing on September 26, 2011.
Between January 22, 2010 and February 10, 2010, five shareholder derivative lawsuits were filed against certain of the Company’s 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. The initial complaints alleged that the named current and former directors and officers caused the Company to make false or misleading statements regarding the Company’s financial performance in connection with its financial statements for the fiscal year ended September 30, 2008 and the first three quarters of the fiscal year ended September 30, 2009. The plaintiffs, who purported to assert claims on behalf of the Company, sought various equitable and/or injunctive relief, unspecified restitution to the Company, interest, and attorneys’ fees and costs. The cases before the
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
United States District Court were 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 were consolidated as Andrew L. Tarr v. Dennis L. Yakobson, et al., LASC Master File No. BC430553. The Company announced on March 23, 2011 that it had agreed to settle these matters by adopting certain corporate governance practices and paying, or causing its insurance carrier to pay, plaintiffs’ attorneys fees and expenses of approximately $300,000, subject to court approval of the settlements. The Superior Court of the State of California in Los Angeles approved the settlements at a hearing on July 21, 2011.
Included in other receivables, net at September 30, 2011 is $1.9 million due from insurance carriers for reimbursement of the class action and shareholder derivative lawsuits.
Note 14 - Stockholders’ Equity
Common Stock
On June 29, 2009 the Company issued 11,000,000 shares of Company common stock directly to selected institutional investors for a purchase price of $0.58 per share in cash, which resulted in the Company receiving net proceeds of $6,300,000. The Company did not retain an underwriter or placement agent, and the Company did not pay a commission or underwriting discount in connection with this offering.
On August 25, 2009, we issued 8,571,428 shares of Company common stock, through a placement agent, to selected institutional investors for a purchase price of $1.75 per share in cash. We paid to the placement agent a fee equal to 4% of the gross proceeds received from the offering and also reimbursed the agent $25,000 for its actual out-of-pocket expenses and certain other expenses incurred by it in the offering. The net proceeds to the Company were approximately $14,300,000.
On September 28, 2009, we issued 11,111,000 shares of Company common stock, through a placement agent, to selected institutional investors for a purchase price of $1.80 per share in cash. We paid to the placement agent a fee equal to 3.5% of the gross proceeds received from the offering and also reimbursed the agent $25,000 for its actual out-of-pocket expenses and certain other expenses incurred by it in the offering. The net proceeds to the Company were approximately $19,200,000.
In February 2010, the Company entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”), which permits the Company to sell up to $50 million aggregate gross sales price of common stock over a period of six months. Sales of shares may be made by means of ordinary brokers’ transactions on the NYSE Amex at market prices or as otherwise agreed by the Company and its sales agent. The sales agent will receive a commission of 1.5% based on the gross sales price per share. On a daily basis, the Company may sell a number of shares of its common stock up to twenty-five percent of the average daily trading volume of the Company’s common stock for the thirty trading days preceding the date of the sale. The net proceeds from any sales under the Equity Distribution Agreement are expected to be used for general corporate purposes. For the period from March 1, 2010 through September 30, 2010, the Company sold a total of approximately 6,172,000 shares of common stock at an average price of approximately $1.03 per share which resulted in aggregate net proceeds of approximately $6.2 million after sales commissions of approximately $95,000. In August 2010, the Equity Distribution Agreement was extended for an additional six month period, which was scheduled to end February 2, 2011. In February 2011, the Equity Distribution Agreement was extended for an additional year, which will end February 9, 2012. For the fiscal year ended September 30, 2011, the Company did not sell any shares of common stock under the Equity Distribution Agreement. The Company terminated the Equity Distribution Agreement, effective November 15, 2011, with no penalty.
On April 1, 2010, the Securities and Exchange Commission declared effective a shelf registration statement filed by the Company, which permits it to issue up to $99,297,330 of common stock, preferred stock, debt securities and other securities from time to time. As of September 30, 2011 and 2010, approximately $94.3 million aggregate offering price of securities was available to be sold under the shelf registration statement. 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 under the securities laws of such jurisdiction.
On April 30, 2010, Credit Suisse exercised warrants to purchase 624,172 shares of Company common stock that were scheduled to expire in May 2010 for total consideration to the Company of $575,000. On May 28, 2010, SOLA LTD and Solus Core Opportunities Master Fund Ltd. exercised warrants to purchase 529,957 and 94,215 shares of Company common stock, respectively, that were scheduled to expire in May 2010 for total consideration to the Company of $575,000.
On May 11, 2010, the Company’s shareholders approved an amendment to the Company’s Amended and Restated Articles of Incorporation, as amended, to increase the authorized common stock of the Company from 350,000,000 shares to 450,000,000 shares.
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
On May 18, 2009, the shareholders of the Company approved the 2009 Incentive Award Plan (the “2009 Plan”). The 2009 Plan provides for the grant to eligible individuals of stock options and other equity based awards. Up to 9,500,000 shares of common stock have been reserved for issuance under the 2009 Plan.
On May 11, 2011 the shareholders of the Company adopted the Amended and Restated 2009 Incentive Award Plan (the “Amended Plan”) at its Annual Meeting of Shareholders. The Amended Plan amends the 2009 Incentive Award Plan, as amended (the “Original Plan”), in the following respects:
•
Increases the maximum number of shares of common stock which may be issued or awarded under the Original Plan by 15,000,000 shares to a total of 24,500,000;
•
Revises the eligibility provision so that individuals eligible to participate in the Amended Plan include all employees, consultants, and independent directors of the Company;
•
Provides that “full value awards” (which are awards other than stock options and stock appreciation rights, such as restricted stock, restricted stock units and similar awards) will count against the Amended Plan’s share limit as 1.5 shares for each share of stock delivered in settlement of a full-value award granted on or after the Amendment Date, as defined in the Amended Plan, (and correspondingly, that full value awards that are terminated, expired, forfeited or settled in cash on or after the Amendment Date will be added back to the Amended Plan’s share limit as 1.5 shares);
•
Removes certain vesting limitations applicable to full value awards; and
•
Clarifies certain limitations on the transferability of awards and their underlying shares.
