14. Stockholders’ Equity

Approval of 2016 Long Term Incentive Plan - During 2016, our board of directors adopted our 2016 Long Term Incentive Plan (the “2016 Plan”), which plan was approved by our shareholders at our annual meeting of shareholders held on June 2, 2016. The effective date of the 2016 Plan is April 19, 2016 and no awards may be granted under the 2016 Plan on and after the tenth anniversary of its effective date.

In addition, no further awards will be granted under our 2008 Incentive Stock Plan (the “2008 Plan”) or our Outside Directors Stock Purchase Plan (the “Outside Director Plan”) on or after the effective date of the 2016 Plan. Any awards that remain outstanding under the 2008 Plan or the Outside Director Plan will continue to be governed by the respective plan’s terms and the terms of the specific award agreement, as applicable.

The maximum aggregate number of shares reserved and available for issuance under the 2016 Plan shall not exceed 2,750,000 shares plus any shares that become available for reissuance under the share counting provisions of the 2008 Plan following the effective date of the 2016 Plan, subject to adjustment as permitted under the 2016 Plan. Shares subject to any award that is canceled, forfeited, expires unexercised, settled in cash in lieu of common stock or otherwise terminated without a delivery of shares to a participant will again be available for awards under the 2016 Plan to the extent allowable by law. Under the 2016 Plan, awards may be made to employees, directors and consultants (for services rendered) of LSB or our subsidiaries subject to limitations as defined by the 2016 Plan.

The 2016 Plan will be administered by the compensation committee (the “Committee”) of our board of directors. Our board of directors or the Committee may amend the 2016 Plan, except that if any applicable statute, rule or regulation requires shareholder approval with respect to any amendment of the 2016 Plan, then to the extent so required, shareholder approval will be obtained. Shareholder approval will also be obtained for any amendment that would increase the number of shares stated as available for issuance under the 2016 Plan.

The following may be granted by the Committee under the 2016 Plan:

Stock Options - The Committee may grant either incentive stock options or non-qualified stock options. The Committee sets option exercise prices and terms, except that the exercise price of a stock option may be no less than 100% of the fair market value, as defined in the 2016 Plan, of the shares on the date of grant. At the time of grant, the Committee will have sole discretion in determining when stock options are exercisable and when they expire, except that the term of a stock option cannot exceed 10 years subject to certain conditions.

14. Stockholders’ Equity (continued)

Stock Appreciation Rights (“SARs”) - The Committee may grant SARs as a right in tandem with the number of shares underlying stock options granted under the 2008 Plan or on a stand-alone basis. SARs are the right to receive payment per share of the SAR exercised in stock or in cash equal to the excess of the share’s fair market value, as defined in the 2008 Plan, on the date of exercise over its fair market value on the date the SAR was granted. Exercise of a SAR issued in tandem with stock options will result in the reduction of the number of shares underlying the related stock option to the extent of the SAR exercise.

Stock Awards, Restricted Stock, Restricted Stock Units, and Other Awards - The Committee may grant awards of restricted stock, restricted stock units, and other stock and cash-based awards, which may include the payment of stock in lieu of cash (including cash payable under other incentive or bonus programs) or the payment of cash (which may or may not be based on the price of our common stock).

Stock Incentive Plans - The following information relates to our long-term incentive plans:

	December 31, 2016
	2016 Plan		2008 Plan
Maximum number of securities for issuance		2,750,000
Number of awards available to be granted (1)		2,632,332
Number of unvested restricted stock/restricted stock units outstanding		398,349		639,941
Number of options outstanding		—		219,230
Number of options exercisable		—		131,705

(1)

Includes 2008 Plan shares canceled, forfeited, expired unexercised, which became available for reissuance under the 2016 Plan after the effective date of the 2016 Plan.

Amounts disclosed within this note include amounts attributable to our discontinued operations for prior periods, unless otherwise noted.

Restricted Stock and Restricted Stock Units – During 2016, the Committee approved various grants under the 2016 Plan of shares of restricted stock (“2016 Restricted Stock”) to certain executives and employees. Most of the 2016 Restricted Stock vest at the end of each one-year period at the rate of one-third per year for three years while a portion of these grants vest 100% at the end of three years. On December 31, 2015, the Committee approved the grants under the 2008 Plan of shares of restricted stock (“2015 Restricted Stock”) to certain executives, of which a portion of these awards immediately vested as of the grant date. The non-vested 2016 and 2015 Restricted Stock carry dividend and voting rights. Sales of these shares are restricted prior to the date of vesting. Excluding the shares that immediately vested, the 2015 Restricted Stock vest at the end of each one-year period at the rate of one-third per year for three years. Pursuant to the terms of the 2016 and 2015 Restricted Stock agreements, unvested restricted shares will immediately vest upon the occurrence of a change in control (as defined by agreement), termination without cause or death.