Preferred Stock / Tax Benefit Preservation Plan
On August 5, 2011, the Board of Directors (the “Board”) of the Company approved a Tax Benefit Preservation Plan between the Company and Computershare Trust Company, N.A., as rights agent (as amended from time to time, the “Plan”).
The Company has accumulated substantial operating losses. By adopting the Plan, the Board is seeking to protect the Company’s ability to carry forward its net operating losses (collectively, “NOLs”). For federal and state income tax purposes, the Company may “carry forward” NOLs in certain circumstances to offset current and future taxable income, which will reduce future federal and state income tax liability, subject to certain requirements and restrictions. However, if the Company were to experience an “ownership change,” as defined in Section 382 of the Internal Revenue Code (the “Code”), its ability to utilize these NOLs to offset future taxable income could be significantly limited. Generally, an “ownership change” would occur if the percentage of the Company’s stock owned by one or more “five percent stockholders” increases by more than fifty percentage points over the lowest percentage of stock owned by such stockholders at any time during the prior three-year period.
The Plan is intended to act as a deterrent to any person acquiring 4.99% or more of the outstanding shares of the Company’s common stock or any existing 4.99% or greater holder from acquiring more than an additional 1% of then outstanding common stock, in each case, without the approval of the Board and to thus mitigate the threat that stock ownership changes present to the Company’s NOL asset. The Plan includes procedures whereby the Board will consider requests to exempt certain acquisitions of common stock from the applicable ownership trigger if the Board determines that the acquisition will not limit or impair the availability of the NOLs to the Company.
In connection with its adoption of the Plan, the Board declared a dividend of one preferred stock purchase right (individually, a “Right” and collectively, the “Rights”) for each share of common stock of the Company outstanding at the close of business on August 19, 2011 (the “Record Date”). Each Right will entitle the registered holder, after the Rights become exercisable and until expiration, to purchase from the Company one ten-thousandth of a share of the Company’s Series D Junior Participating Preferred Stock, par value $10.00 per share (the “Preferred Stock”), at a price of $3.75 per one ten-thousandth of a share of Preferred Stock, subject to certain anti-dilution adjustments (the “Purchase Price”).
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
One Right will be distributed to stockholders of the Company for each share of common stock owned of record by them at the close of business on August 19, 2011. As long as the Rights are attached to the common stock, the Company will issue one Right with each new share of common stock so that all such shares will have attached Rights. The Company has reserved 45,000 shares of Preferred Stock for issuance upon exercise of the Rights.
The Rights will expire, unless earlier redeemed or exchanged by the Company or terminated, on the earliest to occur of: (i) August 5, 2014, subject to the Company’s right to extend such date, (ii) August 5, 2012 if stockholder approval of the Plan has not been obtained by that date, or (iii) the time at which the Board determines that the NOLs are fully utilized or no longer available under Section 382 of the Code or that an ownership change under Section 382 of the Code would not adversely impact in any material respect the time period in which the Company could use the NOLs, or materially impair the amount of the NOLs that could be used by the Company in any particular time period, for applicable tax purposes. The Rights do not have any voting rights.
Long-Term Incentive Equity Awards
The Compensation Committee and the Board of Directors approved long-term incentive equity awards for a group of its officers including its named executive officers effective November 17, 2009. The awards include both restricted stock units that may vest upon the achievement of certain performance targets, and restricted stock units that vest over time. The awards are intended to balance the objectives of retention, equity ownership by management, and achievement of performance targets. Vesting of the performance awards is tied to milestones related to the development, construction and operation of the Company’s proposed renewable synthetic fuels and power project in Rialto, California or another comparable project designated by the Compensation Committee. Under the performance vesting awards, sixty percent (60%) of the performance-based restricted stock units vest upon the closing of financing for the project, twenty percent (20%) vest upon completion of construction and initial operation of the project facility and twenty percent (20%) vest upon sustained operation of the project facility. The Compensation Committee may also designate additional performance vesting milestones in the awards. The performance vesting awards are subject to the recipient’s continued employment with the Company, provided that a recipient’s award may vest with respect to a milestone that is achieved within six months of (i) termination without cause related to a change in control or (ii) death or disability. All unvested restricted stock units expire five years after the date of grant.
The long-term incentive equity awards also include a time vesting restricted stock unit award that vests over a three year period with one-third of the restricted stock units vesting on each of the first three anniversaries of November 17, 2009. The time vesting awards are subject to the recipient’s continued employment with the Company, provided that a recipient’s award may vest upon (i) termination without cause related to a change in control or (ii) death or disability.
In the fiscal year ended September 30, 2009, ten percent (10%) of the cash bonus awards for the named executive officers was allocated to purchase vested restricted stock units in December 2009 pursuant to the management stock purchase plan. The Company matched these awards with an equal number of restricted stock units that vest December 10, 2012, subject to the recipient’s continued employment with the Company.
During 2011 and 2010, the Company issued the following performance shares and restricted stock units:
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
There were no shares allocated to the management stock purchase program in conjunction with the awards granted in the fiscal year ended September 30, 2011. In the fourth quarter of the fiscal year ended September 30, 2011, the Company determined that the Rialto Project would not be developed. Previously accrued compensation expense of $3.4 million for performance based restricted stock units tied to Rialto Project milestones was reversed and is included in selling, general and administrative expense.
Note 15 - Accounting for Stock Based Compensation
The accounting guidance requires all share-based payments, including grants of stock options, to be recognized in the statement of operations, based on their fair values. Stock based compensation expense for all fiscal periods is based on estimated grant-date fair value. Stock options generally vest over three years. As a result, compensation expense recorded during the period includes amortization related to grants during the period as well as prior grants. Most grants have graded vesting provisions where an equal number of shares vest on each anniversary of the grant date. The Company allocates the total compensation cost on a straight-line attribution method over the requisite service period. Most grants vest upon the fulfillment of service conditions and have no performance or market-based vesting conditions. Certain grants of warrants and restricted stock units include share price driven vesting provisions. Stock based compensation expense that the Company records is included in selling, general and administrative expense. There was no tax benefit from recording this non-cash expense as such benefits will be recorded upon utilization of the Company’s net operating losses.
During the fiscal years ended September 30, 2011, 2010 and 2009, charges associated with all equity-based grants were recorded as follows:
The Company uses the Black-Scholes option pricing model to determine the weighted average fair value of options and warrants. The assumptions utilized to determine the fair value of options and warrants are indicated in the following table:
The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of our stock options. The Company used the last day of the month stock price over the last 54 months to project expected stock price volatility For grants made after December 31, 2007 the estimated expected term of the grant is based on our historical exercise experience. Beginning in the fiscal year ended September 30, 2008, the Company included a forfeiture component in the pricing model on certain grants to employees, based on historical forfeiture rate for the grantees’ level employees.
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
The number of shares reserved, outstanding and available for issuance are as follows:
Stock Options
The Company has multiple stock option plans under which options have been granted to employees, including officers and directors of the Company, to purchase at a price not less than the fair market value of the Company’s common stock at the date the options were granted. Each of these plans allow the issuance of incentive stock options, within the meaning of the Code, and other options pursuant to the plan that constitute non-statutory options. Options under the Company’s 2005 Stock Option Plan generally expire five years from the date of grant or at an alternative date as determined by the committee of the Board that administers the plan. Options under the Company’s 2006 Incentive Award Plan and the 2009 Plan generally expire between three and ten years from the date of grant or at an alternative date as determined by the committee of the Board that administers the plan. Options under the Company’s 2005 Stock Option Plan, 2006 Incentive Award Plan and the 2009 Plan are generally exercisable on the grant date or a vesting schedule between one and three years from the grant date as determined by the committee of the Board that administers the plans.
During the fiscal years ended September 30, 2011, 2010 and 2009, charges associated with stock option grants were recorded as follows:
Option transactions during the fiscal years ended September 30, 2011, 2010 and 2009 are summarized as follows:
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
The aggregate intrinsic value was calculated based on the difference between the Company’s stock price on September 30, 2011 and the exercise price of the outstanding shares, multiplied by the number of outstanding shares as of September 30, 2011. The total intrinsic value of options exercised during the fiscal years ended September 30, 2011, 2010 and 2009 was $0, $5,000, and $44,000, respectively.
As of September 30, 2011, there was $1,221,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements from previously granted stock options. This cost is expected to be recognized over a weighted-average period of 2.0 years.
The following information summarizes stock options outstanding and exercisable at September 30, 2011:
Warrants
During fiscal 2005, the Company issued a warrant to Management Resource Center, Inc, an entity controlled by D. Hunt Ramsbottom, the Company’s President and CEO. During the last quarter of fiscal 2005, Mr. Ramsbottom assigned the warrant to East Cliff Advisors, LLC, an entity controlled by Mr. Ramsbottom. The warrant is for the purchase of 3.5 million shares of the Company’s common stock at an exercise price of $1.82. The warrant has vested or will vest in the following incremental amounts upon such time as the Company’s stock reaches the stated closing prices for 12 consecutive trading days: 10% at $2.10 (vested); 15% at $2.75 (vested); 20% at $3.50 (vested); 25% at $4.25 (vested); and 30% at $5.25 (not vested). The Company recognizes compensation expense as the warrants vest, as the total number of shares to be granted under the warrant was not known on the grant date. In fiscal 2005, the Company accounted for the warrant under guidance for accounting for stock issued to employees due to the employer-employee relationship between the Company and Mr. Ramsbottom. Under the guidance, compensation cost would only be recognized for stock based compensation granted to employees when the exercise price of the Company’s stock options granted is less than the market price of the underlying common stock on the date of grant.
The original warrants include 2,082,500 shares that are vested and 1,050,000 shares that are not vested. East Cliff Advisors assigned 262,500 warrants to a third party and continues to hold 787,500 warrants. In January 2009, the vesting terms and expiration for the warrants held by East Cliff Advisors, LLC were amended. As amended, with respect to the unvested warrants representing 787,500 shares, half of these warrants will vest upon the earlier of Rentech’s stock price reaching $5.25 or higher for 12 consecutive trading days or December 31, 2011, in either case as long as Mr. Ramsbottom is still an employee of the Company. The expiration date for this half of the warrants was extended from August 4, 2010 to December 31, 2012. The other 393,750 warrants will vest upon Rentech’s stock price reaching $5.25 or higher for 12 consecutive trading days, but their expiration date, and the expiration date of the original vested 2,082,500 warrants were extended from August 4, 2010 to the earlier of 90 days after Mr. Ramsbottom ceases to be employed by the Company or December 31, 2011. The exercise price of each of the warrants remained at $1.82 per share.
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
The changes in terms to the vested warrants were evaluated using the Black-Scholes option-pricing model and additional compensation expense of $190,000 was recognized in the fiscal year ended September 30, 2009 since the value calculated under the amendment exceeds the original warrant value.
During the fiscal years ended September 30, 2011, 2010 and 2009, charges associated with grants of warrants were recorded as follows:
Warrant transactions during the fiscal years ended September 30, 2011, 2010 and 2009 are summarized as follows:
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
As of September 30, 2011, there was $6,000 of total unrecognized compensation cost related to share-based compensation arrangements from previously granted warrants. That cost is expected to be recognized over a weighted-average period of 0.3 years.
The following information summarizes warrants outstanding and exercisable at September 30, 2011:
Restricted Stock Units and Performance Share Awards
The Company issues Restricted Stock Units (“RSU’s”) which are equity-based instruments that may be settled in shares of common stock of the Company. In the fiscal years ended September 30, 2011, 2010 and 2009, the Company issued RSU’s and Performance Share Awards to certain employees as long-term incentives.