During 2016, four employees surrendered a total of 280,000 shares of stock options previously granted under the 2008 Plan. These employees were also granted shares of restricted stock. These transactions were accounted for as modifications of stock awards. The total incremental fair value of these modified awards (additional compensation cost) was approximately $1.5 million and will be recognized on a straight-line basis over the requisite service period of three years, but the recognition of these costs could be accelerated if the unvested restricted shares immediately vest.

During 2016, the Committee approved the grant of 27,654 shares of Restricted Stock Units (RSU) to our non-employee directors for payment of a portion of their director fees under the 2016 Plan. Each RSU represents a right to receive one share of our common stock following the grant date and are non-forfeitable. Vesting occurs upon the earliest to occur: (i) the director’s separation from service, (ii) the third anniversary of the grant date, or (iii) the occurrence of a change of control as defined by the agreement. Based on terms of the RSU agreements, the grant date fair value of approximately $375,000 or $ 13.56 per share was recognized as stock-based compensation expense (SG&A) on the grant date.

14. Stockholders’ Equity (continued)

The following table summarizes information about these granted restricted stocks:

	2016			2015			2014

Shares of restricted stock granted		850,771			584,959		N/A
Total fair value of restricted stock granted	$	6,652,000		$	4,200,000		N/A
Weighted-average fair value per restricted stock granted during year	$	7.82		$	7.18		N/A
Stock-based compensation expense - Cost of sales	$	240,000		$	—		N/A
Stock-based compensation expense - SG&A	$	2,773,000		$	405,000		N/A
Income tax benefit	$	(1,157,000	)	$	(156,000	)	N/A
Total weighted-average remaining vesting period in years		2.41			3.00		N/A
Total fair value of restricted stock vested during the year	$	2,579,000		$	405,000		N/A

	2016
	Shares			Weighted-Average Grant Date Fair Value
Unvested restricted stock outstanding at beginning of year		528,553		$	11.80
Granted (1)		850,771		$	7.82
Vested (1)		(296,034	)	$	8.71
Cancelled or forfeited		(45,000	)	$	6.24
Unvested restricted stock outstanding at end of year		1,038,290		$	8.60

(1)

Approximately 89,000 of restricted stock related to discontinued operations.

Stock Options - No stock options have been granted under the 2016 Plan. As it relates to stock options granted under the 2008 plan, the exercise price of the outstanding options granted were equal to the market value of our common stock at the date of grant. During 2015, the Committee approved the grants under the 2008 Plan of 135,000 shares of stock options (the “2015 Options”) to certain employees, which grants included 5,000 shares of stock options related to discontinued operations. During 2014, the Committee approved the grants under the 2008 Plan of 489,000 shares of stock options (the “2014 Options”) to certain employees, which grants included 119,000 shares of stock options related to discontinued operations. The exercise price of the 2015 and 2014 Options was equal to the market value of our common stock at the date of grant. The 2015 and 2014 Options vest at the end of each one-year period at the rate of 16.5% per year for the first five years and the remaining unvested options will vest at the end of the sixth year. The 2015 and 2014 Options expire in 2025 and 2024, respectively. The fair value for the 2015 and 2014 Options was estimated, using an option pricing model, as of the date of the grant, which date was also the service inception date.

14. Stockholders’ Equity (continued)

The fair value for the 2015 and 2014 Options was estimated using a Black-Scholes-Merton option pricing model with the following assumptions:

•

risk-free interest rate based on an U.S. Treasury zero-coupon issue with a term approximating the estimated expected life as of the grant date;

•

a dividend yield based on historical data;

•

volatility factors of the expected market price of our common stock based on historical volatility of our common stock primarily over approximately six years from the date of grant; and

•

a weighted-average expected life of the options based on the historical exercise behavior of these employees and outside director, if applicable.

The following table summarizes information about these granted stock options:

	2016			2015			2014
Weighted-average risk-free interest rate	N/A				1.73	%		1.83	%
Dividend yield	N/A				—			—
Weighted-average expected volatility	N/A				38.32	%		45.18	%
Total weighted-average expected forfeiture rate	N/A				0.00	%		7.88	%
Weighted-average expected life (years)	N/A				5.11			5.90
Total weighted-average remaining vesting period in years (1)		2.25			3.76			3.77
Total fair value of options granted for continuing operations (2)	N/A			$	1,853,000		$	5,518,000
Stock-based compensation expense - Cost of sales for continuing operations (1) (3)	$	321,000		$	303,000		$	139,000
Stock-based compensation expense - SG&A for continuing operations (1) (4)	$	836,000		$	1,410,000		$	636,000
Income tax benefit for continuing operations (1) (5)	$	(444,000	)	$	(662,000	)	$	(302,000	)

(1)	For 2016, information relates to continuing operations only.

(2)	Approximately $62,000 and $1,744,000 for 2015 and 2014, respectively, is included in discontinued operations.

(3)	Approximately $126,000 and $116,000 for 2015 and 2014, respectively, is included in discontinued operations.

(4)	Approximately $508,000 and $1,024,000 for 2015 and 2014, respectively, is included in discontinued operations.