Most RSU agreements include a three-year vesting period such that one-third will vest on each annual anniversary date of the commencement date of the agreement. The vesting of various RSU’s are subject to partial or complete acceleration under certain circumstances, including termination without cause, end of employment for good reason or upon a change in control (in each case as defined in the agreement). The vesting of a portion of certain RSU’s will accelerate if employment is terminated without cause, or employment is ended for good reason. In certain agreements, if we fail to offer to renew an employment agreement on competitive terms or if a termination occurs which would entitle the grantee to severance during the period of three months prior and two years after a change in control, the vesting of the restricted stock unit grant will accelerate.
The compensation expense incurred by the Company for RSU’s and Performance Share Awards is based on the closing market price of the Company’s common stock on the date of grant and is amortized ratably on a straight-line basis over the requisite service period and charged to selling, general and administrative expense with a corresponding increase to additional paid-in capital.
During the fiscal years ended September 30, 2011, 2010 and 2009, charges associated with RSU’s and Performance Share Award grants were recorded as follows:
RSU and Performance Share Award transactions during the fiscal years ended September 30, 2011, 2010 and 2009 are summarized as follows:
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
Of the 6,623,000 RSU’s and Performance Share Awards outstanding at September 30, 2011, 1,812,000 and 4,228,000 were granted pursuant to our 2006 Incentive Award Plan and 2009 Plan, respectively. The other 583,000 RSU’s were not granted pursuant to a stock option plan but were “inducement grants.” Of the 7,560,000 RSU’s and Performance Share Awards outstanding at September 30, 2010, 2,802,000 and 4,431,000 were granted pursuant to our 2006 Incentive Award Plan and 2009 Plan, respectively. The other 327,000 RSU’s were not granted pursuant to a stock option plan but were “inducement grants.” Of the 2,060,000 RSU’s and Performance Share Awards outstanding at September 30, 2009, 1,625,000 were granted pursuant to our 2006 Incentive Award Plan. The other 435,000 RSU’s were not granted pursuant to a stock option plan but were “inducement grants.” Such grants may be made without prior shareholder approval pursuant to the rules of the NYSE Amex if the grants are made to new employees as an inducement to joining the Company, the grants are approved by the Company’s independent compensation committee of the Board and terms of the grants are promptly disclosed in a press release.
As of September 30, 2011, there was $1,880,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements from previously granted RSU’s and Performance Share Awards. That cost is expected to be recognized over a weighted-average period of 1.6 years.
The grant date fair value of RSU’s and Performance Share Awards that vested during the fiscal years ended September 30, 2011, 2010 and 2009 was $2.4 million, $1.1 million and $2.9 million, respectively.
Stock Grants
During 2011, the Company issued a total of 465,000 shares of stock which were fully vested at date of grant. Of this amount, 440,000 shares, which were evenly distributed, were granted to the directors and 25,000 shares were granted to a consultant. This resulted in stock-based compensation expense of $400,000 and $32,000 for the shares granted to the directors and consultant, respectively. During 2010, the Company issued a total of 516,900 shares of stock which were fully vested at date of grant. Of this amount, 291,900 shares, which were evenly distributed, were granted to the directors and 225,000 shares were granted to consultants. This resulted in stock-based compensation expense of $350,000 and $233,000 for the shares granted to the directors and consultants, respectively. During 2009, the Company issued a total of 419,000 shares of stock which were fully vested at date of grant. Of this amount, 394,000 shares, which were evenly distributed, were granted to the directors and 25,000 shares were granted to a consultant. This resulted in stock-based compensation expense of $216,000 and $17,000 for the shares granted to the directors and consultant, respectively.
Note 16 - Defined Contribution Plan
The Company has a 401(k) plan. Employees, excluding RNLLC’s union employees, who are at least 18 years of age are eligible to participate in the plan and share in the employer matching contribution. The Company is currently matching 75% of the first 6% of the participant’s salary deferrals. All participants who have completed 1,000 hours of service and who are employed on the last day of the plan year are eligible to share in the non-matching employer contributions. Employer matching and non-matching contributions vest immediately in years in which the plan is not top heavy. During years in which the plan is top heavy, employer matching and non-matching contributions vest 100% after three years of service. Union employees who are at least 18 years of age and have been employed by RNLLC for 120 days are eligible to participate in the Company’s plan. Union employees hired before October 20, 1999 receive a Company contribution of 4% of compensation and a Company match of 50% of the first 2% of the participant’s salary deferrals. Union employees hired after October 19, 1999 receive a company matching contribution of 75% of the first 6% of the participant’s salary deferrals. Participants are fully vested in both matching and any discretionary contributions made to the plan by RNLLC. The Company contributed $883,000, $834,000 and $789,000 to the plans for the fiscal years ended September 30, 2011, 2010, and 2009, respectively.
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
Note 17 - Income Taxes
Accounting guidance requires deferred tax assets and liabilities to be recognized for temporary differences between the tax basis and financial reporting basis of assets and liabilities, computed at the expected tax rates for the periods in which the assets or liabilities will be realized, as well as for the expected tax benefit of net operating loss and tax credit carryforwards. A full valuation allowance was recorded against the deferred tax assets.
The realization of deferred income tax assets is dependent on the generation of taxable income in appropriate jurisdictions during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in determining the amount of the valuation allowance. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred income tax assets are deductible, management determines if it is more likely than not that the Company will realize the benefits of these deductible differences. As of September 30, 2011, the most significant factor considered in determining the realizability of these deferred tax assets was our profitability over the past three years. The Company needs to generate approximately $174 million in pre-tax income in the United States prior to the expiration of our net operating loss and capital loss carryforwards to fully utilize these net deferred tax assets. Management believes that at this point in time, it is more likely than not that the deferred tax assets will not be realized. The Company therefore has recorded a full valuation allowance against its deferred tax assets at September 30, 2011, 2010 and 2009.
The provision (benefit) for income taxes for the fiscal years ended September 30, 2011, 2010, and 2009 was, as follows:
A reconciliation of the income taxes at the federal statutory rate to the effective tax rate was as follows:
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
The components of the net deferred tax liability and net deferred tax asset as of September 30, 2011 and 2010 are as follows:
A portion of the valuation allowance relates to the deferred tax asset created by the stock option expense. The benefit that will be generated by the reversal of this portion of the allowance will be recorded to equity upon the release of the valuation allowance in the future. The amount of the deferred tax asset related to the stock option expense was $5,888,000 and $6,374,000 for the fiscal years ended September 30, 2011 and 2010, respectively.
As of September 30, 2011, we had the following available carryforwards to offset future taxable income:
Tax Contingencies
Accounting guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The guidance requires that the Company recognize in its consolidated financial statements, only those tax positions that are “more-likely-than-not” of being sustained as of the adoption date, based on the technical merits of the position. The Company performed a comprehensive review of its material tax positions in accordance with accounting guidance.
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
If the $2,754 of unrecognized tax benefits are recognized, the entire amount will affect the effective tax rate. The Company believes that it is not reasonably possible that the unrecognized tax benefits will significantly increase or decrease within the next 12 months. The Company and its subsidiaries are subject to the following material taxing jurisdictions: U.S. federal, California, Colorado, Illinois and Texas. The tax years that remain open to examination by the U.S. federal and Illinois jurisdictions are years 2007 through 2009; the tax years that remain open to examination by the California, Colorado and Texas jurisdictions are years 2006 through 2009.
In accordance with its accounting policy, the Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. The Company has not accrued any interest and penalties related to uncertain tax positions in the balance sheet or statement of operations as a result of the Company’s net operating loss position.
While management believes the Company has adequately provided for all tax positions, amounts asserted by taxing authorities could materially differ from our accrued positions as a result of uncertain and complex application of tax regulations. Additionally, the recognition and measurement of certain tax benefits includes estimates and judgment by management and inherently includes subjectivity. Accordingly, additional provisions on federal and state tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved.
Note 18 - Segment Information
The Company operates in two business segments as follows:
•
Nitrogen products manufacturing - The Company manufactures a variety of nitrogen-based 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 is developing projects that would employ these processes.
The Company’s reportable operating segments have been determined in accordance with the Company’s internal management structure, which is organized based on operating activities. The Company evaluates performance based upon several factors, of which the primary financial measure is segment-operating income.
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
Note 19 - Net Income (Loss) Per Common Share Attributable To Rentech
Basic income (loss) per common share attributable to Rentech is calculated by dividing net income (loss) attributable to Rentech by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per common share attributable to Rentech is calculated by dividing net income (loss) attributable to Rentech by the weighted average number of common shares outstanding plus the dilutive effect, calculated using the “treasury stock” method for the unvested restricted stock units, outstanding stock options and warrants and using the “if converted” method for the convertible debt.
For the fiscal year ended September 30, 2011, 2010 and 2009, approximately 40.5 million, 36.9 million and 37.2 million shares, respectively, of the Company’s common stock issuable pursuant to stock options, stock warrants, restricted stock units and convertible debt were excluded from the calculation of diluted income (loss) per share because their inclusion would have been anti-dilutive.
Note 20 - Selected Quarterly Financial Data (Unaudited)
Selected unaudited condensed consolidated financial information is presented in the tables below (in thousands, except per share data).
RENTECH, INC.
Notes to Consolidated Financial Statements (Continued)
Note 21 - Subsequent Events
On November 9, 2011, RNP completed the Offering of 15,000,000 common units representing limited partner interests at a public offering price of $20.00 per common unit. The common units sold to the public in the Offering represent approximately 39.2% of RNP’s common units outstanding as of the closing of the Offering. The Company’s indirect wholly-owned subsidiary, RNHI, owns the remaining 60.8% of RNP’s common units and RNHI’s wholly-owned subsidiary, Rentech Nitrogen GP, LLC, owns 100% of the non-economic general partner interest in us. RNP’s assets consist of all of the equity interests of RNLLC, which owns the East Dubuque Facility. At the Offering, RNLLC was converted into a limited liability company. Approximately $150.8 million of the proceeds of the Offering were used to repay in full the 2011 Credit Agreement, including accrued interest and a prepayment penalty fee of $2.9 million. Approximately $78.1 million of the proceeds were used to make a distribution to RNHI. In addition, RNP paid Rentech $19.4 million under a previous management services agreement and distributed to RNHI an additional $39.3 million. Approximately $50 million of the proceeds were retained by RNP.
On November 10, 2011, RNLLC entered into a new $25.0 million senior secured revolving credit facility, with a two year maturity (the “Revolving Credit Facility”) and paid associated financing costs of approximately $0.4 million. The Revolving Credit Facility includes a letter of credit sublimit of up to $2.5 million for issuance of letters of credit. The borrowings under the Revolving Credit Facility will bear interest at a rate equal to an applicable margin plus, at RNLLC’s option, either (a) in the case of base rate borrowings, a rate equal to the highest of (1) the prime rate, (2) the federal funds rate plus 0.5% and (3) the LIBOR for an interest period of three months plus 1.00% or (b) in the case of LIBOR borrowings, the offered rate per annum for deposits of dollars for the applicable interest period. The applicable margin for borrowings under the Revolving Credit Facility is 3.25% with respect to base rate borrowings and 4.25% with respect to LIBOR borrowings. Additionally, RNLLC is required to pay a fee to the lenders under the Revolving Credit Facility on the unused amount at a rate of 0.5%. RNLLC is also required to pay customary letter of credit fees on issued letters of credit. In the event RNLLC reduces or terminates the Revolving Credit Facility prior to its first anniversary, it is required to pay a prepayment premium of 2.0% of the principal amount reduced or terminated, subject to certain exceptions. There is currently no outstanding advances under the Revolving Credit Facility.