(5)	Approximately $(244,000) and $(445,000) for 2015 and 2014, respectively, is included in discontinued operations.

At December 31, 2016, the total stock-based compensation expense not yet recognized is $10,170,000, relating to non-vested restricted stock and stock options, which we will be amortizing (subject to adjustments for forfeitures) through the respective remaining vesting periods.

14. Stockholders’ Equity (continued)

The following information relates to our stock options:

	2016
	Shares			Weighted-Average Exercise Price
Outstanding at beginning of year (1)		842,780		$	31.93
Granted		—		$	—
Exercised (2)		(45,215	)	$	8.20
Forfeited or expired (3)		(578,335	)	$	34.38
Outstanding at end of year (4)		219,230		$	30.36
Exercisable at end of year (4)		131,705		$	28.25

(1)

Approximately 221,000 stock options related to discontinued operations.

(2)

Approximately 44,000 stock options related to discontinued operations.

(3)

Approximately 177,000 stock options related to discontinued operations.

(4)

Relates to continuing operations only.

	2016		2015		2014
Weighted-average fair value per option granted during year	N/A		$	14.19	$	14.85

Total intrinsic value of options exercised during the year	$	216,000	$	4,292,000	$	3,461,000

Total fair value of options vested during the year	$	469,000	$	2,411,000	$	1,502,000

					Stock Options Outstanding At December 31, 2016
Exercise Prices					Shares Outstanding		Weighted- Average Remaining Contractual Life in Years		Weighted- Average Exercise Price		Intrinsic Value of Shares Outstanding
$ 7.86						17,525		1.92	$	7.86	$	9,814
$	9.69	-	$	9.97		12,705		1.83	$	9.71		—
$	33.36	-	$	34.50		189,000		6.66	$	33.84		—
$	7.86	-	$	34.50		219,230		6.00	$	30.36	$	9,814

					Stock Options Exercisable At December 31, 2016
Exercise Prices					Shares Outstanding		Weighted- Average Remaining Contractual Life in Years		Weighted- Average Exercise Price		Intrinsic Value of Shares Outstanding
$ 7.86						17,525		1.92	$	7.86	$	9,814
$	9.69	-	$	9.97		12,705		1.83	$	9.71		—
$	33.36	-	$	34.50		101,475		5.99	$	34.09		—
$	7.86	-	$	34.50		131,705		5.05	$	28.25	$	9,814

14. Stockholders’ Equity (continued)

Preferred Share Rights Plan - On January 5, 2009, a renewed shareholder rights plan (the “Renewed Rights Agreement”) became effective upon the expiration of our previous shareholder rights plan. Pursuant to the Securities Purchase Agreement as discussed in Note 13 – Securities Financing, on December 4, 2015, LSB and UMB, as rights agent, entered into an amendment to the Renewed Rights Agreement (the “Renewed Rights Amendment”). The Renewed Rights Amendment amends the definition of “Acquiring Person” to exclude the Purchaser and its Affiliates and Associates (as defined therein) in order to permit the issuance of the Securities discussed in Note 13, and additional securities issuable to the Purchaser as contemplated by the terms of the Securities, without triggering the issuance of Series 4 Junior Participating Class C Preferred Stock. The Renewed Rights Agreement will affect a potential acquirer unless the acquirer negotiates with our Board and the Board approves the transaction. Pursuant to the renewed plan, one preferred share purchase right (a “Right”) is attached to each currently outstanding or subsequently issued share of our common stock. Prior to becoming exercisable, the Rights trade together with our common stock. In general, if a person or group acquires or announces a tender or exchange offer for 15% or more of our common stock (except for the Golsen Holders and certain other limited excluded persons, as amended), then the Rights become exercisable. Each Right entitles the holder (other than the person or group that triggers the Rights being exercisable) to purchase from us one one-hundredth of a share of Series 4 Junior Participating Preferred Stock, no par value (the “Preferred Stock”), at an exercise price of $47.75 per one one-hundredth of a share, subject to adjustment. If a person or group acquires 15% or more of our common stock, each Right will entitle the holder (other than the person or group that triggered the Rights being exercisable) to purchase shares of our common stock (or, in certain circumstances, cash or other securities) having a market value of twice the exercise price of a Right at such time. Under certain circumstances, each Right will entitle the holder (other than the person or group that triggered the Rights being exercisable) to purchase the common stock of the acquirer having a market value of twice the exercise price of a Right at such time. In addition, under certain circumstances, our Board may exchange each Right (other than those held by the acquirer) for one share of our common stock, subject to adjustment. Our Board may redeem the Rights at a price of $0.01 per Right generally at any time before 10 days after the Rights become exercisable. Our Board may exchange all or part of the Rights (except to the person or group that triggered the Rights being exercisable) for our common stock at an exchange ratio of one common share per Right until the person triggering the Right becomes the beneficial owner of 50% or more of our common stock.

Other – As of December 31, 2016, we have reserved 1.5 million shares of common stock issuable upon potential conversion of preferred stocks and equity awards pursuant to their respective terms.