The Company terminated the Equity Distribution Agreement, effective November 15, 2011, which was scheduled to end on February 9, 2012. The Equity Distribution Agreement was terminable at will upon written notification by the Company with no penalty.
Report of Independent Registered Public Accounting Firm on
Financial Statement Schedules
To the Board of Directors and Stockholders of Rentech Inc.
Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated December 14, 2011 also included an audit of the financial statement schedules listed in Item 15(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
As disclosed in Note 1 to Schedule I, the Company has restated its Parent Company only condensed financial statements included on Schedule I as of September 30, 2010 and for the years ended September 30, 2010 and 2009.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
December 14, 2011
SCHEDULE I - CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
RENTECH, INC.
Balance Sheets
(Amounts in thousands, except per share data)
RENTECH, INC.
Statements of Operations
(Amounts in thousands, except per share data)
RENTECH, INC.
Consolidated Statements of Cash Flows
(Amounts in thousands)
Note 1 - Restatements
In connection with the preparation of its Parent Company only condensed financial statements for the fiscal year ended September 30, 2011, Rentech, Inc. identified several presentation errors in its previously issued Parent Company only condensed financial statements. Rentech, Inc. presented subsidiaries consolidated with its parent company in its previously Parent Company only condensed financial statements. These presentation errors, for which Rentech, Inc. has restated its Parent Company only condensed financial statements, had no impact on Rentech, Inc.’s previously issued consolidated financial statements, or on the previously reported net loss or stockholders’ equity of the Parent Company only condensed financial statements.
Note 2 - Background
The condensed financial statements represent the financial information required by Securities and Exchange Commission Regulation S-X 5-04 for Rentech, Inc. Regulation S-X 5-04 requires the inclusion of parent company only financial statements if the restricted net assets of consolidated subsidiaries exceed 25% of total consolidated net assets as of the last day of its most recent fiscal year.
The accompanying financial statements have been prepared to present the financial position, results of operations and cash flows of Rentech, Inc. on a stand-alone basis as a holding company. Investments in subsidiaries and other investees are stated at cost plus equity in undistributed earnings from the date of acquisition. These financial statements should be read in conjunction with Rentech, Inc. consolidated financial statements.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. We have established and currently maintain disclosure controls and procedures designed to ensure that information required to be disclosed by us in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s 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 our 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, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2011.
Management’s Report on Internal Control Over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition our assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, future periods are subject to the risk that existing controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with the policies and procedures.
Our management, including our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of its internal control over financial reporting based upon the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. In connection with management’s assessment of our internal control over financial reporting described above, management concluded that our internal control over financial reporting was effective as of September 30, 2011.
The effectiveness of our internal control over financial reporting as of September 30, 2011 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control over Financial Reporting. There were no significant changes in our internal control over financial reporting during the quarter ended September 30, 2011 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item regarding directors and executive officers is incorporated herein by reference to the Company’s Proxy Statement for its 2012 annual meeting of shareholders (the “Proxy Statement”) under the caption “Election of Directors.”
Code of Ethics
We have adopted a code of business conduct ethics that applies to Rentech’s directors, officers and employees. This code includes a special section entitled “Business Conduct and Ethics for Senior Financial Officers” which applies to our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. A copy of the code of ethics was filed as an exhibit to our annual report on Form 10-K for the fiscal year ended September 30, 2008 and is available on the Corporate Governance Section of our website at www.rentechinc.com. We intend to disclose any amendment to or waiver of our Code of Business Conduct or Ethics either on our website or by filing a Current Report on Form 8-K. Our website address referenced above is not intended to be an active hyperlink, and the contents of our website shall not be deemed to be incorporated herein.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the Proxy Statement under the caption “Executive Compensation.”
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference to the Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners and Management.”
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference to the Proxy Statement under the caption “Certain Relationships and Related Transactions, and Director Independence.”
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated herein by reference to the Proxy Statement under the caption “Principal Accounting Fees and Services.”
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) and (2) Financial Statements and Schedules.
The information required by this Item is included in Part II, Item 8 of this report.
(b) Exhibits.
See Exhibit Index.
EXHIBIT INDEX
2.1
Agreement and Plan of Merger, dated June 23, 2009 among Rentech, Inc., SilvaGas Holdings Corporation, RTK Acquisition Sub, Inc., RTK Acquisition Sub, LLC, John A. Williams as the Principal Stockholder, Milton Farris as the Stockholder Representative and the other stockholders of the SilvaGas Holdings Corporation party thereto (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by Rentech on June 24, 2009).
2.2
Membership Interest Purchase Agreement, dated April 12, 2011 by and between Biomass Energy Holdings LLC and GCSEC Holdings, LLC (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by Rentech on April 15, 2011).
3.1
Amended and Restated Articles of Incorporation, dated April 29, 2005 (incorporated by reference to Exhibit 3(i) to the Quarterly Report on Form 10-Q, for the quarterly period ended March 31, 2005, filed by Rentech on May 9, 2005).
3.2
Articles of Amendment to Amended and Restated Articles of Incorporation of Rentech, Inc. (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q, for the quarterly period ended March 31, 2008, filed by Rentech on May 9, 2008).
3.3
Articles of Amendment to Amended and Restated Articles of Incorporation of Rentech, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by Rentech on May 22, 2009).
3.4
Articles of Amendment to Amended and Restated Articles of Incorporation of Rentech, Inc., as amended (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by Rentech on May 14, 2010).
3.5
Bylaws dated November 30, 2004 (incorporated by reference to Exhibit 3(ii) to the Annual Report on Form 10-K for the year ended September 30, 2004 filed by Rentech on December 9, 2004).
3.6
Articles of Amendment to the Articles of Incorporation of Rentech, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by Rentech on August 5, 2011).
4.1
Stock Purchase Warrant, dated September 17, 2004, by and between Rentech, Inc. and Mitchell Technology Investments (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by Rentech on September 23, 2004).
4.2
Registration Rights Agreement, dated September 17, 2004, by and between Rentech, Inc. and Mitchell Technology Investments (incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed by Rentech on September 23, 2004).
4.3
Warrant to Purchase 1,000,000 Shares of Common Stock by and between Rentech, Inc. and DKRW Advanced Fuels LLC, dated January 12, 2006 (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by Rentech on January 19, 2006).
4.4
Indenture dated April 18, 2006, by and between Rentech, Inc. and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed by Rentech on April 18, 2006).
4.5
Officers’ Certificate to Indenture dated April 18, 2006 to Indenture (incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K filed by Rentech on April 18, 2006).
4.6
Form of 4.00% Convertible Senior Note Due 2013 (incorporated by reference to Exhibit 4.4 to the Current Report on Form 8-K filed by Rentech on April 18, 2006).
4.7
Form of Warrant to purchase shares of Common Stock (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by Rentech on April 20, 2007).
4.8
Form of Warrant to purchase shares of Common Stock (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by Rentech on January 20, 2009).
4.9
Warrant Agreement, dated June 23, 2009 between Rentech, Inc. and ClearFuels Technology Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rentech on June 24, 2009).
4.10
Tax Benefit Preservation Plan, dated as of August 5, 2011, Rentech, Inc. and Computershare Trust Company, N.A., which includes the Form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed by Rentech on August 5, 2011).
10.1*
Amended and Restated Employment Agreement by and between Rentech, Inc. and D. Hunt Ramsbottom, Jr. dated December 31, 2008 (incorporated by reference to Exhibit 10.43 to Amendment No. 1 to the Annual Report on Form 10-K/A filed by Rentech January 28, 2009).
10.2*
Amended and Restated Employment Agreement by and between Rentech, Inc. and Douglas M. Miller dated December 31, 2008 (incorporated by reference to Exhibit 10.44 to Amendment No. 1 to the Annual Report on Form 10-K/A filed by Rentech on January 28, 2009).
10.3*
Employment Agreement by and between Rentech, Inc. and Dan J. Cohrs, dated October 22, 2008 (incorporated by reference to Exhibit 10.21 to the Annual Report on Form 10-K for the year ended September 30, 2008 filed by Rentech on December 15, 2008).
10.4*
Employment Agreement by and between Rentech, Inc. and Tom Samson, dated October 5, 2010 (incorporated by reference to Exhibit 10.4 to the Annual Report on Form 10-K for the year ended September 30, 2010 filed by Rentech on December 14, 2010).
10.5*
Employment Agreement with Colin Morris (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by Rentech on November 6, 2009).
10.6*
Rentech, Inc. Compensation Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.6 to the Annual Report on Form 10-K for the fiscal year ended September 30, 2010 filed by Rentech on December 14, 2010).
10.7
Stock Purchase Agreement, dated June 24, 2009, between Rentech, Inc. and the Buyers party thereto (incorporated by reference to Exhibit 10.1 to Company’s Current Report on Form 8-K filed on June 25, 2009).
10.8
Lease Agreement dated as of April 21, 2006 with Center West (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed by Rentech on April 21, 2006).
10.9
Rider to the Lease Agreement dated as of April 21, 2006 by and between Rentech, Inc. and Center West (incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K filed by Rentech on April 21, 2006).
10.10
Second Amendment to Lease, dated January 21, 2010, by and between Rentech, Inc. and Center West (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rentech on January 26, 2010).
10.11*
Form of Stock Option Grant Notice and Stock Option Agreement under 2006 Incentive Award Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rentech on July 20, 2006).
10.12*
2005 Stock Option Plan (incorporated by reference to Exhibit 10.34 to the Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2004 filed by Rentech on February 9, 2005).
10.13*
Amended and Restated Rentech, Inc. 2006 Incentive Award Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rentech on March 29, 2007).
10.14*
First Amendment to Rentech’s Amended and Restated 2006 Incentive Award Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rentech on November 6, 2009).
10.15*
Rentech, Inc. 2009 Incentive Award Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rentech on May 22, 2009).
10.16*
First Amendment to Rentech’s 2009 Incentive Award Plan (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by Rentech on November 6, 2009).
10.17**
Development Cost Sharing and Equity Option Agreement, dated May 25, 2007 by and between Rentech, Inc. and Peabody Venture Fund, LLC (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 filed by Rentech on August 9, 2007).
10.18*
Form of Absolute Share Price Target Performance Share Award Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rentech on July 23, 2008).
10.19*
Form of Total Shareholder Return Performance Share Award Agreement (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by Rentech on July 23, 2008).
10.20*
Form of Performance Vesting Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rentech on November 23, 2009).
10.21
Distribution Agreement, dated April 26, 2006, by and between Royster-Clark Resources LLC and Rentech Development Corporation (incorporated by reference to Exhibit 10.1 to the Form S-1 (File No. 333-176065) filed by RNP on August 5, 2011).
10.22
Amendment to Distribution Agreement, dated October 13, 2009, among Rentech Energy Midwest Corporation, Rentech Development Corporation and Agrium U.S., Inc. (incorporated by reference to Exhibit 10.2 to the Form S-1 (File No. 333-176065) filed by RNP on August 5, 2011).
10.23
Assignment and Assumption Agreement, dated as of September 29, 2006, by and between Royster-Clark, Inc., Agrium U.S. Inc. and Rentech Development Corporation (incorporated by reference to Exhibit 10.3 to the Form S-1 (File No. 333-176065) filed by RNP on August 5, 2011).
10.24
Credit Agreement, dated January 29, 2010, by and among Rentech Energy Midwest Corporation, as the borrower, Rentech, Inc. and Credit Suisse AG, Cayman Islands Branch, individually and as Administrative Agent and Collateral Agent (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rentech on February 1, 2010).
10.25
Guarantee and Collateral Agreement, dated January 29, 2010, by and among Rentech Energy Midwest Corporation, Rentech, Inc., the subsidiaries of Rentech, Inc. listed therein and Credit Suisse AG, Cayman Islands Branch, as Collateral Agent (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by Rentech on February 1, 2010).
10.26
Real Estate Mortgage, Assignment of Rents, Security Agreement and UCC Fixture Filing, dated January 29, 2010, by and among Rentech Energy Midwest Corporation, Rentech, Inc. and Credit Suisse AG, Cayman Islands Branch, as Administrative Agent and Collateral Agent (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by Rentech on February 1, 2010).
10.27
Amendment to Credit Agreement, Waiver and Collateral Agent Consent, dated July 21, 2010, among Rentech Energy Midwest Corporation, Rentech, Inc., certain subsidiaries of Rentech, Inc., the Lenders party thereto and Credit Suisse AG, Cayman Islands Branch (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rentech on July 26, 2010).
10.28
Incremental Loan Assumption Agreement, dated July 21, 2010, among Rentech Energy Midwest Corporation, Rentech, Inc., certain subsidiaries of Rentech, Inc., the Incremental Lenders party thereto and Credit Suisse AG, Cayman Islands Branch (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by Rentech on July 26, 2010).
10.29
Second Amendment to Credit Agreement, Waiver and Collateral Agent Consent, dated November 24, 2010, among Rentech Energy Midwest Corporation, Rentech, Inc., certain subsidiaries of Rentech, Inc., the Lenders party thereto and Credit Suisse AG, Cayman Islands Branch (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rentech on November 29, 2010).
10.30
Second Incremental Loan Assumption Agreement, dated November 24, 2010, among Rentech Energy Midwest Corporation, Rentech, Inc., certain subsidiaries of Rentech, Inc., the Incremental Lenders party thereto and Credit Suisse AG, Cayman Islands Branch (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rentech on November 29, 2010).
10.31
Project Support Agreement, dated September 3, 2010 between Rentech, Inc. and ClearFuels Technology Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rentech on September 10, 2010).
10.32
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 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by Rentech on February 9, 2011).
10.33*
Amended and Restated 2009 Incentive Award Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rentech on May 13, 2011).
10.34
Credit Agreement, dated June 10, 2011, by and among Rentech Energy Midwest Corporation, as the borrower, Rentech, Inc., the lenders party thereto, Credit Suisse AG, Cayman Islands Branch, individually and as Administrative Agent and Collateral Agent and Credit Suisse Securities (USA) LLC as Sole Bookrunner, Sole Syndication Agent and Sole Lead Arranger (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rentech on June 14, 2011).
10.35
Guarantee and Collateral Agreement, dated June 10, 2011, by and among Rentech Energy Midwest Corporation, Rentech, Inc., the subsidiaries of Rentech, Inc. listed therein and Credit Suisse AG, Cayman Islands Branch, as Collateral Agent (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by Rentech on June 14, 2011).
10.36
Real Estate Mortgage, Assignment of Rents, Security Agreement and UCC Fixture Filing, dated June 10, 2011, by and among Rentech Energy Midwest Corporation, Rentech, Inc. and Credit Suisse AG, Cayman Islands Branch, as Administrative Agent and Collateral Agent (incorporated by reference to Exhibit 10.3 to Company’s Current Report on Form 8-K filed on June 14, 2011).
10.37
Contribution, Conveyance and Assignment Agreement, dated as of November 9, 2011, by and among Rentech, Inc., Rentech Development Corporation, Rentech Nitrogen Holdings, Inc., Rentech Nitrogen GP, LLC, Rentech Nitrogen Partners, L.P. and Rentech Energy Midwest Corporation (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 001-35334) filed by RNP on November 9, 2011).
10.38
Omnibus Agreement, dated as of November 9, 2011, by and among Rentech, Inc., Rentech Nitrogen GP, LLC and Rentech Nitrogen Partners, L.P. (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K (File No. 001-35334) filed by RNP on November 9, 2011).
10.39
Services Agreement, dated as of November 9, 2011, by and among Rentech Nitrogen Partners, L.P., Rentech Nitrogen GP, LLC and Rentech, Inc. (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K (File No. 001-35334) filed by RNP on November 9, 2011).
10.40
Credit Agreement, dated as of November 10, 2011, among Rentech Nitrogen, LLC, as borrower, Rentech Nitrogen Partners, L.P., as guarantor, General Electric Capital Corporation, as administrative agent, and the other lender parties thereto (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Rentech on November 15, 2011).
10.41
Guaranty and Security Agreement, dated as of November 10, 2011, among Rentech Nitrogen, LLC, as borrower, Rentech Nitrogen Partners, L.P., as guarantor and General Electric Capital Corporation, as administrative agent (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by Rentech on November 15, 2011).
10.42
Indemnification Agreement dated November 9, 2011, by and between Rentech Nitrogen Partners, L.P. and D. Hunt Ramsbottom (all other Indemnification Agreements, which are substantially identical in all material respects, except as to the parties thereto and the dates of execution, are omitted pursuant to Instruction 2 to Item 601 of Regulation S-K).
12.1
Computation of Ratio of Earnings to Fixed Charges.
Code of Ethics (incorporated by reference to Exhibit 14 to the Annual Report on Form 10-K for the fiscal year ended September 30, 2008 filed by Rentech on December 15, 2008).
Subsidiaries of Rentech, Inc.
23.1
Consent of Independent Registered Public Accounting Firm.
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14 or Rule 15d-14(a).
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14 or Rule 15d-14(a).
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
The following financial information from the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011 formatted in Extensible Business Reporting Language (“XBRL”) includes: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements.
*
Management contract or compensatory plan or arrangement.
**
Certain portions of this Exhibit have been omitted and filed separately under an application for confidential treatment.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: December 14, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: December 14, 2011
Date: December 14, 2011
Date: December 14, 2011
Date: December 14, 2011
Date: December 14, 2011
Date: December 14, 2011
Date: December 14, 2011
Date: December 14, 2011
Date: December 14, 2011
Date: December 14, 2011
Date: December 14, 2011